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                                                                  Exhibit 10.8.1
                             EMPLOYMENT AGREEMENT

          This EMPLOYMENT AGREEMENT ("Agreement"), which is dated as of January
24, 2002, is made by and between VARIFLEX, INC., a Delaware corporation, located
at 5152 North Commerce Avenue, Moorpark, California, 93021 and hereinafter
referred to as "the Company", and PETAR KATURICH, whose address is
XXXXXXXXXXXXXXX , California XXXXX, hereinafter referred to as "Executive",
based upon the following:

                                   RECITALS
                                   --------

          WHEREAS, the Company wishs to retain the services of Executive as its
Chief Financial Officer and to set forth in this Agreement the duties and
responsibilities Executive has agreed to undertake on behalf of the Company; and

          WHEREAS, Executive wishes to render services to the Company as its
Chief Financial Officer and to have set forth in this Agreement the duties and
responsibilities he has agreed to undertake on behalf of the Company; and

          THEREFORE, in consideration of the foregoing and of the mutual
promises contained in this Agreement, the Company and Executive (who are
sometimes individually referred to as a "party" and collectively referred to as
the "parties") agree as follows:

                                   AGREEMENT
                                   ---------

          1.  "COMPANY" DEFINED.  The term "the Company" as used in this
              -----------------
Agreement shall mean Variflex, Inc.

          2.  SPECIFIED PERIOD.
              ----------------

          (a) INITIAL TERM.  Subject to paragraphs 9, 10 and 11, the Company
              ------------
hereby employs Executive pursuant to the terms of this Agreement and Executive
hereby accepts employment with the Company pursuant to the terms of this
Agreement for the period beginning on February 4, 2002 ("Commencement Date") and
ending on February 3, 2005 (the "Initial Expiration Date"), the day before the
three (3) year anniversary of the Commencement Date.

          (b) RENEWAL OF TERM.  Subject to paragraphs 9, 10 and 11, this
              ---------------
Agreement will be automatically renewed for an additional one (1) year term on
the Initial Expiration Date and on each anniversary date of the Initial
Expiration Date occurring thereafter, unless either party gives written notice
to the other, at least ninety (90) days prior to the Initial Expiration Date or
prior to the date of expiration of the then applicable renewal term of this
Agreement (the "Renewal Expiration Date"), as applicable, that the party desires
to terminate this Agreement.
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          (c) TERM.  For purposes of this Agreement, "Term" shall mean the
              ----
period beginning on the Commencement Date and ending on the earlier of (i) the
date on which Executive's employment is terminated pursuant to paragraphs 9, 10
or 11 of this Agreement, (ii) the Initial Expiration Date if this Agreement is
not automatically renewed pursuant to paragraph 2(b) above, or (iii) the then
applicable Renewal Expiration Date if the then renewal term is not automatically
renewed for an additional one (1) year period pursuant to paragraph 2(b) above.

          3.  GENERAL DUTIES.  Executive shall report only to the Company's
              --------------
Chief Executive Officer and the Company's Board of Directors (the "Board").
Executive shall devote his entire productive time, ability, and attention to the
Company's business during the Term of this Agreement.  Unless otherwise modified
by the Board, the Executive shall serve as the Chief Financial Officer of the
Company.  In this capacity, Executive shall do and perform all services, acts,
or things necessary or advisable to discharge his duties under this Agreement,
including, but not limited to, acting as immediate manager and supervisor of the
Company's accounting department, maintaining the Company's financial reporting
systems, acting as the Company's liaison with its certified public accountants
so that all financial information required to be prepared and filed with the
Securities and Exchange Commission or other regulatory agencies will be done in
a correct and timely manner, assisting with the preparation of filings required
by any federal or state taxing authority, acting as the Company's liaison with
its investors, managing the Company's cash in accordance with those standards
set forth by the Board, maintaining internal accounting controls and rendering
to the Board, at its meetings or when the Board otherwise requests, an account
or report of the financial condition of the Company.  Executive shall perform
such other duties as are commonly performed by the Chief Financial Officer of a
publicly traded corporation or which may from time to time be prescribed by the
Board or the Chief Executive Officer consistent with such duties.  Executive
shall not work for any other person, firm or entity during the Term of this
Agreement.

          4.  NONCOMPETITION, NONSOLICITATION AND NONINTERFERENCE AND
              -------------------------------------------------------
PROPRIETARY PROPERTY AND CONFIDENTIAL INFORMATION PROVISIONS.
------------------------------------------------------------

          (a) NONCOMPETITION.
              --------------

              (1) "Applicable Definitions" - For purposes of this paragraph 4,
                   ----------------------
the following capitalized terms shall have the definitions set forth below:

                  i.  "Business Segments" - The term "Business Segment" is
                       -----------------
defined as each portion of the Company's (or the Company's affiliates')
business, including, without limitation, the production, distribution,
marketing, and sales of the Company's (or the Company's affiliates') products or
product lines, and the purchasing of raw materials and supplies in connection
therewith.

                  ii. "Competitive Business" - The term "Competitive Business"
                       --------------------
is defined as any business that is or may be competitive with or similar to or
adverse to any of the Company's (or the Company's affiliates') Business
Segments, whether such business is conducted by a proprietorship, partnership,
corporation or other entity or venture.

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          iii.  "Territory" - The term "Territory" is defined as the geographic
                 ---------
area (both within the United States and internationally) in which any Business
Segment is carried on including, by way of example and not limitation, the
entire geographic area in which the Company conducts various phases of any such
Business Segment, including purchasing, production, distribution, promotional
and marketing activities, sales, and location of plants and warehouses.

      (2) Covenant Not to Compete.  Executive hereby covenants and agrees that
          -----------------------
(A) during the Term of this Agreement and (B) if Executive is paid a severance
benefit pursuant to paragraph 10 of this Agreement, for six (6) months following
the termination of this Agreement, Executive shall not, with respect to any
Business Segment and within the boundaries of the Territory applicable to such
Business Segment, without the prior written consent of the Company (which
consent may be withheld in the sole and absolute discretion of the Company),
directly or indirectly, either alone or in association or in connection with or
on behalf of any person, firm, partnership, corporation or other entity or
venture now existing or hereafter created: (i) be or become interested or
engaged in, directly or indirectly, with any Competitive Business including,
without limitation, being or becoming an organizer, investor, lender, partner,
joint venturer, stockholder, officer, director, employee, manager, independent
sales representative , associate, consultant, agent, supplier, vendor, vendee,
lessor, or lessee to any Competitive Business, or (ii) in any manner associate
with, or aid or abet or give information or financial assistance to any
Competitive Business, or (iii) use or permit the use of Executive's name or any
part thereof to be used or employed in connection with any Competitive Business
(collectively and severally, the "Noncompetition Covenants"). Notwithstanding
the foregoing, the provisions of this paragraph 4(a)(2) shall not be deemed to
prevent the purchase or ownership by Executive as a passive investment of no
more than 5% of the outstanding capital shares of any publicly held corporation,
so long as any other obligation or duty under the Noncompetition Covenants are
not breached. Executive shall have the right to waive his entitlement to all of
the severance benefits otherwise required to be paid to him pursuant to
paragraph 10 of this Agreement, in which event restrictions in paragraph
4(a)(2)(B) of this Agreement shall not apply.

      (3) Separate Covenants.  The Noncompetition Covenants shall be construed
          ------------------
to be divided into separate and distinct Noncompetition Covenants with respect
to (i) each Business Segment and (ii) each matter or type of conduct described
therein. Each of such divided Noncompetition Covenants shall be separate and
distinct from all such other Noncompetition Covenants with respect to the same
or any other Business Segment.

      (4) Acknowledgments.  Executive acknowledges that:  (i) the covenants and
          ---------------
the restrictions contained in the Noncompetition Covenants are necessary,
fundamental, and required for the protection of the Company's business; (ii) the
Noncompetition Covenants relate to matters which are of a special, unique and
extraordinary value; and (iii) a breach of any of the Noncompetition Covenants
will result in irreparable harm and damages which cannot be adequately
compensated by a monetary award.

      (5) Judicial Limitation.  Notwithstanding the foregoing, if at any time a
          -------------------
court of competent jurisdiction holds that any portion of any Noncompetition
Covenant is unenforceable by reason of its extending for too great a period of
time or over too great a geographical area or by reason of its being too
extensive in any other respect, such

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Noncompetition Covenant shall be interpreted to extend only over the maximum
period of time, maximum geographical area, or maximum extent in all other
respects, as the case may be, as to which it may be enforceable, all as
determined by such court in such action.

          (b) NONSOLICITATION AND NONINTERFERENCE.
              -----------------------------------

              (1)   Covenants.  Executive hereby covenants and agrees that
                    ---------
during the Term of this Agreement, and for a period of one (1) year from the
date this Agreement terminates or expires, Executive shall not, either for
Executive's own account or directly or indirectly in conjunction with or on
behalf of any person, partnership, corporation or other entity or venture:

                    i.  Solicit or employ or attempt to solicit or employ any
person who is then or has, within twelve (12) months prior thereto, been an
officer, partner, manager, agent or employee of the Company or any affiliate of
the Company whether or not such a person would commit a breach of that person's
contract of employment with the Company or any affiliate of the Company, if any,
by reason of leaving the service of the Company or any affiliate of the Company
(the "Nonsolicitation Covenant"); or

                    ii. On behalf of, directly or indirectly, any Competitive
Business (as such term is defined in paragraph 4(a)(1)ii., or for the purpose of
or with the reasonably foreseeable effect of harming the business of the
Company, solicit the business of any person, firm or company which is then, or
has been at any time during the preceding twelve (12) months prior to such
solicitation, a customer, client, contractor, supplier or vendor of the Company
or any affiliate of the Company (the "Noninterference Covenant").

              (2)   Acknowledgments.  Each of the parties acknowledges that:
                    ---------------
(i) the covenants and the restrictions contained in the Nonsolicitation and
Noninterference Covenants are necessary, fundamental, and required for the
protection of the business of the Company; (ii) such Covenants relate to matters
which are of a special, unique and extraordinary value; and (iii) a breach of
either of such Covenants will result in irreparable harm and damages which
cannot be adequately compensated by a monetary award.

              (3)   Judicial Limitation.  Notwithstanding the foregoing, if at
                    -------------------
any time, despite the express agreement of the Company and Executive, a court of
competent jurisdiction holds that any portion of any Nonsolicitation or
Noninterference Covenant is unenforceable by reason of its extending for too
great a period of time or by reason of its being too extensive in any other
respect, such Covenant shall be interpreted to extend only over the maximum
period of time or to the maximum extent in all other respects, as the case may
be, as to which it may be enforceable, all as determined by such court in such
action.

          (c) PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION.
              ----------------------------------------------

              (1) "Applicable Definitions" For purposes of this paragraph 4(c),
                   ----------------------
the following capitalized terms shall have the definitions set forth below:

                  i.  "Confidential Information" - The term "Confidential
                       ------------------------
Information" is collectively and severally defined as any information, matter or
thing of a secret, confidential or private nature, whether or not so labeled,
which is connected with the Company's business,

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Business Segments, or methods of operation or concerning any of the Company's
suppliers, customers, licensors, licensees or others with whom the Company has a
business relationship, and which has current or potential value to the Company
or the unauthorized disclosure of which could be detrimental to the Company.
Confidential Information shall be broadly defined and shall include, by way of
example and not limitation: (i) matters of a business nature available only to
management and owners of the Company of which Executive may become aware (such
as information concerning customers, vendors and suppliers, including their
names, addresses, credit or financial status, buying or selling habits,
practices, requirements, and any arrangements or contracts that the Company may
have with such parties, the Company's marketing methods, plans and strategies,
the costs of materials, the prices the Company obtains or has obtained or at
which the Company sells or has sold its products or services, the Company's
manufacturing and sales costs, the amount of compensation paid to employees of
the Company and other terms of their employment, financial information such as
financial statements, budgets and projections, and the terms of any contracts or
agreements the Company has entered into) and (ii) matters of a technical nature
(such as product information, trade secrets, know- how, formulae, innovations,
inventions, devices, discoveries, techniques, formats, processes, methods,
specifications, designs, patterns, schematics, data, compilation of information,
test results, and research and development projects). For purposes of the
foregoing, the term "trade secrets" shall mean the broadest and most inclusive
interpretation of trade secrets as defined by Section 3426.1(d) of the
California Civil Code (the Uniform Trade Secrets Act) and cases interpreting the
scope of said Section. "Confidential Information" does not include information
which (i) is or becomes generally available to the public through no wrongful
act of Executive, or (ii) was available to or otherwise in the possession of
Executive prior to the date of this Agreement, provided Executive acquired such
information through lawful means and from a source who or which was not under a
duty of non-disclosure.

          ii.  "Proprietary Property" - The term "Proprietary Property" is
                --------------------
collectively and severally defined as any written or tangible property owned or
used by the Company in connection with the Company's business, whether or not
such property also qualifies as Confidential Information.  Proprietary Property
shall be broadly defined and shall include, by way of example and not
limitation, products, samples, equipment, files, lists, books, notebooks,
records, documents, memoranda, reports, patterns, schematics, compilations,
designs, drawings, data, test results, contracts, agreements, literature,
correspondence, spread sheets, computer programs and software, computer print
outs, other written and graphic records, and the like, whether originals,
copies, duplicates or summaries thereof, affecting or relating to the business
of the Company, financial statements, budgets, projections, invoices.

          (2)  Ownership of Proprietary Property.  Executive acknowledges that
               ---------------------------------
all Proprietary Property which Executive may prepare, use, observe, come into
possession of and/or control shall, at all times, remain the sole and exclusive
property of the Company.  Executive shall, upon demand by the Company at any
time, or upon the cessation of Executive's employment, irrespective of the time,
manner, cause or lack of cause of such cessation, immediately deliver to the
Company or its designated agent, in good condition, ordinary wear and tear and
damage by any cause beyond the reasonable control of Executive excepted, all
items of the Proprietary Property which are or have been in Executive's
possession or under his control, as well as a statement describing the
disposition of all items of the Proprietary Property

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previously in Executive's possession in the event Executive has not previously
returned such items of the Proprietary Property to the Company.

          (3)  Agreement Not to Use or Divulge Confidential Information.
               --------------------------------------------------------
Executive agrees that he will not, at any time, in any fashion, form or manner,
unless specifically consented to in writing by the Company, either directly or
indirectly use, divulge, transmit or otherwise disclose or cause to be used,
divulged, transmitted or otherwise disclosed to any person, firm or corporation,
in any manner whatsoever (other than in Executive's performance of duties for
the Company or except as required by law) any Confidential Information of any
kind, nature or description.  The foregoing provisions shall not be construed to
prevent Executive from making use of or disclosing information which is in the
public domain through no fault of Executive, provided, however, specific
information shall not be deemed to be in the public domain merely because it is
encompassed by some general information that is published or in the public
domain or in Executive's possession prior to Executive's employment with the
Company.

          (4)  Acknowledgment of Secrecy.  Executive acknowledges that the
               -------------------------
Confidential Information is not generally known to the public or to other
persons who can obtain economic value from its disclosure or use and that the
Confidential Information derives independent economic value thereby, and
Executive agrees that he shall take all efforts reasonably necessary to maintain
the secrecy and confidentiality of the Confidential Information and to otherwise
comply with the terms of this Agreement.

          (5)  Inventions, Discoveries.  Executive acknowledges that any
               -----------------------
inventions, discoveries or trade secrets, whether patentable or not, made or
found by Executive in the scope of his employment with the Company constitute
property of the Company and that any rights therein now held or hereafter
acquired by Executive individually or in any capacity are hereby transferred and
assigned to the Company, and agrees to execute and deliver any confirmatory
assignments, documents or instruments of any nature necessary to carry out the
intent of this paragraph when requested by the Company without further
compensation therefor, whether or not Executive is at the time employed by the
Company.  Provided, however, notwithstanding the foregoing, Executive shall not
be required to assign his rights in any invention which qualifies fully under
the provisions of Section 2870(a) of the California Labor Code, which provides,
in pertinent part, that the requirement to assign "shall not apply to any
invention that the employee developed entirely on his or her own time without
using employer's equipment, supplies, facilities or trade secret information
except for those inventions that either:

               i.   Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or

               ii.  Result from any work performed by the employee for the
employer."

     Executive understands that he bears the full burden of proving to the
Company that an invention qualifies fully under Section 2870(a). By signing this
Agreement, Executive acknowledges receipt of a copy of this Agreement and of
written notification of the provisions of Section 2870.

                                       6
<PAGE>

          5.   COMPLIANCE WITH SECURITIES LAWS.
               -------------------------------

          Executive acknowledges that, the Company is a publicly reporting
company, and that the Company and Executive are subject to the provisions of
Sections 10(b), 16(a) and 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act").  Executive acknowledges that Section 16(a) of the Exchange Act
requires Executive to report the ownership or transfer of his stock or other
securities in the Company to the Securities and Exchange Commission and that
Sections 10(b) and 16(b) can prohibit Executive from selling or transferring his
stock or securities in the Company.  Executive agrees that he will comply with
the Company's policies, as stated from time to time in writing, relating to
selling or transferring his stock or securities in the Company.

          6.   COMPENSATION.
               ------------

          (a)  SALARY.  During the Term of this Agreement, the Company shall pay
               ------
to Executive a base salary of One Hundred Fifty Thousand Dollars ($150,000) per
year.  Executive's annual salary shall be reviewed periodically by the Company
for the purpose of determining whether Executive's salary shall be increased.
In no event shall this review take place less frequently than annually.
Executive shall be entitled to receive such bonuses as the Company may, in its
discretion, award of up to thirty percent (30%) of Executive's base salary.

          (b)  EMPLOYEE BENEFIT PLANS.  Except as otherwise herein provided,
               ----------------------
Executive shall be entitled, during the specified period of this Agreement, to
participate in any retirement, pension, profit-sharing, insurance, or other
plans which may now be in effect or which may be adopted by the Company,
including, without limitation, all such benefits generally available to the
Company's other senior executive employees.

          (c)  STOCK OPTIONS.  Within thirty (30) days after the date of this
               -------------
Agreement, the Company will prepare and deliver to Executive, a stock option
agreement which shall provide the following:  (i) Executive shall be granted
incentive options, pursuant to the 1994 Variflex Stock Plan, to purchase an
aggregate of fifty thousand (50,000) shares of the Company's common stock at a
price per share equal to the closing price of the Company's common stock as
listed by NASDAQ as of the end of the first business day immediately preceding
the option grant date; (ii) the option grant date shall be the Commencement
Date; (iii) options to purchase shall vest over a five year period according to
the vesting schedule in the stock option agreement, so long as Executive
continues his employment with the Company; (iv) options shall expire five years
following the applicable vesting date, except that vested options shall
terminate earlier in certain circumstances and unvested options shall terminate
upon termination of Executive's employment; (v) Executive shall be entitled to
pay for the stock in cash or in stock of the Company with a fair market value
equal to the exercise price; and (vi) stock issued pursuant to this plan shall
be restricted stock, although the Company shall reserve the right to issue
registered shares if it so decides.  Executive agrees to be bound by the terms
of the stock option agreement as adopted, and the provisions of this paragraph
shall be limited by and subject to the terms of that agreement.

          7.   REIMBURSEMENT OF BUSINESS EXPENSES.  The Company shall promptly
               ----------------------------------
reimburse Executive for all reasonable business expenses incurred by Executive
in connection

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<PAGE>

with the business of the Company. However, each such expenditure shall be
reimbursable only if Executive furnishes to the Company such records and other
documentary evidence as are required by the policies adopted from time to time
by the Company for reimbursement of expenses.

          8.   ANNUAL VACATION; PLACE OF PERFORMANCE.
               -------------------------------------

          (a)  VACATION. Executive shall be entitled to three (3) weeks vacation
               --------
time each year without loss of compensation. The Executive shall be entitled to
such period of vacation immediately upon effectiveness of this Agreement, and
such vacation need not be taken in consecutive periods. If Executive does not
take all such vacation time in any given calendar year, such unused time shall
carry over to the next year during the Term. Executive shall also be entitled to
all paid holidays provided by the Company to its other senior executive
employees.

          (b)  PLACE OF PERFORMANCE.  In connection with his employment by the
               --------------------
Company pursuant to this Agreement, the Executive shall be based at the
principal executive office of the Company in Southern California, except for
travel reasonably required for the Company business.

          9.   TERMINATION BY COMPANY FOR CAUSE.  The Company reserves the right
               --------------------------------
to terminate Executive and Executive's employment hereunder for cause. For
purposes of this Agreement, the term "cause" shall be deemed to exist if the
Company, acting in good faith based upon the information then known to the
Company, determines that Executive has engaged in or committed: willful
misconduct; gross negligence; theft, fraud or other illegal conduct; refusal or
unwillingness to perform his duties; sexual harassment; conduct which reflects
adversely upon, or making any remarks disparaging of, the Company, its Board,
officers, directors, advisors or employees or its affiliates or subsidiaries;
insubordination; any willful act that is likely to and which does in fact have
the effect of injuring the reputation, business or a business relationship of
the Company; violation of any fiduciary duty; violation of any duty of loyalty;
and breach of any term of this Agreement. The Company may terminate this
Agreement after Executive has received written notice of a proposed termination
for cause and Executive has had an opportunity to be heard before at least a
majority of the Board of Directors With the exception of the covenants included
in paragraphs 4 and 5 above, upon such termination the obligations of Executive
and the Company under this Agreement shall immediately cease. Such termination
shall be without prejudice to any other remedy to which the Company may be
entitled either at law, in equity, or under this Agreement. If Executive's
employment is terminated pursuant to this paragraph, the Company shall pay to
Executive, within two (2) business days of such termination, any deferred or
unpaid compensation and benefits to which Executive has earned and vested and is
otherwise entitled at the time of such termination.

          10.  TERMINATION WITHOUT CAUSE.
               -------------------------

          (a)  BY COMPANY.  The Company shall have the right to terminate this
               ----------
Agreement and Executive's employment hereunder without cause at any time.  If
the Company terminates Executive without cause prior to the six-month
anniversary of the Commencement Date, Executive shall not be entitled to any
severance benefit.  If the Company terminates Executive without cause on or
after the six-month anniversary of the Commencement Date, Executive shall

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be entitled to a severance benefit equal to six (6) months of his then base
salary; provided, however, that if such termination occurs as a result of a
"change in ownership," Executive shall instead be entitled to a severance
benefit equal to twelve (12) months of his then base salary (for purposes of
this Section 10(a), a "change in ownership" shall mean an individual, group or
entity, other than REMY Capital Partners IV, L.P., Mark S. Siegel, Kenneth
Berns, Raymond H. Losi, Raymond H. Losi II, Eileen Losi, or Barbara Losi, or any
of their respective affiliates, acquiring beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of
the shares of the then outstanding common stock of the Company). Notwithstanding
the preceding sentence, Executive shall not be entitled to any severance benefit
if (i) this Agreement is terminated by the Company pursuant to paragraph 2(b)
above, or (ii) this Agreement is terminated by Executive pursuant to paragraph
2(b) above or paragraph 10(b) below, or (iii) this Agreement and Executive's
employment hereunder is terminated for cause pursuant to paragraph 9 above, or
(iv) Executive's employment is terminated by reason of the death or disability
of Executive as provided in paragraph 11 below. The severance payment shall be
subject to applicable tax withholding and shall be paid in a lump sum within ten
(10) business days following the effective date of the event giving rise to
Executive's being terminated without cause.

          (b)  BY EXECUTIVE.  Executive shall have the right to terminate this
               ------------
Agreement and Executive's employment hereunder without cause at any time upon at
least sixty (60) days advance written notice to the Company.  If Executive fails
for any reason to give the Company at least sixty (60) days advance written
notice of termination of his employment with the Company, such failure shall
constitute a breach of this Agreement by Executive.

          (c)  BY EXECUTIVE FOR GOOD REASON

               The parties agree that if the Executive is "constructively
discharged", as such term is defined below, Executive shall have the right to
terminate his employment and such termination shall be considered a termination
of the Executive by the Company pursuant to Section 10(a) of the agreement.
"Constructively discharged" shall mean any of the following: (i) there is a
reduction by the Company in Executives Base Salary, (ii) the Company requires
Executive to relocate his principal place of employment outside the counties of
Los Angeles and Ventura, or (iii) there is a material diminution in Executives
reporting responsibilities or title.

          11.  TERMINATION UPON DEATH OR DISABILITY.
               ------------------------------------

          (a)  DEATH.  Executive's employment shall terminate upon the death of
               -----
Executive.  Upon such termination, the obligations of Executive and the Company
under this Agreement shall immediately cease.

          (b)  DISABILITY. The Company reserves the right to terminate
               ----------
Executive's employment upon ten (10) days written notice ("Disability
Termination Notice") if, for a period of sixty (60) days, Executive is prevented
from discharging his duties under this Agreement due to any physical or mental
disability. With the exception of the covenants included in paragraphs 4 and 5
above, upon such termination the obligations of Executive and the Company under
this Agreement shall immediately cease. If the Executive shall not agree with a
determination to terminate his employment because of disability, he must send a
written notice

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<PAGE>

of objection ("Disability Objection Notice") to the Company within ten (10) days
after the date of the Disability Termination Notice. If for any reason Executive
fails or neglects to send a Disability Objection Notice within such ten (10) day
period, Executive shall be deemed to have waived his right to object to his
termination for disability. If Executive does send a Disability Objection Notice
to the Company within said ten (10) day period, then the question of the
Executive's disability within the meaning of this Agreement shall be subject to
the certification of a qualified medical doctor agreed to by the Company and the
Executive. If a qualified medical doctor cannot be mutually agreed upon within
ten (10) days following the date of the Disability Objection Notice, each party
shall nominate a medical doctor by written notice to each other within fifteen
(15) days after the date of the Disability Objection Notice and those two
doctors shall select a third doctor within twenty (20) days after the date of
the Disability Objection Notice, who shall make the final determination as to
disability and send a reasonably detailed written report of such determination
to the Company and Executive not later than the forty-fifth (45th) day following
the date of the Disability Objection Notice. If Executive sends a Disability
Objection Notice within the time period specified herein, then during the period
from the date of such Notice until the earlier of the date of the written report
of the third medical doctor setting forth his determination or the forty-fifth
(45th) day following the date of the Disability Objection Notice, Executive
shall continue to receive full compensation and other benefits called for
hereunder.

          12.  MISCELLANEOUS.
               -------------

          (a)  PREPARATION OF AGREEMENT.  It is acknowledged by each party that
               ------------------------
such party either had separate and independent advice of counsel or the
opportunity to avail itself or himself of same.  In light of these facts it is
acknowledged that no party shall be construed to be solely responsible for the
drafting hereof, and therefore any ambiguity shall not be construed against any
party as the alleged draftsman of this Agreement.

          (b)  COOPERATION.  Each party agrees, without further consideration,
               -----------
to cooperate and diligently perform any further acts, deeds and things and to
execute and deliver any documents that may from time to time be reasonably
necessary or otherwise reasonably required to consummate, evidence, confirm
and/or carry out the intent and provisions of this Agreement, all without undue
delay or expense.

          (c)  INTERPRETATION.
               --------------

               (1)   Entire Agreement/No Collateral Representations.  Each party
                     ----------------------------------------------
expressly acknowledges and agrees that this Agreement, including all exhibits
attached hereto:  (1) is the final, complete and exclusive statement of the
agreement of the parties with respect to the subject matter hereof; (2)
supersedes any prior to contemporaneous agreements, promises, assurances,
guarantees, representations, understandings, conduct, proposals, conditions,
commitments, acts, course of dealing, warranties, interpretations or terms of
any kind, oral or written (collectively and severally, the "Prior Agreements"),
and that any such Prior Agreements are of no force or effect except as expressly
set forth herein; and (3) may not be varied, supplemented or contradicted by
evidence of Prior Agreements, or by evidence of subsequent oral agreements.  Any
agreement hereafter made shall be ineffective to modify, supplement or discharge
the terms

                                       10
<PAGE>

of this Agreement, in whole or in part, unless such agreement is in writing and
signed by the party against whom enforcement of the modification or supplement
is sought.

          (2) Waiver.  No breach of any agreement or provision herein contained,
              ------
or of any obligation under this Agreement, may be waived, nor shall any
extension of time for performance of any obligations or acts be deemed an
extension of time for performance of any other obligations or acts contained
herein, except by written instrument signed by the party to be charged or as
otherwise expressly authorized herein.  No waiver of any breach of any agreement
or provision herein contained shall be deemed a waiver of any preceding or
succeeding breach thereof, or a waiver or relinquishment of any other agreement
or provision or right or power herein contained.

          (3) Remedies Cumulative.  The remedies of each party under this
              -------------------
Agreement are cumulative and shall not exclude any other remedies to which such
party may be lawfully entitled.

          (4) Severability.  If any term or provision of this Agreement or the
              ------------
application thereof to any person or circumstance shall, to any extent, be
determined to be invalid, illegal or unenforceable under present or future laws
effective during the Term of this Agreement, then and, in that event:  (A) the
performance of the offending term or provision (but only to the extent its
application is invalid, illegal or unenforceable) shall be excused as if it had
never been incorporated into this Agreement, and, in lieu of such excused
provision, there shall be added a provision as similar in terms and amount to
such excused provision as may be possible and be legal, valid and enforceable,
and (B) the remaining part of this Agreement (including the application of the
offending term or provision to persons or circumstances other than those as to
which it is held invalid, illegal or unenforceable) shall not be affected
thereby and shall continue in full force and effect to the fullest extent
provided by law.

          (5) Time is of the Essence.  It is expressly understood and agreed
              ----------------------
that time of performance is strictly of the essence with respect to each and
every term, condition, obligation and provision hereof and that the failure to
timely perform any of the terms, conditions, obligations or provisions hereof by
any party shall constitute a material breach and a noncurable (but waivable)
default under this Agreement by the party so failing to perform.

          (6) No Third Party Beneficiary.  Notwithstanding anything else herein
              --------------------------
to the contrary, the parties specifically disavow any desire or intention to
create any third party beneficiary obligations, and specifically declare that no
person or entity, other than as set forth in this Agreement, shall have any
rights hereunder or any right of enforcement hereof.

          (7) No Reliance Upon Prior Representation.  The parties acknowledge
              -------------------------------------
that no other party has made any oral representation or promise which would
induce them prior to executing this Agreement to change their position to their
detriment, partially perform, or part with value in reliance upon such
representation or promise; the parties acknowledge that they have taken such
action at their own risk; and the parties represent that they have not so
changed their position, performed or parted with value prior to the time of
their execution of this Agreement.

                                       11
<PAGE>

          (8)  Headings; References; Incorporation; Gender.  The headings used
               -------------------------------------------
in this Agreement are for convenience and reference purposes only, and shall not
be used in construing or interpreting the scope or intent of this Agreement or
any provision hereof. References to this Agreement shall include all amendments
or renewals thereof. All cross-references in this Agreement, unless specifically
directed to another agreement or document, shall be construed only to refer to
provisions within this Agreement, and shall not be construed to be referenced to
the overall transaction or to any other agreement or document. Any exhibit
referenced in this Agreement shall be construed to be incorporated in this
Agreement. As used in this Agreement, each gender shall be deemed to include the
other gender, including neutral genders or genders appropriate for entities, if
applicable, and the singular shall be deemed to include the plural, and vice
versa, as the context requires.

      (d) ENFORCEMENT.
          -----------

          (1)  Applicable Law.  This Agreement and the rights and remedies of
               --------------
each party arising out of or relating to this Agreement (including, without
limitation, equitable remedies) shall be solely governed by, interpreted under,
and construed and enforced in accordance with the laws (without regard to the
conflicts of law principles thereof) of the State of California, as if this
Agreement were made, and as if its obligations are to be performed, wholly
within the State of California.

          (2)  Arbitration.  Subject to paragraph 12(d)(3), any controversy or
               -----------
claim arising out of or relating to this Agreement, its enforcement or
interpretation, or because of an alleged breach, default, or misrepresentation
in connection with any of its provisions, shall be submitted to arbitration, to
be held in Los Angeles County, California in accordance with California Civil
Procedure Code Sections 1282-1284.2.  In the event either party institutes
arbitration under this Agreement, the prevailing party, as determined by the
arbitrator, in any such litigation shall be entitled, in addition to all other
relief, to reasonable attorneys' fees relating to such arbitration.  The
nonprevailing party shall be responsible for all costs of the arbitration,
including but not limited to, the arbitration fees and court reporter fees.
Either party may enforce this paragraph in a court of law.

          (3)  Consent to Specific Performance and Injunctive Relief and Waiver
               ----------------------------------------------------------------
of Bond or Security.  Each party acknowledges that the Company may, as a result
-------------------
of Executive's breach of the covenants and obligations included in paragraph 4
of this Agreement, sustain immediate and long-term substantial and irreparable
injury and damage which cannot be reasonably or adequately compensated by
damages at law.  Notwithstanding paragraph, 12(d)(2), each party agrees that in
the event of Executive's breach or threatened breach of the covenants and
obligations included in paragraph 4, pending any decision on the merits by an
arbitrator, the Company shall be entitled to obtain injunctive relief from a
court of law without proof of any actual damages that have been or may be caused
to the Company by such breach or threatened breach and without the posting of
bond or other security in connection therewith.  Executive waives the claim or
defense that the Company has an adequate, remedy at law and Excessive shall not
allege or otherwise assert the legal position that any such remedy at law
exists.  Each party agrees and acknowledges:  (1) that the terms of this
paragraph are fair, reasonable and necessary to protect the legitimate interests
of the other party; (2) that this waiver is a material inducement to the other
party to enter into the transaction contemplated hereby; (3) that the other

                                       12
<PAGE>

party has already relied upon this waiver in entering into this agreement; and
(4) that each party will continue to rely on this wavier in their future
dealings.  Each party warrants and represents that such party has reviewed this
provision with such party's legal counsel or has been afforded an ample
opportunity to do so, and that such party has knowingly and voluntarily waived
its rights.

          (4) Consent to Jurisdiction; Service of Process.  Any action or
              -------------------------------------------
proceeding brought by either party seeking to enforce the provisions of
paragraph 12(d)(2) or by the Company seeking injunctive relief under paragraph
12(d)(3) pending a decision on the merits by the arbitrator shall be filed in
and heard and litigated solely before the state courts of California located
within the County of Los Angeles.  Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and to venue therein, consents
to the service of process in any such action or proceeding by certified or
registered mailing of the summons and complaint in accordance with the notice
provisions of this Agreement, and waives any defense or right to object to venue
in said courts based upon the doctrine of "Forum Non Conveniens".

     (e)  NO ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES BY EXECUTIVE.
          ------------------------------------------------------------
Executive's rights and benefits under this Agreement are personal to him and
therefore (i) no such right or benefit shall be subject to voluntary or
involuntary alienation, assignment or transfer; and (ii) Executive may not
delegate his duties or obligations hereunder.  This Agreement will be binding
upon and inure to the benefit of the Company and any successor to the Company by
merger, consolidation, reorganization, sale of all or substantially all of the
assets or otherwise (and such successor shall thereafter be deemed the "the
Company" for the purposes of this Agreement), but will not otherwise be
assignable, transferable or delegable by the Company.

     (f)  NOTICES.  Unless otherwise specifically provided in this Agreement,
          -------
all notices, demands, requests, consents, approvals or other communications
(collectively and severally called "Notices") required or permitted to be given
hereunder, or which are given with respect to this Agreement, shall be in
writing, and shall be given by: (A) personal delivery (which form of Notice
shall be deemed to have been given upon delivery), (B) by telegraph or by
private airborne/overnight delivery service (which forms of Notice shall be
deemed to have been given upon confirmed delivery by the delivery agency), (C)
by facsimile transmission (which forms of Notice shall be deemed delivered upon
receipt by the sending party of a confirmation of transmission issued by
sender's facsimile machine), or (D) by mailing in the United States mail by
registered or certified mail, return receipt requested, postage prepaid (which
forms of Notice shall be deemed to have been given upon the fifth (5th) business
day following the date mailed). Each party, and their respective counsel, hereby
agree that any such Notice may be given hereunder by such party's Counsel and
such counsel may communicate directly with all principals, as required to comply
with the foregoing notice provisions. Notices shall be addressed to the address
hereinabove set forth in the introductory paragraph of this Agreement, or to
such other address as the receiving party shall have specified most recently by
like Notice, with a copy to the other parties hereto. Any Notice given to the
estate of a party shall be sufficient if addressed to the party as provided in
this subparagraph.

     (g)  COUNTERPARTS.  This Agreement may be executed in counterparts, each of
          ------------
which shall be deemed an original, and all of which together shall constitute
one and the same

                                       13
<PAGE>

instrument, binding on all parties hereto. Any signature page of this Agreement
may be detached from any counterpart of this Agreement and reattached to any
other counterpart of this Agreement identical in form hereto by having attached
to it one or more additional signature pages.

          (h) EXECUTION BY ALL PARTIES REQUIRED TO BE BINDING:  ELECTRONICALLY
              ----------------------------------------------------------------
TRANSMITTED DOCUMENTS.  This Agreement shall not be construed to be an offer and
---------------------
shall have no force and effect until this Agreement is fully executed by all
parties hereto.  If a copy or counterpart of this Agreement is originally
executed and such copy or counterpart is thereafter transmitted electronically
by facsimile or similar device, such facsimile document shall for all purposes
be treated as if manually signed by the party whose facsimile signature appears.

          (i) NO OBLIGATION TO MITIGATE.  Absent a breach of this Agreement by
              -------------------------
Executive, the Executive is under no obligation to mitigate the amount of any
payment provided for hereunder by seeking other employment or otherwise.

          IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

                              COMPANY:

                              VARIFLEX, INC., a Delaware corporation

                              By:  /s/ Steven L. Muellner
                                   ___________________________________
                              Name:   Steven L. Muellner
                              Title:  President

                              EXECUTIVE:

                              /s/ Petar Katurich
                              _______________________________________
                              Petar Katurich

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