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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.:
|---------------------- |  | --------------------
|October 31, 2003       |  | 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 November 15, 2003, there were 4,603,771 shares of Common Stock, $.001
par value, outstanding.



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##### Table of Contents

VARIFLEX, INC.

INDEX



|                                                                                              |  | Page No.
|--------------------------------------------------------------------------------------------- |  | --------
|Part I - Financial Information                                                                |  |         
|                                                                                              | 
|Item 1. Financial Statements                                                                  |  |         
|                                                                                              | 
|Consolidated Balance Sheets at October 31, 2003 and July 31, 2003                             |  | 3       
|                                                                                              | 
|Consolidated Statements of Operations for the Three Months Ended October 31, 2003 and 2002    |  | 4       
|                                                                                              | 
|Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2003 and 2002    |  | 5       
|                                                                                              | 
|Notes to Consolidated Financial Statements                                                    |  | 6       
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9       
|                                                                                              | 
|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)



|                                                                                                                       |  | October 31,2003 |        |   | July 31,2003 |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ------------ | -
|                                                                                                                       |  | (Unaudited)     |        |   |              |  
|Assets                                                                                                                 |  |                 |        |   |              |  
|Current assets:                                                                                                        |  |                 |        |   |              |  
|Cash and cash equivalents                                                                                              |  | $               | 18,283 |   |              | $
|Trade accounts receivable, less allowances of $452 and $449 as of October 31, 2003 and July 31, 2003, respectively     |  |                 | 10,849 |   |              |  
|Inventory (finished goods)                                                                                             |  |                 | 5,449  |   |              |  
|Inventory (raw materials and work-in-process)                                                                          |  |                 | 352    |   |              |  
|Deferred income taxes                                                                                                  |  |                 | 1,043  |   |              |  
|Prepaid expenses and other current assets                                                                              |  |                 | 1,536  |   |              |  
|                                                                                                                       |  |                 |        |   |              |  
|Total current assets                                                                                                   |  |                 | 37,512 |   |              |  
|Property and equipment, net                                                                                            |  |                 | 446    |   |              |  
|Intangible assets                                                                                                      |  |                 | 1,772  |   |              |  
|Other assets                                                                                                           |  |                 | 562    |   |              |  
|                                                                                                                       |  |                 |        |   |              |  
|Total assets                                                                                                           |  | $               | 40,292 |   |              | $
|                                                                                                                       |  |                 |        |   |              |  
|Liabilities and stockholders equity                                                                                   |  |                 |        |   |              |  
|Current liabilities:                                                                                                   |  |                 |        |   |              |  
|Trade acceptances payable                                                                                              |  | $               | 251    |   |              | $
|Accounts payable                                                                                                       |  |                 | 3,208  |   |              |  
|Accrued warranty                                                                                                       |  |                 | 889    |   |              |  
|Accrued salaries and related liabilities                                                                               |  |                 | 436    |   |              |  
|Accrued co-op advertising                                                                                              |  |                 | 1,329  |   |              |  
|Accrued returns and allowances                                                                                         |  |                 | 1,324  |   |              |  
|Other accrued expenses                                                                                                 |  |                 | 802    |   |              |  
|Current maturities of note payable                                                                                     |  |                 | 200    |   |              |  
|                                                                                                                       |  |                 |        |   |              |  
|Total current liabilities                                                                                              |  |                 | 8,439  |   |              |  
|Note payable, less current maturities                                                                                  |  |                 | 437    |   |              |  
|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 October 31, 2003 and July 31,
2003 |  |                 | 9      |   |              |  
|Common stock warrants                                                                                                  |  |                 | 702    |   |              |  
|Additional paid-in capital                                                                                             |  |                 | 21,023 |   |              |  
|Retained earnings                                                                                                      |  |                 | 18,397 |   |              |  
|Treasury stock, at cost, 1,440,965 shares as of October 31, 2003 and July 31, 2003                                     |  |                 | (8,715 | ) |              |  
|                                                                                                                       |  |                 |        |   |              |  
|Total stockholders equity                                                                                             |  |                 | 31,416 |   |              |  
|                                                                                                                       |  |                 |        |   |              |  
|Total liabilities and stockholders equity                                                                             |  | $               | 40,292 |   |              | $
|                                                                                                                       |  |                 |        |   |              |  



See accompanying notes.



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VARIFLEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                             |  | Three months endedOctober 31, |       
|-------------------------------------------- |  | ----------------------------- | ------
|                                             |  | 2003                          |       
|Net sales                                    |  | $                             | 12,081
|Cost of goods sold                           |  |                               | 10,706
|                                             |  |                               |       
|Gross profit                                 |  |                               | 1,375 
|                                             |  |                               |       
|Operating expenses:                          |  |                               |       
|Selling and marketing                        |  |                               | 520   
|General and administrative                   |  |                               | 1,364 
|                                             |  |                               |       
|Total operating expenses                     |  |                               | 1,884 
|                                             |  |                               |       
|Loss from operations                         |  |                               | (509  
|                                             |  |                               |       
|Other income (expense):                      |  |                               |       
|Interest expense                             |  |                               | (17   
|Interest income and other                    |  |                               | 49    
|                                             |  |                               |       
|Total other income (expense)                 |  |                               | 32    
|                                             |  |                               |       
|Income (loss) before income taxes            |  |                               | (477  
|Provision for income taxes                   |  |                               |      
|                                             |  |                               |       
|Net income (loss)                            |  | $                             | (477  
|                                             |  |                               |       
|Net income (loss) per share of common stock: |  |                               |       
|Basic                                        |  | $                             | (0.10 
|                                             |  |                               |       
|Diluted                                      |  | $                             | (0.10 
|                                             |  |                               |       
|Weighted average shares outstanding:         |  |                               |       
|Basic                                        |  |                               | 4,603 
|                                             |  |                               |       
|Diluted                                      |  |                               | 4,603 
|                                             |  |                               |       



See accompanying notes.



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VARIFLEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                         |  | Three months endedOctober 31, |       
|---------------------------------------------------------------------------------------- |  | ----------------------------- | ------
|                                                                                         |  | 2003                          |       
|Operating activities                                                                     |  |                               |       
|Net income (loss)                                                                        |  | $                             | (477  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                               |       
|Depreciation and amortization                                                            |  |                               | 32    
|Amortization of intangibles                                                              |  |                               | 120   
|Non-cash interest charge                                                                 |  |                               | 17    
|Changes in operating assets and liabilities:                                             |  |                               |       
|Trade accounts receivable                                                                |  |                               | (130  
|Inventory                                                                                |  |                               | (99   
|Prepaid expenses and other current assets                                                |  |                               | 122   
|Trade acceptances payable                                                                |  |                               | 74    
|Accounts payable                                                                         |  |                               | 2,053 
|Other current liabilities                                                                |  |                               | (759  
|                                                                                         |  |                               |       
|Net cash provided by operating activities                                                |  |                               | 953   
|                                                                                         |  |                               |       
|Investing activities                                                                     |  |                               |       
|Purchases of property and equipment                                                      |  |                               | (52   
|                                                                                         |  |                               |       
|Net cash used in investing activities                                                    |  |                               | (52   
|                                                                                         |  |                               |       
|Financing activities                                                                     |  |                               |       
|Principal payment on note payable                                                        |  |                               | (200  
|                                                                                         |  |                               |       
|Net cash used in financing activities                                                    |  |                               | (200  
|                                                                                         |  |                               |       
|Net increase in cash                                                                     |  |                               | 701   
|Cash and cash equivalents at beginning of period                                         |  |                               | 17,582
|                                                                                         |  |                               |       
|Cash and cash equivalents at end of period                                               |  | $                             | 18,283
|                                                                                         |  |                               |       
|Cash paid during the period for:                                                         |  |                               |       
|Interest                                                                                 |  | $                             |      
|Income taxes                                                                             |  | $                             |      



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 generally accepted accounting principles 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 generally accepted accounting principles 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 months ended October 31, 2003 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.



Note 2. Reclassifications



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 months ended October 31, 2003 and 2002, diluted earnings per share
excluded the effect of all options and warrants as their effect would have been antidilutive.



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 months ended October 31, 2003 and 2002, it operated in only one
segment. The Company classifies its products into similar product groupings. The action sport products primarily include in-line skates and skateboards. The outdoor products primarily include portable instant canopies and springless 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 for that segment are as follows:



|                        |  | Three months endedOctober 31, |       
|----------------------- |  | ----------------------------- | ------
|                        |  | 2003                          |       
|                        |  | (In thousands)                |       
|Action sport products   |  | $                             | 5,732 
|Outdoor products        |  |                               | 6,693 
|Protective products     |  |                               | 432   
|Other products          |  |                               | 97    
|                        |  |                               |       
|Total gross sales       |  |                               | 12,954
|Returns and allowances  |  |                               | (627  
|Cooperative advertising |  |                               | (246  
|                        |  |                               |       
|Total net sales         |  | $                             | 12,081
|                        |  |                               |       



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 and routinely reserves against such 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 position, results of operations or cash flows.



Note 6. 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.



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:



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|                                                                     |  | Three months ended October 31, |      
|-------------------------------------------------------------------- |  | ------------------------------ | -----
|                                                                     |  | 2003                           |      
|Net income/(loss) as reported                                        |  | $                              | (477 
|Stock-based employee compensation cost Included in reported net loss |  |                                |     
|Pro forma stock-based employee compensation cost under SFAS 123      |  |                                | (55  
|                                                                     |  |                                |      
|Pro forma net income/(loss)                                          |  | $                              | (532 
|                                                                     |  |                                |      
|Earnings/(loss) per share:                                           |  |                                |      
|Basic  as reported                                                  |  | $                              | (0.10
|Basic  pro forma                                                    |  | $                              | (0.12
|Diluted  as reported                                                |  | $                              | (0.10
|Diluted  pro forma                                                  |  | $                              | (0.12



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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, knee pads used by skaters and skateboarders), helmets, canopies, and trampolines. 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.



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.



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 first quarter of fiscal 2004 (the quarter ended October 31, 2003) totaled $12,081,000 compared to
$12,601,000 for the first quarter of fiscal 2003 representing a decrease of $520,000 or 4%. Gross sales of action sport products decreased $2,300,000, or 29% as a result of lower sales for both in-line skate and skateboards. Gross sales of outdoor
products increased $2,146,000, or 47% as result of increased demand both for canopies and trampolines. Gross sales of protective products decreased by $225,000 or 34%, as a result of decreased helmet sales and to a lesser extent decreased sales in
other protective gear.



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The following table shows the Companys major product categories as a percentage of total gross
sales for the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Action sport products include in-line skates and skateboards. The outdoor products include canopies and trampolines. Protective products include recreational
protective equipment, such as wrist guards, elbow pads, knee pads, and helmets:



|                      |  | Quarter Ended October 31, |  
|--------------------- |  | ------------------------- | -
|                      |  | 2003                      |  
|Action sport products |  | 44                        | %
|Outdoor products      |  | 51                        | %
|Protective products   |  | 4                         | %
|Other products        |  | 1                         | %
|                      |  |                           |  
|Total                 |  | 100                       | %
|                      |  |                           |  



Gross
Profit. Gross profit for the first quarter of fiscal 2004 totaled $1,375,000 compared to $1,890,000 for the first quarter of fiscal 2003, a decrease of $515,000 or 27.2%. The Companys gross margin was 11.4% of net sales for the
quarter ended October 31, 2003, compared to 15.0% for the quarter ended October 31, 2002. The decrease in gross margin percentage was primarily due to lower margins on canopy sales as a result of increased competition which affected overall pricing
trends and a shift in the Companys business to a greater percentage of sales being made on a direct basis from Asia which carry lower margins.



Operating Expenses.The Companys selling and marketing expenses totaled $520,000 for the first quarter of 2004, compared to
$604,000 in the first quarter of 2003, a decrease of $84,000 or 14%. Selling and marketing expenses for the first quarter of fiscal 2004 amounted to 4.3% of net sales, compared to 4.8% during the first quarter of fiscal 2003. The decrease in selling
and marketing costs was due to lower commissions paid as a result of lower sales, less international trade show expenses, partially offset by additional personnel hired to promote the Companies newly created bike accessory line, Cycle
Force.



General and administrative expenses totaled
$1,364,000 in the first quarter of 2004, compared to $1,308,000 in the first quarter of 2003, an increase of $56,000 or 4.3%. The slight increase in general and administrative expenses for the first quarter of fiscal 2004 was due to an increase in
product development expenses.



Other Income
(Expense). Other income totaled $32,000 in the first quarter of 2004, compared to $33,000 in the first quarter of 2003, which was relatively flat with the prior quarter.



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Provision for Income Taxes. The income tax provision for the first quarter of fiscal
2004 and 2003 was zero due to changes in the valuation allowance and a pre-tax net loss of $477,000 in fiscal 2004. The effective rate differs from the federal statutory rate due to changes in the valuation allowance, certain expenses not deductible
for tax purposes and state taxes. At October 31, 2003, the Company had a valuation allowance of approximately $1.9 million against its net deferred tax assets. To the extent that the Company generates sufficient ordinary income in the future, the
valuation may be reduced. The valuation allowance may need to be increased should the Company not generate sufficient taxable income in the future. Approximately $1.4 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 is not expected 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 $18,283,000 as of October 31, 2003, compared to $17,582,000 as of July 31, 2003. The 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 equivalents in this manner. Net working capital as of October 31, 2003 was $29,073,000, 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 banks
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 periods and the spring seasons. The outstanding balance on letters of credit on October 31, 2003 was $402,000 leaving approximately $8,598,000 available for issuance of
letters of credit, inclusive of a separate sub limit of $2,000,000 available for cash borrowings. 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. To the extent that terms and conditions are favorable, the Company intends to renegotiate its credit agreement with the bank for an extended period on or before expiration of the
current agreement which expires May 1, 2005.



The Company had
long-term debt of $437,000 as of October 31, 2003 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 the purchase of a patent 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.



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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 that 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 assuming continued financial performance at present levels.



The following table summarizes the outstanding borrowings and long-term contractual obligations of Variflex, Inc. at October
31, 2003 and the effects such obligations are expected to have on liquidity and cash flow in future periods.



|Contractual Obligations            |       | Years ending July 31: (In thousands)
|---------------------------------- | ----- | ------------------------------------
|                                   | Total |                                     
|Notes Payable                      |       | $                                   
|Operating Leases                   |       |                                     
|Minimum Royalty Payments           |       |                                     
|Total Contractual Cash Obligations |       | $                                   



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.



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.



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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 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) fluctuations in the companys quarterly operating results may negatively affect the Companys stock price; (7) 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; (8) the Company 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.



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.



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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. Under the insurance policy, any settlements on product liability
claims require the Company to pay a deductible, depending on the type of product. Management and its legal counsel periodically review the claims for merit and for those claims that are deemed to be of merit the Company estimates its portion of the
potential settlement and provides an accrual for that amount.



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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##### Table of Contents

PART II

OTHER INFORMATION



Item 1. Legal Proceedings



| | See Note 5 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. At November 14, 2003,
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 November
14, 2003, 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
November 14, 2003.



|Item | 6. Exhibits and Reports on Form 8-K
|---- | -----------------------------------



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



| |  | Pursuant to Section 302 of the Sarbanes Act of 2002:
| |  | ----------------------------------------------------



|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.
| | --- | --------------------



| |  | No reports on Form 8-K were filed by the Registrant during the quarter to which this Form 10-Q relates.
| |  | -------------------------------------------------------------------------------------------------------



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##### Table of Contents

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.                                                      
|---------------- |  | --------------------------------------------------------------------
|                 | 
|December 9, 2003 |  | /s/ Raymond H. Losi II                                              
|                 |  | Raymond H. Losi II                                                  
|                 |  | Chief Executive Officer (Principal Executive Officer)               
|                 | 
|December 9, 2003 |  | /s/ Petar Katurich                                                  
|                 |  | Petar Katurich                                                      
|                 |  | Chief Financial Officer (Principal Financial and Accounting
Officer)



16