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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE
ACT OF 1934



|                       |  |                     
|---------------------- |  | --------------------
|For the Quarter Ended: |  | Commission File No.:
|April 30, 2004         |  | 0-24338             



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VARIFLEX, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-3164466                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



5152 North Commerce
Avenue

Moorpark, California 93021

(Address of principal executive offices)



Registrants telephone number, including area code:

(805) 523-0322



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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 whether the Registrant is an accelerated filer (as defined under Rule 12b-2 of the Exchange
Act.    Yes ̈No  x



As of May 27, 2004, there were 4,603,771 shares of Common Stock, $.001 par value,
outstanding.



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VARIFLEX, INC.

INDEX



|                               |  |         |  |                                                                                                                            |  |         
|------------------------------ |  | ------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | --------
|                               |  |         |  |                                                                                                                            |  | Page No.
|Part I - Financial Information |  |        
|                               |  |         | 
|                               |  | Item 1. |  | Financial Statements                                                                                                       |  |         
|                               |  |         | 
|                               |  |         |  | Consolidated Balance Sheets at April 30, 2004 (unaudited) and July 31, 2003                                                |  | 3       
|                               |  |         | 
|                               |  |         |  | Consolidated Statements of Operations for the Three Month and Nine Month Periods Ended April 30, 2004 and 2003 (unaudited) |  | 4       
|                               |  |         | 
|                               |  |         |  | Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2004 and 2003 (unaudited)                        |  | 5       
|                               |  |         | 
|                               |  |         |  | Notes to Consolidated Financial Statements (unaudited)                                                                     |  | 6       
|                               |  |         | 
|                               |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 8       
|                               | 
|Part II - Other Information    |  |        
|                               |  |         | 
|                               |  | Item 1. |  | Legal Proceedings                                                                                                          |  | 15      
|                               |  |         | 
|                               |  | Item 4. |  | Controls and Procedures                                                                                                    |  | 15      
|                               |  |         | 
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                           |  | 15      



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##### Table of Contents

PART 1

FINANCIAL INFORMATION



Item 1. Financial Statements



VARIFLEX, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                     |  |                |        |   |              |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ------------ | - | ------ | -
|                                                                                                                     |  | April 30, 2004 |        |   | July 31,2003 |  
|                                                                                                                     |  | (Unaudited)    |        |   |              |  
|Assets                                                                                                               |  |                |        |   |              |   |        |  
|Current assets:                                                                                                      |  |                |        |   |              |   |        |  
|Cash and cash equivalents                                                                                            |  | $              | 6,693  |   |              | $ | 17,582 |  
|Trade accounts receivable, less allowances of $452 and $449 as of April 30, 2004 and July 31, 2003, respectively     |  |                | 20,475 |   |              |   | 10,719 |  
|Inventory (finished goods)                                                                                           |  |                | 8,791  |   |              |   | 5,285  |  
|Inventory (raw materials and work-in-process)                                                                        |  |                | 539    |   |              |   | 417    |  
|Deferred income taxes                                                                                                |  |                | 1,043  |   |              |   | 1,043  |  
|Prepaid expenses and other current assets                                                                            |  |                | 1,898  |   |              |   | 1,915  |  
|                                                                                                                     |  |                |        |   |              |   |        |  
|Total current assets                                                                                                 |  |                | 39,439 |   |              |   | 36,961 |  
|Property and equipment, net                                                                                          |  |                | 422    |   |              |   | 425    |  
|Intangible assets                                                                                                    |  |                | 1,533  |   |              |   | 1,892  |  
|Other assets                                                                                                         |  |                | 342    |   |              |   | 306    |  
|                                                                                                                     |  |                |        |   |              |   |        |  
|Total assets                                                                                                         |  | $              | 41,736 |   |              | $ | 39,584 |  
|                                                                                                                     |  |                |        |   |              |   |        |  
|Liabilities and stockholders equity                                                                                 |  |                |        |   |              |   |        |  
|Current liabilities:                                                                                                 |  |                |        |   |              |   |        |  
|Trade acceptances payable                                                                                            |  | $              | 249    |   |              | $ | 177    |  
|Accounts payable                                                                                                     |  |                | 3,503  |   |              |   | 1,155  |  
|Accrued warranty                                                                                                     |  |                | 918    |   |              |   | 1,130  |  
|Accrued salaries and related liabilities                                                                             |  |                | 409    |   |              |   | 888    |  
|Accrued co-op advertising                                                                                            |  |                | 1,200  |   |              |   | 1,236  |  
|Accrued returns and allowances                                                                                       |  |                | 1,410  |   |              |   | 1,332  |  
|Other accrued expenses                                                                                               |  |                | 1,209  |   |              |   | 953    |  
|Current maturities of note payable                                                                                   |  |                | 200    |   |              |   | 200    |  
|                                                                                                                     |  |                |        |   |              |   |        |  
|Total current liabilities                                                                                            |  |                | 9,098  |   |              |   | 7,071  |  
|                                                                                                                     |  |               
|Note payable, less current maturities                                                                                |  |                | 471    |   |              |   | 620    |  
|                                                                                                                     |  |               
|Commitments and contingencies                                                                                        |  |                |        |   |              |   |        |  
|                                                                                                                     |  |               
|Stockholders equity:                                                                                                |  |                |        |   |              |   |        |  
|Preferred stock, $.001 par value, 5,000,000 shares Authorized, none issued and outstanding                           |  |                |       |   |              |   |       |  
|Common stock, $.001 par value, 40,000,000 shares Authorized, 6,044,736 issued as of April 30, 2004 and July 31, 2003 |  |                | 9      |   |              |   | 9      |  
|Common stock warrants                                                                                                |  |                | 702    |   |              |   | 702    |  
|Additional paid-in capital                                                                                           |  |                | 21,023 |   |              |   | 21,023 |  
|Retained earnings                                                                                                    |  |                | 19,148 |   |              |   | 18,874 |  
|Treasury stock, at cost, 1,440,965 shares as of April 30, 2004 and July 31, 2003                                     |  |                | (8,715 | ) |              |   | (8,715 | )
|                                                                                                                     |  |                |        |   |              |   |        |  
|Total stockholders equity                                                                                           |  |                | 32,167 |   |              |   | 31,893 |  
|                                                                                                                     |  |                |        |   |              |   |        |  
|Total liabilities and stockholders equity                                                                           |  | $              | 41,736 |   |              | $ | 39,584 |  
|                                                                                                                     |  |                |        |   |              |   |        |  



See accompanying notes.



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VARIFLEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                      |  | Nine months endedApril 30, |        |   | Three months endedApril 30, |  
|                                      |  | 2004                       |        |   | 2003                        |   |        | 2004 |  |   | 2003   |  
|Net sales                             |  | $                          | 43,625 |   |                             | $ | 43,785 |      |  | $ | 23,019 |   |  | $ | 21,303 |  
|Cost of goods sold                    |  |                            | 37,146 |   |                             |   | 36,712 |      |  |   | 18,931 |   |  |   | 17,260 |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                          |  |                            | 6,479  |   |                             |   | 7,073  |      |  |   | 4,088  |   |  |   | 4,043  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                   |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Selling and marketing                 |  |                            | 2,060  |   |                             |   | 1,866  |      |  |   | 1,027  |   |  |   | 808    |  
|General and administrative            |  |                            | 4,183  |   |                             |   | 4,109  |      |  |   | 1,455  |   |  |   | 1,409  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses              |  |                            | 6,243  |   |                             |   | 5,975  |      |  |   | 2,482  |   |  |   | 2,217  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Income from operations                |  |                            | 236    |   |                             |   | 1,098  |      |  |   | 1,606  |   |  |   | 1,826  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Other income (expense):               |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Interest expense                      |  |                            | (51    | ) |                             |   | (62    | )    |  |   | (17    | ) |  |   | (22    | )
|Interest income and other             |  |                            | 134    |   |                             |   | 149    |      |  |   | 34     |   |  |   | 39     |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Total other income                    |  |                            | 83     |   |                             |   | 87     |      |  |   | 17     |   |  |   | 17     |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Income before income taxes            |  |                            | 319    |   |                             |   | 1,185  |      |  |   | 1,623  |   |  |   | 1,843  |  
|Provision for income taxes            |  |                            | 45     |   |                             |   | 505    |      |  |   | 45     |   |  |   | 505    |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Net income                            |  | $                          | 274    |   |                             | $ | 680    |      |  | $ | 1,578  |   |  | $ | 1,338  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Net income per share of common stock: |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Basic                                 |  | $                          | 0.06   |   |                             | $ | 0.15   |      |  | $ | 0.34   |   |  | $ | 0.29   |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Diluted                               |  | $                          | 0.06   |   |                             | $ | 0.15   |      |  | $ | 0.32   |   |  | $ | 0.29   |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding:  |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Basic                                 |  |                            | 4,604  |   |                             |   | 4,604  |      |  |   | 4,604  |   |  |   | 4,604  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Diluted                               |  |                            | 4,867  |   |                             |   | 4,604  |      |  |   | 4,982  |   |  |   | 4,604  |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|                                      |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  



See accompanying notes.





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VARIFLEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                              |  |                            |         |   |      |   |        |  
|----------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------ | -
|                                                                              |  | Nine months endedApril 30, |        
|                                                                              |  | 2004                       |         |   | 2003 |  
|Operating activities                                                          |  |                            |         |   |      |   |        |  
|Net income                                                                    |  | $                          | 274     |   |      | $ | 680    |  
|Adjustments to reconcile net income to net cash Used in operating activities: |  |                            |         |   |      |   |        |  
|Depreciation and amortization                                                 |  |                            | 101     |   |      |   | 77     |  
|Amortization of intangibles                                                   |  |                            | 359     |   |      |   | 358    |  
|Non-cash interest charge                                                      |  |                            | 51      |   |      |   | 60     |  
|Deferred income taxes                                                         |  |                            |        |   |      |   | 32     |  
|                                                                              |  |                           
|Changes in operating assets and liabilities:                                  |  |                            |         |   |      |   |        |  
|Trade accounts receivable                                                     |  |                            | (9,756  | ) |      |   | (8,036 | )
|Inventory                                                                     |  |                            | (3,628  | ) |      |   | 3,535  |  
|Prepaid expenses and other assets                                             |  |                            | (19     | ) |      |   | (1,333 | )
|Trade acceptances payable                                                     |  |                            | 72      |   |      |   | 534    |  
|Accounts payable                                                              |  |                            | 2,348   |   |      |   | 1,353  |  
|Other current liabilities                                                     |  |                            | (393    | ) |      |   | 239    |  
|                                                                              |  |                            |         |   |      |   |        |  
|Net cash used in operating activities                                         |  |                            | (10,591 | ) |      |   | (2,501 | )
|                                                                              |  |                            |         |   |      |   |        |  
|Investing activities                                                          |  |                            |         |   |      |   |        |  
|Purchases of property and equipment                                           |  |                            | (98     | ) |      |   | (133   | )
|                                                                              |  |                            |         |   |      |   |        |  
|Net cash used in investing activities                                         |  |                            | (98     | ) |      |   | (133   | )
|                                                                              |  |                            |         |   |      |   |        |  
|Financing activities                                                          |  |                            |         |   |      |   |        |  
|Principal payment on note payable                                             |  |                            | (200    | ) |      |   | (200   | )
|                                                                              |  |                            |         |   |      |   |        |  
|Net cash used in financing activities                                         |  |                            | (200    | ) |      |   | (200   | )
|                                                                              |  |                            |         |   |      |   |        |  
|Net decrease in cash                                                          |  |                            | (10,889 | ) |      |   | (2,834 | )
|Cash and cash equivalents at beginning of period                              |  |                            | 17,582  |   |      |   | 12,169 |  
|                                                                              |  |                            |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                    |  | $                          | 6,693   |   |      | $ | 9,335  |  
|                                                                              |  |                            |         |   |      |   |        |  



See accompanying notes.



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VARIFLEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1. Basis of Presentation



The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles 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. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month
periods ended April 30, 2004 are not necessarily indicative of the results that may be expected for the full fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Companys annual report
on Form 10-K for the fiscal year ended July 31, 2003.



Stock Based Compensation



Employee stock options are accounted for under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, as amended and interpreted, which requires recognition of expense when the option price is less that the fair value of the stock at the date of grant. The Company
generally awards options for a fixed number of shares at an option price equal to the fair value of the stock at the date of the grant. The Company has adopted the disclosure-only provisions of the Financial Accounting Standards Boards
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by (SFAS) No. 148, Accounting for Stock-based Compensation  Transitional Disclosure.



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If the Company recognized employee stock option related compensation expense in accordance with SFAS 123
and used the Black-Scholes model for determining the weighted average fair value of options granted, the Companys net income and earnings per share would have been reduced to the pro forma amounts indicated below:



|                                                                     |  |                            |      |   |                             |   |      |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------- |  | -------------------------- | ---- | - | --------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                     |  | Nine months endedApril 30, |      |   | Three months endedApril 30, |  
|                                                                     |  | 2004                       |      |   | 2003                        |   |      | 2004 |  |   | 2003  |  
|Net income as reported                                               |  | $                          | 274  |   |                             | $ | 680  |      |  | $ | 1,578 |   |  | $ | 1,338 |  
|Stock-based employee compensation cost included in reported net loss |  |                            |     |   |                             |   |     |      |  |   |      |   |  |   |      |  
|Pro forma stock-based employee compensation cost under SFAS 123      |  |                            | (163 | ) |                             |   | (158 | )    |  |   | (54   | ) |  |   | (53   | )
|                                                                     |  |                            |      |   |                             |   |      |      |  |   |       |   |  |   |       |  
|Pro forma net income                                                 |  | $                          | 111  |   |                             | $ | 522  |      |  | $ | 1,524 |   |  | $ | 1,285 |  
|                                                                     |  |                            |      |   |                             |   |      |      |  |   |       |   |  |   |       |  
|                                                                     |  |                            |      |  
|Income per share:                                                    |  |                            |      |   |                             |   |      |      |  |   |       |   |  |   |       |  
|Basic  as reported                                                  |  | $                          | 0.06 |   |                             | $ | 0.15 |      |  | $ | 0.35  |   |  | $ | 0.29  |  
|Basic  pro forma                                                    |  | $                          | 0.02 |   |                             | $ | 0.11 |      |  | $ | 0.33  |   |  | $ | 0.28  |  
|Diluted  as reported                                                |  | $                          | 0.06 |   |                             | $ | 0.15 |      |  | $ | 0.32  |   |  | $ | 0.29  |  
|Diluted  pro forma                                                  |  | $                          | 0.02 |   |                             | $ | 0.11 |      |  | $ | 0.31  |   |  | $ | 0.28  |  



Note 2. Reclassification



Certain reclassifications have been made to the fiscal 2003 financial statements to
conform with fiscal 2004 presentation.



Note 3. Earnings per Share



Basic earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share include the dilutive effects of stock options and warrants. For the three and nine month periods ended April 30, 2004, the number of shares used in the calculation of diluted earnings per share
included 378,668 and 263,087 shares respectively issuable under stock options and warrants using the treasury stock method. For the three and nine month periods ended April 30, 2003, diluted earnings per share excluded the effect of all options and
warrants as their effect would have been antidilutive. Total options and warrants outstanding as of April 30, 2004 and 2003 were 1,177,000 and 1,224,000, respectively.



Note 4. Segment Information



Pursuant to Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of an Enterprise and Related
Information, the Company has determined, based on its internal system of management reporting and its assessment of performance as a single operating unit, that during the three and nine months ended April 30, 2004 and 2003, it operated in
only one segment. The Company classifies its products into similar product groupings. The action sport products primarily include in-line skates, skateboards, scooters, bodyboards and bike accessories. The outdoor products primarily include canopies
and trampolines. The protective products include recreational protective equipment, such as wrist guards, elbow pads, knee pads, and helmets.



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Sales of similar products within the segment are as follows:



|                        |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|----------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                        |  | Nine months endedApril 30, |        |   | Three months endedApril 30, |  
|                        |  | 2004                       |        |   | 2003                        |   |        | 2004 |  |   | 2003   |  
|Action sport products   |  | $                          | 16,672 |   |                             | $ | 20,882 |      |  | $ | 6,776  |   |  | $ | 7,204  |  
|Outdoor products        |  |                            | 27,502 |   |                             |   | 23,420 |      |  |   | 16,729 |   |  |   | 14,680 |  
|Protective products     |  |                            | 1,791  |   |                             |   | 1,769  |      |  |   | 611    |   |  |   | 469    |  
|Other products          |  |                            | 250    |   |                             |   | 273    |      |  |   | 87     |   |  |   | 100    |  
|                        |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Total gross sales       |  |                            | 46,215 |   |                             |   | 46,344 |      |  |   | 24,203 |   |  |   | 22,453 |  
|Returns and allowances  |  |                            | (1,729 | ) |                             |   | (1,745 | )    |  |   | (690   | ) |  |   | (850   | )
|Cooperative advertising |  |                            | (861   | ) |                             |   | (814   | )    |  |   | (494   | ) |  |   | (300   | )
|                        |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  
|Total net sales         |  | $                          | 43,625 |   |                             | $ | 43,785 |      |  | $ | 23,019 |   |  | $ | 21,303 |  
|                        |  |                            |        |   |                             |   |        |      |  |   |        |   |  |   |        |  



Note 5. Legal Proceedings



From time to time, the Company is involved in claims involving product liability arising
in the ordinary course of its business. The Company carries product liability insurance coverage with self-insured retention deductible claims. A prior year insurance carrier has declared bankruptcy and as such, coverage for one claim has the
potential of not being covered by insurance. At April 30, 2004 the Company has an estimated reserve against all insured and uninsured claims. In the opinion of management, any additional liability to the Company arising under any pending product
liability claims would not materially affect its financial condition, results of operations, or cash flows.



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



The Company is a leading distributor and wholesaler in the United States of in-line skates, skateboards, recreational protective equipment (such as wrist
guards, elbow pads and knee pads used by skaters and skateboarders), helmets, canopies, trampolines and bike accessories. The Company designs and develops these products, which are then manufactured to the Companys detailed specifications by
independent contractors. The Company distributes its products throughout the United States and, to a lesser extent, in foreign countries.



Net sales consist of invoiced sales less agreed upon programs (primarily returns and allowances, and cooperative advertising expenses). The Company sells
its products primarily to mass merchandise, major sporting goods and major home improvement retailers. The Company uses a combination of internal sales personnel and independent sales representatives to provide sales support. Sales are subject to
trends that frequently change and affect the demand for certain products. Accordingly, the Companys future sales will fluctuate based on the Companys ability to identify and create products that meet such changes in demand. Outdoor
products typically have higher sales in the spring and early summer months. As outdoor products have become a larger part of the business, the Company has experienced increased levels of seasonality with higher sales in the third and fourth fiscal
quarters.



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Costs of goods sold consist of product costs, freight distribution (as well as warehouse costs), payroll
expenses, facility costs, and other product related costs such as warranty expenses and royalty fees. The Company does not own or operate any manufacturing facilities and sources its products through independent contract manufacturers. A recent
trend affecting the Company is the increase in direct shipments to its customers directly from its vendors in Asia. The affect on the Company are generally lower selling prices, mitigated by its ability to lower its warehousing space
requirements and in effect lower its inventory risk and exposure.



Operating expenses consist of selling and marketing costs and general and administrative costs. Selling and marketing costs consist of payroll expenses, sales commissions and other promotional items. General and administrative costs consist
of payroll, legal, accounting, information systems, product development, intangible amortization and other overhead expenses.



Other income and expenses consists of interest income, interest expense and other non-operating items.



Results of Operations



Net Sales. Net sales for the third quarter of fiscal
2004 (the quarter ended April 30, 2004) totaled $23,019,000 compared to $21,303,000 for the third quarter of fiscal 2003, representing an increase of $1,716,000 or 8%. For the nine months ended April 30, 2004, net sales totaled $43,625,000 compared
to $43,785,000 for the corresponding period of the prior year, representing a decrease of $160,000 or less than 1%.



Gross sales of action sport products decreased $428,000, or 6% and $4,210,000, or 20% for the quarter and the nine month period ended April 30, 2004,
respectively. The decrease in action sports for the quarter was primarily the result of lower sales of in-line skates attributable to one major customer. All other product lines within the action sport category showed higher sales for the quarter
compared to the same period of the prior year. For the nine month period, sales of in-line skates and skateboards declined from the comparable period in the prior year by 24% and 29%, respectively. Gross sales of outdoor products increased
$2,049,000, or 14% and $4,083,000, or 17% for the quarter ended April 30, 2004 and the nine month period ended April 30, 2004, respectively. The increase in outdoor products for the quarter was a result of an 8% increase in sales of canopies and a
21% increase in sales of trampolines. For the nine month period, the increase in sales from outdoor products was attributable to a 13% increase in canopies and a 29% increase in trampolines. Sales of protective products increased $142,000 or 30% in
the quarter, due to an increase in helmet sales, and were flat for the nine months ended April 30, 2004.



The following table shows the Companys major product categories as a percentage of total gross sales for the third quarter and first nine months of
fiscal 2004 compared to the third quarter and first nine months of fiscal 2003. Action sport products include in-line skates, skateboards, scooters, bodyboards and bike accessories. Outdoor products include canopies and trampolines. Protective
products include recreational protective equipment, such as wrist guards, elbow pads, knee pads and helmets. Outdoor products typically have higher sales in the spring and early summer months. Accordingly, a greater percentage of the Companys
total sales are derived from this category in the third and fourth fiscal quarters.



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|                      |  |                             |   |  |                         |   |  |      |   |  |      |  
|--------------------- |  | --------------------------- | - |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                      |  | Nine months ended April 30, |   |  | Quarter ended April 30, |  
|                      |  | 2004                        |   |  | 2003                    |   |  | 2004 |   |  | 2003 |  
|Action sport products |  | 36                          | % |  | 45                      | % |  | 28   | % |  | 32   | %
|Outdoor products      |  | 60                          | % |  | 51                      | % |  | 69   | % |  | 65   | %
|Protective products   |  | 3                           | % |  | 3                       | % |  | 2    | % |  | 2    | %
|Other products        |  | 1                           | % |  | 1                       | % |  | 1    | % |  | 1    | %
|                      |  |                             |   |  |                         |   |  |      |   |  |      |  
|Total                 |  | 100                         | % |  | 100                     | % |  | 100  | % |  | 100  | %
|                      |  |                             |   |  |                         |   |  |      |   |  |      |  



Gross
Profit. Gross profit for the third quarter of fiscal 2004 totaled $4,088,000 compared to $4,043,000 for the third quarter of fiscal 2003, an increase of $45,000 or 1.1%. The Companys gross margin was 17.8% of net sales for the
quarter ended April 30, 2004, compared to 19.0% for the quarter ended April 30, 2003. The decrease in gross margin percentage was a result of lower margins on canopy and trampoline sales primarily as a result of higher raw material costs (primarily
steel), increased direct (direct shipments to the customer from Asia) product sales as well as overall pricing trends. The impact on gross profit was offset by an increase in sales. Gross profit for the nine months ended April 30, 2004
totaled $6,479,000 compared to $7,073,000 in fiscal 2003, a decrease of $594,000 or 8.3%. Gross margin was 14.9% for the nine months ended April 30, 2004, compared to 16.2% for the nine months ended April 30, 2003. The decrease in gross margin for
the nine month period was largely due to the same factors affecting the quarterly results impacting all outdoor products.



Operating Expenses.The Companys selling and marketing expenses totaled $1,027,000 for the third quarter of fiscal 2004,
compared to $808,000 in the third quarter of 2003, an increase of $219,000 or 27%. Selling and marketing expenses for the third quarter of fiscal 2004 amounted to 4.5% of net sales, compared to 3.8% during the third quarter of fiscal 2003. The
increase in selling and marketing expense during the quarter was attributable to an increase in commission expense (as a result of changes in customer mix and higher sales), as well as higher wage costs associated with the addition of a sales office
in Illinois used primarily for the distribution of bike accessories. For the nine months ended April 30, 2004, selling and marketing expenses totaled $2,060,000 compared to $1,866,000 for the corresponding period of the prior year, representing an
increase of $194,000 or 10.4%. Selling and marketing expenses for the first nine months of fiscal 2004 amounted to 4.7% of net sales, compared to 4.3% during the first nine months of fiscal 2003. The increase in selling and marketing expense for the
nine month period was due to primarily the same factors affecting the quarter.



General and administrative expenses totaled $1,455,000 in the third quarter of 2004, compared to $1,409,000 in the third quarter of 2003. General and administrative expenses totaled $4,183,000 for the nine months
ended April 30, 2004 compared to $4,109,000 in the prior period. Both periods are relatively flat when compared to the comparable period of the prior year.



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Other Income (Expense). Other income net totaled $17,000 in the third quarter of
2004 and 2003. For the nine months ended April 30, 2004, other income net totaled $83,000 compared to $87,000 for the corresponding period of the prior year, a decrease of $4,000 or 5%. The decrease for the nine months was primarily due to decreased
interest rates available on the Companys cash and cash equivalents.



Provision for Income Taxes. The income tax provision for the third quarter and nine months of fiscal 2004 was $45,000 compared to $505,000 in both the prior year periods. The effective rate
differs from the federal statutory rate due to reductions in the valuation allowance, certain expenses not being deductible for tax purposes and state taxes. At April 30, 2004, the Company had a valuation allowance of approximately $1.9 million
against a portion of its net deferred tax assets. Given that the Company has generated taxable ordinary income in the current year, the valuation allowance has been reduced in the current quarter by $100,000 based on managements assessment as
to the likelihood that deferred assets will be realized. Approximately $1.3 million of the valuation allowance would only be reversed and reflected as a reduction of income tax expense if the Company generates qualifying capital gain income, which
we do not expect to occur in the foreseeable future.



Liquidity and Capital Resources



The
Company funds its activities principally from cash flow generated from operations and a credit facility with a major bank. Cash and cash equivalents totaled $6,693,000 as of April 30, 2004, compared to $17,582,000 as of July 31, 2003. Cash
equivalents are invested in money market funds which consist of investment-grade short-term instruments and government securities. The Company currently plans to continue investing cash in this manner. The decrease in cash and cash equivalents of
$10,889,000 was due to higher accounts receivable balances related to the increase in sales for the quarter ended April 30, 2004, and the result of higher inventory balances. Net working capital as of April 30, 2004 was $30,341,000, compared to
$29,890,000 as of July 31, 2003.



The Company has a credit
agreement with a major bank providing a $9,000,000 revolving line of credit with separate sub-limits of $9,000,000 for the issuance of commercial letters of credit and $2,000,000 for actual cash borrowing. The agreement is secured by substantially
all the assets of the Company and carries an interest rate equal to the banks reference rate which is equivalent to prime and offers certain LIBOR based interest options. The Company is in compliance with all monthly
financial covenants called for in the credit agreement. Borrowings for letters of credit have varied, typically reaching the highest levels in the pre-Christmas and the spring seasons. The outstanding balance on letters of credit on April 30, 2004
was $2,671,000 leaving approximately $6,329,000 available which may be used entirely for issuance of letters of credit, or for cash borrowings up to $2,000,000 with the remainder available for issuances of letters of credit. Since the Company
expects to finance its 2004 operations from operating cash flow and existing cash reserves, the Company does not currently anticipate borrowing cash available under the line during this fiscal year. The current agreement expires on May 1, 2005. The
Company is currently in negotiations to extend this credit agreement to May 2006.



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The Company had long-term debt of $471,000 as of April 30, 2004 compared to $620,000 as of July 31, 2003,
with the decrease due to a $200,000 principal payment made in the first quarter, offset by accrued interest for the period. The long term debt arose as a result of a patent that was purchased in April 2000 involving a collapsible canopy with a
telescoping roof support structure and is payable in installments of $200,000 each year, to be paid over an eight year period with a final payment on August 1, 2007.



Future Liquidity and Financial Position



The Company intends to continue to focus upon building and maintaining its existing product lines. The Company also plans to
continue to devote resources toward the pursuit and development of new products. In addition, management continues to explore the possibility of making selected acquisitions of other companies or products, or other alliances, which would offer a
strategic fit with the Companys existing products and its sourcing and distribution channels in the mass market.



Management believes that its current cash position, funds available under existing banking arrangements, and cash generated from operations will be
sufficient to meet the Companys presently projected cash and working capital requirements for the next fiscal year.



The following table summarizes the outstanding borrowings and long-term contractual obligations of Variflex, Inc. at April 30, 2004 and the effects such
obligations are expected to have on liquidity and cash flow in future periods.



|                                   |  |                                                   |       |                        |   |                     |  |                   |       |           |   |     |  |   |  
|---------------------------------- |  | ------------------------------------------------- | ----- | ---------------------- | - | ------------------- |  | ----------------- | ----- | --------- | - | --- |  | - | -
|Contractual Obligations            |  | Years (or periods) ending July 31: (In thousands)
|                                   |  | Total                                             |       | Three Monthsending2004 |   | Threeyearsended2007 |  | TwoYearsended2009 |       | After2009
|Outstanding Letters of Credit      |  | $                                                 | 2,671 |                        | $ | 2,671               |  | $                 |      |           | $ |    |  | $ | 
|Notes Payable                      |  |                                                   | 800   |                        |   |                    |  |                   | 600   |           |   | 200 |  |   | 
|Operating Leases                   |  |                                                   | 1,396 |                        |   | 266                 |  |                   | 1,130 |           |   |    |  |   | 
|Minimum Royalty Payments           |  |                                                   | 805   |                        |   | 200                 |  |                   | 605   |           |   |    |  |   | 
|                                   |  |                                                   |       |                        |   |                     |  |                   |       |           |   |     |  |   |  
|Total Contractual Cash Obligations |  | $                                                 | 5,672 |                        | $ | 3,137               |  | $                 | 2,335 |           | $ | 200 |  | $ | 



Sensitivity



The Company does not believe that the fluctuation in the
value of the dollar in relation to the currency of its suppliers has any significant material and adverse impact on the Companys ability to purchase products at agreed upon prices. Typically, the Company and its suppliers negotiate prices in
U.S. Dollars and payments to suppliers are also made in U.S. Dollars. Nonetheless, there can be no assurance that the value of the dollar will not have an impact upon the Company in the future if it fluctuates significantly against foreign
currencies.



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The Companys exposure to market rate risk for changes in interest rates relates primarily to the
Companys investment in short-term instruments and money market funds. The Company also has interest rate sensitivity related to its revolving direct advance line of credit.



Risks Associated With Forward Looking Statements



From time to time, the Company may make certain statements that contain
forward-looking information or statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Words such as believe, intends, expects, anticipates,
plans and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of the
Managements Discussion and Analysis of Financial Condition and Results of Operations contained in this Report, and in the Companys other filings with the Securities Exchange Commission. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions,
including, without limitation those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current or future operations may vary materially
from those anticipated, estimated, or projected. The Company undertakes no obligations to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.



There are risks and uncertainties that may affect our future operating results, business and
financial condition, including, but not limited to the following risks: (1) the risk of reduction in consumer demand for the product categories in which the Company does business or the Companys products in particular; (2) a slowdown in
economic conditions in general and the retail sector in particular; (3) the risk of loss of one or more of the Companys major customers; (4) the risks inherent in the design, development, and sale of new products and product enhancements,
including those associated with patent issues and marketability; (5) the risk that the Company may not be able to continue to provide its products at prices that are competitive or that it can continue to design and market products that appeal to
consumers even if price-competitive; (6) the risk that the Company cannot on a timely basis pass along increases in product costs to customers; (7) fluctuations in the companys quarterly operating results may negatively affect the
Companys stock price; (8) reliance on foreign suppliers to source the Companys products could make it difficult to enforce our rights abroad and to quickly find alternative sources of supply if needed; (9) the Companys product mix
subjects it to potentially large product liability claims.



Readers are also
encouraged to refer to the Companys most recent annual report on Form 10-K for a further discussion of the Companys business and the risks and opportunities attendant thereto.



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Critical Accounting Policies



Use of Estimates  Financial statements prepared in accordance with generally accepted accounting
principles require management to make estimates and judgments that affect amounts and disclosures reported in the financial statements. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated
financial statements include allowances made against accounts receivables, reserves taken against inventory, accruals for sales returns and allowances, warranty, product liability claims, and other litigation related matters.



Accounts Receivable  Accounts receivable consist
primarily of amounts due to us from our normal business activities. The Companys ability to collect outstanding receivables from our customers is critical to our operating performance and cash flows. We maintain an allowance for doubtful
accounts to reflect the estimated future uncollectability of accounts receivable based on past collection history and specific risks that have been identified by reviewing current customer information.



Inventory  Inventories consist primarily of finished
products purchased in bulk categories to be sold to our customers. We state our inventories at lower of cost or market. In assessing the ultimate realization of inventories, we are required to make judgments as to the future selling prices and
demand requirements and compare that with the current or committed inventory levels. In addition, an allowance for obsolete inventory is maintained to reflect the expected net realizable value of inventory based on an evaluation of slow-moving
products.



Revenue Recognition  We
recognize revenue when products are shipped, which is at the point in time risk of loss is transferred to the customer. Sales are shown net of estimated allowances for returns, discounts, and cooperative advertising.



Warranties/Returns  The Company records a liability for
the estimated costs of product warranties and returns at the time revenue is recognized. The Companys warranty and returns obligations are affected by product failure rates, material usage, and other factors. The estimate of costs to service
its warranty and returns obligation is based on historical experience and expectation of future conditions. To the extent the Company experiences increased warranty claim and returns activity or increased costs with servicing those claims, its
warranty and returns accrual will increase, resulting in decreased gross profit.



Product Liability  The Company is involved in various claims arising from the sale of products in the normal course of business. The Company carries product liability insurance on its products,
with the exception of one outstanding claim, which has the potential of not being covered by insurance as a result of a prior year insurance carrier declaring bankruptcy. Under the insurance policy, any settlements on product liability claims
require the Company to pay a deductible, depending on the type of product.



Deferred Taxes  The Company records a valuation allowance to reduce tax assets to the amount that is more likely than not to be realized. Realization of our deferred tax assets is principally
dependent upon our achievement of projected future taxable income. Our judgment regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require possible material adjustments to these
deferred tax asset balances.



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PART II

OTHER INFORMATION



Item 1. Legal Proceedings



See
Note 4 to Notes to Consolidated Financial Statements included in Part I of this Form

10-Q, which is incorporated herein by this reference.



ITEM 4. CONTROLS AND PROCEDURES



| | (a) | Evaluation of disclosure controls and procedures
| | --- | ------------------------------------------------



The term disclosure controls and procedures refers to the controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within required time periods. On April 30, 2004 our
Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of April 30,
2004, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our periodic reports filed under the Exchange Act.



| | (b) | Changes in internal controls
| | --- | ----------------------------



There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to May 20,
2004.



Item 6. Exhibits and Reports on Form 8-K



| | (a) | Exhibits.
| | --- | ---------



|     |  |                                        
|---- |  | ---------------------------------------
|     | 
|31.1 |  | Chief Executive Officers Certification
|     | 
|31.2 |  | Chief Financial Officers Certification
|     | 
|32.1 |  | Section 906 Certification              



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



The Company furnished an 8-K with its earnings results for the prior quarter.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.



|             |  |                                                      
|------------ |  | -----------------------------------------------------
|             |  | VARIFLEX, INC.                                       
|             | 
|June 8, 2004 |  | /s/ Raymond H. Losi II                               
|             |  | Raymond H. Losi II                                   
|             |  | Chief Executive Officer (Principal Executive Officer)



|             |  |                                                                     
|------------ |  | --------------------------------------------------------------------
|June 8, 2004 |  | /s/ Petar Katurich                                                  
|             |  | Petar Katurich                                                      
|             |  | Chief Financial Officer (Principal Financial and Accounting Officer)



16