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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF

THE SECURITIES EXCHANGE ACT OF 1934



For the Fiscal Year Ended July 31, 2003



Commission File No.: 0-24338



VARIFLEX, INC.

(Exact name of Registrant as specified in its charter)



|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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Securities registered pursuant to Section 12(b) of the Act:

None



Securities registered pursuant to Section 12(g) of the
Act:

Common Stock, $.001 par value per share



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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K ̈



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



The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of January 31, 2003 was approximately $5,073,000 based upon the
closing sale price of the Registrants Common Stock on such date, as reported on the Nasdaq SmallCap Market. Shares of Common Stock held by each executive officer and director and each person owning more than 5% of the outstanding Common Stock
of the Registrant have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



Shares of $.001 par value Common Stock outstanding at October 1, 2003:
4,603,771 shares.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants definitive Proxy
Statement for its 2003 Annual Meeting of Stockholders scheduled to be held on December 12, 2003 are incorporated by reference into Part III of this Form 10-K.



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Forward-Looking Statements



All statements, other than statements of historical fact, contained within this report constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify forward-looking statements by terms such as may, intend, might, will,
should, could, would, expect, believe, estimate, potential, expect, plan or the negative of these terms, and similar expressions intended to
identify forward-looking statements.



These
forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Also, these forward-looking statements present our estimates and assumptions only as of the
date of this report. Except as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.



Factors that could cause actual results to differ
materially from those expressed or implied by the forward-looking statements include, but are not limited to, those described in Risk Factors or in the documents incorporated by reference in this report.



PART I



|Item 1. |  | Business.
|------- |  | ---------



The Company was originally incorporated in California in 1977, and reincorporated in Delaware in March 1994. The Company is a distributor and wholesaler
of in-line skates, skateboards, scooters, recreational protective equipment (such as wrist guards, elbow pads and knee pads used by skaters and skateboarders) and helmets, canopies, and springless 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.



The following table shows the Companys major product categories as a
percentage of total gross sales for the fiscal years ended July 31, 2003, 2002, and 2001 (see footnote 1, segment information, in notes to financial statements). Action sport products include in-line skates, skateboards, scooters, bodyboards and
bike accessories. The outdoor products include canopies and springless trampolines. Protective products include recreational protective equipment, such as wrist guards, elbow pads, knee pads and helmets. Other products consist primarily of
replacement parts.



|                       |  | 2003 |   |  | 2002 |   |  | 2001 |  
|---------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Action sports products |  | 41   | % |  | 34   | % |  | 48   | %
|Outdoor products       |  | 55   | % |  | 57   | % |  | 37   | %
|Protective products    |  | 3    | % |  | 8    | % |  | 15   | %
|Other products         |  | 1    | % |  | 1    | % |  | (*   | )
|                       |  |      |   |  |      |   |  |      |  
|Total                  |  | 100  | % |  | 100  | % |  | 100  | %
|                       |  |      |   |  |      |   |  |      |  

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|(*) | Less than one percent.
|--- | ----------------------



The Company has developed and markets its Quik Shade® instant canopy that is designed to offer portable shade and shelter for a variety of uses with the convenience of quick set-up and take-down. Canopies
generally are sold in a variety of sizes and colors. They contain a fully assembled powder coated frame with multiple height adjustments, aluminum backed polyester tops offering 100% protection from harmful UV rays, storage bags and anchoring kits.
The Company presently offers multiple models of the Quik Shade® and a line of Quik Shade® accessories.



The Company has
developed and markets, under an exclusive license agreement, a springless trampoline that makes use of elastic bands for its suspension system. The agreement gives the Company worldwide rights to the patented technology for the duration of the
patent. The trampolines come in different sizes and are sold under the Airzone and Ultraflex
brands. Additionally, the Company markets mini-trampolines, trampoline enclosures and trampoline covers.



In-line skates feature wheels mounted in a straight line on a composite plastic or aluminum chassis, functioning much like the blade on an ice skate. The
Company sells various models of in-line skates to the mass market under the VFX®brand.
The Companys in-line skates generally consist of a molded polymer boot with a wheel chassis attached to the bottom of the boot, and high density polyurethane wheels mounted on bearings and bolted through the wheel chassis. The boot contains a
removable breathable nylon liner that increases comfort. Each chassis holds three or four wheels mounted in line, and each pair of skates has either one or two brakes mounted on the rear of the chassis.



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The Company markets a wide range of skateboards and scooters. The Company presently offers different
models of skateboards and scooters under the Variflex®, VFX®, Static® and other licensed brands.



The Company also markets a line of recreational protective helmets. Different
helmets are marketed to cyclists, snowboarders, skateboarders and in-line skaters. The Companys helmets are manufactured by independent contractors using either a process of injecting a polyurethane foam or expanded polystyrene (EPS) to form a
strong, lightweight protective inner shell bonded to a hard PVC outer shell. These helmets meet or exceed the applicable standards of the American Society for Testing and Materials (ASTM) or the Consumer Product Safety Commission (CPSC). We also
offer a line of skating and skateboarding protective equipment, such as knee pads, elbow pads and wrist guards.



Additionally, the Company offers bodyboards and a line of bicycle accessories, such as lights, pumps, locks, saddles and tubes under the brand name
Cycle-Force.



The Companys products are marketed in North America primarily through a
network of independent sales representatives and through customer visits by Company employees. The Companys customers consist primarily of national mass merchandisers, regional mass merchandisers, catalog houses, major sporting goods chains
and major home improvement chains.



Source and
availability of materials.



The Companys
products are sourced from independent contractors located primarily in Asia. These suppliers manufacture, assemble and package the Companys products under the detailed specifications of the Companys management representatives who visit
frequently to oversee quality control and contain costs The raw materials and subcomponents for these products are manufactured by independent contractors, most of which are also located in Asia, that have been procured by the Companys
suppliers or, often, by the Company.



The Company submits
purchase orders to its manufacturers for the production of specific amounts of its products and has not entered into any long-term contractual agreements. The Company negotiates the cost of its products directly with its foreign suppliers in U.S.
Dollars.



A significant portion of the Companys products
are manufactured in mainland China, which trades with the United States under a Normal Trade Relations (NTR) trade status. While the Company believes that alternative manufacturing sources could be found, maintaining existing costs will
depend upon these products continuing to be treated under NTR tariff rates. From time to time, the U.S. has threatened to rescind NTR tariff rates and impose trade sanctions on certain goods manufactured in China. To date, no such sanctions have
been imposed that have affected the Company or its products; however there can be no assurance with regard to the possible imposition of sanctions in the future.



Patents, trademarks, licenses, franchises and concessions.



The Company holds or has pending certain design patents and utility patents.
In the course of its business the Company employs various trademarks and trade names, including its own logos, in the packaging and advertising of its products. The Company has registered the Variflex®, VFX®, Static®, Quik Shade®, Motoshade, Motoshed,
Ultraflex, Airzone and CycleForce trademarks in the United States, and actively protects against any unauthorized use.
Registrations of various other trademarks for the Companys products are pending.



During fiscal 2003, the Company entered into a license agreement with NASCAR® to produce the NASCAR® logo on instant canopies. The Company also entered into a license agreement with NO-RULES®, to produce several lines of in-line skates, helmets, skateboards, scooters,
protective pads, accessories and other new products to be introduced in the future. Both these licenses expire in December 2004. These new licenses complement the Companys other licenses currently in use; SpongeBob Squarepants®, Rocket Power® and Jimmy Neutron®, all three of which are popular animation programs on the Nickelodeon channel.
The Rocket Power® and SpongeBob
Squarepants® agreements expire in December
2003, while the Jimmy Neutron®
agreement expires in December 2004. The Company is currently in negotiations and believes that it will renew the SpongeBob® and Rocket Power® licenses for another two-year period.



During fiscal 1999, the Company entered into an exclusive license agreement with Product Resource and Development, Inc. to manufacture and market a
springless trampoline that uses an elastic material to provide the bounce and lift. The agreement gives the Company worldwide rights to the patented technology for the duration of the patent. The trampolines are being sold under the Airzone and Ultraflex brands. Additionally, the Company markets mini trampolines, trampoline enclosures and
trampoline covers.





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Major customers.



The Company had four customers (The Sports Authority, Target, Toys R Us and Wal-Mart) that individually
accounted for in excess of 10% of the Companys sales in 2003. These companies represented, in aggregate, approximately 59% of the Companys total sales in 2003. The loss of any one or more of the Companys major customers could have
a material adverse effect upon the Company.



Backlog.



Backlog may not be indicative of future sales as
timeliness of order placement and shipments vary. In addition, order cancellation or other adjustments may occur. The Company had approximately $5,250,000 in unfilled purchase orders as of September 30, 2003, compared to approximately $7,360,000 as
of September 30, 2002. The decrease in backlog is due primarily to a decrease in unfilled orders of in-line skates, skateboards and scooters.



Competition.



The principal competitive factors in each of the Companys product categories are price, quality, brand recognition and customer service, with the
most important factors being price and quality. The Company believes that its products in each category, when compared to competitors products of comparable quality, are currently offered at similar prices to most of its competitors.



Independent research indicates that the Company
has a significant market share in the in-line skate category, particularly in the mass market segment, where Variflex enjoys name recognition and is considered a market leader. The Companys primary competitors in the in-line skate market
include Rollerblade Inc., Roller Derby (CAS) and World Sports. In the case of recreational protective equipment, CXSports is the Companys primary competitor in the mass market. Bell Sports Corp. (Bell) and Protective Technologies, Inc. (PTI)
are the primary competitors in the recreational helmet mass market. For instant canopies, the Companys primary competitors are International E-Z Up, Inc., Powell & Powell and Caravan. For trampolines, the Companys primary competitors
are Jumpking, Inc. and Hedstrom.



Employees.



As of July 31, 2003, the Company employed
approximately 91 full-time employees. None of the Companys employees are represented by unions.



|Item 2. |  | Properties.
|------- |  | -----------



The Companys principal facility is a leased 104,000 square foot concrete tilt-up building comprising the Companys corporate headquarters and
executive offices, as well as serving as the United States distribution center for the Companys products, located at 5152 North Commerce Avenue, Moorpark, California, approximately forty miles northwest of Los Angeles, California. The Company
also leases an immediately adjacent 31,233 square foot building, consisting primarily of additional warehouse space. The leases for these facilities expire December 31, 2005 with a five-year renewal option, after which management believes new leases
can be negotiated, at those locations or for other equivalent space, on commercially satisfactory terms. The Company also leases two additional buildings used for warehouse space (in aggregate approximately 55,000 square feet) under operating leases
requiring minimum monthly payments of approximately $25,000 and $3,600, respectively, both of which amounts include property taxes, insurance, repairs and maintenance, and utilities. These agreements both expire in June 2004.



Management believes that the Companys present facilities will be
adequate for the near future.



|Item 3. |  | Legal Proceedings.
|------- |  | ------------------



On December 19, 2001, JumpSport Inc., filed a complaint in the United States District Court for the Northern District of California against the Company
and ten other entities (the JumpSport Action). The complaint alleged, among other things, that the Companys trampoline enclosures infringed and continues to infringe two patents owned by the plaintiff.



The Company has settled the litigation with JumpSport, Inc. In accordance
with the terms of the settlement agreement, JumpSport, Inc has dismissed all claims. The terms of the settlement are subject to a confidentiality agreement.



From time to time, the Company is involved in claims involving product liability arising in the ordinary course of its business. The Company carries
product liability insurance coverage with self insured retention deductible claims. A prior year insurance carrier has declared bankruptcy and as such, coverage for one claim has the potential of not being covered by insurance. At July 31, 2003 the
Company has a reserve against all insured and uninsured claims. In the opinion of management, any additional liability to the Company arising under any pending product liability claims would not materially affect its financial position, results of
operations or cash flows.



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|Item 4. |  | Submission of Matters to a Vote of Security Holders.
|------- |  | ----------------------------------------------------



No matters were submitted to a vote of the Companys stockholders during the quarter ended July 31, 2003.



PART II



|Item 5. |  | Market for Companys Common Equity and Related Stockholder Matters.
|------- |  | -------------------------------------------------------------------



(a) Market Information.



The high and low last sale prices for the Companys common stock, as reported on the Nasdaq National Market, during
each of the quarters of the fiscal years ended July 31, 2002 and 2003 were as follows (per share):



|                            |  | High |  | Low 
|--------------------------- |  | ---- |  | ----
|Fiscal 2002, quarter ended: |  |      |  |     
|October 31, 2001            |  | 5.71 |  | 4.53
|January 31, 2002            |  | 5.57 |  | 4.40
|April 30, 2002              |  | 5.00 |  | 4.25
|July 31, 2002               |  | 4.74 |  | 4.00
|Fiscal 2003, quarter ended: |  |      |  |     
|October 31, 2002            |  | 4.09 |  | 3.25
|January 31, 2003            |  | 4.00 |  | 3.13
|April 30, 2003              |  | 3.85 |  | 3.41
|July 31, 2003               |  | 6.30 |  | 3.55



The Companys
Common Stock is traded on the Nasdaq SmallCap Market under the symbol VFLX. As of October 1, 2003, the closing sale price of the Companys Common Stock on the Nasdaq SmallCap Market was $6.39.



(b) Holders.



There were 99 holders of record of the Companys Common Stock on
October 1, 2003.



(c) Dividends.



The Company has never paid cash dividends and has no present intention to
pay cash dividends in the foreseeable future. The Delaware General Corporation Law also restricts the Companys ability to pay dividends. The Delaware General Corporation Law provides that a Delaware corporation may pay dividends either (1) out
of the corporations surplus (as defined by Delaware law), or (2) if there is no surplus, out of the corporations net profit for the fiscal year in which the dividend is declared or the preceding fiscal year. Any determination in the
future to pay dividends will depend on the Companys financial condition, capital requirements, results of operations, contractual limitations, legal restrictions and any other factors the Board of Directors deems relevant.



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|Item 6. |  | Selected Financial Data.
|------- |  | ------------------------



The following selected consolidated financial data with respect to the Companys consolidated financial position as of July 31, 2003 and 2002 and
results of operations for the years ended July 31, 2003, 2002, and 2001 has been derived from the Companys audited consolidated financial statements appearing elsewhere in this report. This information should be read in conjunction with such
consolidated financial statements and the notes thereto. The selected financial data with respect to the Companys consolidated financial position as of July 31, 2001, 2000 and 1999 and results of operations for the years ended July 31, 2000
and 1999 has been derived from the Companys audited consolidated financial statements, which are not presented in this report.



|                                     |  | (In thousands, except per share data)
|------------------------------------ |  | -------------------------------------
|                                     |  | 2003                                 
|Operations Data:                     |  |                                      
|Net sales                            |  | $                                    
|Pre-tax income (loss)                |  |                                      
|Net income (loss)                    |  |                                      
|Net income (loss) per share:         |  |                                      
|Basic                                |  | $                                    
|Diluted                              |  | $                                    
|Weighted average shares outstanding: |  |                                      
|Basic                                |  |                                      
|Diluted                              |  |                                      
|                                     |  |                                      
|Balance Sheet Data:                  |  |                                      
|Total assets                         |  | $                                    
|Working capital                      |  |                                      
|Long-term obligations                |  |                                      
|Stockholders equity                 |  |                                      



|Item 7. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- |  | --------------------------------------------------------------------------------------



Overview



Net sales consist of invoiced sales less agreed upon rebates and discounts (primarily returns and allowances, and cooperative advertising expenses). The
Company sells its products primarily through mass merchandise, major sporting goods and major home improvement channels. The Company uses independent sales representatives to provide sales support.



Cost of goods sold consists 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.



New Accounting Standards



In August 2002, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal
plan. These new standards will be prospectively applied for exit or disposal activities initiated after December 31, 2002. If exit or disposal activities are initiated after that date, SFAS No. 146 will affect the timing of the recognition of the
related costs. The Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transaction and Disclosure-an amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based



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Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has included disclosures in its quarterly reports and this annual report.



Results of Operations



Year Ended July 31, 2003 Compared to Year Ended July 31, 2002



Net Sales. Net sales for the fiscal year ended July 31, 2003 totaled $57,884,000, an increase of $11,438,000
or 25% from fiscal 2002 net sales of $46,446,000. The increase in net sales for the year is attributable to an increase in sales of action sport products and outdoor products partially offset by a decrease in sales of protective products.



Gross sales of the action sport product category (which
includes in-line skates, skateboards, scooters, bodyboards and bike accessories) increased $8,578,000 or 52% to $ 25,221,000 in 2003 from $16,643,000 in 2002. The increase in action sports was primarily the result of greater sales of in-line skates
because the Company secured an exclusive in-line skate program with one of its top customers for a two-year period beginning in 2003 and, to a lesser extent, increased sales of other products.



Gross sales of outdoor products (which include canopies and springless
trampolines) increased $5,293,000, or 19% to $33,449,000 in 2003 from $28,156,000 in 2002. The increase in outdoor products was a result of a 29% increase in sales of canopies partially offset by a 7% decline in sales of trampolines.



The overall increase in gross sales in both action sports and outdoor
products were partially offset by a $2,046,000, or 50% reduction in protective products (which include recreational protective equipment such as wrist guards, elbow pads, knee pads and helmets) as gross sales of this category were $2,080,000 in 2003
and $4,126,000 in 2002. This decrease in gross sales of protective products was largely the result of the expiration of a license to use the X-Games logo on certain products.



Four customers in fiscal 2003 individually accounted for more than 10% of the Companys gross sales. Collectively these
four customers accounted for approximately 59% of the Company sales in 2003, compared to the prior year where three customers exceeded 10% of sales and in aggregate, accounted for 40% of the Companys gross sales.



Gross Profit. Gross profit for the fiscal year ended July 31,
2003 increased $2,086,000 compared to fiscal year ended July 31, 2002, representing a 28.5% increase. The Companys gross margin increased to 16.3% in fiscal 2003 compared to 15.8% in fiscal 2002. The increase in gross margin for the year was
due to the 25% increase in sales during the period and by a substantial portion of labor and overhead costs being fixed in nature and, therefore, not increasing with higher sales volumes. Partially offsetting this increase in gross margin were lower
gross margins on an increase in products shipped directly to customers from Asia which have lower gross margins, and overall competitive pricing on certain products resulting in lower prices.



Operating Expenses.The Companys operating expenses
(which consist of selling and marketing expenses and general and administrative expenses) for fiscal 2003 totaled $8,086,000, or 14.0% of net sales. Operating expenses for fiscal 2002 were $8,276,000, or 17.8% of net sales.



Selling and marketing expenses totaled $2,614,000 in fiscal 2003, or 4.5% as
a percentage of net sales, as compared to $2,547,000 or 5.5% of net sales in fiscal 2002. The slight increase in selling and marketing costs is primarily the result of higher commission expenses due to higher sales.



General and administrative expenses totaled $5,472,000 or 9.5% of sales as
compared to $5,729,000 or 12.3% of sales. The decrease in general and administrative expenses is primarily attributable to certain non-recurring expenses in 2002 associated with facility maintenance and recruitment fees.



Other Income (Expense).Other income (expense) for fiscal 2003
was $110,000 as compared to $269,000 in fiscal 2002, a decrease of $159,000, or 59%. This decrease was due to decreased interest income as a result of lower interest rates.



Provision for Income Taxes. The income tax provision for fiscal 2003 was $583,000 compared to zero in the
prior year. The effective rate differs from the federal statutory rate due to certain expenses not deductible for federal tax purposes and state taxes. At July 31, 2003, the Company had a valuation allowance of approximately $2.0 million against a
portion of its net deferred tax assets. To the extent that the Company generates sufficient taxable ordinary income in the future, the valuation allowance may be reduced. Should the Company not generate sufficient taxable income in the future, the
valuation allowance may need to be increased. Approximately $1.4 million of the valuation allowance would only be reversed and reflected as a reduction



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of income tax expense if the Company generates qualifying capital gain income, which we do not expect to occur in the foreseeable future.



Year Ended July 31, 2002 Compared to Year Ended July 31, 2001



Net Sales.Net sales for the fiscal
year ended July 31, 2002 totaled $46,446,000, a decrease of $11,267,000 or 20% from fiscal 2001 net sales of $57,713,000. The decrease in sales was primarily the result of decreased sales in action sport products and protective products partially
offset by an increase in outdoor products.



Gross sales in the
action sports category (which includes in-line skates, skateboards and scooters) decreased $12,900,000 from $29,500,000 in fiscal 2001 to $16,600,000 in fiscal 2002 primarily as a result of the Company dropping the scooter business, which
contributed over $8 million in fiscal 2001. In addition, gross sales for in-line skates and skateboards decreased in 2002 by 22% and 25% respectively, primarily due to lower volume sales in these products as a result of the consumer spending
slowdown that caused many retailers to be extremely cautious and to manage their inventory levels downward.



Gross sales of protective products (which include recreational protective equipment such as wrist guards, elbow pads, knee pads and helmets) decreased
$5,049,000, or 55%, from $9,175,000 in fiscal 2001 to $4,126,000 in fiscal 2002. This was primarily due to lower sales on X-Games identified products as a result of the expiration of the Companys right to sell X-Games products on March 31,
2002.



The overall decrease in gross sales was partially offset
by an increase in gross sales of our outdoor products (which include canopies and springless trampolines). Gross sales of our outdoor products increased $5,717,000, or 25%, to $28,156,000 in 2002 from $22,439,000 in 2001. Canopies and trampolines
when compared to fiscal 2001 showed increased sales of 25% and 27%, respectively.



Three customers in fiscal 2002 individually accounted for more than 10% of the Companys gross sales. Collectively, these three customers accounted for approximately 40% of the Company sales compared to the prior
year where only one customer (at 27%) exceeded 10%.



Gross Profit.Gross profit for the fiscal year ended July 31, 2002 decreased by $1,739,000 compared to the fiscal year ended July 31, 2001, representing a 19% decrease. The Companys gross profit margin as a percentage of
net sales was relatively flat at 15.8% in fiscal 2002, compared with 15.7% in fiscal 2001. Changes in product mix contributed to the relatively minimal change in gross profit. Outdoor products, specifically canopies, were sold at slightly higher
gross profit margins. However, the increase in gross profit margin resulting from increased canopy sales was offset by lower gross profit margins on increased international direct sales and to a lesser degree over-all competitive pricing.



Operating Expenses.The Companys operating
expenses (consisting of selling and marketing expenses and general and administrative expenses) for fiscal 2002 totaled $8,276,000, or 17.8% of net sales. Operating expenses for fiscal 2001 were $7,914,000, or 13.7% of net sales.



Selling and marketing expenses totaled $2,547,000 in fiscal 2002, or 5.5% as
a percentage of sales, as compared to $3,704,000 or 6.4% of sales in fiscal 2001. The lower costs in selling and marketing reflect decreased commission expense as a result of lower sales in fiscal 2002, lower employee wages from an unfilled position
for a part of the year and lower promotional tradeshow expenses.



General and administrative expenses totaled $5,729,000 or 12.3% of sales as compared to $4,743,000 or 8.2% of sales. The increase in general and administrative expense is partially a result of increased emphasis by the Company on product
development. Product development expense in fiscal 2002 amounted to $1,110,000 compared to $811,000 in the prior year. The increase in general and administrative expense also included increased facility costs and increased professional fees as a
result of the Company having received a legal fee reimbursement in the previous year.



Other Income (Expense).Other income (expense) for fiscal 2002 was $269,000 as compared to $572,000 in fiscal 2001, a decrease of $303,000, or 53%. This decrease was primarily due to decreased interest
income due to lower interest rates and lower cash balances held throughout the year.



Provision for Income Taxes.No provision or benefit for income taxes was recorded in fiscal 2002 due to the operating loss throughout
the year and due to changes in the valuation allowance. As of July 31, 2002 the company had a valuation allowance of approximately $2,000,000 against its net deferred tax assets. Approximately $1,400,000 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 the Company does not expect to occur in the foreseeable future.



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Liquidity and Capital Resources



The Company funds its activities principally from cash flow generated from operations and a credit facility with an
institutional lender. Cash and cash equivalents totaled $17,582,000 as of July 31, 2003, compared to $12,169,000 as of July 31, 2002. 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. The increase in cash and cash equivalents of $5,413,000 was primarily due to the Companys lower inventory balances and to a lesser extent
decreased accounts receivable balances. Net working capital as of July 31, 2003 was $29,890,000, compared to $28,491,000 as of July 31, 2002, and the Companys current ratio (which measures the liquidity of the Company by comparing the current
assets as a percentage of current liabilities) was 5.2:1 as of July 31, 2003, compared to 4.6:1 as of July 31, 2002.



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 July 31, 2003 was $379,000 leaving approximately $8,621,000 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 anticipate borrowing cash available under the line throughout fiscal 2004.
The current agreement expires May 1, 2005.



The Company had
long-term debt of $620,000 as of July 31, 2003 compared to $739,000 as of July 31, 2002, with the decrease due to a $200,000 principal payment made in the first quarter, offset by accrued interest for the period. The long-term debt arose as a result
of a patent that was purchased in April 2000 which involved a collapsible canopy with a telescoping roof support structure and is payable in installments of $200,000 each year, to be paid over an eight-year period with a final payment on August 1,
2007.



Future Liquidity and Financial Position



The Company intends to continue to focus upon building and maintaining its
existing product lines. The Company also plans to continue to devote resources toward the pursuit and development of new products. In addition, management continues to explore the possibility of making selected acquisitions of other companies or
products 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 July
31, 2003 and the effects such obligations are expected to have on liquidity and cash flow in future periods.



|                                   |  | Payments Due by Period(In thousands)
|---------------------------------- |  | ------------------------------------
|Contractual Obligations            |  | Total                               
|Notes Payable                      |  | $                                   
|Operating Leases                   |  |                                     
|Minimum Royalty Payments *         |  |                                     
|                                   |  |                                     
|Total Contractual Cash Obligations |  | $                                   
|                                   |  |                                     



| |  includes minimum royalty payments from licensed contracts entered into prior to the filing of the companys Form 10K report.
|- | ------------------------------------------------------------------------------------------------------------------------------



9



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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 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.



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 receivable, reserves taken against inventory, accruals for sales returns and allowances, warranty, product liability claims, and
other litigation related matters.



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



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



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



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



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



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



Additional Factors That Could Affect Operating Results



The following factors, together with other information contained elsewhere herein, should be considered carefully in evaluating the Company and its business.



10



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Loss of a major customer would immediately and severely curtail distribution outlets.In
the past three fiscal years, the Company has had several customers that accounted for a majority of the Companys sales. As is customary in the industry, the Company generally does not have long-term contracts with any of its customers. The
loss of, or a reduction in business from, any of its major customers would have a material and adverse effect on the Companys business results of operations and financial condition. In addition, because a large percentage of the Companys
accounts receivables are due from the major customers, the failure of any of them to make payments with respect to its account would have a material and adverse effect on the Companys results of operations and financial condition.



If we cannot control prices, our very price-sensitive customers will
purchase from our competitors instead of us.The Company operates in a highly competitive environment and there are no significant technological or manufacturing barriers to entry for most product categories other than instant canopies and
springless trampolines. While the Company believes that the principal competitive factors in its market are price, quality of product, brand recognition, accessibility and customer service, the Companys primary customers, mass merchandisers,
are extremely price sensitive. As a result, the Company must continually monitor and control its costs while refining its products to maintain its market position. There can be no assurance that the Company can continue to provide its products at
prices which are competitive, or that it can continue to design and market products that appeal to consumers even if price competitive. Some of the Companys current and potential competitors have longer operating histories, greater brand
recognition and significantly greater financial, marketing and other resources than the Company. The Company also competes to a lesser degree with manufacturers who sell directly to our customers.



Consumer demand could shift away from our products.The Company
must continually anticipate the emergence of, and adapt its products to, the popular demands of consumers. No assurance can be given, however, that consumer demand for the Companys product categories in general, or the Companys products
in particular, will continue into the future. A reduction in the demand for these products could have a material and adverse effect on the Companys results of operations.



Changes in government regulations could hurt the Companys business.The consumer retail industry is
regulated by many agencies including but not limited to, the Consumer Product Safety Commission and the California Department of Food and Agriculture Division of Measurement Standards. The nature of any new laws and regulations and the manner in
which existing and new laws and regulations may be interpreted and enforced cannot be fully determined. The enforcement of existing laws and regulations and the adoption of any future laws or regulations might decrease the demand for the
Companys products, impose taxes or other costly technical requirements or otherwise increase the cost of doing business which could hurt the Companys business. The Company cannot predict the impact, if any, that future regulation or
regulatory changes may have on the Companys business.



Fluctuations in the companys quarterly operating results may negatively affect the Companys stock price.The Companys quarterly results may fluctuate from quarter to quarter in the future due to a variety of
factors, not all of which are under the Companys control. Some of the factors that could cause the Companys revenues and operating results to fluctuate include the following:



| |  | the mix of products sold;
| | - | -------------------------



| |  | the introduction of new products or delays in such introductions;
| | - | -----------------------------------------------------------------



| |  | the introduction or announcement of new products by the Companys competitors;
| | - | ------------------------------------------------------------------------------



| |  | customer acceptance of new products;
| | - | ------------------------------------



| |  | shipment delays;
| | - | ----------------



| |  | competitive pricing pressures;
| | - | ------------------------------



| |  | the adverse effect of suppliers or the Companys failure, and allegations of their failure, to comply with applicable regulations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | the availability and cost to its suppliers of raw materials;
| | - | ------------------------------------------------------------



| |  | the introduction of its products into new markets;
| | - | --------------------------------------------------



| |  | unanticipated changes in the timing of customer promotions;
| | - | -----------------------------------------------------------



| |  | increased operating expenses; and
| | - | ---------------------------------



| |  | economic conditions in general and in the retail sector in particular.
| | - | ----------------------------------------------------------------------



It is possible that in some future periods the Companys results of operations may fall below the expectations of public market analysts and
investors. This could result in a decline in the value of the Companys common stock.



Reliance on Foreign Suppliers to Source the Companys Products.The Companys products are primarily sourced from suppliers located in Asia with whom the Company does not have long-term
contractual agreements. If the Company



11



---

were unable to develop and maintain relationships with suppliers that would allow it to obtain sufficient quantities of merchandise on acceptable commercial
terms, its business, prospects, financial condition and results of operations would be materially and adversely affected. Moreover, the Company may not be able to obtain its products and supplies on substantially similar terms, including cost, in
order to sustain its operating margins. Although management presently believes that other suppliers could be obtained in such instances, there can be no assurance that the Company would be able to obtain products and supplies on substantially
similar terms, including cost, in the future. In addition, purchasing products from foreign suppliers subjects the Company to the general risks of doing business abroad. These risks include potential delays in shipment, work stoppages, adverse
fluctuations in currency exchange rates, changes in import duties and tariffs, changes in foreign regulations and political instability.



A significant portion of the Companys products, including various models of its in-line skates, are manufactured in mainland China, which trades
with the United States under a Normal Trade Relations (NTR) trade status. While the Company believes that alternative manufacturing sources could be found, maintaining existing costs will depend upon these products continuing to be
treated under NTR tariff rates. From time to time, the U.S. has threatened to rescind NTR tariff rates and impose trade sanctions on certain goods manufactured in China. To date, no such sanctions have been imposed that have affected the Company or
its products; however there can be no assurance with regard to the possible imposition of sanctions in the future.



In addition, economic conditions in Asia could have a material and adverse impact upon the Companys ability to procure products from suppliers. Any
economic and financial difficulties experienced in Asia could cause a delay or inability to procure products from the Companys suppliers which could have a material adverse effect on its business, operating results and financial condition



The Companys product mix subjects it to
potentially large product liability claims. Due to the nature of its products, the Company is subject to product liability claims, including claims for serious personal injury or death. Coverage is on a claims-made basis, and is subject to
certain deductibles. Although the Company believes that it has adequate liability insurance for risks arising in the normal course of business, including product liability insurance with respect to all of its products, there can be no assurance that
insurance coverage will be sufficient to cover one or more large claims or that the applicable insurer will be solvent at the time of any covered loss. Further, there can be no assurance that the Company will be able to obtain insurance coverage at
acceptable levels and cost in the future. Successful assertion against the Company of one or a series of large claims, or of one or a series of claims exceeding any insurance coverage, could have a material and adverse effect on the Companys
results of operations and financial condition.



Our
expenses could increase dramatically in defense of, or due to the loss of, any of our trademarks and proprietary rights. There are risks inherent in the design and development of new products and product enhancements, including those
associated with patent issues and marketability. Potential liability from patent and other intellectual property infringements can have a material and adverse effect on the Companys business, financial condition, results of operations or cash
flows.



With respect to the Companys own patents, service
marks, trademarks, trade secrets and similar intellectual property, the Company considers such proprietary rights as critical to its success, and relies on patent and trademark law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its proprietary rights. The Company holds or has pending certain design patents and utility patents and employs various trademarks, trade names, including its own logos, in the
packaging and advertising of its products. The Company has registered the Variflex®, VFX®,
Static®, Quik Shade® and Airzone trademarks in the United States, and actively protects against any unauthorized use in
any other parts of the world. Registration of various other trademarks of the Companys products are pending.



Enforcing our intellectual property rights, including through litigation, could result in substantial costs that could have a material adverse effect on
the Companys results of operation and financial condition. In addition, effective patent, trademark, service mark and trade secret protection may not be available in every country in which the Companys products and services are made
available. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Companys patents, trademarks and similar proprietary
rights. In addition, there can be no assurance that other parties will not assert infringement claims against the Company. The Company has been subject to claims and expects to be subject to legal proceedings and claims from time to time in the
ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company. Such claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.



Current brand licenses
generally expire within two and a half years. Any extension or modification of these licenses is subject to the approval of both the licensor and Variflex. The loss or expiration of any of our larger revenue generating licenses could require us to
immediately discontinue sales that account for a significant amount of revenues.



Our expansion into new business areas might not be cost effective. The Company is expanding its operations by developing and promoting new or complementary products, expanding the breadth and depth of
products and services offered or expanding the acquisition of new or complementary businesses, products or technologies. There can be no assurance that the



12



---

Company would be able to expand its efforts and operations in a cost-effective or timely manner or that any such efforts would increase overall market
acceptance. Furthermore, any new business or product line launched by the Company that is not favorably received by consumers could damage the Companys reputation or its various brand names. Expansion of the Companys operations in this
manner would also require significant additional development and operations expenses and would strain the Companys management, financial and operational resources. The lack of market acceptance of such efforts or the Companys inability
to generate satisfactory revenues from such expanded businesses or products to offset their cost could have a material and adverse effect on the Companys business, prospects, financial condition and results of operations.



We are dependent on key personnel. The Companys
performance is substantially dependent on the continued services and on the performance of its senior management and other key personnel, particularly Raymond (Jay) H. Losi II, who has entered into an employment agreement with the Company, which
currently is on a month-to-month basis. The loss of Mr. Losi II could have a material and adverse effect on the Company. Although the Company carries a $5,000,000 life insurance policy on Mr. Losi II, no assurance can be given that the proceeds will
be sufficient to protect against such a loss. The Companys performance also depends on the Companys ability to retain and motivate its other officers and key employees. The loss of the services of any of its executive officers or other
key employees could have a material and adverse effect on the Companys business, prospects, financial condition, and results of operations. Other than the aforementioned exceptions, the Company has long-term employment agreements with only a
few of its key personnel. The Companys future success also depends on its ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, merchandising, marketing and customer service personnel.
Competition for such personnel is intense, and there can be no assurance that the Company will be able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract the necessary technical,
managerial, merchandising, marketing and customer service personnel could have a material and adverse effect on the Companys business, prospects, financial condition and results of operations.



A product recall on one of our products could require us to take an
unanticipated charge. Certain of the Companys products are subject to regulation by the Federal Consumer Products Safety Commission (the CPSC), and may therefore be subject to recall request by the CPSC. In October 2000,
the Company announced that it was voluntarily recalling certain of its X Games helmets that did not comply with all applicable CPSC standards. This recall was completed in fiscal 2001. In fiscal 2000, the Company recorded an estimated product recall
charge relating to these helmets, which was adjusted downward in fiscal 2001. Although the Company is not aware of any current proceeding by the CPSC that would result in the recall of the Companys products, any such proceeding could have a
material and adverse effect on the Companys business, prospects, financial condition and results of operations.



|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk.
|-------- |  | -----------------------------------------------------------



The Company is exposed to changes in interest rates primarily from its investments in short-term instruments and money market funds. These investments are
subject to risks associated with the level of volatility within the various financial markets, changes in interest rates, the condition of the United States and world economies and many other factors. The Company also has interest rate sensitivity
related to its revolving direct advance line of credit. The Company currently has no derivative financial instruments. As of July 31, 2003, a 10% change in interest rates would not have had a material effect on our results of operations, financial
position or cash flows.



|Item 8. |  | Financial Statements and Supplementary Data.
|------- |  | --------------------------------------------



The financial statements and schedules included herein are listed in Item 14.



13



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REPORT OF INDEPENDENT AUDITORS



The Board of Directors

Variflex, Inc.



We have audited the accompanying consolidated balance sheets of Variflex, Inc.
(the Company) as of July 31, 2003 and 2002, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended July 31, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our
audits.



We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Variflex, Inc. at July 31, 2003 and 2002, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended July 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



/s/    ERNST & YOUNG



Woodland Hills, California

September 19, 2003



14



---

VARIFLEX, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                           |  | July 31 |       
|---------------------------------------------------------------------------------------------------------- |  | ------- | ------
|                                                                                                           |  | 2003    |       
|Assets                                                                                                     |  |         |       
|Current assets:                                                                                            |  |         |       
|Cash and cash equivalents                                                                                  |  | $       | 17,582
|Trade accounts receivable, less allowances of $449 and $445 as of July 31, 2003 and 2002, respectively     |  |         | 10,719
|Inventory                                                                                                  |  |         | 5,702 
|Deferred income taxes                                                                                      |  |         | 1,043 
|Prepaid expenses and other current assets                                                                  |  |         | 1,915 
|                                                                                                           |  |         |       
|Total current assets                                                                                       |  |         | 36,961
|Property and equipment, net                                                                                |  |         | 425   
|Intangible assets                                                                                          |  |         | 1,892 
|Other assets                                                                                               |  |         | 306   
|                                                                                                           |  |         |       
|Total assets                                                                                               |  | $       | 39,584
|                                                                                                           |  |        
|Liabilities and stockholders equity                                                                       |  |         |       
|Current liabilities:                                                                                       |  |         |       
|Trade acceptances payable                                                                                  |  | $       | 177   
|Accounts payable                                                                                           |  |         | 1,155 
|Accrued warranty                                                                                           |  |         | 1,130 
|Accrued salaries and related liabilities                                                                   |  |         | 888   
|Accrued co-op advertising                                                                                  |  |         | 1,236 
|Accrued returns and allowances                                                                             |  |         | 1,332 
|Other accrued expenses                                                                                     |  |         | 953   
|Current maturities of note payable                                                                         |  |         | 200   
|                                                                                                           |  |         |       
|Total current liabilities                                                                                  |  |         | 7,071 
|                                                                                                           |  |        
|Note payable, less current maturities                                                                      |  |         | 620   
|                                                                                                           |  |        
|Commitments and contingencies                                                                              |  |         |       
|                                                                                                           |  |        
|Stockholders equity:                                                                                      |  |         |       
|Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued and outstanding                 |  |         |      
|Common stock, $.001 par value, 40,000,000 shares authorized, 6,044,736 issued as of July 31, 2003 and 2002 |  |         | 9     
|Common stock warrants                                                                                      |  |         | 702   
|Additional paid-in capital                                                                                 |  |         | 21,023
|Retained earnings                                                                                          |  |         | 18,874
|Treasury stock, at cost, 1,440,965 shares as of July 31, 2003 and 2002                                     |  |         | (8,715
|                                                                                                           |  |         |       
|Total stockholders equity                                                                                 |  |         | 31,893
|                                                                                                           |  |         |       
|Total liabilities and stockholders equity                                                                 |  | $       | 39,584
|                                                                                                           |  |         |       



See accompanying
notes.



15



---

VARIFLEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                             |  | Year Ended July 31 |       
|-------------------------------------------- |  | ------------------ | ------
|                                             |  | 2003               |       
|Net sales                                    |  | $                  | 57,884
|Cost of goods sold                           |  |                    | 48,469
|                                             |  |                    |       
|Gross profit                                 |  |                    | 9,415 
|                                             |  |                    |       
|Operating expenses:                          |  |                    |       
|Selling and marketing                        |  |                    | 2,614 
|General and administrative                   |  |                    | 5,472 
|Product recall charge reversal               |  |                    |      
|                                             |  |                    |       
|Total operating expenses                     |  |                    | 8,086 
|                                             |  |                    |       
|Income (loss) from operations                |  |                    | 1,329 
|                                             |  |                    |       
|Other income (expense):                      |  |                    |       
|Interest expense                             |  |                    | (83   
|Interest income and other                    |  |                    | 193   
|                                             |  |                    |       
|Total other income, net                      |  |                    | 110   
|                                             |  |                    |       
|Income (loss) before income taxes            |  |                    | 1,439 
|Provision for income taxes                   |  |                    | 583   
|                                             |  |                    |       
|Net income (loss)                            |  | $                  | 856   
|                                             |  |                    |       
|Net income (loss) per share of common stock: |  |                    |       
|Basic                                        |  | $                  | 0.19  
|                                             |  |                    |       
|Diluted                                      |  | $                  | 0.19  
|                                             |  |                    |       
|Weighted average shares outstanding:         |  |                    |       
|Basic                                        |  |                    | 4,604 
|                                             |  |                    |       
|Diluted                                      |  |                    | 4,614 
|                                             |  |                    |       



See accompanying
notes.



16



---

|                           |        | Common Stock |        | CommonStockWarrants |   | AdditionalPaid-InCapital |   | RetainedEarnings |  |        | Treasury Stock |  |   | Total  |  
|-------------------------- | ------ | ------------ | ------ | ------------------- | - | ------------------------ | - | ---------------- |  | ------ | -------------- |  | - | ------ | -
|                           | Shares |              | Amount |                     |   |                          |   | Shares           |  | Amount |                | 
|Balance at July 31, 2000   |        | 6,025,397    |        | $                   | 9 |                          | $ | 702              |  | $      | 21,023         |  | $ | 17,350 |  
|Comprehensive income:      |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Net income                 |        |             |        |                     |  |                          |   |                 |  |        |               |  |   | 1,346  |  
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Total comprehensive income |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Balance at July 31, 2001   |        | 6,025,397    |        |                     | 9 |                          |   | 702              |  |        | 21,023         |  |   | 18,696 |  
|Exercise of stock options  |        | 19,339       |        |                     |  |                          |   |                 |  |        |               |  |   |       |  
|Comprehensive loss :       |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Net loss                   |        |             |        |                     |  |                          |   |                 |  |        |               |  |   | (678   | )
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Total comprehensive loss   |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Balance at July 31, 2002   |        | 6,044,736    |        |                     | 9 |                          |   | 702              |  |        | 21,023         |  |   | 18,018 |  
|                           |        |              |        |                     |   |                          |   |                 
|Comprehensive income :     |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Net income                 |        |             |        |                     |  |                          |   |                 |  |        |               |  |   | 856    |  
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Total comprehensive income |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  
|Balance at July 31, 2003   |        | 6,044,736    |        | $                   | 9 |                          | $ | 702              |  | $      | 21,023         |  | $ | 18,874 |  
|                           |        |              |        |                     |   |                          |   |                  |  |        |                |  |   |        |  



See accompanying
notes.



17



---

VARIFLEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                   |  | Year Ended July 31 |       
|-------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                   |  | 2003               |       
|Operating activities                                                                               |  |                    |       
|Net income (loss)                                                                                  |  | $                  | 856   
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                    |       
|Depreciation and amortization                                                                      |  |                    | 105   
|Amortization of intangibles                                                                        |  |                    | 478   
|Non-cash interest charge                                                                           |  |                    | 81    
|Deferred income taxes                                                                              |  |                    | 187   
|Loss on disposal of fixed assets                                                                   |  |                    |      
|Changes in operating assets and liabilities:                                                       |  |                    |       
|Trade accounts receivable                                                                          |  |                    | 622   
|Inventory                                                                                          |  |                    | 5,072 
|Prepaid expenses and other assets                                                                  |  |                    | (756  
|Trade acceptances payable                                                                          |  |                    | (153  
|Accounts payable                                                                                   |  |                    | (649  
|Accrued product recall expenses                                                                    |  |                    |      
|Other current liabilities                                                                          |  |                    | (50   
|                                                                                                   |  |                    |       
|Net cash provided by (used in) operating activities                                                |  |                    | 5,793 
|                                                                                                   |  |                    |       
|                                                                                                   |  |                    |       
|Investing activities                                                                               |  |                    |       
|Purchases of property and equipment                                                                |  |                    | (180  
|Other assets                                                                                       |  |                    |      
|                                                                                                   |  |                    |       
|Net cash used in investing activities                                                              |  |                    | (180  
|                                                                                                   |  |                    |       
|                                                                                                   |  |                    |       
|Financing activities                                                                               |  |                    |       
|Principal payment on note payable                                                                  |  |                    | (200  
|                                                                                                   |  |                    |       
|Net cash used in financing activities                                                              |  |                    | (200  
|                                                                                                   |  |                    |       
|Net increase (decrease) in cash                                                                    |  |                    | 5,413 
|Cash and cash equivalents beginning of period                                                      |  |                    | 12,169
|                                                                                                   |  |                    |       
|Cash and cash equivalents at end of period                                                         |  | $                  | 17,582
|                                                                                                   |  |                    |       
|Cash paid during the period for:                                                                   |  |                    |       
|Interest                                                                                           |  | $                  |      
|Income taxes                                                                                       |  | $                  | 475   



See accompanying
notes.



18



---

VARIFLEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2003



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of Consolidation and Basis of Presentation



The consolidated financial statements include the accounts of Variflex, Inc., a Delaware
corporation and its two wholly owned subsidiaries (which have been closed and are currently inactive), Oketa Limited (Oketa), a Hong Kong corporation, and Static Snowboards, Inc., a Delaware corporation (collectively, the Company). The Company
markets and distributes in-line skates, skateboards, recreational protective equipment (such as knee pads, elbow pads and wrist guards) and helmets, portable instant canopies, trampolines and other products. The Company designs and develops these
products which are then manufactured to the Companys specifications by independent contractors. The Companys products are sold, primarily in the United States, to retailers, with some sales to wholesalers and distributors. All
significant intercompany accounts and transactions have been eliminated in consolidation.



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 receivable, reserves taken against inventory, accruals for sales returns and allowances, warranty, product liability claims, other
litigation related matters, and the accrual for the product recall charge discussed in Note 14.



Revenue Recognition and Returns and Allowances



The Company recognizes revenue from product sales upon shipment which is at the point in time when risk of loss is transferred to the customer, net of estimated returns and allowances. The Company has established programs with its customers
which enable them to receive credit for defective merchandise covered under its warranty policy. The Companys products are under warranty against defects in material and workmanship for varying periods from date of purchase. The amount of
potential credits is estimated and provided for in the period of sale.



In
addition, the Company has certain cooperative advertising programs with its customers. In accordance with Emerging Issue Task Force 00-25, Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer, the Company
records the cooperative advertising expenditures as a reduction of revenue. Cooperative advertising expenditures are recorded at the time of revenue recognition.



Cost of Goods Sold



Cost of goods sold consist of product costs, freight distribution costs, warehouse costs, payroll expense, facility costs and other product related costs such as warranty
expense and royalty fees.



The Company records freight and handling charges
billed to customers in net sales and records related freight and handling costs in cost of goods sold.



19



---

Concentration of Risk



The Company performs periodic evaluation of the credit worthiness of its customers and generally does not require collateral. Credit losses relating to the Companys
customers, mainly mass merchant retailers, have consistently been within managements expectations and are provided for in the financial statements.



The Company operates within one industry segment where certain customers represent a significant portion of the Companys business. Sales to the Companys
largest customers which have each individually accounted for more than 10% of the Companys sales as a percentage of consolidated gross sales, were 18%, 17%, 13%, and 11% during fiscal 2003, 15%, 14% and 11% during fiscal 2002; and 27% for one
customer during fiscal 2001. Receivables from three customers as a percentage of the Companys total trade account receivable were 24%, 20% and 11% at July 31, 2003.



The Companys products are sourced from independent contractors located primarily in Asia. These suppliers manufacture, assemble and
package the Companys products under the detailed specifications of the Companys management representatives who visit frequently to oversee quality control and work on cost containment. The Company submits purchase orders to its
manufacturers for the production of specific amounts of its products and has not entered into any long-term contractual agreements. The Company negotiates the cost of its products directly with its foreign suppliers in U.S. Dollars.



A significant portion of the Companys products are manufactured in mainland China,
which trades with the United States under a Normal Trade Relations (NTR) trade status. While the Company believes that alternative manufacturing sources could be found, maintaining existing costs will depend upon these products
continuing to be treated under NTR tariff rates. From time to time, the U.S. has threatened to rescind NTR tariff rates and impose trade sanctions on certain goods manufactured in China. To date, no such sanctions have been imposed that have
affected the Company or its products; however there can be no assurance with regard to the possible imposition of sanctions in the future.



Cash Equivalents



Short-term investments and money market funds with original maturities of three months or less are classified as cash equivalents. The carrying value of cash equivalents approximates market value.



Inventory



Inventory is stated at the lower of cost (first-in, first-out method) or market and consists of the following:



|                                 |  | July 31       
|-------------------------------- |  | --------------
|                                 |  | 2003          
|                                 |  | (In thousands)
|Raw material and work-in-process |  | $             
|Finished goods                   |  |               
|                                 |  |               
|                                 |  | $             
|                                 |  |               



Long Lived Assets



In accordance with FASB Statement No. 144, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets. The impairment loss is measured by comparing the fair value of the asset to its carrying amount.



20



---

Property and Equipment



Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives (two to seven years) of the related
assets or, for leasehold improvements, over the terms of the related leases, if shorter. Depreciation expense for the fiscal years ended July 31, 2003, 2002 and 2001 amounted to $104,000, $96,000 and $121,000, respectively.



Intangible Assets



The springless trampoline license agreement described in Note 9 is amortized on a straight-line basis over a period of 8 years and is
included net of accumulated amortization as a component of intangible assets. Accumulated amortization of this license agreement as of July 31, 2003 and 2002 amounted to $521,000 and $396,000, respectively. The total cost recorded for the license
agreement was $1,000,000 at July 31, 2003 and 2002.



The patent described in
Note 10 is amortized on a straight-line basis over a period of 7.25 years and is included net of accumulated amortization as a component of intangible assets. Accumulated amortization of patents as of July 31, 2003 and 2002 amounted to $1,148,000
and $794,000, respectively. The total cost recorded for the patent was $2,560,000 at July 31, 2003 and 2002.



The estimated aggregate amortization expense for each of the five succeeding fiscal years will be $478,000, $478,000, $478,000, $457,000, and zero, respectively.



Earnings (Loss) Per Share



Basic earnings (loss) per share is computed based on the weighted average number of shares
of common stock outstanding during the period. Dilutive earnings (loss) per share is based on the weighted average number of shares of common stock outstanding, and common stock equivalents, when dilutive. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding options and warrants. For the years ended July 31, 2003 and 2001, the number of shares used in the calculation of diluted earnings per share included 11,000 and 212,501 shares,
respectively, issuable under stock options and warrants using the treasury stock method. Common stock equivalents are excluded from the computation for the year ended July 31, 2002 because their effect is antidilutive.



Advertising Costs



Cooperative advertising expense is charged against gross sales and for the years ended July 31, 2003, 2002 and 2001 amounted to $888,000,
$1,323,000 and $2,317,000, respectively.



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.



21



---

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:



|                                                                              |  | 2003 |      |   | 2002 |   |       | 2001 | 
|----------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | ---- | 
|Net income/(loss) as reported                                                 |  | $    | 856  |   |      | $ | (678  | )    | 
|Stock-based employee compensation cost Included in reported net loss          |  |      |     |   |      |   |      |      | 
|Pro forma stock-based employee compensation cost under SFAS 123, net of taxes |  |      | (126 | ) |      |   | (200  | )    | 
|                                                                              |  |      |      |   |      |   |       |      | 
|Pro forma net income/(loss)                                                   |  | $    | 730  |   |      | $ | (878  | )    | 
|                                                                              |  |      |      |   |      |   |       |      | 
|                                                                              |  |      |     
|Earnings/(loss) per share:                                                    |  |      |      |   |      |   |       |      | 
|Basicas reported                                                             |  | $    | 0.19 |   |      | $ | (0.15 | )    | 
|Basicpro forma                                                               |  | $    | 0.16 |   |      | $ | (0.19 | )    | 
|Dilutedas reported                                                           |  | $    | 0.19 |   |      | $ | (0.15 | )    | 
|Dilutedpro forma                                                             |  | $    | 0.16 |   |      | $ | (0.19 | )    | 



Comprehensive Income



During the years ending July 31, 2003, 2002 and 2001 comprehensive income
(loss) was the same as net income or loss.



Product Development



Product development costs are included in general and administrative
costs and are expensed as incurred. Product development costs were $1,261,000, $1,110,000, and $810,000 in the years ended July 31, 2003, 2002 and 2001, respectively.



Segment Reporting



Pursuant to Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosure about Segments of an Enterprise and Related
Information, the Company has determined, based on its internal system of management reporting and since it assesses performance as a single operating unit, that in the years ended July 31, 2003, 2002 and 2001, it operated in only one segment.



Gross sales of similar products for the single segment are as follows:



|                        |  | 2003           |        |   | 2002 |   |        | 2001 | 
|----------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- | 
|                        |  | (In thousands) |       
|Action sport products   |  | $              | 25,221 |   |      | $ | 16,643 |      | 
|Outdoor products        |  |                | 33,449 |   |      |   | 28,156 |      | 
|Protective products     |  |                | 2,080  |   |      |   | 4,126  |      | 
|Other products          |  |                | 478    |   |      |   | 394    |      | 
|                        |  |                |        |   |      |   |        |      | 
|Total gross sales       |  |                | 61,228 |   |      |   | 49,319 |      | 
|Returns and allowances  |  |                | (2,456 | ) |      |   | (1,550 | )    | 
|Cooperative Advertising |  |                | (888   | ) |      |   | (1,323 | )    | 
|                        |  |                |        |   |      |   |        |      | 
|Total net sales         |  | $              | 57,884 |   |      | $ | 46,446 |      | 
|                        |  |                |        |   |      |   |        |      | 



Reclassifications



Certain reclassifications have been made to the 2002 and 2001 financial statements to
conform with the 2003 presentation.



22



---

New Accounting Standards



In August 2002, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No.
146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or
disposal plan. These new standards will be prospectively applied for exit or disposal activities initiated after December 31, 2002. If exit or disposal activities are initiated after that date, SFAS No. 146 will affect the timing of the recognition
of the related costs. The Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transaction and Disclosure-an amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has included disclosures in its quarterly reports and this annual report.



2. PROPERTY AND EQUIPMENT



Property and equipment consist of the following:



|                                               |  | July 31        |       
|---------------------------------------------- |  | -------------- | ------
|                                               |  | 2003           |       
|                                               |  | (In thousands) |       
|Computer equipment                             |  | $              | 602   
|Trade show assets                              |  |                | 122   
|Machinery and equipment                        |  |                | 303   
|Furniture and fixtures                         |  |                | 258   
|Leasehold improvements                         |  |                | 272   
|Molds, dies and tooling equipment              |  |                | 105   
|Construction in Progress                       |  |                | 85    
|                                               |  |                |       
|                                               |  |                | 1,747 
|Less accumulated depreciation and amortization |  |                | (1,322
|                                               |  |                |       
|                                               |  | $              | 425   
|                                               |  |                |       



3. REVOLVING LINE OF CREDIT



As of July 31, 2003, the Company has a credit agreement with a major bank
providing for the issuance of letters of credit and cash borrowings in aggregate of $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 of 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
agreement requires that the Company satisfy certain financial covenants. At July 31, 2003,



23



---

approximately $8,621,000 was available for issuance of letters of credit, inclusive of the separate sub limit of $2,000,000 for actual cash borrowings for
which no cash advances were outstanding. The borrowing base is based on a percentage of eligible receivables, inventory and short-term investments. The agreement expires on May 1, 2005.



As of July 31, 2003, letters of credit in the amount of $379,000 were open for the receipt of future merchandise. Of this amount, $177,000
is recorded as trade acceptances in the accompanying consolidated balance sheet at July 31, 2003 and $202,000 has not been reflected on these financial statements since title to the merchandise has not yet passed to the Company.



4. NOTE PAYABLE



The Company has an outstanding promissory note payable, as described in Note 10, which consists of the following:



|                                       |  | July 31       
|-------------------------------------- |  | --------------
|                                       |  | 2003          
|                                       |  | (In thousands)
|Note payable (approximates fair value) |  | $             
|Less current maturities                |  |               
|                                       |  |               
|                                       |  | $             
|                                       |  |               



Aggregate future maturities of the
note payable are as follows:



|                      |  | Maturities     |      
|--------------------- |  | -------------- | -----
|                      |  | (In thousands) |      
|Years ending July 31: |  |                |      
|2004                  |  | $              | 200  
|2005                  |  |                | 200  
|2006                  |  |                | 200  
|2007                  |  |                | 200  
|Thereafter or 2008    |  |                | 200  
|                      |  |                |      
|                      |  |                | 1,000
|Less imputed interest |  |                | (180 
|                      |  |                |      
|                      |  | $              | 820  
|                      |  |                |      



5. COMMITMENTS AND CONTINGENCIES



Litigation



On December 19, 2001, JumpSport Inc., filed a complaint in the United States District Court
for the Northern District of California against the Company and ten other entities (the JumpSport Action). The complaint alleged, among other things, that the Companys trampoline enclosures infringed two patents owned by the
plaintiff.



The Company has settled the litigation with JumpSport, Inc. In
accordance with the terms of the settlement agreement, JumpSport, Inc has dismissed all claims. The terms of the settlement are subject to a confidentiality agreement.



From time to time, the Company is involved in claims involving product liability arising in the ordinary course of its business. The Company
carries product liability insurance coverage with self insured retention deductible claims. A prior year insurance carrier has declared bankruptcy and as such, coverage for one claim has the potential of not being covered by insurance. At July 31,
2003 the Company has a reserve against all insured and uninsured claims. In the opinion of management, any additional liability to the Company arising under any pending product liability claims would not materially affect its financial position,
results of operations or cash flows.



24



---

Lease Commitments



The Company leases warehouse and office facilities under an operating lease that requires minimum monthly payments of $62,000, and also provides for the lessee to pay
property taxes, insurance, repairs and maintenance and utilities. The lease expires on December 31, 2005 and is subject to escalation every eighteen months based on changes in the consumer price index. The Company has an option to extend this lease
for sixty months based on the escalation amount determined above and the Company has a right of first offer to purchase this facility. The Company also leases two additional buildings used for warehouse space under operating leases requiring minimum
monthly payments of approximately $25,000 and $3,600, respectively, both of which amounts include property taxes, insurance, repairs and maintenance, and utilities. These agreements expire in June 2004.



Annual future minimum lease payments under existing operating leases are as follows:



|                             |  | OperatingLeases
|---------------------------- |  | ---------------
|                             |  | (In thousands) 
|Years ending July 31:        |  |                
|2004                         |  | $              
|2005                         |  |                
|2006                         |  |                
|2007                         |  |                
|2008 and thereafter          |  |                
|                             |  |                
|Total minimum lease payments |  | $              
|                             |  |                



Total rent expense was $1,080,000,
$1,004,000 and $688,000 for the fiscal years ended July 31, 2003, 2002 and 2001, respectively.



6. PENSION PLAN



Effective August 1,
1997, the Company established a defined contribution pension plan covering substantially all of its employees. Company contributions were determined at the discretion of the Company. Effective August 1, 1999, the Company amended and restated this
plan as a 401(k) profit sharing plan, with the Company matching contributions determined at the discretion of the Company. Contributions for fiscal 2003, 2002, and 2001 were approximately $54,000, $57,000, and $57,000, respectively.



25



---

7. INCOME TAXES



The provision for (benefit from) income taxes for the fiscal years ended July 31, 2003, 2002, and 2001 is as follows:



|                                   |  | 2003 |     | 2002 |   |      | 2001 | 
|---------------------------------- |  | ---- | --- | ---- | - | ---- | ---- | 
|Current (benefit) provision:       |  |      |     |      |   |      |      | 
|Federal                            |  | $    | 262 |      | $ | (106 | )    | 
|State                              |  |      | 75  |      |   |     |      | 
|                                   |  |      |     |      |   |      |      | 
|Total current (benefit) provision  |  |      | 337 |      |   | (106 | )    | 
|Deferred provision (benefit):      |  |      |     |      |   |      |      | 
|Federal                            |  |      | 234 |      |   | (134 | )    | 
|State                              |  |      | 12  |      |   | (31  | )    | 
|                                   |  |      |     |      |   |      |      | 
|Total deferred provision (benefit) |  |      | 246 |      |   | (165 | )    | 
|                                   |  |      |     |      |   |      |      | 
|Valuation allowance                |  |      |    |      |   | 271  |      | 
|                                   |  |      |     |      |   |      |      | 
|                                   |  | $    | 583 |      | $ |     |      | 
|                                   |  |      |     |      |   |      |      | 



|                                               |  | 2003           |        |   | 2002 |  
|---------------------------------------------- |  | -------------- | ------ | - | ---- | -
|                                               |  | (In thousands) |       
|Deferred tax assets:                           |  |                |        |   |      |  
|Realized loss deductible against capital gains |  | $              | 1,435  |   |      | $
|Inventory valuation allowances                 |  |                | 215    |   |      |  
|Inventory                                      |  |                | 214    |   |      |  
|Warranty allowances                            |  |                | 378    |   |      |  
|Allowances for losses on receivables           |  |                | 179    |   |      |  
|Sales return allowances                        |  |                | 368    |   |      |  
|Product liability                              |  |                | 123    |   |      |  
|Other                                          |  |                | 613    |   |      |  
|                                               |  |                |        |   |      |  
|Total deferred tax assets                      |  |                | 3,525  |   |      |  
|Deferred tax liabilities:                      |  |                |        |   |      |  
|Depreciation                                   |  |                | (171   | ) |      |  
|Unremitted earnings of Oketa                   |  |                | 24     |   |      |  
|Prepaid Insurance                              |  |                | (296   | ) |      |  
|                                               |  |                |        |   |      |  
|Total deferred tax liabilities                 |  |                | (443   | ) |      |  
|                                               |  |                |        |   |      |  
|Net deferred tax assets                        |  |                | 3,082  |   |      |  
|Valuation allowance                            |  |                | (2,039 | ) |      |  
|                                               |  |                |        |   |      |  
|                                               |  | $              | 1,043  |   |      | $
|                                               |  |                |        |   |      |  



Approximately $1,435,000 of the
valuation allowance fully provides for the deferred tax asset realized loss deductible against capital gains, since this asset is not expected to be realized in the foreseeable future.



26



---

A reconciliation of the statutory federal income tax rate to the effective tax rate, as a percentage of income before
taxes based on income, follows:



|                                    |  | 2003 |   |  | 2002 |    |  | 2001 |  
|----------------------------------- |  | ---- | - |  | ---- | -- |  | ---- | -
|Statutory federal income tax rate   |  | 34   | % |  | (34  | %) |  | 34   | %
|Valuation allowance                 |  |     |   |  | 39   |    |  | (18  | )
|State taxes, net of federal benefit |  | 4    |   |  | (5   | )  |  | 5    |  
|Other non-deductible expenses       |  | 3    |   |  |     |    |  | 1    |  
|                                    |  |      |   |  |      |    |  |      |  
|                                    |  | 41   | % |  |     | %  |  | 22   | %
|                                    |  |      |   |  |      |    |  |      |  



Pretax income (loss) earned by Oketa
amounted to $143,000 in fiscal 2001, and is not subject to Hong Kong tax as provided under that countrys taxation requirements. The Company provides deferred taxes on Oketas income until such income is repatriated to the United States.
In fiscal 2002, the Company closed the Oketa operations and as a result there is no pretax income (loss) earned by Oketa for either fiscal year 2003 or 2002.



8. STOCK OPTION PLANS



On April 1, 1994, the stockholders of the Company approved the 1994 Variflex Stock Plan (the 1994 Stock Plan) which became effective at the initial public offering date of June 17, 1994. Under the 1994 Stock Plan,
options, stock appreciation rights (SARS) and bonus stock may be granted for the purpose of attracting and motivating deserving employees and directors of the Company. The exercise price of the options is to be not less than the market price of the
common stock at the time of grant with respect to incentive stock options, and not less than 85% of the market price of the common stock at the time of grant with respect to non-qualified options. The maximum number of shares reserved for issuance
under the 1994 Stock Plan is 600,000. At July 31, 2003, 155,000 shares are available for grant under the 1994 Stock Plan.



The options granted under the 1994 Stock Plan generally vest over five years, with exercise prices ranging from $3.60 to $8.19 per share and are exercisable over 10 years
from the date of grant.



On March 16, 1998, the Company established the 1998
Stock Option Plan for Non-Employee Directors (the 1998 Stock Plan) for the purpose of attracting and retaining experienced and knowledgeable non-employee directors of the Company. Under the 1998 Stock Plan, each non-employee director receives an
option to purchase 4,000 shares of common stock of the Company upon being appointed or elected as a director, and an option to purchase 2,000 shares as an annual retainer upon being re-appointed or re-elected as a director. The exercise price of the
options is to be not less than the market price of the common stock at the time of grant. The options vest on the first business day prior to the first anniversary of the date of grant and are exercisable over 10 years from the date of grant. The
maximum number of shares reserved for issuance under the 1998 Stock Plan is 250,000. At July 31, 2003, 222,000 shares are available for grant under the 1998 Stock Plan.



A summary of stock option activity and data is as follows:



|                         |  | Options Outstanding
|------------------------ |  | -------------------
|                         |  | Numberof Shares    
|Balance at July 31, 2000 |  | 323,629            
|Granted                  |  | 149,000            
|Canceled                 |  | (5,000             
|                         |  |                    
|Balance at July 31, 2001 |  | 467,629            
|Granted                  |  | 104,000            
|Exercised                |  | (19,339            
|Canceled                 |  | (50,790            
|                         |  |                    
|Balance at July 31, 2002 |  | 501,500            
|Granted                  |  | 76,500             
|Canceled                 |  | (105,000           
|                         |  |                    
|Balance at July 31, 2003 |  | 473,000            
|                         |  |                    



27



---

Information regarding stock options outstanding as of July 31, 2003 is as follows:



|Options Outstanding |  | Options Exercisable
|------------------- |  | -------------------
|Price Range         |  | NumberofShares     
|$3.60 to $5.1875    |  | 327,750            
|$5.375 to $8.1875   |  | 145,250            



The weighted average exercise prices
and fair market value of stock options granted using the Black-Scholes option valuation model were as follows:



|                                                             |  | 2003      |       | 2002         
|------------------------------------------------------------ |  | --------- | ----- | -------------
|                                                             |  | FairValue |       | ExercisePrice
|Exercise price equals market value of stock at date of grant |  | $         | 1.922 |              



The weighted average fair values of
2003 and 2002 stock option grants were estimated at the date of grant using the Black-Scholes option valuation model and the following average actuarial assumptions:



|                        |  | 2003 |  | 2002 |  | 2001
|----------------------- |  | ---- |  | ---- |  | ----
|Risk-free interest rate |  | 4.5  |  | 4.75 |  | 5.5 
|Expected life           |  | 5.0  |  | 5.0  |  | 5.0 
|Expected volatility     |  | .531 |  | .507 |  | .564
|Expected dividend yield |  | None |  | None |  | None



The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options. The Companys employee stock options have characteristics significantly different from those of traded options such as vesting restrictions and extremely limited
transferability. In addition, the assumptions used in option valuation models (see above) are highly subjective, particularly the expected stock price volatility of the underlying stock. Because changes in these subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options.



9. LICENSE AGREEMENTS



In December 1998, the Company entered into an exclusive license agreement with another company to manufacture and market a springless trampoline. The Company paid
$1,000,000 in cash upon execution of the agreement, $500,000 which was applied towards deferred royalties otherwise payable by the Company. At July 31, 2003 the balance of deferred royalties pertaining to this transaction was $139,000. In December
1999, an additional $500,000 was paid by the Company when a U.S. patent on this technology was issued. Total royalties and amortization of the license agreement were $313,000, $342,000 and $298,000, respectively, during the years ended July 31,
2003, 2002, and 2001.



28



---

The Company also has other license agreements which in total have minimum guaranteed payments of $730,000 to be paid over
a three year period ending July 31, 2006. These agreements require the Company to pay royalties based on a percentage of the revenue from products covered by the respective agreements. Royalties under these agreements are recorded at the time of
revenue recognition.



10. PATENTS



In April 2000, the Company purchased a patent which involves a collapsible canopy with a
telescoping roof support structure. The Company purchased the patent for an initial cash payment of $1,450,000 and a promissory note payable in installments of $200,000 each to be paid annually over an eight-year period commencing on August 1, 2000.
The note was recorded at its present value of $1,110,000, based on the Companys estimated incremental borrowing rate of interest. The total cost recorded for the patent was $2,560,000. Total amortization of the patent was $353,000 in fiscal
2003, 2002 and 2001.



11. TREASURY STOCK



In January 1999, the Company purchased 371,279 shares of its common stock, which were
tendered as a result of a self-tender offer, pursuant to a modified Dutch auction. The shares were purchased at a price of $6.00 per share. In June 1999, the Company, in a private sale transaction, purchased an aggregate of 141,700 shares of its
common stock at a price of $5.50 per share pursuant to an unsolicited offer to sell received by the Company. In December 1999, the Company purchased 512,075 shares of its common stock, which were tendered as a result of a self-tender offer, at a
price of $6.50 per share. In May 2000, the Company, in a private sale transaction, purchased an aggregate of 415,911 shares of its common stock at a price of $5.41 per share pursuant to an unsolicited offer to sell received by the Company. Treasury
stock is recorded at cost, including all applicable fees and expenses.



29



---

12. STOCK WARRANTS



In November 1997, in connection with the acquisition of approximately 28% of the Companys outstanding common stock from existing shareholders by REMY Capital
Partners IV, L.P., a private investment partnership (Remy), the Company entered into consultation agreements with Remy and Raymond H. Losi, the Companys co-founder and former Chairman of the Board. As compensation under those
agreements, Remy and Mr. Losi received warrants to purchase 400,000 and 200,000 shares respectively, of the Companys common stock for $5.10 per share, all of which are exercisable until November 2004. The Company recognized in general and
administrative expenses non-cash consulting expenses of $702,000 in connection with the issuance of those stock warrants. The amount of consulting expense was determined in accordance with FASB Statement No. 123, Accounting for Stock-Based
Compensation, and the Company recognized the entire amount of the expense immediately.



Also in connection with the Remy common stock acquisition, Raymond H. Losi, II, the Companys Chief Executive Officer, received warrants to purchase 100,000 shares of the Companys common stock for $5.10 per
share, all of which are currently exercisable until November 2004.



13.
RELATED PARTY



The Company paid to Remy a management consulting fee in the
amount of $150,000, $150,000 and $125,000 for the years ended July 31, 2003, 2002 and 2001, respectively, for management consulting services.



14. PRODUCT RECALL



In October 2000, the Company announced that it was voluntarily recalling certain of its X Games helmets which did not comply with all applicable Consumer Product Safety Commission standards. Approximately 200,000 of
these helmets were shipped by the Company between October 1999 and September 2000, with approximately 150,000 sold by retailers during that time period. The Company recorded an estimated product recall charge of $1,750,000 in the fourth quarter of
fiscal 2000. Management believed that this represented a reasonable estimate of the cost of the recall; however, due to the various factors involved in the estimation, including return rates, replacement periods, and other items, actual results
substantially differed from this estimate. In the fourth quarter of fiscal 2001, the Company recorded a $533,000 reversal of the product recall charge to reflect the actual recall results.



15. QUARTERLY OPERATING DATA (UNAUDITED)



The following is a summary of unaudited quarterly results of operations:



|                            |  | First                                 |        |   | Second |   |        | Third |  | Fourth
|--------------------------- |  | ------------------------------------- | ------ | - | ------ | - | ------ | ----- |  | ------
|                            |  | (in thousands, except per share data)
|Year ended July 31, 2003    |  |                                       |        |   |        |   |        |       |  |       
|Net sales                   |  | $                                     | 12,601 |   |        | $ | 9,881  |       |  | $     
|Gross profit                |  |                                       | 1,890  |   |        |   | 1,140  |       |  |       
|Net income (loss)           |  |                                       | 11     |   |        |   | (670   | )     |  |       
|Net income (loss) per share |  |                                       |        |   |        |   |        |       |  |       
|Basic                       |  |                                       | .00    |   |        |   | (.15   | )     |  |       
|Diluted                     |  |                                       | .00    |   |        |   | (.15   | )     |  |       
|                            |  |                                       |        |  
|Year ended July 31, 2002    |  |                                       |        |   |        |   |        |       |  |       
|Net sales                   |  | $                                     | 9,738  |   |        | $ | 6,767  |       |  | $     
|Gross profit                |  |                                       | 1,025  |   |        |   | 430    |       |  |       
|Net income (loss)           |  |                                       | (895   | ) |        |   | (1,493 | )     |  |       
|Net income (loss) per share |  |                                       |        |   |        |   |        |       |  |       
|Basic                       |  |                                       | (.19   | ) |        |   | (.32   | )     |  |       
|Diluted                     |  |                                       | (.19   | ) |        |   | (.32   | )     |  |       



30



---

VARIFLEX, INC.

VALUATION AND QUALIFYING ACCOUNTS

Three years ended July 31, 2003



|                                     |  | Balance atBeginningof Period |           | AdditionsCharged toExpense |   | Write-offsCharged toAllowance |  |   | BalanceAt Endof Period
|------------------------------------ |  | ---------------------------- | --------- | -------------------------- | - | ----------------------------- |  | - | ----------------------
|Year ended July 31, 2003:            |  |                              |           |                            |   |                               |  |   |                       
|Reserves and allowances:             |  |                              |           |                            |   |                               |  |   |                       
|Allowance for uncollectable accounts |  | $                            | 445,000   |                            | $ | 0                             |  | $ | (4,000                
|Accrued Warranty                     |  |                              | 1,054,000 |                            |   | 1,431,000                     |  |   | 1,355,000             
|Accrued Returns & Allowances         |  |                              | 1,226,000 |                            |   | 2,456,000                     |  |   | 2,350,000             
|                                     |  |                              |           |                           
|Year ended July 31, 2002:            |  |                              |           |                            |   |                               |  |   |                       
|Reserves and allowances:             |  |                              |           |                            |   |                               |  |   |                       
|Allowance for uncollectible accounts |  | $                            | 436,000   |                            | $ | 0                             |  | $ | (9,000                
|Accrued Warranty                     |  |                              | 848,000   |                            |   | 2,126,000                     |  |   | 1,920,000             
|Accrued Returns & Allowances         |  |                              | 730,000   |                            |   | 1,550,000                     |  |   | 1,054,000             
|                                     |  |                              |           |                           
|Year ended July 31, 2001:            |  |                              |           |                            |   |                               |  |   |                       
|Reserves and allowances:             |  |                              |           |                            |   |                               |  |   |                       
|Allowance for uncollectable accounts |  | $                            | 421,000   |                            | $ | 715,000                       |  | $ | 700,000               
|Accrued Warranty                     |  |                              | 1,101,000 |                            |   | 2,090,000                     |  |   | 2,343,000             
|Accrued Returns & Allowances         |  |                              | 1,367,000 |                            |   | 2,548,000                     |  |   | 3,185,000             



| | (1) | Net of recoveries of $33,000
| | --- | ----------------------------



| | (2) | Net of recoveries of $46,000
| | --- | ----------------------------



|Item 9. |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- |  | -------------------------------------------------------------------------------------



Not Applicable



31



---

Item 9A. Controls and Procedures



The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(the Exchange Act). These rules refer 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 Exchange Act is recorded,
processed, summarized and reported within required time periods. As of July 31, 2003, the end of the period covered by this report, the Company had carried out an evaluation under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective.
The Company reviews its disclosure controls and procedures on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness and to ensure that they evolve with the Companys business.



PART III



Except as provided below, the information required by items 10, 11, 12 and 13 is included in the Companys definitive
Proxy Statement to be filed within 120 days after July 31, 2003 in connection with the Companys 2003 Annual Meeting of Stockholders, and is therefore incorporated herein by reference.



|Item 10. |  | Directors and Executive Officers of the Registrant.
|-------- |  | ---------------------------------------------------



|Item 11. |  | Executive Compensation.
|-------- |  | -----------------------



|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management.
|-------- |  | ---------------------------------------------------------------



|                                                           |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |      | Number of securitiesremaining available forfuture issuance underequity compensation plans
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | -----------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 1,173,000                                                                                |  | $                                                                        | 5.07 |                                                                                          
|                                                           |  |                                                                                          | 
|Equity compensation plans not approved by security holders |  |                                                                                         |  |                                                                          |     |                                                                                          
|                                                           |  |                                                                                          |  |                                                                          |      |                                                                                          
|Total                                                      |  | 1,173,000                                                                                |  | $                                                                        | 5.07 |                                                                                          
|                                                           |  |                                                                                          |  |                                                                          |      |                                                                                          



32



---

|Item 13. |  | Certain Relationships and Related Transactions.
|-------- |  | -----------------------------------------------



PART IV



|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
|-------- |  | -----------------------------------------------------------------



Financial Statements



The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:



Independent Auditors Report on Consolidated Financial
Statements and Schedule



Consolidated Balance
Sheets as of July 31, 2003 and 2002



Consolidated Statements of Operations for the years ended July 31, 2003, 2002 and 2001



Consolidated Statements of Stockholders Equity for the years ended July 31, 2003, 2002 and 2001



Consolidated Statements of Cash Flows for the years ended
July 31, 2003, 2002 and 2001



Notes to
Consolidated Financial Statements



Financial Statement
Schedules



The following schedules are included in
Part II, Item 8 of this Annual Report on Form 10-K:



Schedule II. Valuation and Qualifying Accounts



Schedules I and III through V are omitted for the reason that they are not applicable, not required or the information

is presented in the consolidated financial statements or related notes.



Reports on Form 8-K



None



33



---

EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | Note No.
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|3.1         |  | Certificate of Incorporation of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | (1)     
|3.2         |  | By-laws of the Company as amended and restated on September 9, 1998                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | (6)     
|9.1         |  | Voting Agreement dated November 18, 1997, by and among Raymond H. Losi, Raymond H. Losi, II, Raymond H. Losi, as Trustee of the 1989 Raymond H. Losi Revocable Trust under
Declaration of Trust dated January 23, 1989, Losi Enterprises Limited Partnership, Raymond H. Losi, II and Kathy Losi, as Co-Trustees of the Jay and Kathy Losi Revocable Trust dated January 1, 1989, EML Enterprises, L.P., Eileen Losi, as Trustee of
the Eileen Losi Revocable Trust under Declaration of Trust dated October 13, 1993, Barbara Losi, as Trustee of the 1989 Barbara Losi Revocable Trust under Declaration of Trust dated January 31, 1989, The BL 1995 Limited Partnership, Raymond H. Losi,
as Trustee of the Diane K. Losi Trust and Remy Capital Partners IV, L.P. |  | (3)     
|10.1        |  | Lease for property located at 5152 North Commerce Avenue, Moorpark, California, dated December 1, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | (5)     
|10.2        |  | First Amendment dated June 11, 2001, to the December 1, 1999, lease for property located at 5152 North Commerce Avenue, Moorpark, California                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | (6)     
|10.3        |  | Employment agreement dated April 1, 1994 with Raymond H. Losi II                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | (1)     
|10.4        |  | Employment agreement dated April 1, 1994 with Paula Coffman (formerly Paula Montez)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | (1)     
|10.5        |  | Employment agreement dated August 24, 1998 with Steven Muellner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | (4)     
|10.6        |  | Employment agreement dated February 4, 2002 with Petar Katurich                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | (7)     
|10.7        |  | Consulting Agreement dated November 18, 1997, by and between Variflex, Inc. and Remy Capital Partners IV, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | (3)     
|10.8        |  | First Amendment dated November 18, 1999, to the November 18, 1997 Consulting Agreement by and between Variflex, Inc. and Remy Capital Partners IV, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | (5)     
|10.9        |  | Consulting Agreement dated November 18, 1997, by and between Variflex, Inc. and Raymond H. Losi                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | (3)     
|10.10       |  | First Amendment dated December 21, 1999, to the November 18, 1999 Consulting Agreement by and between Variflex, Inc. and Raymond H. Losi                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | (5)     
|10.11       |  | Indemnification agreement dated April 1, 1994 with Raymond H. Losi                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | (1)     
|10.12       |  | Indemnification agreement dated April 1, 1994 with Raymond H. Losi II                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | (1)     
|10.13       |  | Indemnification agreement dated April 1, 1994 with Loren Hildebrand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | (1)     
|10.14       |  | Indemnification agreement dated September 17, 1998 with Mark S. Siegel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | (4)     
|10.15       |  | Indemnification agreement dated September 17, 1998 with Michael T. Carr                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | (4)     
|10.16       |  | Indemnification agreement dated September 17, 1998 with Steven Muellner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | (4)     
|*10.17      |  | Indemnification agreement dated February 4, 2002 with Petar Katurich                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | (8)     
|10.18       |  | License Agreement with Rollerblade, Inc. dated September 1, 1993                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | (1)     
|10.19       |  | Trade Finance Credit Agreement dated March 31, 2002 between United California Bank and Variflex, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | (8)     
|10.20       |  | Stock Purchase Agreement dated November 18, 1997, by and between Remy Capital Partners IV, L.P., The RHL Limited Partnership, EML Enterprises, L.P. and The BL 1995 Limited
Partnership                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | (3)     



34



---

|Exhibit No. |  | Description                                                                                                                                                                          |  | Note No.
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------
|10.21       |  | Registration Rights Agreement dated November 18, 1997, by and among Variflex, Inc., Remy Capital Partners IV, L.P. and Raymond H. Losi, II                                           |  | (3)     
|10.22       |  | Warrant to purchase Variflex, Inc. Common Stock issued to Remy Capital Partners IV, L.P.                                                                                             |  | (3)     
|10.23       |  | Warrant to purchase Variflex, Inc. Common Stock issued to Raymond H. Losi                                                                                                            |  | (3)     
|10.24       |  | Warrant to purchase Variflex, Inc. Common Stock issued to Raymond H. Losi, II                                                                                                        |  | (3)     
|10.25       |  | 1994 Stock Option Plan, as amended                                                                                                                                                   |  | (4)     
|10.26       |  | Non-Employee Directors Compensation Plan                                                                                                                                             |  | (4)     
|10.27       |  | Exclusive License Agreement dated December 1, 1998, by and between Variflex, Inc., on the one hand and Product Resource & Development Inc. and Rolland Wayne Rich, on the other
hand |  | (5)     
|10.28       |  | Amendment dated October 6, 2000, to the December 1, 1998 Exclusive License Agreement with Product Resource & Development Inc. and Rolland Wayne Rich                                 |  | (6)     
|            |  |                                                                                                                                                                                     
|14.1        |  | Variflex, Inc Code of Ethics for Chief Executive Officer and Senior Financial Officers                                                                                               |  | (9)     
|31.1        |  | Certification 302 for Chief Executive Officer                                                                                                                                        |  | (9)     
|31.2        |  | Certification 302 for Chief Financial Officer                                                                                                                                        |  | (9)     
|32.1        |  | Certification 906 for Chief Executive Officer and Chief Financial Officer                                                                                                            |  | (9)     



|(1) | Previously filed together with the Companys Registration Statement on Form S-1, Reg. No. 33-77362.
|--- | ---------------------------------------------------------------------------------------------------



|(2) | Previously filed together with the Companys annual report on Form 10-K (file no.: 0-24338) on October 24, 1995.
|--- | ----------------------------------------------------------------------------------------------------------------



|(3) | Previously filed together with the Companys report on Form 8-K (file no.: 0-24338) on November 26, 1997.
|--- | ---------------------------------------------------------------------------------------------------------



|(4) | Previously filed together with the Companys annual report on Form 10-K (file no.: 0-24338) on October 29, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------



|(5) | Previously filed together with the Companys annual report on Form 10-K (file no.: 0-24338) on October 30, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------



|(6) | Previously filed together with the Companys annual report on Form 10-K (file no.: 0-24338) on October 29, 2001.
|--- | ----------------------------------------------------------------------------------------------------------------



|(7) | Previously filed together with the Companys quarterly report on Form 10-Q (file no.: 0-24338) on March 15, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------



|(8) | Previously filed together with the Companys annual report on Form 10-K (file no.: 0.04338) on October 29, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------



|(9) | Filed herewith.
|--- | ---------------



|* | Management contract, compensatory plan or arrangement
|- | -----------------------------------------------------



35



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.



|                 |  |  |  | VARIFLEX, INC.
|---------------- |  |  |  | --------------
|                 |  |  | 
|October 23, 2003 |  |  |  | By            
|                 |  |  |  |               
|                 |  |  |  |               



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



We the undersigned directors and officers of Variflex, Inc. hereby constitute
and appoint Raymond H. Losi II, Steven L. Muellner, and Petar Katurich, or any of them, our true and lawful attorneys and agents, with full powers of substitution and resubstitution, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments for us, in our names in the capacities indicated below, that said attorneys and agents, or any of them, may deem necessary or advisable to enable said corporation to comply
with the Securities and Exchange Act of 1934, as amended, any rules, regulations, and requirements of the SEC in connection with this Report, including specifically, but not limited to, power and authority to sign for us or any of us, in our names
and in the capacities indicated below, any and all amendments and supplements to this Report, and we hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.



|                 |  |  | 
|---------------- |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 
|                 |  |  | 
|October 23, 2003 |  |  | 
|                 |  |  | 
|                 |  |  | 



36