<PAGE>
 
BANK OF AMERICA                                          BUSINESS LOAN AGREEMENT
National Trust and Savings Association

 
________________________________________________________________________________

This Agreement dated as of _______________________, 19___, is between BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and Variflex, Inc.
(the "Borrower").

1.    LINE OF CREDIT AMOUNT AND TERMS

1.1   LINE OF CREDIT AMOUNT.

(a)   During the availability period described below, the Bank will provide a
      line of credit to the Borrower. The amount of the line of credit (the
      "Commitment") is Seven Million Five Hundred Thousand Dollars ($7,500,000).

(b)   This is a revolving line of credit providing for letters of credit and
      shipside bonds.

(c)   The Borrower agrees not to permit the outstanding amounts of any letters
      of credit, including amounts drawn on letters of credit and not yet
      reimbursed, and shipside bonds, to exceed the Commitment.

1.2   AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and December 31, 1998 (the "Expiration Date") unless the Borrower
is in default.

1.3   LETTERS OF CREDIT.  This line of credit may be used for financing
commercial letters of credit with a maximum maturity of 180 days but not to
extend more than 90 days beyond the Expiration Date. Each commercial letter of
credit will require drafts payable at sight. The following letters of credit are
outstanding from the Bank for the account of the Borrower:

<TABLE>
<CAPTION>

                LETTER OF CREDIT NUMBER                AMOUNT           
                -----------------------                ------           
<S>                                                  <C>                
                        1025513                      $ 65,000.00        
                        1025787                       163,392.00        
                        1025844                       523,000.00        
                        1026010                           200.07        
                        1026598                         3,900.00        
                        1026599                        33,795.06        
                        1026600                       161,833.90        
                        1026950                       351,948.97        
                        1030070                       435,680.37        
                        1030177                        23,230.00        
                        1031764                       445,625.00         
</TABLE>

As of the date of this Agreement, these letters of credit shall be deemed to be
outstanding under this Agreement, and shall be subject to all the terms and
conditions stated in this Agreement.

The Borrower agrees:

(a)  any sum drawn under a letter of credit may, at the option of the Bank, be
     added to the principal amount outstanding under this Agreement. The amount
     will bear interest and be due as described elsewhere in this Agreement.

(b)  if there is a default under this Agreement, to immediately prepay and make
     the Bank whole for any outstanding letters of credit.

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<PAGE>
 
(c)  the issuance of any letter of credit and any amendment to a letter of
     credit is subject to the Bank's reasonable written approval and must be in
     form and content reasonably satisfactory to the Bank and in favor of a
     beneficiary acceptable to the Bank.

(d)  to sign the Bank's form Application and Agreement for Commercial Letter of
     Credit.

(e)  to pay the following issuance and other fees for issuing and processing
     letters of credit:

<TABLE>
<CAPTION>

<S>                                                                     <C> 
                         Issuance Fee                                   1 /10%, minimum $90
                         Amendment Fee (increases)                      1 /10%, minimum $70
                         Amendment Fee (Other)                          $70
                         Negotiation Fee                                $80
</TABLE>

(f)  to allow the Bank to automatically charge its checking account for
     applicable fees, discounts, and other charges.

1.4  SHIPSIDE BONDS. This line of credit up to a maximum face value outstanding
of Five Hundred Thousand Dollars ($500,000) may be used for financing shipside
bonds. The Borrower agrees:

(a)  any sum owed to the Bank, as a result of a payment by the Bank, under a
     shipside bond may, at the option of the Bank, be added to the principal
     amount outstanding under this Agreement. The amount will bear interest and
     be due as described elsewhere in this Agreement.

(b)  if there is a default under this Agreement, to immediately prepay and make
     the Bank whole for any outstanding shipside bonds.

(c)  the issuance of any shipside bond is subject to the Bank's reasonable
     express approval and must be in form and content satisfactory to the Bank.

(d)  to sign the Bank's application, security agreement and other standard forms
     for shipside bonds, and to pay any issuance and/or other fees that the Bank
     notifies the Borrower will be charged for issuing and processing shipside
     bonds for the Borrower.

(e)  to allow the Bank to automatically charge its checking account for
     applicable fees, discounts, and other charges.

 2.  EXPENSES

2.1  REIMBURSEMENT COSTS. The Borrower agrees to reimburse the Bank for any
     expenses it incurs in the preparation of this Agreement and any agreement
     or instrument required by this Agreement up to a maximum of One Thousand
     Dollars ($1,000). Expenses include, but are not limited to, reasonable
     attorneys' fees, including any allocated costs of the Bank's in-house
     counsel.

3.   DISBURSEMENTS, PAYMENTS AND COSTS

3.1  REQUESTS FOR CREDIT.  Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.

3.2  DISBURSEMENTS AND PAYMENTS.  Each disbursement by the Bank and each payment
by the Borrower will be:

(a)  made at the Bank's branch (or other location) selected by the Bank from
     time to time;

(b)  made for the account of the Bank's branch selected by the Bank from time to
     time;

(c)  made in immediately available funds:

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<PAGE>
 
(d)  evidenced by records kept by the Bank. In addition, the Bank may, at its
     discretion, require the Borrower to sign one or more promissory notes.

3.3  TELEPHONE and TELEFAX AUTHORIZATION.

(a)  The Bank may honor telephone or telefax instructions for advances or
     repayments and telefax requests for the issuance of letters of credit given
     by any one of the individuals authorized to sign loan agreements on behalf
     of the Borrower, or any other individual designated by any one of such
     authorized signers.

(b)  Advances will be deposited in and repayments will be withdrawn from the
     Borrower's account number 17699-00587, or such other of the Borrower's
     accounts with the Bank as designated in writing by the Borrower.

(c)  The Borrower indemnifies and excuses the Bank (including its officers,
     employees, and agents) from all liability, loss, and costs in connection
     with any act resulting from telephone or telefax instructions it reasonably
     believes are made by any individual authorized by the Borrower to give such
     instructions. This indemnity and excuse will survive this Agreement's
     termination.

3.4  DIRECT DEBIT (PRE-BILLING).

(a)  The Borrower agrees that the Bank will debit the Borrower's deposit account
     number 17699-00587, or such other of the Borrower's accounts with the Bank
     as designated in writing by the Borrower (the "Designated Account") on the
     date each payment of interest and any fees from the Borrower becomes due
     (the "Due Date"). If the Due Date is not a banking day, the Designated
     Account will be debited on the next banking day.

(b)  Approximately 10 days prior to each Due Date, the Bank will mail to the
     Borrower a statement of the amounts that will be due on that Due Date (the
     'Billed Amount"). The calculation will be made on the assumption that no
     new extensions of credit or payments will be made between the date of the
     billing statement and the Due Date, and that there will be no changes in
     the applicable interest rate.

(c)  The Bank will debit the Designated Account for the Billed Amount,
     regardless of the actual amount due on that date (the "Accrued Amount"). If
     the Billed Amount debited to the Designated Account differs from the
     Accrued Amount, the discrepancy will be treated as follows:

     (i)  If the Billed Amount is less than the Accrued Amount. the Billed
          Amount for the following Due Date will be increased by the amount of
          the discrepancy. The Borrower will not be in default by reason of any
          such discrepancy.

     (ii) If the Billed Amount is more than the Accrued Amount, the Billed
          Amount for the following Due Date will be decreased by the amount of
          the discrepancy.

     Regardless of any such discrepancy, interest will continue to accrue based
     on the actual amount of principal outstanding without compounding. The Bank
     will not pay the Borrower interest on any overpayment.

(d)  The Borrower will maintain sufficient funds in the Designated Account to
     cover each debit. If there are insufficient funds in the Designated Account
     or. the date the Bank enters any debit authorized by this Agreement, the
     debit will be reversed.

3.6  BANKING DAYS.  Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.

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<PAGE>
 
3.7  TAXES.  If any payments to the Bank under this Agreement are made from
outside the United States, the Borrower will not deduct any foreign taxes from
any payments it makes to the Bank. If any such taxes are imposed on any payments
made by the Borrower (including payments under this paragraph), the Borrower
will pay the taxes and will also pay to the Bank, at the time interest is paid,
any additional amount which the Bank specifies as necessary to preserve the
after-tax yield the Bank would have received if such taxes had not been imposed.
The Borrower will confirm that it has paid the taxes by giving the Bank official
tax receipts (or notarized copies) within 30 days after the due date.

3.8  ADDITIONAL COSTS.  The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:

(a)  any reserve or deposit requirements; and

(b)  any capital requirements relating to the Bank's assets and commitments for
     credit.

3.9  INTEREST CALCULATION.  Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.

3.10 DEFAULT RATE.  Upon the occurrence and during the continuation of any
default under this Agreement, all amounts outstanding under this Agreement will
at the option of the Bank bear interest at the Bank's Reference Rate plus two
(2.00) percentage points. This will not constitute a waiver of any default.

The Reference Rate is the rate of interest publicly announced from time to time
by the Bank in San Francisco, California, as its Reference Rate. The Reference
Rate is set by the Bank based on various factors, including the Bank's costs and
desired return, general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Bank may price loans to its
customers at, above, or below the Reference Rate. Any change in the Reference
Rate will take effect at the opening of business on the day specified in the
public announcement of a change in the Bank's Reference Rate.

4.   CONDITIONS

The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:

4.1  AUTHORIZATIONS.  Evidence that the execution, delivery and performance by
the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.

4.2  GOVERNING DOCUMENTS.  A copy of the Borrower's articles of incorporation.

4.3  OTHER ITEMS.  Any other items that the Bank reasonably requires.

5.   REPRESENTATIONS AND WARRANTIES

When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.

5.1  ORGANIZATION OF BORROWER.  The Borrower is a corporation duly formed and
existing under the laws of the state where organized.

                                       4
<PAGE>
 
5.2  AUTHORIZATION. This  Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.

5.3  ENFORCEABLE AGREEMENT.  This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.

5.4  GOOD STANDING.  In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.

5.5  NO CONFLICTS.  This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.

5.6  FINANCIAL INFORMATION.  All financial and other information that has been
or will be supplied to the Bank is:

(a)  sufficiently complete to give the Bank accurate knowledge of the Borrower's
     (and any guarantor's) financial condition, including all material
     contingent liabilities.

(b)  in compliance with all government regulations that apply.

5.7  YEAR 2000 COMPLIANCE.  The Borrower has conducted a comprehensive review
and assessment of the Borrower's computer applications and made inquiry of the
Borrower's key suppliers, vendors and customers with respect to the 'year 2000
problem" (that is, the risk that computer applications may not be able to
properly perform date-sensitive functions after December 31, 1999) and, based on
that review and inquiry, the Borrower does not believe the year 2000 problem
will result in a material adverse change in the Borrower's business condition
(financial or otherwise), operations, properties or prospects, or ability to
repay the credit.

5.8  LAWSUITS.  There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, in each case in any material
respect, except as have been disclosed in writing to the Bank.

5.9  OTHER OBLIGATIONS.  The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.

5.10 INCOME TAX MATTERS.  The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.

5.11 NO TAX AVOIDANCE PLAN.  The Borrower's obtaining of credit from the Bank
under this Agreement does not have as a principal purpose the avoidance of U.S.
withholding taxes.

5.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of
time or both would be, a default under this Agreement.

5.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the Borrower
has more than one place of business, its chief executive office) is located at
the address listed under the Borrower's signature on this Agreement.

6.   COVENANTS

The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:

6.1  USE OF PROCEEDS.  To use the proceeds of the credit only to finance the
importation of inventory.

                                       5
<PAGE>
 
6.2  USE OF PROCEEDS - INELIGIBLE Securities.  Not to use, directly or
indirectly, any portion of the proceeds of the credit (including any letters of
credit) for any of the following purposes:

(a)  knowingly to purchase Ineligible Securities from BancAmerica Robertson
     Stephens (the "Arranger") during any period in which the Arranger makes a
     market in such Ineligible Securities; or

(b)  knowingly to purchase during the underwriting or placement period
     Ineligible Securities being underwritten or privately placed by the
     Arranger.

"Ineligible Securities" means securities which may not be underwritten or dealt
in by member banks of the Federal Reserve System under Section 16 of the Banking
Act of 1933 (12 U.S.C. (S) 24, Seventh), as amended. The Arranger is a wholly-
owned subsidiary of BankAmerica Corporation, and is a registered broker-dealer
which is permitted to underwrite and deal in certain Ineligible Securities.

6.3  FINANCIAL INFORMATION. To provide the following financial information and
statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:

(a)  Within 90 days of the Borrower's fiscal year end, the Borrower's annual
     financial statements. These financial statements must be audited (with an
     unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to
     the Bank.

(b)  Copies of the Borrower's Form 10-K Annual Report and Form 10-Q Quarterly
     Report within 15 days after the date of filing with the Securities and
     Exchange Commission.

(c)  Copies of the Borrower's annual forecasts consisting of monthly balance
     sheets, income statements and cash flows not later than 60 days prior to
     the Expiration Date.

(d)  Within 15 days of each quarter end, the Borrower shall provide to the Bank
     copies of statements from depository institutions or brokerage firms, or
     other evidence acceptable to the Bank of the Borrower's liquid assets.

6.4  TANGIBLE NET WORTH.  To maintain tangible net worth equal to at least Forty
Million Dollars (S40,000,000).  Tangible net worth" means the gross book value
of the Borrower's assets (excluding up to Six Million Dollars (S6,000,000) in
goodwill generated by an acquisition, and excluding patents, trademarks, trade
names, organization expense, treasury stock, unamortized debt discount and
expense, capitalized or deferred research and development costs, deferred
marketing expenses, deferred receivables, and other like intangibles, and) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.

6.5  TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO.  To maintain a ratio of
total liabilities to tangible net worth not exceeding .50:1. "Total liabilities"
means the sum of current liabilities plus long term liabilities. For the
purposes of this paragraph, total liabilities shall include undrawn amounts of
outstanding letters of credit.

6.6  LIQUIDITY.  To maintain unencumbered liquid assets equal to at least Ten
Million Dollars (S10,000,000).  "Liquid assets" means the following assets of
the Borrower:

(a)  cash and certificates of deposit:

(b)  U. S. treasury bills and other obligations of the federal government;

(c)  readily marketable securities (including commercial paper, but excluding
     restricted stock and stock subject to the provisions of Rule 144 of the
     Securities and Exchange Commission);

(d)  bankers' acceptances issued by financial institutions;

(e)  repurchase agreements covering U. S. government securities;

                                       6
<PAGE>
 
(f)  readily marketable obligations of states and municipalities.

If more than 25% of the value of the Borrower's liquid assets is represented by
margin stock, the Borrower will provide the Bank a Form U-1 Purpose Statement,
and the Bank and the Borrower will comply with the restrictions imposed by
Regulation U of the Federal Reserve, which may require a reduction in the amount
of credit provided to the Borrower.

6.7  OTHER DEBTS.  Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others without the Bank's written consent.  This does not prohibit:

(a)  Acquiring goods, supplies, or merchandise on normal trade credit.

(b)  Endorsing negotiable instruments received in the usual course of business.

(c)  Obtaining surety bonds in the usual course of business.

(d)  Indebtedness assumed in connection with transactions permitted in Paragraph
     6.17(g) below.

6.8  OTHER LIENS.  Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:

(a)  Deeds of trust and security agreements in favor of the Bank.

(b)  Liens for taxes not yet due.

(c)  Liens outstanding on the date of this Agreement disclosed in writing to the
     Bank.

6.9  NOTICES TO BANK.  To promptly notify the Bank in writing of:

(a)  any lawsuit over Five Hundred Thousand Dollars (S500,000) against the
     Borrower (or any guarantor).

(b)  any substantial dispute between the Borrower (or any guarantor) and any
     government authority.

(c)  any failure to comply with this Agreement.

(d)  any material adverse change in the Borrower's (or any guarantor's) business
     condition (financial or otherwise), operations, properties or prospects, or
     ability to repay the credit.

(e)  any change in the Borrower's name, legal structure, place of business, or
     chief executive office if the Borrower has more than one place of business.

6.10 BOOKS AND RECORDS.  To maintain adequate books and records.

6.11 AUDITS.  To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party. the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.

6.12 COMPLIANCE WITH Laws.  To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.

6.13 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.

                                       7
<PAGE>
 
6.14 MAINTENANCE OF PROPERTIES.  To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.

6.15 COOPERATION.  To take any action reasonably requested by the Bank to carry
out the intent of this Agreement.

6.16 GENERAL BUSINESS INSURANCE.  To maintain insurance as is usual for the
business it is in.

6.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:

(a)  engage in any business activities substantially different from the
     Borrower's present business.

(b)  liquidate or dissolve the Borrower's business.

(c)  enter into any consolidation, merger, or other combination, or become a
     partner in a partnership, a member of a joint venture , or a member of a
     limited liability company.

(d)  sell, assign, lease, transfer or otherwise dispose of any assets for less
     than fair market value, or enter into any agreement to do so.

(e)  sell, assign, lease, transfer or otherwise dispose of all or a substantial
     part of the Borrower's business or the Borrower's assets.

(f)  enter into any sale and leaseback agreement covering any of its fixed or
     capital assets.

(g)  acquire or purchase a business or its assets or enter into a joint venture,
     unless the total consideration for such acquisition or purchase (including
     assumption of debt or capital contributions) would not exceed Five Million
     Dollars (S5,000,000).

(h)  voluntarily suspend its business for more than 7 consecutive days in any 30
     day period.

7.   DEFAULT

If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.

8.1  FAILURE TO PAY.  The Borrower fails to make a payment under this Agreement
when due.

8.2  FALSE INFORMATION.  The Borrower has given the Bank materially false or
misleading information or representations.

8.3  BANKRUPTCY.  The Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower (or any guarantor) or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.

8.4  RECEIVERS.  A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.

8.5  LAWSUITS.  Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of One Hundred Thousand
Dollars (S100,000) or more in excess of any insurance coverage.

                                       8
<PAGE>
 
8.6  JUDGMENTS.  Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Hundred Thousand Dollars ($100,000) or more in excess of
any insurance coverage.

8.7  GOVERNMENT ACTION.  Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.

8.8  MATERIAL ADVERSE CHANGE.  A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.

8.9  CROSS-DEFAULT.  Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) has obtained from anyone else or
which the Borrower (or any guarantor) has guaranteed in the amount of Five
Hundred Thousand Dollars (S500,000) or more in the aggregate

8.10 OTHER BANK AGREEMENTS.  The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank. If,
in the Bank's opinion, the breach is capable of being remedied. the breach will
not be considered an event of default under this Agreement for a period of 30
days after the date on which the Bank gives written notice of the breach to the
Borrower-, provided, however, that the Bank will not be obligated to extend any
additional credit to the Borrower during that period.

8.11 OTHER BREACH UNDER AGREEMENT.  The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank. If, in the Bank's opinion, the breach is capable of being remedied, the
breach will not be considered an event of default under this Agreement for a
period of 30 days after the date on which the Bank gives written notice of the
breach to the Borrower; provided, however, that the Bank will not be obligated
to extend any additional credit to the Borrower during that period.

9.   ENFORCING THIS AGREEMENT; MISCELLANEOUS

9.1  GAAP.  Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.

9.2  CALIFORNIA LAW.  This Agreement is governed by California law.

9.3  SUCCESSORS AND ASSIGNS.  This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.

9.4  ARBITRATION.

(a)  This paragraph concerns the resolution of any controversies or claims
     between the Borrower and the Bank, including but not limited to those that
     arise from:

     (i)  This Agreement (including any renewals, extensions or modifications of
          this Agreement);

     (ii) Any document. agreement or procedure related to or delivered in
          connection with this Agreement;

                                       9
<PAGE>
 
     (iii)  Any violation of this Agreement; or

     (iv)   Any claims for damages resulting from any business conducted between
          the Borrower and the Bank, including claims for injury to persons,
          property or business interests (torts).

(b)  At the request of the Borrower or the Bank, any such controversies or
     claims will be settled by arbitration in accordance with the United States
     Arbitration Act. The United States Arbitration Act will apply for this
     purposes even though this Agreement provides that it is governed by
     California law.

(c)  Arbitration proceedings will be administered by the American Arbitration
     Association and will be subject to its commercial rules of arbitration.

(d)  For purposes of the application of the statute of limitations, the filing
     of an arbitration pursuant to this paragraph is the equivalent of the
     filing of a lawsuit, and any claim or controversy which may be arbitrated
     under this paragraph is subject to any applicable statute of limitations.
     The arbitrators will have the authority to decide whether any such claim or
     controversy is barred by the statute of limitations and, if so, to dismiss
     the arbitration on that basis.

(e)  If there is a dispute as to whether an issue is arbitrable, the arbitrators
     will have the authority to resolve any such dispute.

(f)  The decision that results from an arbitration proceeding may be submitted
     to any authorized court of law to be confirmed and enforced.

(g)  The procedure described above will not apply if the controversy or claim,
     at the time of the proposed submission to arbitration, arises from or
     relates to an obligation to the Bank secured by real property located in
     California. In this case, both the Borrower and the Bank must consent to
     submission of the claim or controversy to arbitration. If both parties do
     not consent to arbitration, the controversy or claim will be settled as
     follows:

     (i)   The Borrower and the Bank will designate a referee (or a panel of
           referees) selected under the auspices of the American Arbitration
           Association in the same manner as arbitrators are selected in
           Association-sponsored proceedings;

     (ii)  The designated referee (or the panel of referees) will be appointed
           by a court as provided in California Code of Civil Procedure Section
           638 and the following related sections;

     (iii) The referee (or the presiding referee of the panel) will be an active
           attorney or a retired judge; and

     (iv)  The award that results from the decision of the referee (or the
           panel) will be entered as a judgment in the court that appointed the
           referee, in accordance with the provisions of California Code of
           Civil Procedure Sections 644 and 645.

(h)  This provision does not limit the right of the Borrower or the Bank to:

     (i)   exercise self-help remedies such as setoff'.

     (ii)  foreclose against or sell any real or personal property collateral;
           or

     (iii) act in a court of law, before, during or after the arbitration
           proceeding to obtain:

           (a)  an interim remedy: and/or

           (b)  additional or supplementary remedies.

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<PAGE>
 
(i)  The pursuit of or a successful action for interim, additional or
     supplementary remedies, or the filing of a court action, does not
     constitute a waiver of the right of the Borrower or the Bank, including the
     suing party, to submit the controversy or claim to arbitration if the other
     party contests the lawsuit. However, if the controversy or claim arises
     from or relates to an obligation to the Bank which is secured by real
     property located in California at the time of the proposed submission to
     arbitration, this right is limited according to the provision above
     requiring the consent of both the Borrower and the Bank to seek resolution
     through arbitration.

(j)  If the Bank forecloses against any real property securing this Agreement,
     the Bank has the option to exercise the power of sale under the deed of
     trust or mortgage, or to proceed by judicial foreclosure.

9.5  SEVERABILITY; WAIVERS.  If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
ft makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.

9.6  ADMINISTRATION COSTS.  The Borrower shall pay the Bank for all reasonable
out-of-pocket costs incurred by the Bank in connection with administering this
Agreement.

9.7  ATTORNEYS' FEES.  The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement arising
prior to commencement of a lawsuit or arbitration proceeding. The prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of in-house counsel

9.8  ONE AGREEMENT.  This Agreement and any related security or other agreements
required by this Agreement, collectively:

(a)  represent the sum of the understandings and agreements between the Bank and
     the Borrower concerning this credit; and

(b)  replace any prior oral or written agreements between the Bank and the
     Borrower concerning this credit; and

(c)  are intended by the Bank and the Borrower as the final, complete and
     exclusive statement of the terms agreed to by them.

In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.

9.9  INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower's obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.

                                       11
<PAGE>
 
9.10   NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.

9.11   HEADINGS. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.

9.12   COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.

9.13  PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan
Agreement entered into as of February 3, 1997, between the Bank and the
Borrower, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.

This Agreement is executed as of the date stated at the top of the first page.

<TABLE>
<CAPTION>

<S>                                                                    <C> 
BANK OF AMERICA                                                        VARIFLEX, INC.
NATIONAL TRUST AND SAVINGS ASSOCIATION



X  /s/ Timothy J. Egan                                                 X      /s/ William B. Ogden
 -------------------------------------------------                       ------------------------------------------------- 
By:  Timothy J. Egan                                                   By:  William B. Ogden
    ----------------------------------------------                         ----------------------------------------------
Title:  Vice President                                                 Title  Chief Financial Officer

ADDRESS WHERE NOTICES TO THE BANK ARE TO BE                            ADDRESS WHERE NOTICES TO THE BORROWER ARE TO BE       
SENT:                                                                  SENT: 

International Trade Bank Office - Southwest #1769                      5152 North Commerce Avenue
333 South Beaudry Avenue, 20th Floor                                   Moorpark, CA  93021
Los Angeles, CA  90017
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