<PAGE>
________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           _________________________

                                    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, 2001            Commission File No.:  0-24338

                                 VARIFLEX, INC.

             (Exact name of Registrant as specified in its charter)

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

                           5152 North Commerce Avenue
                           Moorpark, California 93021
                    (Address of principal executive offices)

              Registrant's telephone number, including area code:
                                 (805) 523-0322
                           _________________________

          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

                           _________________________

     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 [X]

     The aggregate market value of the Common Stock held by non affiliates of
the Registrant as of October 15, 2001 was approximately $4,715,106 based upon
the closing sale price of the Registrant's Common Stock on such date, as
reported on the Nasdaq National 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 15, 2001:
4,603,771 shares.

                           _________________________

                       DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the Registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders scheduled to be held on December 3, 2001 are
incorporated by reference into Part III of this Form 10-K.

________________________________________________________________________________

<PAGE>

     Statements in this Annual Report on Form 10-K as well as oral statements
that may be made by Variflex, Inc. (the "Company") or by officers, directors or
employees of the Company acting on the Company's behalf, that are not historical
fact constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, trend analysis and other
information contained in this Form 10-K relative to markets for the Company's
products and trends in net sales, gross margins and anticipated expense levels,
as well as other statements including words such as "anticipate," "plan,"
"estimate," "expect," "intend," "could," "believe," "may," and other similar
expressions, constitute forward-looking statements. These forward-looking
statements involve risks and uncertainties, including, but not limited to: the
risk of reduction in consumer demand for the product categories in which the
Company does business or for the Company's products in particular; the risk that
the Company may not continue to expand and diversify its business and product
lines; the risk of loss of one or more of the Company's major customers; the
risk that the Company may not be able to 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 its products are price competitive;
and the risk that the Company may not be able to obtain its products and
supplies on substantially similar terms, including cost. In addition, the
Company's business, operations and financial condition are subject to risks
which are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission, including this Report. Actual
results of operations may differ materially from those contained in the
forward-looking statements. We do not undertake any obligation to release
publicly any revision to any forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. For a discussion of factors that might cause such a
difference, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Additional Factors That Could Affect Operating Results."

                                     PART I

Item 1.  Business.

     (a) General Development of Business.

         The Company is a distributor and wholesaler in the United States 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, portable instant 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 in foreign countries.

         The Company was originally incorporated in California in 1977, and
reincorporated in Delaware in March 1994. Unless the context otherwise requires,
references in this Form 10-K to the "Company" refer to Variflex, Inc. and its
subsidiaries.

     (b) Financial Information about Industry Segments.

         Financial information concerning the Company's business is included in
Items 6, 7, 8 and 14.

     (c) Narrative Description of Business. Products.

         A historical principal product of the Company has been in-line roller
skates, which feature wheels mounted in a straight line on a composite plastic
chassis, functioning much like the blade on an ice skate. The Company currently
sells various models of in-line skates to the mass market under the Variflex(R)
brand.

         The Company's in-line roller 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 which increases
comfort. The wheel chassis is, depending on the model, made of either
fiberglass-filled nylon, aluminum, or various plastics. 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.

         The Company also markets skateboards, scooters, and skoot skates. The
Company presently offers different models of skateboards under the Variflex(R)
and Static(R) brands, different models of scooters under the Variflex(R) brand,
and various models of the Variflex Skoot Skate, which is a skateboard with a
removable handle for young children and beginners.

         The Company has developed and markets its Quik Shade(R) instant canopy,
which has become a principal product, and is designed to offer portable shade
and shelter for a variety of uses with the convenience of easy set-up and
take-down. The Company presently offers multiple models of the Quik Shade(R) and
a line of Quik Shade(R) accessories.

                                       2

<PAGE>

     The Company also markets a line of recreational protective helmets.
Different helmets are marketed to cyclists, skateboarders and in-line skaters.
The Company presently has adult helmet models, young adult models, youth models,
child models and toddler models. Each model features ventilated aerodynamic
designs with adjustable straps, and each comes in a variety of colors and
graphics. 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 currently meet or exceed the applicable standards of
the American Society for Testing and Materials (ASTM) or the Consumer Product
Safety Commission (CPSC). In October 2000, the Company announced that it was
voluntarily recalling certain of its X Games helmets which did not comply with
all applicable CPSC standards. The recall was completed during 2001.
Additionally, the Company offers a line of skating and skateboarding protective
equipment, such as knee pads, elbow pads and wrist guards.

     The following table shows the Company's major product categories as a
percentage of total gross sales for the fiscal years ended July 31, 2001, 2000,
and 1999. Action sport products include in-line skates, skateboards, and
scooters (which were separately reported for the fiscal years ended July 31,
2000 and 1999). The outdoor products include portable instant canopies and
springless trampolines (which were separately reported for the fiscal years
ended July 31, 2000 and 1999). Protective products include recreational
protective equipment, such as wrist guards, elbow pads and knee pads, and
helmets:

                                       2001            2000            1999
                                    -----------     -----------     ----------
       Action sports products           48%             51%             66%
       Outdoor products                 37%             34%             18%
       Protective products              15%             13%              7%
       Other products                   (*)              2%              9%
                                      ----            ----            ----
           Total                       100%            100%            100%
                                      ====            ====            ====
______________________________________
(*) Less than one-half of one percent.

     The Company's products are marketed in North America primarily through a
network of independent sales representatives and marketing organizations,
through attendance by representatives of the Company at industry trade shows and
through customer visits by Company employees. The Company's current customers
consist primarily of national mass merchandisers, regional mass merchandisers,
catalog houses, major sporting goods chains, major home improvement chains, and
international exporters. The Company began expanding international marketing in
fiscal 2001. The Company's wholly owned subsidiary, Oketa Ltd., was used to
facilitate sales and the shipment of products to international customers and to
customers in the United States who desired to purchase product through
international letter of credit transactions. The Company closed Oketa Ltd. and
is conducting all of its business directly through Variflex, Inc. in fiscal
2002.

     Status of products in development.

     The Company frequently changes the cosmetic features of its products, such
as graphics and colors, and attempts to develop new products or new designs for
existing products in response to customer requests or changes in consumer
preferences.

     During 2001, the Company introduced additional models of its Quik
Shade(R)portable instant canopy. A U.S. Patent was issued for the Quik
Shade(R)during 1998. In August 2001, the Company began developing snow helmets.
In addition, as disclosed under "Patents, trademarks, licenses, franchises, and
concessions," the Company is developing a line of products using images from the
popular "Rocket Power" cartoon.

     Despite these and other efforts by the Company to update the designs,
features and componentry of existing products and to develop potential new
products or new designs, there can be no assurance that such efforts will be
successful or that such changes or new products will be readily acceptable to
customers and consumers.

     Source 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 work on cost
containment. The raw materials and subcomponents for these products are
manufactured by independent contractors, most of which are also located
primarily in Asia, that have been procured by the Company's suppliers or, often,
by the management of the Company.

                                       3

<PAGE>

     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, 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.

     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(R), Static(R), Quik
Shade(R) and Airzone(TM) trademarks in the United States, and actively protects
against any unauthorized use in any other parts of the world. Registration of
various other trademarks for the Company's products are pending.

     During 2001, the Company entered into a non-exclusive license agreement to
produce a line of in-line skates, helmets, scooters, skoot skates, skateboards,
protective pads, accessories, and new products (hockey sets, body boards, and
pogo sticks) to be introduced in the future under the "Rocket Power" brand.
"Rocket Power" is a popular cartoon program that features kids participating in
extreme sports. The agreement ends in December, 2003.

     During 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(TM) and
Ultraflex brands. Additionally, the Company markets trampoline enclosures and
trampoline covers.

     The Company, during 1999, entered into a non-exclusive license agreement to
produce a line of in-line skates, accessories, snowboards, helmets, yo-yo's, and
skateboards under the "X Games" brand. This agreement ends in December, 2001.

     Major customers.

     The Company had one customer, Toys "R" Us, which individually accounted for
more than 10% of the Company's sales in 2001. The loss of any one or more of the
Company's major customers could have a material adverse effect upon the Company.

     Backlog.

     The Company had approximately $2,868,000 in unfilled purchase orders as of
September 30, 2001, compared to approximately $15,526,000 as of September 30,
2000. This significant decrease is due primarily to a combination of the overall
downturn in the economy (including a less positive forecast for the 2001 holiday
season) and the decrease in demand for scooters. The Company believes that
substantially all of these unfilled orders will be filled in the 2002 fiscal
year. Of the backlog as of September 30, 2001, approximately $148,000
represented orders for products which had not yet been received from suppliers
as of that date. Substantially all of the remaining $2,720,000 of the backlog at
September 30, 2001 represents fall booking orders of products on hand to be
shipped at future dates.

     Competition.

     The principal competitive factors in each of the Company's product
categories are price and performance. With respect to in-line skates in
particular, the main areas of difference in product performance are in the
weight and strength of the boot and frame, the hardness of the wheels, and the
quality of the wheel bearings. The Company offers a 60-day warranty on its
products with the exception of the recreational helmets, and the Quik Shade(R)
instant canopy where a one year warranty is offered and the Airzone(TM)
trampoline where a tiered warranty averaging two years is offered. Beyond such
warranty, the Company does not offer service on its products, and does not
believe that is an important competitive factor.

     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 mass market include Roller Derby (CAS),
Seneca and certain models from Rollerblade, Inc. (Blade Runner). In the case of
recreational protective equipment, Franklin Sports 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. and Enviroworks, Inc. For trampolines, the Company's
primary competitors are Jumpking, Inc. and Hedstrom. In addition, the Company
may compete with its primary customers when such customers directly source
products that the Company sells.

                                       4

<PAGE>

        While management believes that the quality of its products and the
service it provides to its customers are important factors in retaining
accounts, the Company clearly operates in a highly competitive environment and
there are no significant technological or manufacturing barriers to entry for
most product categories other than the Quik Shade(R) instant canopy and the
Airzone(TM) trampoline. Management believes that price is a major competitive
factor, particularly in the mass market. At present, the Company believes that
its products in each category, when compared to competitors' products of
comparable quality, are currently offered at comparable prices to most of its
competitors. However there can be no assurance that other companies, whether new
enterprises or established members of the retail or sporting goods industries,
will not be able to develop products of comparable or higher quality at lower
prices, or that the Company's price structure will not be affected by future
circumstances.

        Employees.

        As of July 31, 2001, the Company employed approximately 93 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 in a building located in nearby Oxnard, California, 50,092 square feet
consisting of additional warehouse space. The lease for this facility expires
June 18, 2002, with two one-year renewal options. The Company also stores
inventory in temporary facilities from time to time as required due to the
timing of shipments.

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

Item 3. Legal Proceedings.

        From time to time, the Company is involved in other claims and lawsuits
(including those involved in product liability) arising in the ordinary course
of its business. In the opinion of management, all of these claims and lawsuits
are covered by insurance or these matters will not have a material and adverse
effect on the Company's business, financial condition, results of operations or
cash flows.

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, 2001.

                                     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, 2000 and 2001 were as follows (per share):

                                               High          Low
                                               ----          ---
              Quarter ended:
                October 31, 1999               6.44          5.13
                January 31, 2000               6.38          5.38
                April 30, 2000                 6.25          4.50
                July 31, 2000                  6             4.63
                October 31, 2000               6.91          3.50
                January 31, 2001               8.94          4.75
                April 30, 2001                 9             7
                July 31, 2001                  7.67          5.50

                                       5

<PAGE>

        The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "VFLX." As of October 15, 2001, the closing sale price of the
Company's Common Stock on the Nasdaq National Market was $4.70.

    (b) Holders.

        There were 93 holders of record of the Company's Common Stock on October
9, 2001.

    (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.

Item 6. Selected Financial Data.

        The following selected consolidated financial data with respect to the
Company's consolidated financial position as of July 31, 2001 and 2000 and
results of operations for the years ended July 31, 2001, 2000, and 1999 has been
derived from the Company's audited consolidated financial statements appearing
elsewhere in this Annual 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, 1999, 1998, and 1997 and results of operations for the years ended
July 31, 1998 and 1997 has been derived from the Company's audited consolidated
financial statements, which are not presented in this Annual Report.

<TABLE>
<CAPTION>
                                                                           (In thousands, except per share data)
                                                          ------------------------------------------------------------------------
                                                                 2001           2000           1999           1998         1997
                                                                 ----           ----           ----           ----         ----
<S>                                                       <C>                 <C>            <C>            <C>          <C>
Operations Data:
   Net sales                                                   $59,164        $55,201        $37,370        $43,148      $51,661
   Pre-tax income (loss)                                         1,726         (1,983)           983         (2,704)      (3,083)
   Net income (loss)                                             1,346         (1,983)           803         (3,488)      (1,805)
   Net income (loss) per share:
      Basic                                                      $0.29         ($0.39)       $  0.14         ($0.58)      ($0.30)
      Diluted                                                    $0.28         ($0.39)       $  0.14         ($0.58)      ($0.30)
   Weighted average shares outstanding:
      Basic                                                      4,584          5,092          5,817          6,025        6,025
      Diluted                                                    4,797          5,092          5,860          6,025        6,025

Balance Sheet Data:
   Total assets                                                $39,574        $43,217        $40,617        $44,755      $47,893
   Working capital                                              28,844         27,192         34,072         39,283       40,210
   Long-term obligations                                           846            942              -              -            -
   Stockholders' equity                                         31,715         30,369         35,561         39,872       43,100
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Overview

        Net sales consists of invoiced sales less estimated returns and
allowances. 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.

        Costs of goods sold consists of product costs and freight, which are
recognized as related revenues are recorded, as well as distribution and
warehouse costs, including payroll expenses and 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.

                                       6

<PAGE>

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

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

New Accounting Standards

     In July 2001, the Financial Accounting Standards Board (FASB) issued the
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS No. 141 supersedes APB No. 16 "Business Combinations" and
SFAS No. 38 "Accounting for Preacquisition Contingencies of Purchased
Enterprises." SFAS No. 141 requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method. Accordingly, the
Company will be applying the provisions of this statement with respect to any
business combination entered into after June 30, 2001.

     In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes Accounting Principles Board Opinion No. 17. SFAS No.
142 applies to goodwill and intangible assets acquired after June 30, 2001, as
well as goodwill and intangible assets previously acquired. Under this
statement, goodwill as well as certain other intangible assets, determined to
have an infinite life, will no longer be amortized.

     Goodwill and other intangible assets will be reviewed for impairment on a
periodic basis. Early adoption of this statement is permitted for non-calendar
year-end companies if their fiscal year begins after March 15, 2001. The Company
elected early adoption of SFAS No. 142 effective August 1, 2001. The adoption of
SFAS No. 142 did not have an impact on the Company's financial statements.

     In April 2001, the Emerging Issue Task Force (EITF) reached a consensus on
Issue 00-25, "Vendor Income Statement Characterization of Consideration from a
Vendor to a Retailer." The consensus creates a presumption that consideration
paid by a vendor to a retailer, such as slotting fees and cooperative
advertising, should be classified as a reduction of revenue in the vendor's
income statement (instead of an expense) unless certain criteria are met. This
consensus is effective for fiscal quarters beginning after December 15, 2001.
The Company adopted EITF 00-25 effective August 1, 2001. Accordingly, beginning
August 1, 2001, certain charges for cooperative advertising will be reflected as
a reduction of revenue. Cooperative advertising expenses for the years ended
July 31, 2001, 2000, and 1999 were $1,451,000, $1,915,000, and $893,000,
respectively.


Results of Operations

     Year Ended July 31, 2001 Compared to Year Ended July 31, 2000

     Net Sales. Net sales for the fiscal year ended July 31, 2001 totaled
$59,164,000, an increase of $3,963,000, or 7% from fiscal 2000 net sales of
$55,201,000. Significant increases in volume with respect to the Company's
portable instant canopies, scooters, and recreational protective equipment,
offset to a lesser extent by decreases in volume in in-line skates and
trampolines, were the primary factors leading to the increase in total sales.

     With respect to action sport products (which include in-line skates,
skateboards and scooters and were separately reported for fiscal 2000), gross
sales for fiscal 2001 totaled $29,504,000, a decrease of approximately $44,000,
or less than 1%, compared to fiscal 2000. The minor decrease in sales was
primarily due to sales of two offsetting product categories: (1) a significant
decrease in volume of in-line skates, which was primarily attributable to
retailers excess inventory after the 2000 holiday season and the slowdown in
consumer spending; and (2) a significant increase in volume of scooters, which
was primarily due to the industry-wide increase in consumer demand for the 2000
holiday season for mini-scooters.

     Gross sales of outdoor products (which include portable instant canopies
and springless trampolines and were separately reported for fiscal 2000) during
fiscal 2001 totaled $22,439,000, an increase of approximately $2,834,000, or
14%, compared to fiscal 2000. The increase in sales was primarily due to
increased sales of portable instant canopies as a result of the introduction of
additional models during 2001 and increased distribution in major home
improvement chains, national mass merchandisers, and major sporting goods
chains. The increased canopy sales were offset to a lesser extent by a decrease
in sales of trampolines, which was primarily due to the approximate $6,200,000
order received from one customer during fiscal 2000 with no repeat order in
fiscal 2001.

                                       7

<PAGE>

     Gross sales of protective products (which include recreational
protective equipment, such as wrist guards, elbow pads and knee pads, and
helmets) during fiscal 2001 totaled $9,175,000, an increase of approximately
$1,686,000, or 23%, compared to fiscal 2000. The increase in sales was primarily
due to increased sales of X Games aggressive skater helmets and X Games
protective equipment under the X Games license agreement, which expires in
December 2001.

     Sales to the Company's four largest accounts during fiscal 2001 represented
54% of the Company's gross sales in fiscal 2001, compared to 69% for the four
largest accounts during fiscal 2000.

     By major product category, action sport products, outdoor products,
protective products, and other products, accounted for 48%, 37%, 15%, and 0%
respectively, of the Company's total gross sales during fiscal 2001, compared to
51%, 34%, 13%, and 2% during fiscal 2000.

     Gross Profit. Gross profit for the fiscal year ended July 31, 2001
decreased by $1,791,000 compared to the fiscal year ended July 31, 2000,
representing a 15% decrease. The Company's gross profit margin as a percentage
of net sales was 17.8% in fiscal 2001, compared with 22.3% in fiscal 2000. The
decrease in gross margin dollar amount and percentage was primarily the result
of sales of most of the Company's product categories at lower margins and the
writedown of slow-moving inventory due to the slowdown in the retail sector,
offset to a lesser degree by increased sales of higher margin canopies, as well
as increased inventory storage costs, workers' compensation insurance costs, and
product liability insurance costs.

     Operating Expenses. The Company's operating expenses (consisting of selling
and marketing expenses and general and administrative expenses) for fiscal 2001
totaled $9,365,000, or 15.8% of net sales. Operating expenses for fiscal 2000
were $12,163,000, or 22.0% of net sales.

     Selling and marketing expenses decreased by $80,000, or 2%, to $5,155,000
for fiscal 2001 compared to fiscal 2000. Selling and marketing expenses for
fiscal 2001 amounted to 8.7% of net sales, compared to 9.5% in the prior year.
The decrease in dollar amount and as a percentage of net sales was primarily due
to a decrease in sales commissions due to a special commission arrangement on a
large sale of trampoline systems to one customer in fiscal 2000 and lower co-op
advertising expense, offset by increased write-offs for uncollectible accounts,
and increased international sales expenses.

     General and administrative expenses decreased by $435,000, or 8%, to
$4,743,000 for fiscal 2001 compared to fiscal 2000. General and administrative
expenses for fiscal 2001 amounted to 8.0% of net sales, compared to 9.4% in
fiscal 2000. The decrease in dollar amount was primarily due to a decrease in
legal expenses, offset to a lesser extent by an increase in amortization of
intangible assets.

     In fiscal 2001, the Company recorded an increase to income of $533,000 due
to the reversal of the unneeded portion of the estimated product recall
liability recorded in fiscal 2000. The estimated product recall charge of
$1,750,000 related to the voluntary recall of certain of the Company's X Games
helmets.

     Other Income (Expense). Other income (expense) for the fiscal year ended
July 31, 2001 was income of $572,000, a change of $2,702,000, compared to an
expense of $2,130,000 for the fiscal year ended July 31, 2000. This change was
primarily due to the realized losses from the sale of marketable securities
recorded in fiscal 2000, offset to a lesser extent by decreased interest income
as a result of the Company having a reduced amount of marketable securities and
cash equivalents.

     Provision for Income Taxes. The income tax provision for fiscal 2001 was
$380,000, or 22% of income before taxes. The effective rate is less than the
federal statutory rate due to changes in the valuation allowance. There was no
provision for income taxes for fiscal 2000 due to reductions in the valuation
allowance. At July 31, 2001, the Company had a valuation allowance of
approximately $1.8 million against its net deferred tax assets. To the extent
that the Company generates sufficient ordinary income in the future,
approximately $300,000 of the valuation allowance may be further reversed as a
reduction of income tax expense and thereby reduce the effective tax rate.
Approximately $1.5 million of the valuation allowance would only be reversed and
reflected as a reduction of income tax expense if the Company generates
qualifying capital gain income, which is not expected to occur in the
foreseeable future.

     Weighted Average Shares Outstanding. The weighted average shares
outstanding in fiscal 2001 decreased from that of fiscal 2000 and fiscal 1999
due to several repurchases by the Company of its stock in those earlier periods.

     Year Ended July 31, 2000 Compared to Year Ended July 31, 1999

     Net Sales. Net sales for the fiscal year ended July 31, 2000 totaled
$55,201,000, an increase of $17,831,000, or 48% from fiscal 1999 net sales of
$37,370,000. Significant increases in volume with respect to the Company's
skateboard and scooter, recreational protective equipment and helmet, instant
canopy, and trampoline categories, were the primary factors leading to the
increase in total sales.

                                       8

<PAGE>

     With respect to in-line skates, gross sales for fiscal 2000 totaled
$20,625,000, an increase of approximately $749,000, or 4%, compared to fiscal
1999, as unit volume in fiscal 2000 totaled 1,517,000 units, an increase of
approximately 177,000 units, or 13%. The average price per unit (gross revenues
divided by units sold) of the Company's in-line skates was approximately $13.60
during fiscal 2000, compared to $14.83 for fiscal 1999. This sales price decline
was primarily due to competitive pressures in this product category. The
increase in sales was primarily due to additional sales volume of lower price
in-line skates.

     Gross sales of skateboards and scooters during fiscal 2000 totaled
$8,923,000, an increase of approximately $3,156,000, or 55%, compared to fiscal
1999, on total volume of 675,000 units, an increase of approximately 183,000
units, or 37%. The increase was primarily due to an industry-wide increase in
consumer demand for skateboards and mini-scooters.

     Gross sales for recreational protective equipment and helmets during fiscal
2000 totaled $7,489,000, an increase of approximately $4,805,000 or 179%,
compared to fiscal 1999 (in which period the Company separately reported
athletic protective equipment and recreational safety helmets), as unit volume
in fiscal 2000 was 891,000 units, an increase of approximately 533,000 units or
149%. The Company's increase in sales of these products was primarily related to
the increase in sales of in-line skates and skateboards and scooters, as well as
to additional sales volume of combination packages of aggressive skater helmets
with protective equipment.

     Gross sales of portable instant canopies during fiscal 2000 totaled
$10,540,000, an increase of approximately $3,456,000, or 49%, compared to fiscal
1999, on total volume of 130,000 units, an increase of approximately 46,000
units, or 55%. The increase in Quik Shade(R) instant canopy sales was primarily
due to increased distribution in major home improvement chains, regional mass
merchandisers and major sporting goods chains, as well as an industry-wide
increase in consumer demand for portable instant canopy products.

     Gross sales of snowboards and snowboarding accessories, such as bindings,
leashes, and miscellaneous apparel items, during fiscal 2000 totaled $411,000, a
decrease of approximately $532,000, or 56%, compared to fiscal 1999, while unit
volume of snowboards decreased approximately 11,200 units, or 48%, to a total of
12,200 units during fiscal 2000. The decrease in snowboard and snowboarding
accessories sales was primarily due to the Company's decision to reduce emphasis
in this product category and to terminate its exclusive right to manufacture,
market and distribute all snowboards bearing the Barfoot(TM) brand name during
1999.

     Gross sales of yo-yo's during fiscal 2000 totaled $432,000, a decrease of
approximately $1,719,000, or 80%, compared to fiscal 1999. The decrease was
primarily due to an industry-wide decline in consumer demand compared to the
prior year.

     Gross sales of trampolines totaled $9,065,000 during fiscal 2000, which was
the Company's first full year in this product category. This unique springless
product was introduced in the fourth quarter of fiscal 1999 with sales of only
$55,000. Approximately $6,200,000 of the fiscal 2000 sales increase was due to
orders received from one customer from which repeat orders are not expected to
be received in fiscal 2001.

     Sales to the Company's four largest accounts during fiscal 2000 represented
69% of the Company's gross sales in fiscal 2000, compared to 69% for the four
largest accounts during fiscal 1999.

     By product category, in-line skates and recreational protective equipment
and helmets accounted for 36% and 13%, respectively, of the Company's total
gross sales during fiscal 2000, compared to 51% and 7%, respectively, during
fiscal 1999. Skateboards and scooters accounted for 15% of the Company's total
gross sales during fiscal 2000 and 1999. Portable instant canopies represented
18% of total gross sales during 2000 and 1999. Snowboards and snowboarding
accessories represented 1% of total gross sales during fiscal 2000, compared to
2% in fiscal 1999. Yo-yo's represented 1% of total gross sales during 2000,
compared to 6% in the prior year. Trampolines represented 16% of total gross
sales during 2000, the first full year of sales.

     Gross Profit. Gross profit for the fiscal year ended July 31, 2000
increased by $4,812,000 compared to the fiscal year ended July 31, 1999,
representing a 64% increase. The Company's gross profit margin as a percentage
of net sales was 22.3% in fiscal 2000, compared with 20.1% in fiscal 1999. The
increase in gross margin percentage was due to several factors, including the
impact of increased sales of the higher margin Quik Shade(R) canopies,
recreational protective equipment and helmets, and trampolines, offset to a
lesser degree by increases in ocean freight costs and decreases in sales prices
of in-line skates as discussed above. There can be no assurance that the Company
can continue to increase or maintain sales of higher margin products and to
obtain its products from suppliers at sufficiently low costs to fully offset the
downward pressure on sales prices for in-line skates in order to sustain or
improve present gross profit margins.

     Operating Expenses. The Company's operating expenses (consisting of selling
and marketing expenses and general and administrative expenses) for fiscal 2000
totaled $12,163,000, or 22.0% of net sales. Operating expenses for fiscal 1999
were $8,613,000, or 23.0% of net sales.

                                       9

<PAGE>

     Selling and marketing expenses increased by $1,117,000, or 27%, to
$5,235,000 for fiscal 2000 compared to fiscal 1999. Selling and marketing
expenses for fiscal 2000 amounted to 9.5% of net sales, compared to 11.0% in the
prior year. The increase in dollar amount was primarily due to increases in
various expenses, such as co-op advertising and sales commissions, that are
directly related to sales and increased correspondingly with the higher sales
level described in the Net Sales section, partially offset by a decrease in
promotional advertising expense. The decrease as a percentage of net sales was
primarily due to decreases in promotional advertising expense and the result of
certain other expenses that are basically fixed in amount and are not directly
related to the higher sales level.

     General and administrative expenses increased by $683,000, or 15%, to
$5,178,000 for fiscal 2000 compared to fiscal 1999. General and administrative
expenses for fiscal 2000 amounted to 9.4% of net sales, compared to 12.0% in
fiscal 1999. The increase in dollar amount was primarily due to an increase in
expenses, net of insurance recoveries, related to the legal proceedings
described in "Item 3. Legal Proceedings," and to a lesser extent to an increase
in product development expenses, consulting fees and bonus expense.

     In fiscal 2000, the Company recorded an estimated product recall charge of
$1,750,000 relating to the voluntary recall of certain of its X Games helmets
which did not comply with all applicable Consumer Product Safety Commission
standards.

     Other Income (Expense). Other income (expense) for the fiscal year ended
July 31, 2000 was $(2,130,000), a decrease of $4,228,000, or 202%, compared to
fiscal 1999. This decrease was primarily due to realized losses from the sale of
marketable securities and to a lesser extent to decreased interest income due to
the reduced amount of the marketable securities.

     Provision for Income Taxes. There is no provision for income taxes for
fiscal 2000 due to reductions in the valuation allowance. The Company's
effective tax rate for fiscal 1999 is less than the federal statutory rate due
to changes in the valuation allowance.

Liquidity and Capital Resources

     The Company funds its activities principally from cash flow generated from
operations and credit facilities with institutional lenders. Cash and cash
equivalents available for sale totaled $16,612,000 as of July 31, 2001, compared
to $14,066,000 as of July 31, 2000. Net working capital as of July 31, 2001 was
$28,844,000 compared to $27,192,000 as of July 31, 2000, and the Company's
current ratio was 5.1:1 as of July 31, 2001, compared to 3.3:1 as of July 31,
2000. The increases in working capital and current ratio were primarily due to
cash generated from operations and increases in inventory and accounts
receivable, offset to a lesser extent by increases in current liabilities.
Short-term investments fluctuate on a daily basis as a result of changes in
working capital components.

     The Company has a credit agreement with a major bank providing a
$16,000,000 revolving line of credit which is subject to a borrowing base that
is calculated monthly. A July 31, 2001, approximately $7,000,000 was available
for borrowing and no cash advances were outstanding under the credit facility.
The borrowing base is based on a percentage of eligible receivables, inventory
and short-term investments. The line of credit provides for cash advances to a
maximum of $7,000,000 and the issuance of commercial letters of credit. At July
31, 200l, approximately $1,900,000 in letters of credit were issued. The
agreement, which expires December 31, 2001, is secured by inventory and
receivables and contains certain financial covenants. The cash advances portion
of the line of credit bears interest at the bank's prime rate, which was 6.75%
at July 31, 2001.

     The Company had long-term debt of $846,000 as of July 31, 2001, compared to
$942,000 as of July 31, 2000, with the decrease due to a payment made during the
first quarter of fiscal 2001. The Company had net stockholders' equity of
$31,715,000 as of July 31, 2001, compared to $30,369,000 as of July 31, 2000,
with the difference due to operating results for the fiscal year ended July 31,
2001.

     Capital expenditures for fiscal 2001 totaled $166,000 compared to $157,000
during fiscal 2000. The increase is primarily due to the acquisition of computer
equipment for approximately $70,000 and a new show booth for approximately
$55,000 compared to $67,000 and $51,000, respectively, for such expenditures
during the prior year.

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 which would offer a strategic fit with the Company's
existing products and its sourcing and distribution channels in the mass market.
The Company began in fiscal 2001 expanding international distribution and is
developing additional distribution arrangements in order to take further
advantage of growth opportunities which management believes exist for its
products outside the United States.

     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.

                                       10

<PAGE>

Foreign Exchange

     Management does not believe that the fluctuation in the value of the dollar
in relation to the currency of its suppliers has in the last three fiscal years
had 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.

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.

     Reliance on Major Customers. In the past three fiscal years, the Company
has had several customers which accounted for a majority of the Company's sales.
As is customary in the industry, the Company 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 could 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 timely payments with respect to
its account could have a material and adverse effect on the Company's results of
operations and financial condition.

     Competition from Other Manufacturers/Developers of Products; Price
Sensitivity of Customers. 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 the Quik Shade(R) instant canopy
and the Airzone(TM) trampoline. 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. Many of the Company's current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than the Company. In addition, smaller retailers may be acquired by, receive
investments from or enter into other commercial relationships with larger,
well-established and well-financed companies. The Company also competes to a
lesser degree with manufacturers of specialty or premium priced products.

     Shifting and Uncertain Consumer Demand. 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.

     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;

                                       11

<PAGE>


        . 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
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. However, the Company may be able to move production quickly to
alternate sources in response to economic or political circumstances that might
arise in any particular country.

        Product Liability Claims, Insurance. 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.

        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(R), Static(R), Quik Shade(R) and Airzone(TM) 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.

                                       12

<PAGE>

         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 licenses held under the X Games brand and the Rocket Power
brand are short-term contractual arrangements. Any extension or modification of
these licenses is subject to the approval of both the licensor and Variflex. The
X Games license is not being extended and ends in December, 2001. There are no
assurances that the Rocket Power license will be extended on similar terms or
that any extensions of the agreement will be made.

         Risks Associated With Entry Into New Business Areas. The Company may
choose to expand 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, although it has no present understandings, commitments or
agreements with respect to any material acquisitions or investments. There can
be no assurance that the 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.

         Dependence 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.

         Consumer Regulation of Company Products. 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 which 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 which 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.

Item 8.  Financial Statements and Supplementary Data.

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

                                       13

<PAGE>

                         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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 2001. 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, 2001 and 2000, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended July 31, 2001, 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 LLP

Woodland Hills, California
September 21, 2001

                                       14

<PAGE>

                                 VARIFLEX, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                                          July 31
                                                                                         -------------------------------------------
                                                                                              2001                     2000
                                                                                         ------------------       ------------------
<S>                                                                                      <C>                      <C>
Assets
Current assets:
   Cash and cash equivalents                                                             $           16,612       $          14,066
   Trade accounts receivable, less allowances of $436 and
      $421 as of July 31, 2001 and 2000, respectively                                                 8,067                  13,412
   Inventory                                                                                          8,164                   8,926
   Deferred income taxes                                                                              1,337                   1,192
Prepaid expenses and other current assets                                                             1,677                   1,502
                                                                                         ------------------       -----------------
Total current assets                                                                                 35,857                  39,098
Property and equipment, net                                                                             295                     261
Intangible assets                                                                                     2,848                   3,326
Other assets                                                                                            574                     532
                                                                                         ------------------       ------------------
Total assets                                                                             $           39,574       $          43,217
                                                                                         ==================       ==================
Liabilities and stockholders' equity
Current liabilities:
   Trade acceptances payable                                                             $              537       $             957
   Accounts payable                                                                                   1,141                   1,869
   Accrued warranty                                                                                     848                   1,101
   Accrued salaries and related liabilities                                                             684                   1,204
   Accrued co-op advertising                                                                          1,882                   2,064
   Accrued returns and allowances                                                                       730                   1,367
   Accrued product liability claims                                                                     418                     414
   Accrued product recall expenses                                                                        -                   1,750
   Income taxes payable                                                                                   -                     221
   Other accrued expenses                                                                               573                     759
   Current maturities of note payable                                                                   200                     200
                                                                                         ------------------       ------------------
Total current liabilities                                                                             7,013                  11,906

Note payable, less current maturities                                                                   846                     942

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,
      6,025,397 issued as of July 31, 2001 and 2000                                                       9                       9
   Common stock warrants                                                                                702                     702
   Additional paid-in capital                                                                        21,023                  21,023
   Retained earnings                                                                                 18,696                  17,350
   Treasury stock, at cost, 1,440,965 shares
         as of July 31, 2001 and 2000                                                                (8,715)                 (8,715)
                                                                                         ------------------       ------------------
Total stockholders' equity                                                                           31,715                  30,369
                                                                                         ------------------       ------------------
Total liabilities and stockholders' equity                                               $           39,574       $          43,217
                                                                                         ==================       ==================
</TABLE>


See accompanying notes.

                                       15

<PAGE>

                                 VARIFLEX, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                               Year Ended July 31
                                                                           ---------------------------------------------------------
                                                                                 2001                  2000                1999
                                                                           ------------------     ----------------    --------------

<S>                                                                        <C>                    <C>                 <C>
Net sales                                                                  $           59,164     $         55,201    $      37,370
Cost of goods sold                                                                     48,645               42,891           29,872
                                                                           ------------------     ----------------    --------------
Gross profit                                                                           10,519               12,310            7,498
                                                                           ------------------     ----------------    --------------
Operating expenses:
   Selling and marketing                                                                5,155                5,235            4,118
   General and administrative                                                           4,743                5,178            4,495
   Product recall (income) charge                                                        (533)               1,750                -
                                                                           ------------------     ----------------    --------------
Total operating expenses                                                                9,365               12,163            8,613
                                                                           ------------------     ----------------    --------------
Income (loss) from operations                                                           1,154                  147           (1,115)
                                                                           ------------------     ----------------    --------------

Other income (expense):
   Loss on sale of marketable securities                                                    -               (3,712)               -
   Interest expense                                                                      (104)                 (32)               -
   Interest income and other                                                              676                1,614            2,098
                                                                           ------------------     ----------------    --------------
Total other income (expense)                                                              572               (2,130)           2,098
                                                                            ------------------     ----------------    -------------

Income (loss) before income taxes                                                       1,726               (1,983)             983
Provision for income taxes                                                                380                    -              180
                                                                           ------------------     ----------------    --------------
Net income (loss)                                                          $            1,346     $         (1,983)   $         803
                                                                           ==================     ================    ==============

Net income (loss) per share of common stock:
   Basic                                                                   $             0.29     $          (0.39)   $        0.14
                                                                           ==================     ================    ==============
   Diluted                                                                 $             0.28     $          (0.39)   $        0.14
                                                                           ==================     ================    ==============
Weighted average shares outstanding:
   Basic                                                                                4,584                5,092            5,817
                                                                           ==================     ================    ==============
   Diluted                                                                              4,797                5,092            5,860
                                                                           ==================     ================    ==============
</TABLE>


See accompanying notes.

                                       16

<PAGE>


                                 VARIFLEX, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                                         Accumulated
                                                           Common   Additional              Other
                                         Common Stock      Stock     Paid-In   Retained Comprehensive    Treasury Stock
                                         ------------                                                    --------------
                                       Shares    Amount   Warrants   Capital   Earnings Income (Loss)   Shares    Amount    Total
                                       ------    ------   --------   -------   -------- -------------   ------    ------    -----

<S>                                   <C>        <C>      <C>       <C>        <C>      <C>           <C>        <C>      <C>
Balance at July 31, 1998              6,025,397  $    9   $    702  $  21,023  $ 18,530 $       (392)         -  $     -  $ 39,872
 Comprehensive loss:
  Net unrealized holding losses on
   debt securities available for sale         -       -          -          -         -       (2,040)         -        -    (2,040)
  Net income                                  -       -          -          -       803            -          -        -       803
                                                                                                                          --------
 Total comprehensive loss                                                                                                   (1,237)
 Purchase of treasury shares                  -       -          -          -         -            -    512,979   (3,074)   (3,074)
                                      ---------  ------   --------  ---------  -------- ------------  ---------  -------- --------
Balance at July 31, 1999              6,025,397       9        702     21,023    19,333       (2,432)   512,979   (3,074)   35,561
 Comprehensive income (loss):
  Net realized losses on debt
   securities sold                            -       -          -          -         -        2,432          -        -     2,432
  Net Loss                                    -       -          -          -    (1,983)           -          -        -    (1,983)
                                                                                                                          --------
 Total comprehensive income                                                                                                    449
 Purchase of treasury shares                  -       -          -          -         -            -    927,986   (5,641)   (5,641)
                                      ---------  ------   --------  ---------  -------- ------------  ---------  -------- --------
Balance at July 31, 2000              6,025,397       9        702     21,023    17,350            -  1,440,965   (8,715)   30,369
 Comprehensive income:
  Net income                                  -       -          -          -     1,346            -          -        -     1,346
                                                                                                                          --------
 Total comprehensive income                                                                                                  1,346
                                      ---------  ------   --------  ---------  --------  -----------  --------- --------  --------
Balance at July 31, 2001              6,025,397  $    9   $    702  $  21,023  $ 18,696  $         -  1,440,965 $ (8,715) $ 31,715
                                      =========  ======   ========  =========  ========  ===========  ========= ========  ========
</TABLE>

See accompanying notes.

                                       17

<PAGE>

                                 VARIFLEX, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                               Year Ended July 31
                                                                    ------------  -----------    -----------
                                                                        2001          2000           1999
                                                                    ------------  -----------    -----------
<S>                                                                 <C>           <C>            <C>
Operating activities
Net income (loss)                                                   $   1,346     $   (1,983)     $     803
Adjustments to reconcile net income (loss) to
 net cash provided by (used in) operating activities:
   Depreciation and amortization                                          121            173            326
   Amortization of intangibles                                            478            192             42
   Non-cash interest charge                                               104             32              -
   Deferred income taxes                                                 (145)          (588)          (604)
   Loss on sale of marketable securities                                    -          3,712              1
   Loss on disposal of fixed assets                                        11              2              2
   Changes in operating assets and liabilities:
    Trade accounts receivable                                           5,345         (6,512)         1,305
    Inventory                                                             762         (3,178)           735
    Prepaid expenses and other current assets                            (175)          (861)         1,168
    Trade acceptances payable                                            (420)           824           (251)
    Accounts payable                                                     (728)         1,403             95
    Accrued product recall expenses                                    (1,750)         1,750              -
    Other current liabilities                                          (1,995)         2,673            329
                                                                    ---------     ----------      ---------
Net cash provided by (used in) operating activities                     2,954         (2,361)         3,951
                                                                    ---------     ----------      ---------
Investing activities
Purchases of property and equipment                                      (166)          (157)          (110)
Proceeds from sale of assets                                                -              4              -
Gross purchases of available-for-sale securities                            -         (1,361)        (1,788)
Gross sales of available-for-sale securities                                -         19,973              2
Purchase of intangible assets                                               -         (1,950)          (500)
Other assets                                                              (42)           216           (660)
                                                                    ---------     ----------      ---------
Net cash provided by (used in) investing activities                      (208)        16,725         (3,056)
                                                                    ---------     ----------      ---------

Financing activities
Purchase of treasury shares                                                 -         (5,641)        (3,074)
Principal payment on note payable                                        (200)             -              -
                                                                    ---------    -----------    -----------
Net cash used in financing activities                                    (200)        (5,641)        (3,074)
                                                                    ---------    -----------    -----------

Net increase (decrease) in cash                                         2,546          8,723         (2,179)
Cash and cash equivalents beginning of period                          14,066          5,343          7,522
                                                                    ---------   ------------    -----------
Cash and cash equivalents at end of period                          $  16,612   $     14,066    $     5,343
                                                                    =========   ============    ===========

Cash paid during the period for:
 Interest                                                           $       -   $          -    $         -
 Income taxes                                                       $   1,440   $        638    $       512
</TABLE>

Supplemental disclosure of non-cash financing and investing activities:
 In April 2000, the Company recorded the non-cash portion of the acquisition
 of a patent of $1,110,000 and the resultant note payable. See Note 11.

See accompanying notes.

                                       18

<PAGE>

                                 VARIFLEX, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  July 31, 2001

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, 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, snowboards 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, and other litigation related
matters, and the accrual for the product recall charge discussed in Note 15.

Revenue Recognition and Warranty

The Company recognizes revenue from product sales upon shipment 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 as an
offset to gross sales.

Shipping and Handling Costs

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.

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 27%
for one customer during fiscal 2001; 36%, 17%, and 11% each for three customers
during fiscal 2000; 40% and 19% each for two customers during fiscal 1999.
Receivables from two of these customers as a percentage of the Company's total
trade accounts receivable were 17% and 9% of total accounts receivable at July
31, 2001.

With the exception of yo-yo's, which were manufactured by independent
contractors located domestically and in Asia, all of the Company's products are
manufactured by independent contractors located in Asia. The Company presently
knows of no circumstances that would materially affect its supply or costs of
goods; however, there can be no assurances with respect to events which may
arise in the future.

                                       19

<PAGE>

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.

Marketable Securities

The Company accounts for investments in marketable securities in accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management has determined all
investments should be classified as available-for-sale.

Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as accumulated other comprehensive income
(loss). The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains, losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income (expense). The cost of securities is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.

Inventory

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

<TABLE>
<CAPTION>
                                                            July 31
                                                -------------------------------
                                                    2001                2000
                                                -----------         -----------
                                                         (In thousands)
<S>                                             <C>                 <C>
Raw material and work-in-process                $       727         $     1,027
Finished goods                                        7,437               7,899
                                                -----------         -----------
                                                $     8,164         $     8,926
                                                ===========         ===========
</TABLE>

Long Lived Assets

In accordance with FASB Statement No. 121, 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 (including goodwill) 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.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets or,
for leasehold improvements, over the terms of the related leases, if shorter.

Intangible Assets

License agreement assets described in Note 10 are amortized on a straight-line
basis over a period of 8 years and are included net of accumulated amortization
as a component of intangible assets. Accumulated amortization of license
agreements as of July 31, 2001 and 2000 amounted to $271,000 and $146,000,
respectively.

The patent described in Note 11 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 in 2001 and 2000. Accumulated amortization of
patents as of July 31, 2001 and 2000 amounted to $441,000 and $88,000,
respectively.

                                       20

<PAGE>

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, 2001 and July 31,
1999, the number of shares used in the calculation of diluted earnings per share
included 212,501 shares and 42,778 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, 2000 because their
effect is antidilutive.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs for the years
ended July 31, 2001, 2000, and 1999 amounted to $2,317,000, $2,034,000 and
$1,988,000, respectively.

Stock-Based Compensation

Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record compensation
expenses for stock options at fair value. The Company has chosen to continue to
account for stock options using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, the Company has computed
the pro forma disclosures of the earnings per share as determined under the
provision of SFAS No. 123.

Comprehensive Income

In accordance with Statement 130, "Reporting Comprehensive Income," unrealized
gains or losses on the Company's available-for-sale securities are included in
other comprehensive income (loss) for the years ended July 31, 2001, 2000 and
1999 as follows:

<TABLE>
<CAPTION>
                                                                                  2001              2000              1999
                                                                             --------------    -------------     -------------
                                                                                              (In thousands)
  <S>                                                                        <C>              <C>                <C>
  Unrealized holding gains (losses) arising during period,
     net of taxes of zero in each period                                     $            -    $      (1,280)    $      (2,041)

  Reclassification adjustments for (gains) losses realized in net income                  -            3,712                 1
                                                                             --------------    -------------     -------------

  Net change in unrealized loss                                              $            -    $       2,432     $      (2,040)
                                                                             ==============    =============     =============
</TABLE>

The deferred tax benefit arising from the unrealized holding losses is offset by
the valuation allowance.

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, 2001, 2000 and 1999, it operated in only one segment.

                                       21

<PAGE>

Gross sales of similar products for that segment are as follows:

                                        2001            2000           1999
                                      --------        --------       --------
                                                   (In thousands)

  Action sport products               $ 29,504        $ 29,548       $ 25,643
  Outdoor products                      22,439          19,605          7,139
  Protective products                    9,175           7,489          2,684
  Other products                           594           1,217          3,412
                                      --------        --------       --------
  Total gross sales                     61,712          57,859         38,878
  Returns and allowances                (2,548)         (2,658)        (1,508)
                                      --------        --------       --------
  Total net sales                     $ 59,164        $ 55,201       $ 37,370
                                      ========        ========       ========

Reclassifications

Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform with the 2001 presentation.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued the
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS No. 141 supersedes APB No. 16 "Business Combinations" and
SFAS No. 38 "Accounting for Preacquisition Contingencies of Purchased
Enterprises." SFAS No. 141 requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method. Accordingly, the
Company will be applying the provisions of this statement with respect to any
business combination entered into after June 30, 2001.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes Accounting Principles Board Opinion No. 17. SFAS No.
142 applies to goodwill and intangible assets acquired after June 30, 2001, as
well as goodwill and intangible assets previously acquired. Under this
statement, goodwill as well as certain other intangible assets, determined to
have an infinite life, will no longer be amortized.

Goodwill and other intangible assets will be reviewed for impairment on a
periodic basis. Early adoption of this statement is permitted for non-calendar
year-end companies if their fiscal year begins after March 15, 2001. The Company
elected early adoption of SFAS No. 142 effective August 1, 2001. The adoption of
SFAS No. 142 did not have an impact on the Company's financial statements.

In April 2001, the Emerging Issue Task Force (EITF) reached a consensus on Issue
00-25, "Vendor Income Statement Characterization of Consideration from a Vendor
to a Retailer." The consensus creates a presumption that consideration paid by a
vendor to a retailer, such as slotting fees and cooperative advertising, should
be classified as a reduction of revenue in the vendor's income statement
(instead of an expense) unless certain criteria are met. This consensus is
effective for fiscal quarters beginning after December 15, 2001. The Company
adopted EITF 00-25 effective August 1, 2001. Accordingly, beginning August 1,
2001, certain charges for cooperative advertising will be reflected as a
reduction of revenue. Cooperative advertising expenses for the years ended July
31, 2001, 2000, and 1999 were $1,451,000, $1,915,000, and $893,000,
respectively.

2. INVESTMENTS

The Company experienced no realized gain or loss, a net realized loss of
$3,712,000, and a net realized gain of $1,000, on sales of available-for-sale
securities during the fiscal years ended July 31, 2001, 2000, and 1999,
respectively. In fiscal 2000, the Company sold all of its investment in bond
mutual funds.

                                       22

<PAGE>

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                              July 31
                                                       ---------------------
                                                         2001          2000
                                                       --------      -------
                                                           (In thousands)

   Computer equipment                                  $    539      $   469
   Trade show assets                                        122          226
   Machinery and equipment                                  283          261
   Furniture and fixtures                                   211          202
   Leasehold improvements                                   173          173
   Molds, dies and tooling equipment                         88        3,743
                                                       --------      -------
                                                          1,416        5,074
   Less accumulated depreciation and amortization        (1,121)      (4,813)
                                                       --------      -------
                                                       $    295      $   261
                                                       ========      =======

In fiscal 2001, the Company wrote off against accumulated depreciation fully
depreciated molds, dies, and tooling equipment for a gross amount of $3,666,000.

4. REVOLVING LINE OF CREDIT

As of July 31, 2001, the Company has a credit agreement with a major bank
providing a $16,000,000 revolving line of credit which is subject to a borrowing
base that is calculated monthly. At July 31, 2001, approximately $7,000,000 was
available for borrowing and no cash advances were outstanding under the credit
facility. The borrowing base is based on a percentage of eligible receivables,
inventory and short-term investments. The line of credit provides for cash
advances to a maximum of $7,000,000 and the issuance of commercial letters of
credit. The cash advances portion of the line of credit bears interest at the
bank's prime rate, which was 6.75% at July 31, 2001. The credit line matures on
December 31, 2001. The agreement is secured by inventory and receivables and
requires the Company to comply with certain financial ratios and covenants.

As of July 31, 2001, letters of credit in the amount of $1,861,000 were open for
the receipt of future merchandise. Of this amount, $537,000 is recorded as trade
acceptances in the accompanying consolidated balance sheet at July 31, 2001 and
$1,324,000 has not been reflected on these financial statements since title to
the merchandise has not yet passed to the Company.

5. NOTE PAYABLE

The Company has an outstanding promissory note payable, as described in Note 11,
which consists of the following:

                                                              July 31
                                                       ---------------------
                                                         2001          2000
                                                       --------      -------
                                                           (In thousands)

Note Payable (approximates fair value)                 $  1,046      $ 1,142
Less current maturities                                     200          200
                                                       --------      -------
                                                       $    846      $   942
                                                       ========      =======

                                       23

<PAGE>

Aggregate future maturities of the note payable are as follows:

                                                      Maturities
                                                   ----------------
                                                    (In thousands)

   Years ending July 31:
        2002                                       $            200
        2003                                                    200
        2004                                                    200
        2005                                                    200
        2006                                                    200
        Thereafter                                              400
                                                   ----------------
                                                              1,400

        Less imputed interest                                  (354)
                                                   ----------------
                                                   $          1,046
                                                   ================


6. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in various claims arising primarily from sales of
products in the normal course of business. Management has recorded a $418,000
allowance for product liability losses at July 31, 2001 ($414,000 at July 31,
2000). In addition, the Company carries product liability insurance on its
products. In the opinion of management, any additional liability to the Company
arising under any pending product liability litigation would not materially
affect its financial position, cash flow or results of operations.

Lease Commitments

The Company leases warehouse and office facilities under an operating lease that
requires minimum monthly payments of $61,000, 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 additional warehouse space in another building under an
operating lease requiring minimum monthly payments of $24,000, which amount
includes property taxes, insurance, repairs and maintenance, and utilities. This
agreement expires June 18, 2002, with the Company having an option to extend
this lease for two twelve-month periods. The Company's subsidiary, Static
Snowboards, Inc., leased office and manufacturing facilities under an operating
lease that required monthly payments of $13,000 and expired in September 2000.
The Company had entered into a sublease agreement with a third party for this
facility. The agreement provided monthly receipts of $13,000 and expired in
September 2000.

The Company has no capital leases as of July 31, 2001. Annual future minimum
lease payments under existing operating leases are as follows:

                                                      Operating
                                                        Leases
                                                   ----------------
                                                    (In thousands)

   Years ending July 31:
        2002                                       $            788
        2003                                                    766
        2004                                                    759
        2005                                                    746
        2006 and thereafter                                     307
                                                   ----------------
   Total minimum lease payments                    $          3,366
                                                   ================

Total rent expense was $688,000, $594,000, and $508,000 for the fiscal years
ended July 31, 2001, 2000 and 1999, respectively.

                                       24

<PAGE>

Employment Agreements

The Company has employment and consulting agreements in effect with certain of
its employees. The agreements provide for varying terms of employment and
guaranteed payments aggregating $156,000 in base compensation during the fiscal
year ended July 31, 2002.

7. 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. Contributions for fiscal 1999 were
zero. 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 2001 and fiscal 2000
were approximately $57,000 and $73,000, respectively.

8. INCOME TAXES

The provision for (benefit from) income taxes for the fiscal years ended July
31, 2001, 2000, and 1999 is as follows:

<TABLE>
<CAPTION>
                                                2001            2000            1999
                                            ------------    ------------    ------------
                                                           (In thousands)
<S>                                         <C>            <C>              <C>
Current (benefit) provision:
  Federal                                   $        446    $        439    $        731
  State                                               79             149              53
                                            ------------    ------------    ------------
Total current (benefit) provision                    525             588             784

Deferred provision (benefit):
  Federal                                            109          (1,116)           (352)
  State                                               48            (205)            (56)
                                            ------------    ------------    ------------
Total deferred provision (benefit)                   157          (1,321)           (408)
                                            ------------    ------------    ------------
Valuation allowance                                 (302)            733            (196)
                                            ------------    ------------    ------------
                                            $        380    $          -    $        180
                                            ============    ============    ============
</TABLE>

                                       25

<PAGE>

Deferred income taxes consist of the tax effect of timing differences related to
the following components:

<TABLE>
<CAPTION>
                                                                                 2001                2000
                                                                             --------------      -------------
                                                                                       (In thousands)

<S>                                                                          <C>                 <C>
Deferred tax assets:
  Realized loss deductible against capital gains                             $        1,470      $       1,470
  Inventory valuation allowances                                                        522                345
  Inventory                                                                             273                206
  Warranty allowances                                                                   307                319
  Allowances for losses on receivables                                                  173                167
  Sales return allowances                                                               165                349
  Product liability                                                                     166                164
  Product recall                                                                          -                693
  Other                                                                                 391                395
                                                                             --------------      -------------
Total deferred tax assets                                                             3,467              4,108

Deferred tax liabilities:
  Depreciation                                                                         (168)              (168)
  Unremitted earnings of Oketa                                                          (17)              (197)
  Prepaid Insurance                                                                    (173)               (81)
  Insurance receivable                                                                    -               (396)
                                                                             --------------      -------------
Total deferred tax liabilities                                                         (358)              (842)
                                                                             --------------      -------------
Net deferred tax assets                                                               3,109              3,266
Valuation allowance                                                                  (1,772)            (2,074)
                                                                             --------------      -------------
                                                                             $        1,337      $       1,192
                                                                             ==============      =============
</TABLE>


Approximately $1,470,000 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.

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:

                                            2001           2000          1999
                                         ----------     ----------    ----------
Statutory federal income tax rate                34%           (34%)         34%
Valuation allowance                             (18)            32          (18)
State taxes, net of federal benefit               5              -            -
Other non-deductible expenses                     1              2            2
                                         ----------     ----------    ----------
                                                 22%             -%          18%
                                         ==========     ==========    ==========


Pretax income (loss) earned by Oketa amounted to $143,000, $328,000, and
$(32,000) in fiscal 2001, 2000 and 1999, respectively, 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.

9.  STOCK OPTION PLANS

In April 1993, the Company established a non-qualified stock option plan (the
Plan) to grant stock options to one of its officers. Under the Plan, stock
options were granted each April through April 1997. Each of these grants shall
vest cumulatively at 20% per year over five years. The options are exercisable
over ten years at an exercise price of $0.0004 per share. The number of shares
granted at each grant date will have an aggregate fair market value of $20,000
as of such grant date. The Company has granted options to purchase a total of
20,129 shares of the Company's common stock under the Plan. The Company has
recorded compensation expense related to these options.

                                       26

<PAGE>

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, 2001, 172,500 shares
are available for grant under the 1994 Stock Plan.

In June 1997, the Company terminated certain incentive stock option plans and
stock options granted in April 1994 for the purchase of 280,000 shares of common
stock at $15.50 per share. In connection with the termination of these stock
options and stock option plans the Company granted to certain officers and
employees of the Company incentive stock options, under the 1994 Stock Plan, for
the purchase of an aggregated amount of 145,000 shares of the Company's common
stock. The options vest over five years, with exercise prices ranging from $5.00
to $5.50 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, 2001, 230,000 shares are available for grant
under the 1998 Stock Plan.

There were no options exercised in the years ended July 31, 2001, 2000, and
1999.

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


                                             Options Outstanding
                                  ----------------------------------------
                                        Number               Weighted
                                      of Shares            Average Price
                                  ------------------    ------------------

Balance at July 31, 1998                     185,629                4.7676
Granted                                      134,000                4.6567
Canceled                                      (6,250)               5.0000
                                  ------------------

Balance at July 31, 1999                     313,379                4.7156
Granted                                       10,250                5.8034
Canceled                                           -                     -
                                  ------------------

Balance at July 31, 2000                     323,629                4.7500
Granted                                      149,000                6.2525
Canceled                                      (5,000)               5.0000
                                  ------------------
Balance at July 31, 2001                     467,629                5.2261
                                  ==================


                                       27

<PAGE>


Information regarding stock options outstanding as of July 31, 2001 is as
follows:

<TABLE>
<CAPTION>
                               Options Outstanding                                                 Options Exercisable
----------------------------------------------------------------------------------        ---------------------------------------
                                             Weighted
                                              Average
                                             Remaining            Weighted                                        Weighted
                           Number           Contractual           Average                     Number          Average Exercise
    Price Range          of Shares             Life            Exercise Price               of Shares               Price
----------------------------------------------------------------------------------        ---------------------------------------
<S>                     <C>                   <C>                 <C>                        <C>                   <C>
             $0.0004      20,129              3 years             $0.0004                     19,339               $0.0004

  $4.6250 to $8.1875     447,500              8 years             $5.4611                    200,000               $5.1293
</TABLE>


The weighted average exercise prices and fair market value of stock options and
warrants (see Note 13) using the Black-Scholes option valuation model were as
follows:

<TABLE>
<CAPTION>
                                                                                 2001                           2000
                                                                     -----------------------------   ----------------------------
                                                                         Fair          Exercise          Fair         Exercise
                                                                        Value           Price            Value          Price
                                                                     -------------   -------------   --------------  ------------
<S>                                                                     <C>            <C>              <C>            <C>
Exercise price equals market value of stock at date of grant            $ 3.39         $ 6.253          $ 2.43         $ 5.80
</TABLE>


The weighted average fair values of 2001 and 2000 stock option grants were
estimated at the date of grant using the Black-Scholes option valuation model
and the following average actuarial assumptions:


                                     2001                        2000
                            -----------------------     -----------------------

 Risk-free interest rate              5.5                         5.5
 Expected life                        5.0                         5.0
 Expected volatility                 .564                        .377
 Expected dividend yield             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.

For purposes of the pro forma disclosure of net income (loss), the estimated
fair value of the stock options and warrants granted in 1999, 2000 and 2001 is
amortized as compensation expense over the options' vesting period. Pro forma
net income (loss) and pro forma diluted income (loss) per share for fiscal 2001,
2000, and 1999 would have been $1,238,000, $(2,084,000), and $693,000 and $.26,
$(.41), and $0.12, respectively. However, the pro forma effect on net income for
2001 and 2000 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma compensation
expense for future years. Pro forma information in future years may reflect the
amortization of a larger number of stock options granted in several succeeding
years.

10.  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 of which will
be applied towards royalties otherwise payable by the Company. 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 $247,000, $164,000 and $42,000, respectively, during the years ended July
31, 2001, 2000, and 1999.

                                       28

<PAGE>

11.  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 and $88,000, respectively, during the
years ended July 31, 2001 and 2000.

12.  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.

13.  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 currently 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.

14.  RELATED PARTY TRANSACTIONS

The Company has purchased certain inventories from an entity affiliated with an
officer and stockholder of the Company. Total inventory purchases made from the
related party were approximately $0, $70,000, and $1,530,000 during the years
ended July 31, 2001, 2000, and 1999, respectively. Amounts due to the related
party are recorded in accounts payable and paid under normal terms. No amounts
were recorded in accounts payable at July 31, 2001 and 2000.

15.  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.

                                       29

<PAGE>

16.  QUARTERLY OPERATING DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
                                                        First                  Second                 Third               Fourth
                                                  ------------------      -----------------      ----------------     --------------
                                                                           (in thousands, except per share data)

<S>                                               <C>                     <C>                    <C>                  <C>
Year ended July 31, 2001
    Net sales                                     $    19,958             $    15,477            $     10,845         $    12,884
    Gross profit                                        4,194                   2,790                   1,752               1,783
    Net income (loss)                                   1,004                     445                    (156)                 53**
    Net income (loss) per share
      Basic                                               .22                     .10                    (.03)                .01**
      Diluted                                             .21                     .09                    (.03)                .01**


Year ended July 31, 2000
    Net sales                                     $     9,503             $    10,941            $     17,109         $    17,648
    Gross profit                                        1,916                   2,350                   4,077               3,967
    Net income (loss)                                     105                    (317)                    406              (2,177)*
    Net income (loss) per share
      Basic                                               .02                    (.06)                    .08                (.47)*
      Diluted                                             .02                    (.06)                    .08                (.47)*
</TABLE>


 * Net loss and net loss per share include $3,399,000 realized loss on sales of
marketable securities and $1,750,000 product recall charge, and are reduced by
the insurance recovery from a litigation settlement.

** Net income and net income per share include $533,000 of income related to the
product recall charge reversal.

                                       30

<PAGE>

                                 VARIFLEX, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                         Three years ended July 31, 2001

<TABLE>
<CAPTION>
                                                                                 Additions
                                                               Balance at         Charged          Write-offs          Balance
                                                               Beginning             to            Charged to           At End
                                                               of Period          Expense           Allowance         of Period
                                                             --------------  -----------------  ----------------    --------------

<S>                                                          <C>             <C>                <C>                 <C>
Year ended July 31, 2001:
   Reserves and allowances deducted from asset accounts:
       Allowance for uncollectable accounts                    $ 421,000        $   715,000       $  700,000         $    436,000


Year ended July 31, 2000:
   Reserves and allowances deducted from asset accounts:
       Allowance for uncollectable accounts
                                                               $ 430,000        $    10,000      $    19,000         $    421,000

Year ended July 31, 1999:
   Reserves and allowances deducted from asset accounts:
       Allowance for uncollectable accounts
                                                               $ 413,000        $    95,000      $    78,000         $    430,000
</TABLE>

                                       31

<PAGE>

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

          Not applicable.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

Item 11.  Executive Compensation.

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

Item 13.  Certain Relationships and Related Transactions.

         Except as noted in the following paragraph, the information required by
Items 10, 11, 12 and 13 is included in the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14(A) not later than 120 days after the close
of fiscal 2001 in connection with the Company's 2001 Annual Meeting of
Stockholders, and is therefore incorporated herein by reference.

                                     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, 2001 and 2000
              Consolidated Statements of Operations for the years ended July 31,
              2001, 2000 and 1999
              Consolidated Statements of Stockholders' Equity for the years
              ended July 31, 2001, 2000 and 1999
              Consolidated Statements of Cash Flows for the years ended July 31,
              2001, 2000 and 1999
              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

                                       32

<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
   Exhibit No.    Description                                                                                            Note No.
----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                                                                    <C>
       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      (3)
                  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.
      10.1        Lease for property located at 5152 North Commerce Avenue, Moorpark, California,                           (5)
                  dated December 1, 1999
      10.2        First Amendment dated June 11, 2001, to the December 1, 1999, lease for property located at 5152          (6)
                  North Commerce Avenue, Moorpark, California
      10.3        Reserved
     *10.4        Employment agreement dated April 1, 1994 with Raymond H. Losi II                                          (1)
     *10.5        Reserved
     *10.6        Employment agreement dated April 1, 1994 with Paula Coffman (formerly Paula Montez)                       (1)
     *10.7        Employment agreement dated May 11, 1998 with Roger M. Wasserman                                           (4)
     *10.8        Employment agreement dated August 24, 1998 with Steven Muellner                                           (4)
     *10.9        Consulting Agreement dated November 18, 1997, by and between Variflex, Inc. and Remy Capital              (3)
                  Partners IV, L.P.
     *10.9.1      First Amendment dated November 18, 1999, to the November 18, 1997 Consulting Agreement by and             (5)
                  between Variflex, Inc. and Remy Capital Partners IV, L.P.
     *10.10       Consulting Agreement dated November 18, 1997, by and between Variflex, Inc. and Raymond H. Losi           (3)
     *10.10.1     First Amendment dated December 21, 1999, to the November 18, 1999 Consulting Agreement by and             (5)
                  between Variflex, Inc. and Raymond H. Losi
     *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 September 17, 1998 with Roger M. Wasserman                                (4)
      10.18       License Agreement with Rollerblade, Inc. dated September 1, 1993                                          (1)
      10.20       Business Loan Agreement dated March 31, 2000, between Bank of America, N. A. and Variflex, Inc.           (5)
      10.20.1     Amendment No. 1, dated October 6, 2000, to the March 31, 2000 Business Loan Agreement with Bank of
                  America, N.A.                                                                                             (6)
      10.20.2     Amendment No. 2, dated October 31, 2000, to the March 31, 2000 Business Loan Agreement with Bank of
                  America, N.A.                                                                                             (6)
      10.20.3     Amendment No. 3, dated June 12, 2001, to the March 31, 2000 Business Loan Agreement with Bank of
                  America, N.A.                                                                                             (6)
      10.21       Security Agreement dated March 31, 2000, between Bank of America, N.A. and Variflex, Inc.                 (5)
      10.21.1     Amendment No. 1, dated June 12, 2001, to the March 31, 2000 Security Agreement with Bank of America,
                  N.A.                                                                                                      (6)
      10.22       Reserved
      10.23       Reserved
      10.24       Stock Purchase Agreement dated November 18, 1997, by and between Remy Capital Partners IV, L.P., The      (3)
                  RHL Limited Partnership, EML Enterprises, L.P. and The BL 1995 Limited Partnership
      10.25       Registration Rights Agreement dated November 18, 1997, by and among Variflex, Inc., Remy Capital          (3)
                  Partners IV, L.P. and Raymond H. Losi, II
</TABLE>

                                       33

<PAGE>

<TABLE>
<CAPTION>
  Exhibit No.     Description                                                                                            Note No.
---------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                                                                    <C>
      10.26       Warrant to purchase Variflex, Inc. Common Stock issued to Remy Capital Partners IV, L.P.                  (3)
     *10.27       Warrant to purchase Variflex, Inc. Common Stock issued to Raymond H. Losi                                 (3)
     *10.28       Warrant to purchase Variflex, Inc. Common Stock issued to Raymond H. Losi, II                             (3)
     *10.29       1994 Stock Option Plan, as amended                                                                        (4)
     *10.30       Non-Employee Directors Compensation Plan                                                                  (4)
      10.31       Exclusive License Agreement dated December 1, 1998, by and between Variflex, Inc., on the one hand        (5)
                  and Product Resource & Development Inc. and Rolland Wayne Rich, on the other hand
      10.32       Amendment dated October 6, 2000, to the December 1, 1998 Exclusive License Agreement with Product         (6)
                  Resource & Development Inc. and Rolland Wayne Rich
       21.1       Subsidiaries of the registrant                                                                            (2)

(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)  Filed herewith.
</TABLE>

* Management contract, compensatory plan or arrangement.

                                       34

<PAGE>

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.

                          By /s/ RAYMOND H. LOSI, II
                             ---------------------------------------------------
October 29, 2001                 Raymond H. Losi II
                                    Chief Executive Officer (Principal Executive
                                    Officer)

     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 and Steven L. Muellner, or either 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 either 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 29, 2001             /s/ MARK S. SIEGEL
                          ------------------------------------------------------
                                    Mark S. Siegel
                                    Chairman of the Board

October 29, 2001             /s/ RAYMOND H. LOSI II
                          ------------------------------------------------------
                                    Raymond H. Losi II
                                    Chief Executive Officer (Principal Executive
                                    Officer) and Director

October 29, 2001             /s/ STEVEN L. MUELLNER
                          ------------------------------------------------------
                                    Steven L. Muellner
                                    President

October 29, 2001             /s/ ROGER M. WASSERMAN
                          ------------------------------------------------------
                                    Roger M. Wasserman
                                    Chief Financial Officer (Principal Financial
                                    and Accounting  Officer)

October 29, 2001             /s/ KENNETH N. BERNS
                          ------------------------------------------------------
                                    Kenneth N. Berns
                                    Director

October 29, 2001             /s/ MICHAEL T. CARR
                          ------------------------------------------------------
                                    Michael T. Carr
                                    Director

                                       35

<PAGE>

October 29, 2001                        /s/  LOREN HILDEBRAND
                                     -----------------------------------------
                                               Loren Hildebrand
                                               Director

October 29, 2001                        /s/  RAYMOND H. LOSI
                                     -----------------------------------------
                                               Raymond H. Losi
                                               Director

                                       36