<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                       ***

                                    FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the Fiscal Year ended December 31, 2001

     OR

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

                        Commission file number 000-22803
                                               ---------

                        PROLONG INTERNATIONAL CORPORATION
                        ---------------------------------
             (Exact name of Registrant as specified in its charter)

                Nevada                             74-2234246
                ------                             ----------
    (State or other jurisdiction                (I.R.S. Employer
  of incorporation or organization)            Identification No.)

                       6 Thomas, Irvine, California 92618
                       ----------------------------------
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (949) 587-2700
                                                           --------------

        Securities registered pursuant to Section 12(b) of the Act: None
                                                                    ----

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

                    Common Stock, par value $0.001 per share
                    ----------------------------------------
                                (Title of Class)

                           ---------------------------

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.  [_]


The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of March
20, 2002, was approximately $2,085,300.

The number of outstanding shares of the Registrant's Common Stock as of March
20, 2002 was 29,789,598.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 26, 2002, are incorporated by reference into Part III.

                                  Page 1 of 53

                 Exhibit Index on Sequentially Numbered Page 52


<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


     This Annual Report on Form 10-K contains forward-looking statements
relating to future events or the future financial performance of the Registrant,
including but not limited to statements contained in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Factors Which May Affect Future Operating Results." Readers are cautioned that
such statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are only
predictions or estimations and are subject to known and unknown risks and
uncertainties. In evaluating such statements, readers should consider the
various factors identified in this Annual Report on Form 10-K, including matters
set forth in "Factors Which May Affect Future Operating Results," which could
cause actual events, performance or results to differ materially from those
indicated by such statements.

                                     PART I

ITEM 1. Business
------- --------
General Description of Business

     Prolong International Corporation (the "Registrant" or "PIC") is a Nevada
corporation that was incorporated on August 24, 1981 as Giguere Industries,
Incorporated ("Giguere"). On September 14, 1981, Giguere consummated a merger
with Medical International, Inc., a Utah corporation, pursuant to which Giguere
was the surviving entity. Prior to the merger with Giguere, Medical
International, Inc. had completed an offering of its common stock which was
exempt from registration under the Securities Act of 1933, as amended, by reason
of Regulation A thereunder. All of the outstanding shares of Medical
International, Inc. common stock were exchanged for shares of Giguere as part of
the plan of merger. Subsequent to the merger, Giguere conducted operations for
several years until it liquidated its assets in order to satisfy its creditors
and discontinued operations in 1987. Giguere was inactive and held no
significant assets from 1987 to June 21, 1995.

     On June 21, 1995, Giguere acquired all of the outstanding common stock of
Prolong Super Lubricants, Inc., a Nevada corporation ("PSL"), in a share
exchange with PSL's then existing shareholders (the "Reorganization") and
changed its name from Giguere to Prolong International Corporation. Since the
Reorganization, PIC has changed its focus from being a company without
operations, a business or significant assets, to that of a holding company for
its wholly-owned operating subsidiary, PSL. On December 4, 1998, PIC formed
Prolong International Holdings Ltd. ("PIHL"), a Cayman Islands company, as a
wholly-owned subsidiary. On the same day, PIHL formed Prolong International Ltd.
("PIL"), a Cayman Islands company, as its wholly-owned operating subsidiary.
PIC, through PSL, PIHL and PIL (referred to collectively in the operational
context with PIC as "Prolong" or "the Company"), is engaged in the manufacture,
sale and worldwide distribution of a line of high performance lubrication and
automotive appearance products, several of which are based on a patented extreme
pressure lubricant additive for use in metal lubrication, commonly referred to
as anti-friction metal treatment ("AFMT").

     On February 5, 1998, PIC entered into a definitive agreement with EPL
Pro-Long, Inc., a California Corporation ("EPL"), under which PIC purchased the
business assets of EPL. Under the terms of the agreement, PIC purchased the
principal assets and assumed certain liabilities of EPL for approximately
2,981,035 shares of PIC's common stock, $0.001 par value per share (the "PIC
Common Stock"). With the purchase, PIC acquired the patents for the
anti-friction metal treatment ("AFMT") technology and related trademarks and, as
a result, owns the exclusive, worldwide rights to manufacture, sell and
distribute lubrication and other products based on AFMT and owning the "Prolong"
name. Prior to this transaction, PIC, through PSL, held an exclusive license
from EPL to use AFMT and the "Prolong" name. This transaction closed on November
20, 1998. On November 25, 1998, the U.S. District Court in San Diego, California
(the "Court") granted a temporary restraining order without a hearing in
response to a purported class action filed by a group of plaintiffs representing
less than 2% of the outstanding shares of EPL's common stock against PIC, PSL,
EPL and certain of their respective former and current officers and directors.
On October 12, 2001 the case was settled as a class action, dismissing all of
the claims with prejudice. In settlement, PIC issued 1,350,695 additional shares
of its common stock to EPL, out of which one-third of those shares were
distributed to certain of plaintiff's attorneys and two-thirds of those shares
were distributed to EPL shareholders. PIC agreed to waive its claim to
reimbursement for EPL's accrued expenses of approximately $430,000 as additional
purchase consideration. The acquisition of the assets of EPL by PIC is now
completed and all associated litigation has been dismissed. See "Legal
Proceedings".


                                     Page 2

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


     Prior to fiscal 1996, PIC raised capital primarily through the issuance of
PIC Common Stock in private placements. During 1997 and 1998, working capital
was generated primarily through operations. Working capital for 1999, 2000 and
2001 was generated through operations, the utilization of the Company's line of
credit with a bank and new financing in the form of subordinated debt. In 2002,
Prolong anticipates generating a positive cash flow from operations and will
continue to seek additional financing in the form of secured debt, subordinated
debt, and/or equity to finance its activities and the execution of its strategic
plan.

Products

     Prolong markets a variety of products, some of which are based on AFMT.
AFMT is a patented extreme-pressure lubricant formula which can be blended with
many other lubricants and formulations to create a wide variety of individual
lubricant products with superior extreme pressure friction fighting
characteristics. AFMT can also be blended with other constituents to create
additional products, which may be added to Prolong's product line. AFMT bonds to
the metal surfaces with which it comes into contact, resulting in reduced
friction and heat buildup when subjected to pressure. Prolong believes that AFMT
is most effective in extreme pressure applications, where metal-to-metal
contact, and the resulting contact, can be severe such as: gears (at the contact
point where the teeth of the gear touch each other - for example in hypoid
gears); engines (at the contact points where metal to metal pressure squeezes
out the normal boundary lubrication - for example where the camshaft contacts
the lifters; where the main bearings contact the crankshaft; where the rod
bearings contact the rod and the bearing cap); and machinery (at the metal to
metal contact points where surface or boundary lubrication breaks down metal
contacts under heavy loads - for example in a steel mill where rolling steel
contacts steel rollers).

     AFMT is composed of petroleum distillates and other chemicals and contains
no solid particles. Typically, performance enhancing lubrication additive
formulations contain solid particles such as lead, molybdenum disulphides, PTFE
resins, Teflon(TM), fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong believes
that there is no risk of excessive build-up, because the lubrication "film coat"
is uniform and microscopically thin.

     The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim, Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc.
d.b.a. Prolong International, the entity from which EPL acquired the patented
AFMT formula. The tests were conducted at the expense of Prolong Technology of
Canada, Inc. and at the request of customers for in-depth scientific data. The
friction fighting characteristics are further documented in U.S. Patent No.
4,844,825, which outlines various tests conducted on AFMT precedent to the
issuance of the patent.

     AFMT exhibits both the "hydrostatic" and "boundary" principles of
lubrication. Specifically, all surfaces tend to attract some substances from the
environment. Such substances or films may be only a few molecules thick, and are
absorbed into the surface. The strength of the absorption depends upon the
electronic structure of "polarized" molecules, which tend to absorb
perpendicularly to the surface. Warren Prince, Ph.D., a registered mechanical
engineer and machine and product design specialist was commissioned and retained
by Prolong to analyze and test its product formulation and found that AFMT
operates by attaching to the metal at the microscopic level, evenly and
uniformly. Prolong believes that once this chemical/electrical action takes
place through absorption, only very extreme heat, grinding away of the surface
area, or the introduction of material with a stronger molecular adhesion will
alter the surface bonding. As a result, third party tests performed on AFMT have
demonstrated that it is impervious to many elements and chemicals and its
benefits continue beyond the initial application.

     Prolong believes that the use of AFMT in lubrication products provides many
advantages for its users. For example, in clinical testing by third parties, the
use of AFMT resulted in reduced friction in mechanical devices. This, in turn,
caused the operating temperatures of the machinery to drop due to the reduction
in heat-generating friction. Prolong believes that in the long term, this
combination of friction and temperature reduction leads to a


                                     Page 3

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

longer operating life for the machinery and lower repair bills. Given the
foregoing advantages demonstrated by AFMT, Prolong has identified a broad market
for its lubricant products.

         Prolong believes that the following are examples of some of the
applications of AFMT-based lubricant products:

           . Internal Combustion Engines   . Automatic and Manual Transmissions
           . Agricultural Equipment        . Computer Numerically Controlled
           . Airline Ground Equipment        Machine Tools
           . Marine Equipment              . Milling Equipment
           . Railroad Equipment            . Trucks, Buses
           . Mining Equipment              . Differentials, Gears
           . Bearing Journals              . Compressors
           . Pumps and Generators          . Hydraulic Systems

         Prolong markets the following lubricant products, each of which can be
utilized in multiple applications:

         Prolong Anti-Friction Metal Treatment "AFMT" - This is Prolong's
fundamental lubricating oil which is made according to a patented formula for
use as an extreme pressure lubricant. It is packaged in concentrate form and is
designed to be added by the customer to the lubrication oils in engines, gears,
and other machinery.

         Prolong Engine Treatment and Engine Treatment Booster - Formulated for
use in the lubrication of internal combustion engines, Prolong believes that
this product helps mitigate friction, heat and wear under extreme pressure
conditions in engines. Prolong Engine Treatment is suitable for use in both
gasoline and diesel engines.

         Prolong Transmission Treatment - Formulated for use in both automatic
and manual transmissions and for other applications, such as heavy duty
industrial gear boxes where metal gears are operated under high pressure, this
product is designed to improve lubrication where metal meets metal.

         Prolong Fuel System Treatment - This product is formulated to help
optimize fuel efficiency by lubricating the "top end" of internal combustion
engines and by helping clean and maintain fuel injectors and other fuel system
components. This product is designed to help maintain peak engine performance
and optimize overall mileage. The formula is EPA registered and is compatible
with all grades of gasoline.

         Prolong "Fast-Fuel"(TM) Octane Power Boost - This product is a
specially formulated gasoline additive that is designed to help boost octane,
help restore lost horsepower, help improve fuel mileage and help mitigate
knocks, pings and engine hesitation.

         Prolong "Fast-Fuel"(TM) Injector Cleaner - This product is formulated
as a fuel additive designed to help remove deposits on clogged fuel injectors
and intake valves, to help clean dirty fuel injectors, to help keep carburetors,
combustion chambers, manifolds and ports clean, and consequently help maintain
optimum engine performance and optimum mileage.

         Prolong High Performance Multi-Purpose EP-2 Grease - This product is
formulated to provide a wide range of lubricating benefits to industrial
equipment under extreme pressure, high and low temperature extremes, and
potential water washout conditions. Prolong believes that this product
represents a substantial improvement in lubrication performance relative to
other products on the market in applications benefiting from an extreme pressure
grease formulation.

         Prolong "SPL100" Super Penetrating Lubricant - This product is
formulated to lubricate, penetrate, and prevent corrosion, free sticky
mechanisms, displace moisture, stop squeaks, and reduce friction and wear. This
product can also serve as a light duty machining, tapping and drilling fluid.


                                       Page 4

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

         Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid - This product is
formulated to lubricate and cool metal tools and parts during machining
operations. This product can be used in Computer Numerically Controlled ("CNC")
metal turning and machining operations. Prolong believes that the use of this
product will provide higher feed rates and operating speeds, finer surface
finishes, and improved cutting tool life.

         Prolong Multi-Purpose Precision Oil - This product is formulated as a
fine, light oil for use in lubricating precision tools and equipment. This
product is designed to provide smooth lubrication, which Prolong believes
results in optimal operation of precision equipment and tools and extension of
useful life.

         Along with PSL's current variety of lubricant products, there are other
lubricant products, which Prolong believes could be successfully and
beneficially formulated in the future using AFMT technology and derivatives
thereof that would result in products with improved lubrication performance.
Although there can be no assurances that Prolong will have the financial or
other resources to develop, manufacture and market any such additional lubricant
products, the following is a partial list of such additional lubricant products:

         High Performance Motor Oil
         High Performance Synthetic Motor Oil
         Motorcycle Engine & Transmission Treatment
         Gun Oil & Cleaner
         Gear/Differential Treatment
         Heavy Duty Diesel Fuel Conditioner
         Hydraulic System Treatment
         Chain Oil
         2-Cycle Engine Oil
         Power Steering Treatment
         Radiator Treatment
         Compressor Treatment
         Shock Absorber Lubricants
         Brake Cleaner
         Assembly Lube

         In addition to the development of the above-referenced AFMT-based
lubricant products, Prolong is also engaged in efforts to expand its lubricant
formulations beyond its current AFMT-based technology.

         During 1998, Prolong introduced and began to market the following line
of products designed to enhance and protect a vehicle's appearance (collectively
referred to as the "appearance products").

         Prolong Paint Sealant - Prolong Paint Sealant is designed to give
durable shine and protection to a vehicle's paint. The wipe on, wipe off formula
is easily applied with the patented Prolong refillable applicator.

         Prolong Waterless Wash - This product is designed to both wash and
shine a vehicle in as little as 15 minutes through a simple spray and wipe
technique, without using water. Special lubricating agents encapsulate and lift
dirt particles to clean safely without scratching, leaving a smooth, shiny,
protected finish. The product removes bugs, tar, tree sap, road film and bird
droppings.

         Prolong Super Protectant -This product is formulated to provide durable
protection to vinyl, rubber and plastic surfaces. An easy-to-use patented
applicator is included with this product.

         Prolong Super Cleaner - This product combines a multi-purpose cleaner,
degreaser and stain remover into one product. It is designed to be strong enough
to degrease an engine, remove brake dust and clean whitewalls, yet gentle enough
to remove food stains and ground-in dirt from carpets and fabric seats without
damaging the underlying fabric.


                                       Page 5

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

         Prolong Super Glass Cleaner - Unlike household cleaners, Prolong Super
Glass Cleaner is designed specifically for road grime, oily film, bugs and dirt
found on car windows. This product is designed to leave windows clean and
streak-free and has been formulated without ammonia to be safe for tinted
windows.

Current Markets For Prolong's Products

         PIC's strategy is to successfully direct Prolong's product line to a
number of different markets, each of which is currently large, representing
significant future revenue potential for PIC. Although PIC is currently actively
addressing both the consumer automotive and consumer household markets described
below, PIC's strategy is to adapt Prolong's product line and address the
industrial and governmental markets also described below:

         Consumer Automotive - The consumer automotive market consists of
automobiles, light trucks, motorhomes, motorcycles, snowmobiles, jet skis, and
other fuel burning vehicles. The owners of these vehicles represent a
significant source of customers for Prolong's lubricants, fuel conditioners,
appearance products and other future additions to the Prolong product line.
Recognizing this fact, this market has been the primary target of Prolong's
marketing efforts to date.

         Consumer Household - The consumer household lubrication market is a
potentially lucrative segment of the industry which could prove receptive to
Prolong's products for uses as varied as fishing reels, guns, windows, sliding
doors, garage doors, sewing machines, electric hair clippers, bicycles,
tricycles, scooters, skateboards, garage door openers, lawn mowers, snow
blowers, drills, saws, door locks, hinges, rusted bolts, and virtually anything
made of metal that must be lubricated in order to maintain performance. Prolong
currently manufactures "SPL100 Super Penetrating Lubricant" and "Prolong
Multi-Purpose Precision Oil" for this market.

         Industrial - The industrial market encompasses an enormous variety of
major and minor manufacturers. This market includes businesses such as steel
mills, automobile manufacturers, aircraft manufacturers, paper mills, electric
motor manufacturers, petrochemical manufacturers, oil refineries, mining
operations and electrical generating facilities, all of which require lubricants
and Prolong believes would benefit from the increased performance of Prolong's
products. Even more numerous are the smaller industrial facilities, such as
machine shops and other fabrication businesses throughout the world. Prolong
further believes that businesses engaged in stamping, molding, die casting,
boring, drilling, honing and a number of other similar operations could realize
significant cost savings by using the full line of Prolong's products. Prolong
anticipates pursuing the industrial market through a network of manufacturer's
sales representatives and through established industrial distributors.

         Federal, State, & Local Governments - The government market is not only
very large, but Prolong believes it is also extremely varied. It includes
cities, counties, states and all of the federal government agencies. Prolong
believes that these agencies collectively purchase, operate, and maintain a
significant investment in trucks, automobiles, buses, tanks, airplanes,
helicopters, boats, ships, radar equipment, guns, miscellaneous equipment and
tools, as well as many other mechanisms, all of which require adequate
lubrication. The federal government represents potential sales by Prolong to
many different agencies such as the Department of Defense, NASA, Department of
Energy, Department of Transportation and other federal governmental agencies.
Procurement procedures require that products used in or on military equipment
must be manufactured according to certain military specifications ("MIL Specs").
Prolong intends to apply for and receive United States MIL Specs for certain of
its products, and to market products not only to the United States military, but
to foreign militaries as well. Prolong plans to develop the military market,
both here and abroad, through the utilization of specialists who are familiar
with military procurement procedures and with the special needs of the military
services. Potential sales to state governments include users such as the
National Guard, highway patrol, state police and other state agencies. Both
county and city governments are potential Prolong customers for use by police,
fire, water, gas, waste management and other local departments. Public
transportation entities are major potential customers for Prolong's products,
and Prolong intends to focus its efforts to market products to these entities at
the various levels of government. Prolong believes that rapid transit districts
throughout the country are facing a serious problem with noisy and polluting
diesel buses. The Los Angeles Rapid Transit District, for example, has 3,300
buses and is currently under heavy public and regulatory pressure to reduce
emissions. In addition to diesel buses, there are a significant number of


                                       Page 6

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

other vehicles currently operated by county and city public transportation
agencies which Prolong believes, if treated with its products, could run
cleaner, quieter, last longer and would burn less fuel.

Future Markets For Prolong's Products

         Prolong believes the following to be significant opportunities for
expansion of its marketing efforts into diverse niches of the lubricant market.
There can be no assurances that Prolong will be successful at penetrating any of
these potential markets.

         Commercial Trucking - Prolong has developed a product line and has
begun to develop a market for these products in the long-haul trucking industry.
A substantial portion of the distribution of goods in this country occurs via
truck shipments. Consequently, large quantities of oil and diesel fuel are
consumed by trucks operated in this industry. Prolong believes that the use of
its products in the long-haul trucking industry may provide an economic
advantage to truck operators because of the increased operating efficiency
demonstrated by engines treated with AFMT-based products. Prolong believes that
this increased efficiency may directly result in a reduction in fuel costs and
overall transportation costs. Further, the use of AFMT-based products may
provide additional savings to this industry in the form of reduced service and
repair costs over the useful life of the trucks due to AFMT's propensity to
reduce engine wear and the wear of other "treated" components.

         Agricultural Applications - The agricultural industry represents
another potentially significant market for Prolong's products. Modern
agricultural machinery and equipment tend to be highly complex and are often
subjected to harsh working environments. As a result of the harsh environments,
the machinery and equipment operates inefficiently and results in increased fuel
consumption and a decreased productive life-cycle due to increased mechanical
wear. Prolong believes that the use of its products could save the agriculture
industry substantial sums by reducing these industry wide losses caused by
friction and contaminants.

         Marine Applications - The marine market includes both freshwater and
salt water boats and ships, from outboard fishing skiffs to pleasure boats,
yachts and other marine vessels. Prolong has the ability to formulate special
products for the harsh marine environments, including marine grease and a
special 2-cycle oil for small outboard motors. Prolong believes that in diesel
powered boats and ships, Prolong Fuel System Treatment can provide benefits
similar to those attained from use in diesel truck engines.

Geographic Markets

         Prolong currently markets its products in the United States, Canada,
Mexico, Puerto Rico, Central America, China, Hong Kong, Japan, Thailand,
Sub-Saharan Africa, Brazil, Chile, Turkey, Hungary/Slovakia and intends to
continue developing distributor relationships in other foreign countries.
Prolong's current focus is to identify distributors that possess the expertise
and industry relationships necessary to assist it in further penetrating retail
sales channels in the various markets identified above, with a primary focus on
the consumer automotive and industrial lubricant markets. Prolong intends to
selectively grant distributorships to established companies on a country by
country basis. Prolong intends to build on this relationship and continue to
expand sales and revenues in the international marketplace. There can be no
assurance that Prolong will be able to successfully penetrate any foreign
markets. Prolong has patent protection on its AFMT technology in several of the
EEC member countries.

         International sales comprised 4.7%, 7.8%, and 6.7% of PIC's revenues in
1999, 2000, and 2001, respectively. Prolong consummates such sales through
independent distributors and, as such, has nominal assets attributable to its
international sales.

Marketing And Distribution Of The Products

         Prolong distributes its products through both national and regional
automotive aftermarket stores, traditional automotive aftermarket stores, mass
merchandisers, installers, independent distributors, and directly to consumer
end-users via direct response television sales and the internet. Currently,
Prolong has approximately 450 distributors in the United States. Additionally,
Prolong has ten international distributors located in Europe, Asia,


                                       Page 7

<PAGE>

Africa and South America. Prolong currently employs a direct sales force of 5
people to service its distributors. The Company utilizes contract warehouses
located in Southern California to store and ship its lubricant products.

         Prolong's automotive retailers include AutoZone, CSK Auto, Pep Boys,
Discount Auto, O'Reilly Auto, Restoration (Trak Auto, Forest City, Twin B,
Grundy), Strauss Discount Auto, Murray's Discount Auto, VIP Discount, and a
number of other regional and independent automotive retailers.

         In the traditional automotive aftermarket arena, Prolong distributes
through General Parts, Inc./CarQuest, Genuine Parts Company/NAPA and hundreds of
additional traditional automotive aftermarket locations.

         Prolong's mass retailers include Wal-Mart and Target Stores.
Additionally, Prolong products are distributed through approximately 500 car
dealerships and approximately 600 professional installers throughout the United
States.

         The Company sells its products online through its website at
www.prolong.com. Fulfillment of direct sales to online customers is done on site
---------------
at the Company's headquarters. The Prolong website has e-commerce capabilities
as well as general product and Company information. Prolong intends to continue
to develop its website during 2002 and to further utilize the Internet as a
means of marketing and distributing its products directly to the public, as well
as communicating with its shareholders and the public in general. The products
offered by Prolong have been marketed through endorsements by well-known
spokespersons, event sponsorships, spot television ads, print and electronic
media, trade shows, motorsports, direct response television advertisements,
radio, press releases, public relations, in-store point of sale materials and
promotions, sweepstakes, and through the Internet on Prolong's website,
www.prolong.com.
---------------

         In the area of product endorsements, Prolong has an ongoing agreement
by which it retained the services of Al Unser to endorse and promote Prolong's
products. Mr. Unser has agreed to make certain appearances to assist in
marketing the products and has agreed to license his name and likeness in
connection with the marketing of Prolong's products.

         In the area of motorsports sponsorships, Prolong has executed an
associate sponsorship agreement with the New York Yankees sponsored Top Fuel
Dragster owned by Gwynn Enterprises, Inc. dba Darrell Gywnn Racing pursuant to
which the racing team and driver will provide promotional services and
appearances and will recognize "Prolong Super Lubricants" as a sponsor of the
"New York Yankees Sponsored Dragster" through the year 2002 in all National Hot
Rod Association ( "NHRA") events. The agreement calls for the display of the
Prolong name and logo on the dragster and related racing components in all races
and other events in which the dragster appears.

         Prolong was the title rights sponsor in one nationally televised
national drag racing event during 2001, at the NHRA sanctioned Prolong Super
Lubricants Northwest Nationals held in early August in the Seattle area. The
agreement provided for primary signage and prominent recognition in all racing
promotions including television advertising to promote the event, tickets,
trophies, print ads and all NHRA printed material relating to the NHRA's
national schedule throughout the year. At this time, the Company has not entered
into any definitive agreements to act as the title rights sponsor at any NHRA or
IHRA sanctioned events during 2002.

         In order to support the thousands of retail establishments that carry
Prolong's products, Prolong provides and/or participates in a number of
marketing programs with retailers related to promoting and advertising its
products, which expenditures are commonly known as Marketing Fund Allowances.
The expenditures include, but are not limited to, in store point-of-sale
materials, placement in high traffic areas, printing of fliers and brochures, in
store promotions and sweepstakes, and various other marketing tools that are
traditionally used to promote products at the retail level.

         From time to time, Prolong utilizes direct response television
advertising, commonly called infomercials, in order to educate the public about
the benefits and features of Prolong products, to promote the brand, and to sell
products directly to consumer end users. To date, Prolong has premiered three
separate infomercials. Results through the infomercials vary from program to
program and from time slot to time slot but in general have been


                                       Page 8

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

beneficial to Prolong due to the fact that they provide television exposure at
reduced costs from traditional television spot advertising, as well as fill the
market demand for mail order purchases. In general, Prolong believes that no
more than 5% to 10% of its customers will buy Prolong products through
infomercials and mail order delivery, but Prolong does believe that there is a
wide viewing audience that is exposed to its products through the infomercials
and ultimately purchases Prolong products at a retail establishment. Prolong
intends to air infomercials from time to time so long as they are economically
viable, help to build the brand throughout the marketplace, and drive retail
sales.

Competition

         The market for Prolong's products is highly competitive and is expected
to remain so in the future. The basic formula of Prolong's lubricant products
has not changed materially since its development in 1986. The formula was
granted a United States patent on July 4, 1989. The market for Prolong's
products is characterized by rapid technological advances, frequent new product
introductions and evolving industry standards. Some of Prolong's principal
competitors include other providers of specialized lubrication products, such as
The Clorox Company (STP(R)) and Pennzoil-Quaker State Company (Slick 50(R)),
both of which market engine treatments. Other competitive engine treatment
brands include Duralube(R), and Z-MAX(TM). Prolong's competitors also include
major oil brands such as Shell, Chevron, Castrol, and other companies that
manufacture lubrication products, such as WD-40 Company. Competition for
appearance products comes principally from companies such as Turtle Wax, Inc.,
Meguiar's, Inc., Pennzoil-Quaker State Company and The Clorox Company. Further,
Prolong believes that major oil and consumer products companies not presently
offering products that compete directly with those offered by Prolong may enter
Prolong's markets in the future.

         Increased competition could result in price reductions, reduced gross
margins, and a loss of market share, any of which could have a material adverse
effect on PIC's business, financial condition and results of operations. In
addition, many of Prolong's competitors have significantly greater financial,
technical, research and product development, marketing and other resources and
greater market recognition than Prolong. Several of Prolong's competitors also
currently have, or may develop or acquire, substantial customer bases in the
automotive and other related industries. As a result of these factors, Prolong's
competitors may be able to respond more quickly than Prolong to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products. Additionally, other
dealers and distributors may offer similar lubrication and appearance products
at prices below those offered by Prolong, appealing to the price-sensitive
segment of the market. While Prolong believes that the prices for Prolong
lubrication and appearance products are competitive for the level of quality
obtained by the customer, Prolong relies on PSL's brand name recognition for
selling high quality, state of the art products. There can be no assurance that
Prolong will be able to compete successfully against current and future
competitors or that competitive pressures faced by Prolong will not materially
adversely effect PIC's business, financial condition and results of operations.

         Prolong believes that its current competitive edge lies with the
superior lubrication performance of its products relative to that of its
competitors, the awareness of its brand among consumers, the value offered by
the brand as perceived by consumers and its distribution channels. In order for
Prolong to draw attention to the superior performance of its products, Prolong
is treating and marketing its products as a unique specialty line of high
performance products as opposed to a high volume product line.

Production

         The AFMT formula contained in certain of Prolong's products and the
formulas for such products themselves are comprised of petroleum-based
components which are readily available from several suppliers. Prolong does not
foresee any shortages of supply in the near future. While Prolong is working
actively with each of its suppliers to increase production of the components,
there can be no assurance that each supplier will be able to meet its production
in time to satisfy Prolong's requirements or that alternative suppliers will be
able to meet any such deficiency on an ongoing basis. If Prolong is unable to
obtain sufficient quantities of the components, or if such components do not
meet Prolong's quality standards, delays or reductions in product shipments
could occur which would have a material adverse effect on PIC's business,
financial condition and results of operations.


                                       Page 9

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

         In addition to the potential deficiency in supply of the AFMT
components, such components are also subject to significant price volatility
beyond the control or influence of Prolong. Prices for the components of the
quality sought by Prolong are dependent on the origin, supply and demand at the
time of purchase. Prices can be affected by multiple factors in the producing
countries, including weather and political and economic conditions.
Additionally, petroleum products, upon which Prolong relies for its AFMT
formula, have been affected in the past, and may be affected in the future, by
the actions of certain organizations and associations, such as the Organization
of Petroleum Exporting Countries ("OPEC"), that have historically attempted to
establish price controls on petroleum products through agreements establishing
export quotas or restricting petroleum supplies worldwide. No assurance can be
given that OPEC (or others) will not succeed in raising the price of petroleum
components or that, in such event, Prolong will be able or choose to maintain
its gross margins quickly by raising its prices without effecting demand.
Increases in the prices for the components, whether due to the failure of its
suppliers to perform, conditions affecting the component-producing countries, or
otherwise, could have a material adverse effect on PIC's results of operations.

         The production of Prolong's products is comprised of contract
manufacturers mixing the components pursuant to the AFMT and other proprietary
formulas and bottling the resulting mixtures in packaging specified by Prolong.
Prolong's current contract manufacturers have the capacity to produce its
products in relatively high volumes. By utilizing existing third party
manufacturing facilities, Prolong avoids the large capital expenditures
associated with mixing and packaging operations, as well as costly management of
human resources. At present, there are facilities located throughout the world
that are capable of mixing and packaging the components into finished products.
Prolong has not entered into any long term contracts with respect to the supply
or production of its lubricant products, preferring to take advantage of
competition among suppliers and manufacturers.

Customers

         In 2001, Prolong's sales to automotive aftermarket retail chain stores,
mass merchandisers, and independent distributors comprised approximately 89.4%
of its revenues while sales to commercial, industrial and other customers
comprised 9.6% of total revenues. Approximately 1.0% of Prolong's 2001 sales
resulted as a response to the airing of the infomercials. In 2001, four retail
customers comprised approximately 66.8% of its revenues.

Intellectual Property

         On February 5, 1998, PIC entered into a definitive agreement with EPL
Prolong, Inc., a California corporation ("EPL") under which PIC purchased the
business assets of EPL. Under the terms of the agreement, PIC purchased the
principal assets and assumed certain liabilities of EPL for approximately
2,981,035 shares of PIC Common Stock. With the closing of the acquisition on
November 20, 1998, PIC acquired the U.S. and foreign patents owned by EPL
pertaining to the AFMT technology and related U.S. and foreign trademarks. Prior
to this transaction, PIC, through PSL, held an exclusive license from EPL to use
AFMT and the "Prolong" name. As a result of the transaction, PIC owns the
exclusive rights to manufacture, distribute and sell products based on the
patented technology in the U.S. and in certain foreign countries, and to use the
"Prolong" trade name and trademarks. See "Legal Proceedings."

         The U.S. patent relating to the AFMT technology (U.S. Patent No.
4,844,825, hereinafter "the `825 patent") expires on November 18, 2007. There
are a number of foreign patents corresponding to the `825 patent as well. In
addition, PSL has obtained a federally registered patent in the United States
for a "Sponge Applicator Device" (U.S. Patent No. 6,010,268) and SPONGE
APPLICATOR (U.S. Design Patent No. 414005), which applicator is currently
included in the various appearance product packages marketed by Prolong. PSL has
obtained or applied for trademark registration protection in numerous countries
for various trademarks utilized in the marketing and promotion of Prolong
lubricant products. Currently, PSL holds the following federally registered
trademarks in the United States: PROLONG and the related design (U.S. Reg. Nos.
2,136,672 and 2,136,576), PROLONG SUPER LUBRICANTS (U.S. Reg. No. 2,136,577), NO
EQUAL IN THE WORLD & DESIGN (U.S. Reg. No. 2,129,784), NO EQUAL IN THE WORLD
(Word Mark) (U.S. Reg. No. 2,270,653), SPL100 (U.S. Reg. No. 2,022,220), THE
ULTIMATE IN PROTECTION & PERFORMANCE (U.S. Reg. No. 2,129,785), PSL's Oil Drop
Logo (U.S. Reg. No. 2,135,230), TRIGGER SPRAY BOTTLE CONFIGURATION (U.S. Reg.
No. 2,376,247), and TRIGGER SPRAY BOTTLE BLUE COLOR (U.S. Reg. No. 2,376,248).





                                       Page 10

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

Royalty Agreements

         Prolong has entered into a service and endorsement contract with Al
Unser whereby Prolong agreed to pay royalties on all net lubricant retail sales
according to the following rates: 1.5% from November 1, 1996 through October 31,
1997; 1.25% from November 1, 1997 through October 31, 1998; and 1% from November
1, 1998 through October 31, 1999. Maximum payments under this arrangement were:
$100,000 in year one, $125,000 in year two and $150,000 in year three. The
option to extend this agreement for an additional five years was exercised. For
the five years under the extension, the Company agreed to pay royalties at the
rate of 0.5% from November 1, 1999 through October 31, 2000 and 0.6% from
November 1, 2000 through October 31, 2004 on all net lubricant retail sales. For
each of these years, the Company pays a guaranteed minimum payment of $75,000.
Maximum payments are $100,000 in the first year of the renewal period and
$125,000 each year thereafter. During 2001, Prolong expended $74,330 under this
agreement.

Employees

         As of March 15, 2002, PIC and its subsidiaries collectively employed 26
full-time employees, including 3 executive officers, and no part-time employees.
None of Prolong's employees are represented by a labor organization and PIC
considers the relationships with its employees to be good.

ITEM 2. Properties
------- ----------

         PSL leases approximately 29,442 square feet of office and warehouse
space in a two-story building located at 6 Thomas in Irvine, California. PSL
originally purchased this facility from Huck International, Inc. (a subsidiary
of Thiokol Corporation, PSL's former lessor) pursuant to the exercise of its
lease option on February 23, 1998. The consideration paid by PSL for the
facility was $2,690,000. PSL utilized $248,000 in cash on hand and borrowed
funds in the amounts of $1,692,000 and $750,000, from Bank of America and from
CDC Small Business Finance Corp., respectively. Escrow closed on the purchase
and sale on April 30, 1998. The outstanding loans from Bank of America and CDC
Small Business Finance Corp. are collateralized by the purchased land and
building. On October 30, 2000 the Company entered into a loan agreement with a
lender for a $675,000 loan. The loan is collateralized by a third priority trust
deed lien against the Company's real property in Irvine, California. On December
31, 2001, PSL sold its 6 Thomas, Irvine, California headquarters building to an
investment group for $3,675,000. The buyers made a cash payment of approximately
$1,338,667, and took "subject to" the existing first trust deed in the amount of
$1,609,057, took "subject to" the second trust deed in the amount of $675,276,
and formally assumed the third trust deed loan in the amount of approximately
$252,000. From the cash down payment received by the Company, $423,000 was
applied to a principal payment on the third trust deed loan. The gain on the
sale of the building in the amount of approximately $1,223,000, which is
reflected on the Balance Sheet under "Deposits on Building Under Sales
Contract", will be recognized in a future period when the Company's obligations
and guarantees associated with the first and second trust deed loans have been
extinguished. At the closing, the Company entered into a lease of the building
with the buyer for a period of sixty months on the lower floor and eighteen
months on the upper floor, and continued its business operations in the
building. See "Management's Discussion and Analysis Of Financial Condition and
Results of Operations - Liquidity and Capital Resources." PIC considers the
present facilities to be adequate for Prolong's current operations and for those
reasonably expected to be conducted during the next twelve months. Further, PIC
believes that any additional space, if required, will be available on
commercially reasonable terms.

ITEM 3. Legal Proceedings
------- -----------------

         On November 17, 1998, Dr. Michael Walczak on behalf of himself and
other shareholders of EPL filed a purported class action and derivative suit in
the U.S. District Court in San Diego, California against EPL, PIC, PSL and
certain of their respective former and current officers and directors alleging
breach of contract, certain fraud claims, civil RICO (Racketeering Influenced
and Corrupt Organizations Act), breach of fiduciary duty and conversion and
sought monetary damages in connection with PIC's acquisition of the assets of
EPL Prolong, Inc. On October 12, 2001 the case was settled as a class action,
dismissing all of the claims with prejudice. In settlement, PIC issued 1,350,695
additional shares of its common stock to EPL, out of which one-third of those
shares were distributed to certain of plaintiff's attorneys and two-thirds of
those shares were distributed to EPL shareholders. PIC


                                       Page 11

<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

agreed to waive its claim to reimbursement for EPL's accrued expenses of
approximately $430,000 as additional purchase consideration. This suit was
settled without any admission of wrongdoing or liability on the part of PIC or
any of the defendants. Settlement of this suit had no material adverse affect on
the Company's financial position or results of operation.

     In February 1999, PSL entered into a negotiated Consent Order with the FTC
concerning the standards for adequate substantiation of engine treatment
advertising claims, among others items. As a follow on to the FTC matter, four
separate lawsuits were filed by individuals purporting to act as class
representatives for consumers seeking redress based variously on allegations of
false advertising, unfair competition, violation of various state consumer laws,
fraud, deceit, negligent misrepresentation, breach of warranty and seeking
equitable relief. Class counsel and the Company have entered into a stipulation
of settlement on three of the suits, namely Fernandes et al v PSL, Bowland et al
v PSL and Mata et al v PSL, which settlements were preliminarily approved by the
court in February 2002. In settlement, the Company will offer a discount cash
rebate on certain of its products through four major distributors by means of an
in-store coupon for a period of six months, with the coupons expiring in
eighteen months from date of settlement. In addition, the Company will reimburse
plaintiff's legal counsel as a group in an amount not to exceed $65,000.
Settlement of these as suits as currently proposed will have no material adverse
affect on the Company's financial position or results of operation.

     In the fourth and last of the FTC related suits, Kachold v PSL, a separate
settlement was reached with the individual plaintiff for $1,000 and $1,000 in
attorney fees, with the class claims being dismissed with prejudice contingent
upon final court approval of the above referenced class action settlements.

     On April 8, 1997, a lawsuit was filed by Francis Helman et al v EPL, PIC et
al in the Court of Common Pleas, Columbiana County, Ohio as a purported class
action alleging breach of fiduciary duty, breach of oral and written contract,
and fraud, in thirteen original causes of action. The appellate court in Ohio
largely affirmed a series of orders by the trial judge in favor of EPL, PIC et
al, the effect of which was to reduce the number of complaining parties from
approximately one hundred to less than twenty, and dismissing various causes of
action. The trial court subsequently denied plaintiff's motion to certify the
case as a class action. The remaining Helman plaintiffs have appealed the trial
court's order denying certification of the case as a class action. Management
believes that there is no merit to the plaintiffs' complaint, is vigorously
defending against the claims, and does not believe the outcome will have a
material adverse affect on the Company's financial position or results of
operations.

     PIC and its subsidiaries are subject to other legal proceedings, claims,
and litigation arising in the ordinary course of business. PIC's management does
not expect that the ultimate costs to resolve these matters will have a material
adverse affect on PIC's consolidated financial position, results of operations
or cash flows.

ITEM 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------

     No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.


                                       Page 12

<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


                                     PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
------- ---------------------------------------------------------------------

Price Range of Common Stock

     PIC Common Stock is currently trading on AMEX under the symbol "PRL." High
and low sales prices as furnished by AMEX for each quarter during 2000 and 2001
are as indicated below.

         Quarter Ended:                        High             Low
         --------------                        -----           -----

         March 31, 2000                        $0.75           $0.30
         June 30, 2000                         $0.63           $0.31
         September 30, 2000                    $0.50           $0.13
         December 31, 2000                     $0.22           $0.02
         March 31, 2001                        $0.22           $0.06
         June 30, 2001                         $0.15           $0.08
         September 30, 2001                    $0.19           $0.06
         December 31, 2001                     $0.10           $0.06

     PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of March 20, 2002, the number of holders of record
of PIC Common Stock is approximately 741 and the high and low sales prices as
reported by AMEX, were $0.08 and $0.07, respectively. PIC has not declared any
cash dividends since inception, and does not intend to do so in the foreseeable
future. PIC currently intends to retain its earnings for the operation and
expansion of its business. PIC does not have any restrictions on its ability to
pay dividends on common equity. In addition to PIC Common Stock, PIC's Board of
Directors is authorized to issue up to 50,000,000 shares of Preferred Stock with
such rights, preferences and privileges as may be determined by PIC's Board of
Directors. No such shares of Preferred Stock have been issued to date.

Recent Sales of Unregistered Securities

     On November 2, 2000 Prolong issued a warrant to purchase 900,000 shares of
Common Stock to ABQ Dolphin, LP, a California limited partnership, in connection
with a certain loan agreement, dated October 30, 2000. The warrant was
exercisable at $0.1875 per share (the market value of the Company's Common Stock
when the warrants were issued) and shall expire on the seventh anniversary of
the date of the original issuance of the warrant. On December 31, 2001, in
exchange for assumption of the loan agreement by an outside entity, Prolong
amended and restated the warrant to set the exercise price to $0.10 per share.

     On December 12, 2001 Prolong issued a warrant to purchase 81,000 shares of
Common Stock to Jeremy E. Kaslow, M.D. Inc., in connection with a certain loan
agreement dated December 12, 2001. The warrant is exercisable at $0.15 per share
and shall expire on the seventh anniversary of the date of the original issuance
of the warrant.

     The sales and issuance of the warrants were made in reliance upon the
exemption from the registration provisions of the Securities Act of 1933 set
forth in Section 4(2) thereof as transactions by an issuer not involving any
public offering. The Company has reason to believe that the purchaser was
familiar with or had access to information concerning the operations and
financial condition of the Company, and the purchaser represented that it was
acquiring the warrant and the underlying shares of Common Stock for investment
and not with a view to the distribution thereof. At the time of the issuance,
the warrant was deemed to be a restricted security for purposes of the
Securities Act of 1933 and the certificate representing the warrant (and the
shares issued upon exercise) bear legends to that effect.

     On or about December 28, 2001, PIC issued an aggregate of 4,331,730 shares
of its Common Stock in connection with the acquisition of EPL (such number to
include the cancellation and reissuance of 2,981,035 shares of Common Stock
originally issued in 1998). See "Legal Proceedings." The issuance of the shares
of Common Stock was


                                       Page 13

<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

made in reliance upon the exemption from the registration provisions of
the Securities Act of 1933 set forth in Section 3(a)(10) thereof.


                                       Page 14

<PAGE>

PROLONG INTERNATIIONAL CORPORATION AND SUBSIDIARIES


ITEM 6. Selected Financial Data
-------------------------------

     The following selected financial data is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements,
related notes and other information included elsewhere in this Annual Report on
Form 10-K as well as "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations." The financial data set forth below for the
years ended December 31, 1997, 1998, 1999 and 2000, respectively, is derived
from the consolidated financial statements of the Company that have been audited
by Deloitte & Touche LLP. The financial data for the year ended December 31,
2001 is derived from the consolidated financial statements of the Company that
have been audited by Haskell & White LLP.
<TABLE>
<CAPTION>

                                                                      Year ended
                                                                     December 31,
                                                                     ------------
                                              1997         1998          1999          2000         2001
                                              ----         ----          ----          ----         ----
<S>                                        <C>          <C>           <C>           <C>          <C>
Statement of Operations Data
     Net revenues......................... $29,846,795  $35,032,689   $34,470,915   $19,080,218  $13,640,667
     Net income (loss)....................   2,132,553      419,513    (6,580,061)   (1,652,278)  (1,002,544)
     Net income (loss) per share:
         Basic............................       $0.08        $0.02        $(0.23)       $(0.06)      $(0.04)
         Diluted..........................       $0.08        $0.02        $(0.23)       $(0.06)      $(0.04)
     Weighted average common shares:
         Basic............................  25,508,035   25,807,618    28,445,835    28,442,341   28,442,604
         Diluted..........................  25,690,774   26,011,767    28,445,835    28,442,341   28,442,604
Balance Sheet Data
     Total assets......................... $13,748,650  $23,210,872   $21,379,648   $17,715,200  $16,941,397
     Total liabilities....................   4,039,796    5,756,537    10,412,463     8,174,388    8,299,935
     Total stockholders' equity...........   9,708,854   17,454,335    10,967,185     9,540,812    8,641,462
------------------------
</TABLE>

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

     The following discussion and analysis of the Registrant's financial
condition and results of operations should be read in conjunction with the
Financial Statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K.

General

     Since the Reorganization in June 1995, management of Prolong has
concentrated a significant portion of its efforts and resources on the marketing
and sale of Prolong's consumer oriented products, through traditional retail
distribution and through direct response television advertising. Management now
believes that it has attained a significant level of brand and product
identification and Prolong has now begun efforts to expand sales of its consumer
lubrication products into commercial and industrial channels, as well as
international markets.

     The lubricant business is extremely competitive. Prolong's business
requires that it compete with larger, better financed entities, most of which
have brand names which are well established in the marketplace. Although
Prolong, in the opinion of management, has unique products which have superior
performance characteristics relative to the well known products available in the
marketplace, Prolong remains at a distinct disadvantage and will be required to
expend substantial sums in order to promote brand name identity and product
acceptance among its prospective customers. In order to establish brand name
identity, Prolong has relied primarily on its direct response television
programs and intends from time to time to utilize this means to gain product
recognition for purposes of directly increasing sales as well as increasing
retail, commercial and industrial and governmental sales resulting from broader
public knowledge of its products.


                                       Page 15

<PAGE>
PROLONG INTERNATIIONAL CORPORATION AND SUBSIDIARIES


Results of Operations

     The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:

                                         Fiscal Year Ended December 31,
                                         ------------------------------
                                          1999       2000       2001
                                          -----      -----      -----

Net revenues                              100.0%     100.0%     100.0%
Cost of goods sold                         30.5       27.6       31.9
                                          -----      -----      -----
     Gross profit                          69.5       72.4       68.1
Selling and marketing expenses             75.0       55.7       46.4
General and administrative expenses        22.2       24.7       26.9
Research and development                     .8        0.5        0.4
                                          -----      -----      -----
     Operating income (loss)              (28.5)      (8.5)      (5.6)
Interest expense                           (1.3)      (2.8)      (4.0)
                                          ------     -----      ------
     Income (loss) before income taxes    (29.8)     (11.3)      (9.6)
Provision (benefit) for income taxes      (10.7)      (2.6)      (2.2)
                                          ------     ------      -----
     Net income (loss)                    (19.1)      (8.7)      (7.4)
                                          ======     ======     ======

     Comparison of the Years Ended December 31, 2001 and December 31, 2000

     Net revenues for the year ended December 31, 2001 were approximately
$13,640,700 as compared to approximately $19,080,200 for the year ended December
31, 2000, a decrease of $5,439,500 or 28.5%. Revenues for the year ended
December 31, 2001 were derived from the following sources: Retail sales of
$12,196,000 and, international and other sales of $1,444,700. Revenues for the
year ended December 31, 2000 were derived from the following sources: Retail
sales of $16,362,400 and, international and other sales of $2,717,800.

     For the year ended December 31, 2001, retail sales were 89.4% of total
revenues while international and other sales comprised 10.6% of total revenues.
For the year ended December 31, 2000, retail sales were 85.8% of total revenues
while international and other sales comprised 14.2% of total revenues. The lower
retail sales for the year ended December 31, 2001 versus the same period a year
ago are mainly attributable to a decrease in lubricant sales of $3,850,000. The
lubricant retail sales decline is attributable to a continuing soft market for
specialty lubricants, competitive factors, reduced advertising exposure, the
effect from the September 11, 2001 tragedy, which resulted in a slower consumer
demand for the products and also due to the decision to discontinue the direct
response infomercial for lubricants in lieu of an ongoing evaluation of more
cost effective means of promoting the line. International and other sales
decreased due to a slower demand in South Africa and Asia.

     Cost of goods sold for the year ended December 31, 2001 was approximately
$4,345,400 as compared to $5,257,600 for the comparable period of the prior
year, a decrease of $912,200 or 17.4%. As a percentage of sales, cost of goods
sold increased from 27.6% for the year ended December 31, 2000 to 31.9% for the
year ended December 31, 2001. This increase was mainly attributable to the shift
in product mix in the retail lubricant sales and the added cost of free
promotional products.

     Selling expenses of $6,335,800 for the year ended December 31, 2001
represented a decrease of $4,296,100 over the comparable period of the prior
year. This 40.4% decrease was primarily the result of decreased expenses for
endorsement and sponsorship payments, slotting fees, commissions, salaries
(headcount), freight expenses, expenditures for media and print advertising and
television airtime purchases. The Company continues to evaluate new
advertising/marketing and promotional activities to promote the brand name.
Selling and marketing expenses as a percentage of sales were 46.4% for the year
ended December 31, 2001 versus 55.7% for the previous year.

     General and administrative expenses for the year ended December 31, 2001
were approximately $3,669,100 as compared to $4,710,000 for the year ended
December 31, 2000, a decrease of $1,040,900 or 22.1%. This




                                       Page 16

<PAGE>
PROLONG INTERNATIIONAL CORPORATION AND SUBSIDIARIES


decrease is primarily attributable to a decrease in legal expenses, and salaries
(headcount). As a percentage of sales, general and administrative expenses
increased from 24.7% in 2000 to 26.9% in 2001. Even though the aggregate
expenses declined during the period, the ratio of expenses as a percentage of
sales increased due to the more than expected decline in sales during the
period. The Company continues to evaluate further reductions in the general and
administrative expenses.

     Research and development expenses for the year ended December 31, 2001 were
$47,600 as compared to $104,100 for the year ended December 31, 2000, a decrease
of $56,500. In 2001, these expenses were attributable to market research and
testing of new potential products.

     Interest expense of approximately $550,800 for the year ended December 31,
2001 represented an increase of $12,000 over the comparable period of the prior
year.

     Net loss for the year ended December 31, 2001 was approximately
$(1,003,000) as compared to a net loss of approximately $(1,652,000) for the
comparable period in the prior year, a decrease of $649,000. The decrease is a
result of the factors discussed above.

     Comparison of the Years Ended December 31, 2000 and December 31, 1999

     Net revenues for the year ended December 31, 2000 were approximately
$19,080,200 as compared to approximately $34,471,000 for the year ended December
31, 1999, a decrease of $15,390,800 or 44.6%. Revenues for the year ended
December 31, 2000 were derived from the following sources: Direct response
infomercial sales of $654,100 ($347,200 of appearance products and $306,900 of
lubricants); retail sales of $16,362,400 ($317,000 of appearance products and
$16,045,400 of lubricants); industrial sales of $298,300; and, international and
other sales of $1,765,400. Revenues for the year ended December 31, 1999 were
derived from the following sources: direct response infomercial sales of
$3,941,000 ($2,796,000 of appearance products and $1,145,000 of lubricants);
retail sales of $27,857,000 ($4,230,000 of appearance products and $23,627,000
of lubricants); industrial sales of $599,000; and, international and other sales
of $2,074,000.

     For the year ended December 31, 2000, retail sales were 85.8% of total
revenues while direct response infomercial sales comprised 3.4% of total
revenues. For the year ended December 31, 1999, direct response infomercial
sales comprised 11.4% of total revenues while retail sales were 80.8%. The
decrease in the direct response sales of approximately $3,286,900 is a direct
result of a strategic decision to evaluate other cost-effective advertising
programs. The lower retail sales for the year ended December 31, 2000 versus the
same period a year ago are attributable to a decrease in appearance sales of
$3,913,000 and lubricants sales of $7,581,600. The appearance products were
launched during the spring and summer of 1999 when initial stocking orders were
filled at several major retailers and were supported by an aggressive television
and print advertising campaign. Revenues for the appearance products declined in
part as a result of a shift in advertising strategies to accommodate the
realities of a marketplace in which the Company was not able to spend as much as
it would like on cost-effective promotional activities and also due to decreased
demand and acceptance of the appearance products in Year 2000 and higher then
anticipated product returns. The lubricants sales decline is attributable to a
soft market for specialty lubricants, higher than expected store inventory
levels at major retailers, competitive factors and also the decision to
discontinue the direct response infomercial for lubricants in lieu of an ongoing
evaluation of more cost-effective means of promoting the line. Industrial,
international and other sales decreased approximately $609,300. The decrease is
attributable to a large stocking order shipped in 1999 to a new international
distributor, which was not repeated in Year 2000.

     Cost of goods sold for the year ended December 31, 2000 was approximately
$5,257,600 as compared to $10,501,000 for the comparable period of the prior
year, a decrease of $5,243,400 or 49.9%. As a percentage of sales, cost of goods
sold decreased from 30.5% for the year ended December 31, 1999 to 27.6% for the
year ended December 31, 2000. This decrease was mainly attributable to the shift
in product mix with the lubricant products yielding higher gross margins than
the appearance products. Also the fourth quarter of 1999 included an increase in
the inventory obsolescence reserve for non-performing or slow moving inventory
items.


                                       Page 17

<PAGE>
PROLONG INTERNATIIONAL CORPORATION AND SUBSIDIARIES


     Selling expenses of $10,632,000 for the year ended December 31, 2000
represented a decrease of $15,218,000 over the comparable period of the prior
year. This 58.9% decrease was primarily the result of decreased expenses for
endorsement and sponsorship payments, slotting fees, commissions, salaries
(reduced headcount), freight expenses, expenditures for media and print
advertising and television airtime purchases. The Company continues to evaluate
new advertising/marketing and promotional activities to promote the brand name
and the cost-effectiveness of each motorsports promotional program. Selling and
marketing expenses as a percentage of sales were 55.7% for the year ended
December 31, 2000 versus 75.0% for the comparable period of the previous year.

     General and administrative expenses for the year ended December 31, 2000
were approximately $4,710,000 as compared to $7,645,000 for the year ended
December 31, 1999, a decrease of $2,935,000 or 38.4%. This decrease is primarily
attributable to a decrease in legal expenses, consulting, website development,
bad debt and general insurance expenses. As a percentage of sales, general and
administrative expenses increased from 22.2% in 1999 to 24.7% in 2000. Even
though the aggregate expenses declined during the period, the ratio of expenses
as a percentage of sales increased due to the more than expected decline in
sales during the period.

     Research and development expenses for the year ended December 31, 2000 were
$104,100 as compared to $305,300 for the year ended December 31, 1999, a
decrease of $201,200. In 2000, these expenses were attributable to market
research of the appearance products, while in 1999; these expenses were related
to continued testing and research.

     Interest expense of approximately $539,000 for the year ended December 31,
2000 represented an increase of $85,000 over the comparable period of the prior
year. The increase is attributable to a higher average balance in borrowings
during the period.

     Net loss for the year ended December 31, 2000 was approximately
$(1,652,000) as compared to a net loss of approximately $(6,580,000) for the
comparable period in the prior year, a decrease of $4,928,000. The decrease is a
result of the factors discussed above.

Liquidity and Capital Resources

     At December 31, 2001, the Company had a negative net working capital of
approximately $149,000 as compared to a negative working capital of $100,000 at
December 31, 2000, representing an increase of $49,000. Operating activities
provided $370,000 during 2001, primarily from an increase in accounts payable,
income taxes receivable and decreases in inventory and accounts receivable which
was partially offset by a decrease in accrued expenses. Additionally, the
Company used $214,000 in investing activities which was primarily the investment
in an affiliate and provided $183,000 from financing activities which were
primarily net reductions in the line of credit and notes payable which were
offset by deposits under the building sales contract.

     The Company has a $5,000,000 credit facility with a financial institution,
expiring in May 2003. Such facility is collateralized by eligible accounts
receivable and inventories. Interest is currently payable monthly at the default
rate of the financial institution's prime rate (4.75% at December 31, 2001) plus
7%, subject to a minimum interest charge of $50,000 per quarter. At the request
of the Company, effective February 7, 2002 the credit facility was reduced to
$3,000,000. The credit facility contains certain defined net income and tangible
net worth financial covenants. At December 31, 2001, the Company was in default
with certain financial covenants under the credit agreement. The Company is
currently discussing remedies with the lender and is also actively pursuing a
replacement senior secured lender and subordinated debt. As of December 31,
2001, $1,728,868 was outstanding and approximately $36,791 was available under
the terms of the line of credit.

     During 2001, the Company reduced headcount, discontinued certain
endorsement and sponsorship contracts and aggressively reduced sales and general
administrative expenses. The Company anticipates realizing the full impact of
these expense reductions in 2002. Additionally, the Company improved its credit
and collections function and worked with its vendors to extend payment terms
wherever possible. The Company's business plan for 2002 provides for positive
cash generation from operations and the Company has initiated an "Accounts
Payable


                                       Page 18

<PAGE>
PROLONG INTERNATIIONAL CORPORATION AND SUBSIDIARIES


Discounted Debt Restructure Program", which if successful is expected to reduce
the accounts payable balance at December 31, 2001 by approximately $1,300,000 in
aged payables. The funds needed for this program are currently being negotiated
through a subordinated debt plan. Management cannot guarantee that it will be
able to obtain adequate funds when needed or on acceptable terms, if at all. Any
inability to obtain funds when needed would have a material adverse effect on
the Company's financial condition. At December 31, 2001 the Company had an
accumulated deficit of approximately $6,525,000. The Company will continue to
search for areas in which to further reduce expenses. The Company cannot
guarantee that the timing of further reductions in operating expenses will be
adequate to return to profitability for 2002 and beyond. Management believes
that these plans, if successfully executed, will provide adequate financial
resources to sustain the Company's operations and enable the Company to continue
as a going concern.

Factors Which May Affect Future Operating Results

     In evaluating our business, you should carefully consider the following
risk factors and other information contained in this Annual Report on Form 10-K.

     Some of the statements contained in this Annual Report on Form 10-K are
forward-looking. These forward-looking statements are based on our current
expectations that involve risks and uncertainties which may affect, among other
things, our ability to maintain our current sales rate or may cause sales to
decline. Such risks and uncertainties include, but are not limited to, the
following:

     .    Competitive, technological, financial and business challenges may make
          it more difficult for us to continue to sell specialty lubricant and
          appearance products.
     .    We may be unable to retain our existing key sales, technical and
          management personnel.
     .    Increased competition in the specialized lubrication or appearance
          product markets may cause downward pressure on our prices. o We may be
          unable to manage our growth effectively. o The lubricant or appearance
          products industries or our operations or business may face other
          unforeseen material adversechanges.
     .    We may be unable to generate either through operations, debt
          placements or equity sales, sufficient cash to operate the business
          profitably.

     Our current expectations, which impact our budgeting, marketing, and other
management decisions, are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments. Revisions to our current expectations may cause us to change our
marketing, capital expenditures or other budgets, which may in turn affect our
business, financial position, results of operations and cash flows. Although we
believe that our current expectations are reasonable, we make no representation
regarding their accuracy. Therefore, you should avoid placing undue reliance on
the forward-looking statements contained in this Annual Report on Form 10-K.

We May Need to Raise Additional Funds in the Future

     We expect that our need for additional funds will increase in the future as
our business grows. We cannot guarantee that we will be able to obtain adequate
funds when we need them or on acceptable terms, if at all. Our future need for
additional funds will depend on numerous factors including the following:

     .    The success of our product development programs.
     .    The commercial success of our products.
     .    The rate of growth of our business.
     .    The availability of cash from our operations and other sources.

     We are currently seeking additional funds through public or private sales
of our stock or through borrowing. The issuance of additional shares of stock
could result in a substantial dilution to the ownership interests of our present
or future stockholders. If we are unable to obtain adequate funds on terms
acceptable to us, we may need to


                                       Page 19

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

delay or scale back our product development and the manufacture of our current
products. Any inability to obtain funds when we need them would have a material
adverse effect on our business, operating results and financial condition.

We Are Currently Seeking a New Credit Facility

     We have a credit facility with a financial institution that allows us to
borrow the greater of $3 million, or eligible accounts receivable and
inventories (as defined). As of December 31, 2001, we were in violation of
certain financial debt covenants, and as a result we are currently paying
interest at the institution's default rate (11.75%). Management is presently
discussing remedies with the financial institution regarding the covenant
violations, and is actively pursuing a replacement senior secured lender with
additional subordinated debt. There is no guarantee that the Company will be
able to secure a new credit facility at terms acceptable to the Company, if at
all. Further, there is no guarantee that our current lender will not pursue the
remedies available to it as the result of our covenant violations.

We Depend on Our Key Management Personnel

     We depend on our key management personnel and our future success will
depend in large part upon their contributions, experience and expertise. We have
entered into employment agreements with 4 of our senior executives for periods
ranging from 3 to 4 years. In addition, our future success will depend upon our
ability to attract and retain other highly qualified management personnel. The
loss of any key management personnel or our failure to attract and retain other
qualified management personnel could have a material adverse effect on our
business, operating results and financial condition.

Our Business Is Subject to the Risk of Product Liability Claims

     The nature of our business exposes us to risk from product liability
claims. We currently maintain product liability insurance with maximum coverage
limits of $11,000,000 for each occurrence and an aggregate limit of $12,000,000
per year. Product liability coverage is becoming increasingly expensive and we
cannot guarantee that our current coverage will adequately cover future product
liability claims. Currently, we have no plans to increase our coverage. However,
we will reevaluate our product liability coverage from time to time in the
future. Any losses that we may suffer from future liability claims, including
the effect that any product liability litigation may have upon our reputation
and marketability of our products, may have a material adverse effect on our
business, financial condition, cash flows and results of operations.

The Market in Which We Operate is Highly Competitive

     The current market for our products is highly competitive and we expect
competition to increase in the future. Our principal competitors include other
providers of specialized lubrication products, such as The Clorox Company
(STP(TM)) and Pennzoil-Quaker State Corporation (Slick 50(TM)), both of which
market engine treatments. Other competitive engine treatment brands include
Duralube(R) and Z-Max(TM). Our competitors also include major oil brands such as
Shell, Chevron, Castrol, and other companies that manufacture lubrication
products, such as WD-40 Company. Further, we believe that major oil companies,
well established consumer products and new start-up companies not presently
offering products that compete directly with our products, may enter our markets
in the future. With respect to our appearance products, major competitors
include such companies as Turtle Wax, Inc., Meguiar's, Inc., Mothers,
Pennzoil-Quaker State Company, and The Clorox Company. Increased competition
could result in any or all of the following, which could have a material adverse
effect on our business, financial condition, cash flows and results of
operations:

     . Price reductions
     . Reduced gross margins
     . Loss of market share
     . Loss of shelf space



                                     Page 20

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     In addition, many of our competitors have significantly greater financial,
technical, product development, marketing and other resources and greater market
recognition than we do. Several of our competitors also have, or may develop or
acquire, substantial customer bases in the automotive and other related
industries. As a result, our competitors may respond quicker to new or emerging
technologies and changes in customer requirements or devote more resources to
the development, promotion and sale of their products. Additionally, other
dealers and distributors may appeal to the price-sensitive segment of the market
by offering similar lubrication and appearance products at prices below ours.
While we believe that our prices are competitive for the level of quality of our
products, we rely on our brand name recognition and reputation for selling
quality products supported by strong customer service.

     We cannot guarantee that we will be able to compete successfully against
current and future competitors or that the competitive pressures that we face
will not have a material adverse effect on our business, financial condition,
cash flows and results of operations.

The Prices of Many of Our Components are Highly Volatile

     We depend upon our suppliers to provide us with the primary components for
our AFMT formula. The price of such components is extremely volatile and beyond
our control or influence. Prices for the quality of components we desire depend
on the origin, supply and demand at the time of purchase. Component prices
typically depend on multiple factors within the producing countries, including
weather and political and economic conditions. Additionally, petroleum products,
which form our AFMT formula, have been affected in the past, and may be affected
in the future, by the actions of certain organizations and associations, such as
the Organization of Petroleum Exporting Countries ("OPEC"), that have
historically attempted to control prices of petroleum products through
agreements establishing export quotas or restricting petroleum supplies
worldwide. We cannot guarantee that OPEC (or others) will be unsuccessful in
raising the prices of petroleum components or that, if prices increase, we will
be able or choose to maintain our gross margins by raising our prices without
affecting demand. Increases in component prices, for whatever reason, could have
a material adverse effect on our business, operating results and financial
condition.

We Have Operated as an Independent Company Only Since 1995

     We have only been an independent operating company since June 1995. Prior
to such time, our company was essentially dormant for approximately 8 years,
with few assets or operations. We cannot guarantee that we will be able to
successfully continue our growth through the expansion of our operations, by
accessing new markets or otherwise.

     From the Reorganization through December 1995, we generated revenues of
approximately $391,000 and operating losses of approximately $416,000. From
December 1995 through December 1998, our operations have generated net income.
In 1999, 2000, and 2001 we suffered net losses of approximately $6,580,000,
$1,652,000 and $1,003,000. We cannot guarantee our operating success and ability
to generate net income in the future.

We Depend on Third Party Suppliers

     To date, we have succeeded in obtaining enough components from existing
suppliers to produce our AFMT formula in order to meet our current manufacturing
needs. We also believe that adequate supplies will continue to be available in
the near future. While we continue to work actively with each supplier in order
to sustain and at times increase production of our components, we cannot
guarantee that each supplier will be able to sustain or increase its production
in time to satisfy our demand or that alternate suppliers will be able to meet
any supply deficiency. If we fail to obtain enough components, or if such
components fall below our quality standards, shipments and sales of our products
may be delayed or reduced. This would have a material adverse effect on our
business, financial condition and results of operations.


                                     Page 21

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

Most of Our Revenue Comes From A Limited Number of Products

     We currently generate substantially all of our revenues from sales of our
AFMT-based products and we expect this trend will continue in the foreseeable
future. Because our revenues are concentrated in lubricant products, a decline
in the demand for, or in the prices of, our AFMT-based products as a result of
competition, technological advances or otherwise, could have a material adverse
effect on our business, financial condition, cash flows and operating results.
We recently contracted our appearance product line to a limited product mix and
at this time we plan to maintain that strategy.

A Significant Portion of Our Revenues Currently Comes from a Small Number of
Customers, and any Decrease in Revenue from These Customers Could Harm Our
Results of Operations

     A significant portion of our revenues comes from only a small number of
customers. For example, during fiscal year 2001, four customers accounted for
approximately 66.8% of net revenues. We expect that a significant portion of our
revenues will continue to depend on sales to a small number of customers. Any
downturn in the business from these customers could seriously harm our revenues
and results of operations.

Our Average Selling Prices May Decline

     The average sales prices for our products may decline. Recently,
competitors and consumers have pressured specialty lubricant suppliers to reduce
pricing, which in turn could result in downward pricing pressure on our
products. In addition, our average sales prices decline when we negotiate large
volume price discounts with certain customers. In the short term, we plan to
work at lowering our manufacturing costs in order to offset the possibility of
declining average sales prices. In the long term, we plan to develop new
AFMT-based products and product mixes that can be manufactured at lower cost or
sold at higher average sales prices. If, however, we fail to achieve such
manufacturing cost reductions or diversify our product mix, our gross margins
could decline. Such a decline could have a material adverse effect on our
business, results of operations, cash flows and financial condition.

We Depend on International Sales for Future Growth and Are Subject to Risks
Associated with Operating in International Markets

     International sales comprised 6.7% of revenues in 2001 as compared to 7.8%
of revenues in 2000. We plan to expand international sales in the future. This
will require significant financial resources and management attention. In order
to expand sales internationally, we plan to do the following:

     .  Establish additional marketing and sales operations.
     .  Recruit additional international distributors.
     .  Investment in international protection of our trademarks.

     To the extent we fail to do any of the above, our growth may suffer and our
business, operating results, cash flows and financial condition could be
materially adversely affected. In addition, we run the risk that revenues from
our expanding international operations will be taxed by foreign authorities at
rates higher than our domestic tax rates.

     Currently, our worldwide sales are denominated in U.S. dollars. An increase
in the value of the United States dollar relative to foreign currencies would
make our products more expensive and, therefore, potentially less competitive in
those markets. Additional risks inherent in our worldwide business activities
include:

     .  Unexpected changes in regulatory requirements, tariffs and other trade
        barriers.
     .  Costs of localizing products in foreign countries.
     .  Longer accounts receivable collection cycles.
     .  Difficulties in managing foreign operations.
     .  Potential for adverse tax consequences, including restrictions on
        repatriating our earnings.
     .  The burdens of complying with a wide variety of foreign laws.


                                     Page 22

<PAGE>
PROLONG  INTERNATIONAL CORPORATION AND SUBSIDIARIES

     .  Currency crisis in foreign  countries that interrupt or terminate the
        ability of our  international  customers to settle their accounts in
        U.S. dollars.

     We cannot guarantee that our international sales and, consequently, our
overall business, operating results, cash flows and financial condition will be
free from any material adverse effect caused by any of the above factors.

Our Business Is Subject to the Risk of Litigation

     We are subject to various legal proceedings from time to time as part of
our business. Such claims or litigation, or other claims or litigation, could
result in a decision that is adverse to us. A decision adverse to us in this or
any other matter could have a material adverse effect on our business, financial
condition, cash flows and results of operations. In addition, litigation,
regardless of its merits, could result in substantial costs to us and divert
management's attention from our operations (see "Legal Proceedings")

We Could Be Subject to Environmental Liabilities or Regulatory Compliance Costs

     Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of substances we use in the
manufacture of our products and on our facilities. We have registered our fuel
conditioners with the United States Environmental Protection Agency ("EPA").
Such EPA registrations have no term but require us to notify the EPA of any
changes in the chemical composition of such conditioners or other information
contained in such registration. We are unaware of any additional governmental
approvals required for our products. We are also unaware of any existing or
probable governmental regulations which would have a material adverse effect on
our business.

     Because we do not manufacture or store significant quantities of our
products, any direct costs incurred in complying with environmental laws have
been minimal and have not materially affected our business. We have tried to
minimize our economic risk from environmental violations by our manufacturers or
bottlers by locating alternative sources of such services. We believe that our
activities and those of our contract manufacturers conform to present
governmental regulations that apply to each such entities' operations.
Additionally, we believe that our current facilities conform to present
governmental regulations relating to environmental, land use, public utility
utilization and fire code matters.

     Government regulations could be changed to impose additional requirements
on us which could restrict our ability to expand our operations or have an
adverse effect on our business. The adoption of these types of governmental
regulations or our failure to comply with the applicable environmental and land
use regulations or restrictions on the discharge of hazardous substances could
subject us to future liability or could cause our operations or those of our
contract manufacturers to be curtailed, relocated or suspended.

We Are Controlled by Management and Certain Stockholders

     As of March 20, 2002, our directors, executive officers and principal
stockholders collectively held approximately 35.2% of our outstanding shares of
common stock. These stockholders, acting together, have the ability to
significantly influence the election of our directors and most other
stockholders' actions and, as a result, can direct our business affairs. Such
concentration of voting power could delay or prevent our company from taking
certain actions including, but not limited to, a change in our company's
control.

Issuances of Our Preferred Stock May Effect the Price of Our Common Stock

     Our Board of Directors is authorized to issue, without stockholder
approval, up to 50,000,000 shares of preferred stock with voting, conversion and
other rights and preferences superior to those of our common stock. Such
issuances could adversely affect the voting power or other rights of the holders
of our common stock. Issuing preferred stock provides flexibility with possible
acquisitions and other corporate purposes. However, an issuance of preferred
stock could make it more difficult for a third party to acquire a majority of
our voting stock and this may not be in the best interests of some of our
stockholders. We do not currently plan to issue any shares of our preferred


                                     Page 23

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

stock. However, we cannot guarantee that the issuance of shares of our preferred
stock will not have a material adverse effect on the market value of our common
stock in the future.

Our Common Stock Price May be Subject to Significant Fluctuations and Volatility

     The market price of our common stock has been subject to significant
fluctuations since the date of our initial public offering. These fluctuations
could continue. Among the factors that could affect our stock price are:

     .  Quarterly variations in our operating results;
     .  Changes in revenues or earnings estimates or publication of research
        reports by analysts;
     .  Speculation in the press or investment community;
     .  Strategic actions by us or our competitors, such as new product
        announcements, acquisitions or restructuring;
     .  Actions by institutional stockholders;
     .  General market conditions; and
     .  Domestic and international economic factors unrelated to our
        performance.

     The stock markets in general have experienced high volatility that has
often been unrelated to the operating performance of particular companies. These
broad market fluctuations may adversely affect the trading price of our common
stock.

New Accounting Pronouncements

     In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after September 30, 2001 and prohibits the use of the pooling-of-interests
method. SFAS 142 changes the accounting for goodwill from an amortization method
to an impairment-only approach. The amortization for goodwill from past business
combinations will cease upon adoption of this Statement on December 31, 2001.
Goodwill and intangible assets acquired in business combinations completed after
September 30, 2001 must comply with the provisions of this Statement. Also under
this Statement, companies will be required to evaluate all existing goodwill for
impairment within six months of adoption by comparing the fair value of each
reporting unit to its carrying value at the date of adoption. Any transitional
impairment losses will be recognized in the first interim period in the year of
adoption and will be recognized as the effect of a change in accounting
principle.

     The Company contracted with an outside consulting valuation firm to
evaluate estimated fair value of the Company's intangible assets and to assess
the potential impact of adopting these pronouncements on the results of
operations and financial position of the Company. At the present time, the
Company has received a draft of the related valuation report. Although
management is still in the process of evaluating the draft report, based on
preliminary analysis, management believes that SFAS 141 and SFAS 142 will not
have a material impact on the Company's consolidated financial statements.

     In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting model, based on the framework established in
SFAS No. 121 for long-lived assets to be disposed of by sale, whether such
assets are or are not deemed to be a business. SFAS No. 144 also modifies the
accounting and disclosure rules for discontinued operations. The standard was
adopted on January 1, 2002, and is not expected to have a material effect on the
financial statements except that any future discontinued operations may be
presented in the financial statements differently under the new rules as
compared to the old rules.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk
-------   ----------------------------------------------------------

                                     Page 24

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     PIC's financial instruments include cash and long-term debt. At December
31, 2001, the carrying values of PIC's financial instruments approximated their
fair values based on current market prices and rates. It is PIC's policy not to
enter into derivative financial instruments. PIC does not currently have any
significant foreign currency exposure since it does not transact business in
foreign currencies. Due to this, PIC did not have significant overall currency
exposure at December 31, 2001.

ITEM 8.   Financial Statements and Supplementary Data
------    -------------------------------------------

     Consolidated balance sheets of PIC as of December 31, 2001 and 2000,
respectively, statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001, and the reports
of independent auditors thereon are referenced in ITEM 14 herein.

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

     PIC's financial statements for the years ended December 31, 1999 and 2000
were audited by Deloitte & Touche, LLP, independent accountants. In October
2001, Deloitte & Touche, LLP notified the Company that they resigned as its
independent accountants, and PIC engaged Haskell & White, LLP as its independent
accountants. The change in PIC's independent accountants was the result of a
mutual agreement between PIC and Deloitte & Touche. There were no disagreements
with Deloitte & Touche on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure during such
period, which disagreements, if not resolved to the satisfaction Deloitte &
Touche, would have caused it to make a reference to the subject matter of the
disagreements in connection with its records. The decision to engage Haskell &
White, LLP was approved by the Board of Directors of PIC.


                                     Page 25

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                    PART III

ITEM 10.  Directors and Executive Officers of the Registrant
-------   --------------------------------------------------

     There is hereby incorporated by reference the information appearing under
the captions "Election of Directors" and "Compliance with Section 16(a) of the
              ---------------------       ------------------------------------
Securities Exchange Act of 1934" from the Registrant's definitive proxy
-------------------------------
statement for the 2002 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 2001.

ITEM 11.  Executive Compensation
-------   ----------------------

     There is hereby incorporated by reference information appearing under the
caption "Executive Compensation" from the Registrant's definitive proxy
         ----------------------
statement for the 2002 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 2001.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management
-------   --------------------------------------------------------------

     There is hereby incorporated by reference the information appearing under
the caption "Security Ownership of Certain Beneficial Owners and Management"
             --------------------------------------------------------------
from the Registrant's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
2001.

ITEM 13.  Certain Relationships and Related Transactions
-------   ----------------------------------------------

     There is hereby incorporated by reference the information appearing under
the captions "Executive Compensation" and "Certain Transactions" from the
              ----------------------       -------------------
Registrant's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
2001.


                                     Page 26

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


                                     PART IV

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

(a)  The following documents are filed as part of this report:

     (1)  Financial Statements

          Consolidated Financial Statements for the Years Ended December 31,
          2001, 2000 and 1999 with Notes and Independent Auditors' Reports

     (2)  Financial Statement Schedule

          Schedule II - Valuation and Qualifying Accounts

          All other schedules are omitted because they are not applicable or the
          required information is shown in the financial statements or notes
          thereto.

     (3)  Exhibits

          The exhibits set forth below are filed as part of this Annual Report
          on Form 10-K:

          2.1  Exchange Agreement between Stockholders of PSL and the Registrant
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).
          2.2  Agreement and Plan of Reorganization, dated as of February 5,
               1998, by and among the Registrant and EPL Pro-Long, Inc.,
               including the following exhibits: (i) Form of Employee Invention
               and Confidentiality Agreement, (ii) Form of Rule 145 Agreement,
               (iii) Form of Confidentiality Agreement, (iv) Form of Transfer
               Restriction, (v) Form of Amendment to Exclusive License
               Agreement, and (vi) Form of Cancellation Agreement (incorporated
               by reference to the same numbered Exhibit to the Registrant's
               Registration Statement on Form S-4 filed May 4, 1998).
          2.3  Amendment to Agreement and Plan of Reorganization, dated as of
               June 29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form S-4 filed May 4,
               1998).
          3.1  Amended and Restated Articles of Incorporation of the Registrant
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).
          3.3  Bylaws of the Registrant, as amended and restated on April 27,
               1998 (incorporated by reference to the same numbered Exhibit to
               the Registrant's Registration Statement on Form S-4 filed May 4,
               1998).
          4.2  Specimen Certificate of Registrant's Common Stock (incorporated
               by reference to the same numbered Exhibit to the Registrant's
               Registration Statement on Form S-4 filed May 4, 1998).
          10.1 Form of Indemnification Agreement for Executive Officers and
               Directors (incorporated by reference to the same numbered Exhibit
               to the Registrant's Registration Statement on Form 10 filed July
               3, 1997).
          10.4 Agreement between PSL and Al Unser, dated July 28, 1995
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).
          10.7 Service and Endorsement Contract between PSL and Al Unser, dated
               April 29, 1996 (incorporated by reference to the same numbered
               Exhibit to the Registrant's Registration Statement on Form 10
               filed July 3, 1997).


                                     Page 27

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

          10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock
                Option Agreement (incorporated by reference to the same numbered
                Exhibit to the Registrant's Registration Statement on Form 10
                filed July 3, 1997).
          10.20 Standing Loan Agreement between PSL and Bank of America
                Community Development Bank, dated April 1, 1998; Promissory
                Note; Deed of Trust, Assignment of Rents and Fixture Filing;
                Payment Guaranty; and Secured and Unsecured Indemnity Agreement
                (incorporated by reference to the same numbered Exhibit to the
                Registrant's Registration Statement on Form S-4 filed May 4,
                1998).
          10.22 Authorization for Debenture Guarantee 504 Program between the
                United States Small Business Administration, CDC Small Business
                Finance Corp. and PSL, dated February 2, 1998, as amended March
                3, 1998, as amended again on April 10, 1998; "504" Note; Deed of
                Turst and Assignment of Rents; Development Company 504
                Debenture; and Servicing Agent Agreement (incorporated by
                reference to the same numbered Exhibit to the Registrant's
                Registration Statement on Form S-4 filed May 4, 1998).
          10.27 Employment Agreement, dated January 21, 2000, between PSL and
                Elton Alderman. (incorporated by reference to the same numbered
                Exhibit to the Registrant's Annual Report on Form 10-K filed
                April 14, 2000).
          10.28 Employment Agreement, dated January 21, 2000, between PSL and
                Thomas C. Billstein. (incorporated by reference to the same
                numbered Exhibit to the Registrant's Annual Report on Form 10-K
                filed April 14, 2000).
          10.32 Employment Agreement, dated June 1, 2000 between PSL and
                Nicholas Rosier. (incorporated by reference, to the same
                numbered Exhibit to the Registrant's Quarterly Report on Form
                10-Q filed August 11, 2000).
          10.33 Loan Agreement between PSL and ABQ Dolphin, LP, A California
                limited partnership, dated October 30, 2000; Promissory Note,
                Third Priority Trust Deed and Warrant agreement, dated November
                2, 2000. (incorporated by reference to the same numbered Exhibit
                to the Registrant's Quarterly Report on form 10-Q filed November
                14, 2000).
          10.34 Proposal to Purchase Property, dated as of December 5, 2001, by
                and among PSL, Euclid Plaza, LLC, a California limited liability
                company, and President Properties, a California general
                partnership (incorporated by reference to the same numbered
                Exhibit to the Registrant's Report on Form 8-K filed on January
                31, 2002.)
          10.35 Release Agreement, dated as of December 21, 2001 by and among
                PIC, a Nevada corporation, EPL Pro-long, Inc., a California
                corporation, Lois M. Miller, and individual, Gary C. Wykidal, an
                individual, Michael R. Davis, and individual and Tom Woodward,
                an individual. (incorporated by reference to the same numbered
                Exhibit to the Registrant's Report on Form 8-K filed on January
                31, 2002.)
          10.36 Amendment to the Agreement and Plan of Reorganization, dated
                December 21, 2001, by and between EPL Pro-Long, Inc., a
                California corporation, and Prolong International Corporation, a
                Nevada corporation.(incorporated by reference to the same
                numbered Exhibit to the Registrant's Report on Form 8-K filed on
                January 31, 2002.)
          21.1  Subsidiaries of the Registrant (incorporated by reference to the
                same numbered Exhibit to the Registrant's Annual Report on Form
                10-K filed March 25, 1999).
          23.1  Consent of Deloitte & Touche LLP.
          23.2  Consent of Haskell & White LLP.
          24.1  Power of Attorney (included as part of the signature page of
                this Annual Report).

     (b)  Reports on Form 8-K.

          There were no reports on Form 8-K filed during the fourth quarter of
          2001.

          On January 31, 2002, the Company filed a Form 8-K relating to the sale
          of the property.

          On January 31, 2002, the Company filed a Form 8-K relating to the
          settlement of litigation matters.


                                     Page 28

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                   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.

                                   PROLONG INTERNATIONAL CORPORATION

March 26, 2002                     By:  /s/  Elton Alderman
                                      ------------------------------------------
                                          Elton Alderman,
                                          President, Chief Executive Officer and
                                          Chairman of the Board
                                          (Principal Executive Officer)

March 26, 2002                     By:  /s/  Nicholas M. Rosier
                                      ------------------------------------------
                                          Nicholas M. Rosier,
                                          Chief Financial Officer
                                          (Principal Financial Officer)





                                     Page 29

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                POWER OF ATTORNEY

     We, the undersigned directors and officers of Prolong International
Corporation. Do hereby constitute and appoint Elton Alderman and Nicholas M.
Rosier, or either of them, with full power of substitution and resubstitution,
our true and lawful attorneys and agents, 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 and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, or their substitutes,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
Annual Report on Form 10-K, including specifically, but without limitation,
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 we do 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.

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>


               Signature                                       Title                              Date
               ---------                                       -----                              ----
<S>                                             <C>                                          <C>
/s/  Elton Alderman                             President,  Chief Executive Officer and       March 26, 2002
----------------------------------------        Chairman of the Board
Elton Alderman                                  (Principal Executive Officer)

/s/  Thomas C. Billstein                        Vice  President  and  Chief   Operating       March 26, 2002
----------------------------------------        Officer, Secretary and Director
Thomas C. Billstein

/s/  Nicholas M. Rosier                         Chief Financial Officer                       March 26, 2002
----------------------------------------        (Principal Financial Officer)
Nicholas M. Rosier

/s/  Richard L. McDermott                       Director                                      March 26, 2002
----------------------------------------
Richard L. McDermott

/s/  Gerry L. Martin                            Director                                      March 26, 2002
----------------------------------------
Gerry L. Martin

/s/  Gregory W. Orlandella                      Director                                      March 26, 2002
----------------------------------------
Gregory W. Orlandella
</TABLE>


                                     Page 30

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

  INDEPENDENT AUDITORS' REPORT

  To the Board of Directors and Stockholders of
    Prolong International Corporation:


  We have audited the accompanying consolidated balance sheet of Prolong
  International Corporation and subsidiaries (the Company) as of December 31,
  2001, and the related consolidated statements of operations, stockholders'
  equity and cash flows for the year then ended. Our audit also included the
  financial statement schedule listed in the Index at Item 14(a)(2) for the year
  ended December 31, 2001. 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 audit.

  We conducted our audit in accordance with auditing standards generally
  accepted in the United States of America. 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
  audit provides a reasonable basis for our opinion.

  In our opinion, such consolidated financial statements present fairly, in all
  material respects, the financial position of Prolong International Corporation
  and subsidiaries as of December 31, 2001, and the results of their operations
  and their cash flows for the year then ended, in conformity with accounting
  principles generally accepted in the United States of America. 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 for the year ended
  December 31, 2001.

  HASKELL & WHITE LLP

  Irvine, California
  March 18, 2002



                 See notes to consolidated financial statement.
                                     Page 31

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
  INDEPENDENT AUDITORS' REPORT

  To the Board of Directors and Stockholders of
    Prolong International Corporation:

  We have audited the accompanying consolidated balance sheet of Prolong
  International Corporation and subsidiaries (the Company) as of December 31,
  2000, and the related consolidated statements of operations, stockholders'
  equity and cash flows for each of the two years in the period ended December
  31, 2000. Our audits also included the financial statement schedule for each
  of the two years in the period ended December 31, 2000, listed in the Index at
  Item 14(a)(2). 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 of America. 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, such consolidated financial statements present fairly, in all
  material respects, the financial position of Prolong International Corporation
  and subsidiaries as of December 31, 2000, and the results of their operations
  and their cash flows for each of the two years in the period ended December
  31, 2000, in conformity with accounting principles generally accepted in the
  United States of America. Also, in our opinion, the related financial
  statement schedule for each of the two years in the period ended December 31,
  2000, when considered in relation to the basic financial statements taken as a
  whole, presents fairly in all material respects the information set forth
  therein.

  DELOITTE & TOUCHE LLP

  Costa Mesa, California
  March 2, 2001



                 See notes to consolidated financial statement.
                                     Page 32

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

  CONSOLIDATED BALANCE SHEETS
  AS OF DECEMBER 31, 2001 AND 2000
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------

                                                                                    2001               2000
  <S>                                                                           <C>                <C>
  ASSETS

  CURRENT ASSETS:
  Cash and cash equivalents                                                     $   466,453        $   126,917
  Accounts receivable, net of allowance for doubtful accounts
    of $461,731 and $168,775 in 2001 and 2000, respectively                       2,485,191          3,245,892
  Inventories, net                                                                  691,921            970,236
  Prepaid expenses, net                                                             145,107            360,227
  Income taxes receivable                                                               ---             87,002
  Prepaid television time                                                               ---              5,583
  Advances to employees, current portion                                             31,578             57,525
  Deferred tax assets                                                               877,455            943,177
                                                                                -----------        -----------

      Total current assets                                                        4,697,705          5,796,559

  Property and equipment, net (Note 9)                                            2,879,094          3,193,109

  Intangible assets, net                                                          6,558,007          6,529,986

  Deferred tax assets, noncurrent                                                 2,349,552          1,972,387

  Investment in affiliate                                                           224,997                ---

  Other assets                                                                      232,042            223,159
                                                                                -----------        -----------

  TOTAL ASSETS                                                                  $16,941,397        $17,715,200
                                                                                ===========        ===========
</TABLE>





                 See notes to consolidated financial statement.
                                     Page 33

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000 (Continued)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                         2001           2000
<S>                                                                  <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                                                      $2,647,266     $2,183,482
Accrued expenses                                                         416,203        937,618
Line of credit                                                         1,728,868      2,050,716
Notes payable, current                                                    53,974        725,442
                                                                     ------------    -----------

    Total current liabilities                                          4,846,311      5,897,258

Deposits under building sales contract (Note 9)                        1,223,265            --

Notes payable, noncurrent                                              2,230,359      2,277,130
                                                                     ------------    -----------

COMMITMENTS AND CONTINGENCIES (Note 14)

STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 50,000,000 shares authorized;
  no shares issued or outstanding                                            --             --
Common stock, $0.001 par value; 150,000,000 shares authorized;
  29,789,598 and 28,438,903 shares issued and outstanding in 2001
  and 2000, respectively                                                  29,789         28,439
Additional paid-in capital                                            15,137,105     15,035,261
Accumulated deficit                                                   (6,525,432)    (5,522,888)
                                                                     ------------    -----------

    Total stockholders' equity                                         8,641,462      9,540,812
                                                                     ------------    -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $16,941,397    $17,715,200
                                                                     ============   ============
</TABLE>


                 See notes to consolidated financial statement.
                                     Page 34

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------

                                                      2001             2000                 1999
<S>                                             <C>                <C>                 <C>
NET REVENUES                                      $13,640,667      $19,080,218          $34,470,915

COST OF GOODS SOLD                                  4,345,451        5,257,600           10,500,586
                                                -------------      -----------         ------------

GROSS PROFIT                                        9,295,216       13,822,618           23,970,329

OPERATING EXPENSES:
Selling and marketing expenses                      6,335,810       10,631,959           25,850,474
General and administrative expenses                 3,669,122        4,709,504            7,645,321
Research and development                               47,628          104,089              305,297
                                                -------------     -------------       -------------

  Total operating expenses                         10,052,560       15,445,552           33,801,092
                                                -------------     -------------       -------------

OPERATING (LOSS) INCOME                             (757,344)       (1,622,934)         (9,830,763)

OTHER INCOME (EXPENSE), net:
Interest expense                                    (550,825)         (538,802)           (454,142)
Interest income                                        8,483            12,213              10,918
                                                -------------     -------------       -------------

  Total other income (expense)                      (542,342)         (526,589)           (443,224)
                                                -------------     -------------       -------------

(LOSS) INCOME BEFORE (BENEFIT) PROVISION
  FOR INCOME TAXES                                (1,299,686)       (2,149,523)        (10,273,987)


(BENEFIT) PROVISION FOR INCOME TAXES                (297,142)         (497,245)         (3,693,926)
                                                -------------     -------------       -------------


NET (LOSS) INCOME                               $ (1,002,544)     $ (1,652,278)       $ (6,580,061)
                                                =============     =============       =============

NET (LOSS) INCOME PER SHARE:
Basic                                                $ (0.04)          $ (0.06)             $(0.23)
                                                     ========          ========             =======

Diluted                                              $ (0.04)          $ (0.06)             $(0.23)
                                                     ========          ========             =======


WEIGHTED AVERAGE COMMON SHARES:
Basic                                              28,442,604        28,442,341          28,445,835
                                                   ==========        ==========          ==========
Diluted                                            28,442,604        28,442,341          28,445,835
                                                   ==========        ==========          ==========
</TABLE>


                 See notes to consolidated financial statement.
                                     Page 35

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                     Retained
                                                             Common stock          Additional        earnings           Total
                                                    ---------------------------      paid-in       (Accumulated      stockholders'
                                                        Shares         Amount        capital         (deficit)          equity

<S>                                                   <C>             <C>          <C>              <C>               <C>
BALANCES, December 31, 1998                           28,445,835      $28,446      $14,716,438      $ 2,709,451       $17,454,335

Compensation costs related to options                        --           --            92,911              --             92,911
Net loss                                                     --           --               --        (6,580,061)       (6,580,061)
                                                      ----------     --------      -----------      ------------     -------------


BALANCES, December 31, 1999                           28,445,835       28,446       14,809,349       (3,870,610)       10,967,185

Shares exchanged as collection for accounts receivable    (6,932)          (7)          (3,459)             --             (3,466)
Compensation costs related to options                        --           --            61,000              --             61,000
Issuance of warrants to lender                               --           --           168,371              --            168,371
Net loss                                                                                             (1,652,278)       (1,652,278)
                                                      ----------     --------      -----------      ------------     -------------

BALANCES, December 31, 2000                           28,438,903       28,439       15,035,261       (5,522,888)        9,540,812

Compensation costs related to options                        --           --             8,646              --              8,646
Issuance of common stock shares from EPL settlement    1,350,695        1,350           93,198              --             94,548
Net loss                                                     --           --               --        (1,002,544)       (1,002,544)
                                                      ----------     --------      -----------      ------------     -------------

BALANCES, December 31, 2001                           29,789,598     $ 29,789      $15,137,105     $ (6,525,432)       $8,641,462
                                                      ==========     ========      ===========     =============       ==========
</TABLE>


                 See notes to consolidated financial statement.
                                     Page 36

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------

                                                                                2001                2000             1999
<S>                                                                          <C>                 <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                     $1,002,544)         $1,652,278)      $6,580,061)

Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                                 838,601             886,334          872,088
  Provision for doubtful accounts                                               292,956            (220,957)        (190,268)
  Deferred taxes                                                               (311,443)          1,247,116       (3,659,244)
  Reserve for inventory obsolescence                                                --              (65,185)         884,024
  Reserve for other assets                                                          --                  --           581,713
  Loss on exchange of common stock received for accounts receivable                 --               (3,466)             --
  Compensation costs related to options                                           8,646              61,000           92,911
  Issuance of warrants to lender                                                140,309              28,062              --
  Changes in assets and liabilities, net of effects of acquisition:
    Accounts receivable                                                          27,588            (277,476)       2,392,864
    Inventories                                                                 278,315           1,266,677         (140,503)
    Prepaid expenses                                                             74,811             (37,272)         552,084
    Income taxes receivable                                                      87,003               7,273          350,096
    Prepaid television time                                                       5,583              (5,583)         627,050
    Other assets                                                                (11,785)             (6,674)         (26,298)
    Accounts payable                                                            463,784            (660,361)         965,425
    Accrued expenses                                                           (521,416)           (272,508)        (250,037)
                                                                             ----------          ----------       ----------

      Net cash provided by (used in) operating activities                       370,408             294,702       (3,528,156)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                             (12,152)             (7,083)        (535,571)
Employee advances                                                                23,099              49,725           90,107
Investment in affiliate                                                        (224,997)                --               --
                                                                             ----------          ----------       ----------

      Net cash (used in) provided by investing activities                      (214,050)             42,642         (445,464)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable                                                          --              675,000              --
Payments on notes payable                                                      (718,239)            (45,922)         (44,462)
Net (payments) proceeds from line of credit                                    (321,848)         (1,934,284)       3,985,000
Deposits under building sales contract                                        1,223,265                 --               --
                                                                             ----------          ----------       ----------

      Net cash provided by (used in) financing activities                       183,178          (1,305,206)       3,940,538
                                                                             ----------          ----------       ----------
</TABLE>


                 See notes to consolidated financial statement.
                                     Page 37

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
--------------------------------------------------------------------------------


                                             2001         2000         1999


NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                     $339,536   $ (967,862)  $  (33,082)

CASH AND CASH EQUIVALENTS,
  Beginning of year                         126,917    1,094,779    1,127,861
                                           --------   ----------   ----------

CASH AND CASH EQUIVALENTS, end of year     $466,453   $  126,917   $1,094,779
                                           ========   ==========   ==========
SUPPLEMENTAL DISCLOSURES -
  Cash paid during the year for:

    Income taxes                           $ 13,600   $   92,000   $      --
                                           ========   ==========   ==========
    Interest                               $550,825   $  538,802   $  454,142
                                           ========   ==========   ==========

SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2001, the Company completed the following transactions:
     Recorded $8,646 to additional paid-in capital for compensation costs
     related to stock options. Issued 1,350,695 shares of common stock valued at
     $94,548 as additional consideration for the business assets of EPL
     Pro-Long, Inc. and increased the purchase price of the acquisition by
     $440,157 for waiver of accrued expenses.

During 2000, the Company completed the following transactions:
     Recorded $61,000 to additional paid-in capital for compensation cost
     related to options. Recorded the exchange of 6,932 shares of common stock
     held by a customer for relief of accounts receivable. Recorded $168,371 to
     additional paid-in capital for issuance of warrants to a lender.

During 1999, the Company completed the following transaction:
     Recorded $92,911 to additional paid-in capital for compensation costs
     related to options.


                 See notes to consolidated financial statement.
                                     Page 38

<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1998
--------------------------------------------------------------------------------

1.   BUSINESS

     Prolong International Corporation (PIC) is a Nevada corporation organized
     on August 24, 1981 as Giguere Industries Incorporated (Giguere). PIC
     remained dormant from 1987 to June 21, 1995, when, pursuant to a
     stockholders' action, it acquired 100% of the outstanding stock of Prolong
     Super Lubricants, Inc., a Nevada corporation (PSL), then changed its name
     to Prolong International Corporation. The transaction was treated as a
     reverse acquisition and was accounted for under the purchase method of
     accounting; however, there were no material assets acquired or liabilities
     assumed. In 1997, Prolong Foreign Sales Corporation was formed as a
     wholly-owned subsidiary of PIC. In 1998, Prolong International Holdings
     Ltd. was formed as a wholly-owned subsidiary of PIC. At the same time,
     Prolong International Ltd. was formed as a wholly-owned subsidiary of
     Prolong International Holdings Ltd.

     PIC, through its subsidiaries, is engaged in the manufacture, sale and
     worldwide distribution of a patented complete line of high-performance and
     high-quality lubricants and appearance products.

     Management's Plans Regarding Financial Results and Liquidity - During 2000
     and 2001, the Company incurred net losses of approximately $1.7 million and
     $1.0 million respectively, and at December 31, 2001, had an accumulated
     deficit of approximately $6,525,000. The Company incurred significant
     expenses in 1999 to launch its new appearance products and to expand its
     distribution to premier automotive aftermarket retailers. Additionally, the
     Company incurred significant legal expenses and recorded reserves for
     inventories, other assets and accounts receivable. During 2000 and 2001,
     the Company suffered a major decline in revenues attributable to a soft
     market for specialty lubricants and also due to the decision to discontinue
     the direct response infomercial for lubricants in lieu of an ongoing
     evaluation of more cost-effective means of promoting the line. Also, the
     demand for the appearance products declined as a result of a shift in
     advertising strategies to accommodate the realities of a marketplace in
     which the Company was not able to spend as much as it would like on
     cost-effective promotional activities to promote this product line. The
     Company is continuing an ongoing evaluation in Year 2002 of the market
     acceptance of the appearance product line. Also, at December 31, 2001, the
     Company was in default with certain financial covenants under the line of
     credit with its lender.

     As a result, the Company initiated vigorous expense-reduction strategies
     during the Year 2000 and 2001. During 2001, the Company reduced headcount,
     discontinued certain endorsement and sponsorship contracts and aggressively
     reduced sales and general administrative expenses. The Company anticipates
     realizing the full impact of these expense reductions in 2002.
     Additionally, the Company improved its credit and collections function and
     worked with its vendors to extend payment terms wherever possible. The
     Company's business plan for 2002 provides for positive cash generation from
     operations and the Company has initiated an "Accounts Payable Discounted
     Debt Restructure Program", which if successful is expected to reduce the
     accounts payable balance at December 31, 2001 by approximately $1,300,000
     in aged payables. The funds needed for this program are currently being
     negotiated through a subordinated debt plan. If these measures are not
     adequate, the Company will pursue further headcount reduction as well as
     other expense reductions. The Company also is redirecting its focus on
     sales strategies, which promote the core lubricant product line. The
     Company is currently seeking additional new financing arrangements through
     senior secured debt, subordinated debt and/or equity providers. Management
     believes that these plans will provide adequate financial resources to
     sustain the Company's operations and enable the Company to continue as a
     going concern.

2.   SUMMARY OF SIGNATURE ACCOUNTING POLICIES

     Basis of Presentation - The accompanying consolidated financial statements,
     prepared in accordance with accounting principles generally accepted in the
     United Sates of America, include the accounts of PIC and its wholly-owned
     subsidiaries, PSL, Prolong Foreign Sales Corporation, Prolong International
     Holdings Ltd. and its wholly-owned subsidiary, Prolong International Ltd.
     (collectively, the Company or Prolong). All intercompany accounts and
     transactions have been eliminated in consolidation.

     Cash and Cash Equivalents - Cash and cash equivalents consist of all
     highly-liquid, short-term investments with an original maturity of three
     months or less.


                                       Page 39

<PAGE>

     Accounts Receivable - The Company reviews a potential customer's credit
     history before extending credit and generally does not require collateral.
     The Company establishes an allowance for doubtful accounts based on factors
     surrounding the credit risk of specific customers, historical trends and
     other information.

     Inventories - Inventories are valued at the lower of cost (determined on
     the first-in, first-out basis) or market. The Company has a contract with
     an outside company to supply the Company's primary lubricant product,
     anti-friction metal treatment (AFMT), which is used in many of the
     Company's lubricant products. Currently, the Company utilizes only one
     manufacturer to produce the AFMT product, which is then bottled and
     packaged by other contract vendors. Although there are facilities located
     throughout the world that are capable of producing this particular patented
     product, a change in suppliers could cause a delay in production of this
     product and a possible loss of sales, which would adversely affect the
     Company's operating results.

     Prepaid Expenses - Prepaid expenses include $38,641 and $38,641 at December
     31, 2001 and 2000, respectively, in advance promotions paid to an entity
     previously affiliated with officers of the Company. Amounts are expensed
     when promotional activities occur.

     Capitalized Infomercial Production Costs - The Company capitalizes certain
     incremental direct costs and payroll-related costs associated with its
     infomercial production. Capitalized amounts related thereto are expensed
     over the lesser of six months or the estimated economic life beginning at
     the time of the first public showing of the infomercial. The Company
     expensed $0, $123,848 and $529,942 for production costs in 2001, 2000 and
     1999, respectively.

     Prepaid Television Time - The Company capitalizes the cost of purchasing a
     time slot for the airing of infomercials. Upon the airing of the
     infomercial, the related cost is expensed. During 2001, 2000 and 1999, the
     total amounts expensed for television time were $2,279, $431,293 and
     $5,668,818, respectively. As of December 31, 2001 and 2000, prepaid
     television time was $0 and $5,583 respectively.

     Property and Equipment - Property and equipment are stated at cost, less
     accumulated depreciation and amortization. Depreciation and amortization
     are computed using the straight-line method over the estimated useful lives
     of the assets, which are as follows:

             Automotive equipment                5 years
             Building improvements               7 years
             Building                           30 years
             Computer equipment                  3 years
             Exhibit equipment                   3 years
             Furniture and fixtures              7 years
             Machinery equipment                 7 years
             Molds and dies                      3 years
             Office equipment                    5 years

     When assets are retired or otherwise disposed of, the cost and the related
     accumulated depreciation are removed from the accounts and any resulting
     gain or loss is recognized in operations for the period. Renewals and
     betterments, which extend the life of an existing asset, are capitalized,
     while normal repairs and maintenance costs are expensed as incurred.

     Intangible Assets - Intangible assets are comprised of the patents,
     licenses, trade secrets, trademarks, service marks and other such assets
     acquired from EPL Pro-Long, Inc. (Note 5). These assets are being amortized
     over a period of fifteen years.

     Other Assets - Other assets are comprised of trademarks, which are being
     amortized over five years, deposits, and long-term employee advances.

     Research and Development Expenses - Research and development expenses
     consist primarily of salaries, contract labor and lab testing fees to
     develop new products. All such costs are expensed in the year incurred.

     Long-Lived Assets - The Company accounts for the impairment and disposition
     of long-lived assets in accordance with Statements of Financial Accounting
     Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS
     No. 121, long-lived assets to be held are reviewed whenever events or
     changes in circumstances indicate that their carrying value may not be
     recoverable. The Company reviews the carrying value of long-lived assets to
     determine whether or not an impairment to such value has occurred. Based on
     the Company's analysis at December 31, 2001, there was no impairment of
     long-lived assets.


                                       Page 40

<PAGE>

     Fair Value of Financial Instruments - SFAS No. 107, Disclosures About Fair
     Value of Financial Instruments, requires management to disclose the
     estimated fair value of certain assets and liabilities defined by SFAS No.
     107 as financial instruments. Financial instruments are generally defined
     by SFAS No. 107 as cash and cash equivalents, evidence of ownership
     interest in equity, or a contractual obligation that both conveys to one
     entity a right to receive cash or other financial instruments from another
     entity and imposes on the other entity the obligation to deliver cash or
     other financial instruments to the first entity. At December 31, 2001 and
     2000, management believes that the carrying amounts of cash and cash
     equivalents, accounts receivable, accounts payable, other current
     liabilities, and notes payable approximate fair value because of the short
     maturity of these financial instruments.

     Accounting For Income Taxes - The Company follows SFAS No. 109, Accounting
     for Income Taxes, which requires the recognition of deferred tax
     liabilities and assets for the expected future tax consequences of events
     that have been included in the financial statements or tax returns. Under
     this method, deferred tax liabilities and assets are determined based on
     the differences between the financial statements and the tax bases of
     assets and liabilities using enacted rates in effect for the year in which
     the differences are expected to reverse. Valuation allowances are
     established, when necessary, to reduce deferred tax assets to the amount
     expected to be realized.

     Revenue Recognition - Revenue is recognized when products are shipped and
     title transfers.

     Revenue is also recognized under an arrangement whereby customers
     responding to television infomercials agree to an upsell. An upsell is a
     transaction where the customer purchases the advertised product and also
     purchases one or more additional items, all in one transaction. Revenue
     from products sold under the upsell arrangement is recognized upon shipment
     of the related products. For the years ended December 31, 2001, 2000 and
     1999, revenues under this arrangement were $4,900, $10,915 and $189,380
     respectively.

     Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
     Comprehensive Income. This statement establishes standards for the
     reporting of comprehensive income and its components. Comprehensive income,
     as defined, includes all changes in equity (net assets) during a period
     from non-owner sources. For each of the years ended December 31, 2001, 2000
     and 1999, there was no difference between net (loss) income and
     comprehensive (loss) income.

     Net (Loss) Income Per Share - The Company has adopted SFAS No. 128,
     Earnings per Share, which replaces the presentation of "primary" earnings
     per share with "basic" earnings per share and the presentation of "fully
     diluted" earnings per share with "diluted" earnings per share. All
     previously reported earnings per share amounts have been restated based on
     the provisions of the new standard. Basic earnings per share are based upon
     the weighted average number of common shares outstanding. Diluted earnings
     per share amounts are based upon the weighted average number of common and
     common-equivalent shares for each period presented. Common-equivalent
     shares include stock options assuming conversion under the treasury stock
     method. For the years ended December 31, 2001 and 2000, no options or
     warrants were included as common stock equivalents, as their effect would
     be antidilutive.

     Use of Estimates - The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America, requires management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amounts of revenues and expenses during the reporting period.
     Actual results could differ from those estimates.

     Reclassifications - Certain reclassifications have been made to the prior
     year amounts to conform with the 2001 presentation.

     Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
     Compensation, requires the determination and disclosure of compensation
     costs implicit in stock option grants or other stock rights. The Company
     has adopted certain required provisions of this standard for nonemployee
     transactions. Under the employee transaction provisions, companies are
     encouraged, but not required, to adopt the fair value of accounting for
     employee stock-based transactions. Companies are also permitted to continue
     to account for such transactions under Accounting Principles Board (APB)
     Opinion No. 25, Accounting for Stock Issued to Employees, but are required
     to disclose in a note to the financial statements pro forma net income and
     income per share as if the Company had adopted SFAS No. 123. The Company
     will continue to account for employee stock-based compensation under APB
     Opinion No. 25.


                                       Page 41

<PAGE>

     Accounting for Derivative Instruments and Hedging Activities - SFAS No.
     133, as amended, established accounting and reporting standards for
     derivative instruments, including certain derivative instruments embedded
     in other contracts and for hedging activities. Under SFAS No. 133, certain
     contracts that were not formerly considered derivatives may now meet the
     definition of a derivative. The Company adopted SFAS No. 133 effective
     January 1, 2001, and the statement did not have a significant impact on the
     financial position, results of operations, or cash flows of the Company.

     Freight Costs and Reimbursements of Freight Costs - In accordance with
     Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling
     Fees and Costs, reimbursements of freight charges are recorded in sales in
     the accompanying consolidated statements of operations. For the years ended
     December 31, 2001, 2000 and 1999, freight-out costs amounting to $607,240,
     $812,353, and $1,516,754, respectively, have been recorded in selling and
     marketing expenses in the accompanying consolidated statements of
     operations.

     Business Combinations - SFAS No. 142, Goodwill and Other Intangible Assets
     - SFAS 141 requires that the purchase method of accounting be used for all
     business combinations initiated after September 30, 2001 and prohibits the
     use of the pooling-of-interests method. SFAS 142 changes the accounting for
     goodwill from an amortization method to an impairment-only approach. The
     amortization for goodwill from past business combinations will cease upon
     adoption of this Statement on December 31, 2001. Goodwill and intangible
     assets acquired in business combinations completed after September 30, 2001
     must comply with the provisions of this Statement. Also under this
     Statement, companies will be required to evaluate all existing goodwill for
     impairment within six months of adoption by comparing the fair value of
     each reporting unit to its carrying value at the date of adoption. Any
     transitional impairment losses will be recognized in the first interim
     period in the year of adoption and will be recognized as the effect of a
     change in accounting principle.

     Accounting for the Impairment or Disposal of Long-Lived Assets. - SFAS No.
     144 addresses significant issues relating to the implementation of SFAS
     No.121, "Accounting for the Impairment of Long-Lived Assets and for
     Long-Lived Assets to Be Disposed Of," and develops a single accounting
     model, based on the framework established in SFAS No. 121 for long-lived
     assets to be disposed of by sale, whether such assets are or are not deemed
     to be a business. SFAS No. 144 also modifies the accounting and disclosure
     rules for discontinued operations. The standard was adopted on January 1,
     2002, and is not expected to have a material effect on the financial
     statements except that any future discontinued operations may be presented
     in the financial statements differently under the new rules as compared to
     the old rules.

3.   INVENTORIES

     Inventories at December 31, 2001 and 2000 consist of the following:
<TABLE>
<CAPTION>
                                                                          2001              2000
     <S>                                                                <C>             <C>
     Raw materials                                                    $  353,065         $  668,612
     Finished goods                                                      423,564          1,245,463
     Obsolescence reserve                                                (84,708)          (943,839)
                                                                        --------         ----------

                                                                      $  691,921         $  970,236
                                                                        ========         ==========
</TABLE>

4.   PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 2001 and 2000 consist of the
following:
<TABLE>
<CAPTION>
                                                                          2001               2000
     <S>                                                              <C>                <C>
     Building and improvements under contract for sale (Note 9)       $2,280,783         $2,280,783
     Computer equipment                                                  265,964            272,978
     Office equipment                                                     55,753             55,753
     Furniture and fixtures                                              585,168            585,168
     Automotive equipment                                                 35,925             35,925
</TABLE>


                                     Page 42

<PAGE>
<TABLE>
<CAPTION>
     <S>                                                              <C>                <C>
     Exhibit equipment                                                   115,143            115,143
     Machinery and equipment                                              17,953             17,953
     Molds and dies                                                      233,117            213,951
                                                                      ----------         ----------

                                                                       3,589,806          3,577,654
       Less accumulated depreciation                                  (1,248,712)          (922,545)
                                                                      ----------         ----------

                                                                       2,341,094          2,655,109
       Land under contract for sale (Note 9)                             538,000            538,000
                                                                      ----------         ----------

                                                                      $2,879,094         $3,193,109
                                                                      ==========         ==========
</TABLE>

5.   ACQUISITION OF EPL PRO-LONG, INC.

     Prior to February 5, 1998, the Company was subject to a license agreement
     with EPL Pro-Long, Inc., which required the Company to pay royalties of
     3.5% of sales (as defined) of the Company's products that utilized certain
     proprietary technology, trademarks and copyrights. The agreement also
     called for an initial one-time license fee of $106,190.

     On February 5, 1998, the Company entered into a definitive agreement to
     purchase the assets of EPL Pro-Long, Inc. (EPL), which includes the patents
     for lubrication technology previously under license to the Company, in
     exchange for 2,981,035 shares of the Company's common stock and the
     assumption of certain liabilities. The total purchase price ascribed to the
     transaction was $7,604,886 (see Note 14). Following regulatory and EPL
     shareholder approval, the transaction closed on November 20, 1998. This
     business combination was accounted for as a purchase.

     The $7,604,886 purchase price was assigned to the net assets acquired based
     on the fair values of such assets and liabilities at the date of closing.
     The excess of cost and liabilities assumed over tangible assets acquired,
     which includes the patents, trademarks, secret marks and other such assets,
     was recorded as intangible assets.

     On December 28, 2001 the Company issued 1,350,695 shares of common stock
     valued at $94,548 as additional consideration for the business assets of
     EPL Pro-Long, Inc. and increased the purchase price of the acquisition by
     $440,157 for waiver of accrued expenses. The intangible assets are being
     amortized over fifteen years from the date of the close of the transaction
     using a straight-line method. Amortization expense for 2001 and 2000 was
     $506,684 and $506,684, respectively, resulting in accumulated amortization
     of $1,576,967 and $1,070,283 as of December 31, 2001 and 2000,
     respectively.

6.   ACCRUED EXPENSES

     Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
                                                                           2001            2000
     <S>                                                              <C>                <C>
       Accrued royalties                                               $  61,955         $ 13,113
       Accrued legal expenses                                            118,124          410,792
       Payroll and payroll taxes                                         128,744          177,902
       Accrued commissions                                                63,362           57,588
       Purchase commitments                                                  ---          263,907
       Other                                                              44,018           14,316
                                                                       ---------         --------

                                                                       $ 416,203         $937,618
                                                                       =========         ========
</TABLE>

7.   NOTES PAYABLE

     During 1998, the Company obtained loans (items a. and b. below) for the
     financing of the purchase of its office and warehouse facility. On October
     30, 2000 the Company entered into a loan agreement which is




                                     Page 43

<PAGE>

     collateralized by a Third Priority Trust Deed lien against the Company's
     real property in Irvine, CA. The terms of the loans and outstanding
     balances as of December 31 are as follows:
<TABLE>
<CAPTION>

                                                                                       2001               2000
     <S>                                                                            <C>               <C>
     a)   Note payable to a bank bearing interest at 7.875% per annum to be
          repaid in monthly principal and interest payments of $13,050 with a
          final payment of all remaining unpaid principal and interest due on
          May 1, 2008.                                                              $1,609,057          $1,629,383

     b)   Loan from CDC Small Business Finance Corporation bearing interest at
          7.65% per annum to be repaid in monthly principal and interest
          payments of $6,376 through July 1, 2018.                                     675,276             698,189

     c)   Loan from ABQ Dolphin LP; interest is payable monthly at the rate of
          the prime rate (4.75% at December 31, 2001) plus 2.5%. The loan had a
          maturity date of October 30, 2001 and the option to extend for one
          additional year was exercised on October 8, 2001. In connection with
          this loan, the Company issued a warrant to purchase 900,000 shares of
          common stock at an exercise price of $0.1875, which was re-priced to
          $0.10 on December 31, 2001. The loan was assumed by an outside entity
          on December 31, 2001 (See Note 9).                                               ---             675,000
                                                                                    ----------          ----------
                                                                                     2,284,333           3,002,572
          Less current maturities                                                      (53,974)           (725,442)
                                                                                    ----------          ----------
                                                                                    $2,230,359          $2,277,130
                                                                                    ==========          ==========
          Borrowings have the following scheduled maturities:
          Year ending December 31:
          2002                                                                      $   53,974
          2003                                                                          57,969
          2004                                                                          61,909
          2005                                                                          66,856
          2006                                                                          71,824
          Thereafter                                                                 1,971,801
                                                                                    ==========
                                                                                    $2,284,333
</TABLE>
     As described in Note 9, on December 31, 2001, the Company sold its
     corporate headquarters that collateralized the notes payable described in
     items a) and b) above. Per the terms of the related notes payable
     agreements, such a sale transaction is defined as an event of default, and
     accordingly, the related note holders have the option of calling all
     outstanding amounts immediately due and payable. However, management and
     the buyer of the property are currently in negotiations with the related
     creditors to arrange legal assumptions of the notes payable by the property
     purchaser, or alternatively, to arrange for the property purchaser's buyout
     of the related notes payable. Based on written and electronic
     communications between the negotiating parties, management believes that it
     is probable that these notes payable will ultimately be assumed or
     purchased by the buyer of the property. As a result, the Company has not
     presented the entire balance of these notes payable as current liabilities
     in the accompanying December 31, 2001 consolidated balance sheet.


8.   LINE OF CREDIT

     The Company had a $5,000,000 credit facility with a financial institution,
     expiring in May 2003. Such facility is collateralized by eligible accounts
     receivable and inventories. Interest is currently payable monthly at the
     default rate of the financial institution's prime rate (4.75% at December
     31, 2001), plus 7% subject to a minimum interest charge of $50,000 per
     quarter. At the request of the Company, effective February 7, 2002, the
     credit facility was reduced to $3,000,000. The credit facility contains
     certain defined net income and tangible net worth financial covenants. At
     December 31, 2001, the Company was in default with certain financial
     covenants under the credit agreement. The Company is currently discussing
     remedies with the lender and is also actively pursuing a replacement senior
     secured lender with additional subordinated debt. As of December 31, 2001,
     $1,728,868 was outstanding and approximately $36,791 was available under
     the terms of the line of credit.

9.   DEPOSITS UNDER BUILDING SALES CONTRACT

     On December 31, 2001, Prolong Super Lubricants, Inc. (PSL) sold its 6
     Thomas, Irvine, CA headquarters building to an investment group for
     $3,675,000. The buyers made a cash down payment of approximately
     $1,138,667, took "subject to" the existing 1st trust deed in favor of Bank
     of America, FSB in the amount of $1,609,057, took "subject to" the 2nd
     trust deed in favor of CDC Small Business Finance in the amount of
     $675,276, and legally assumed the 3rd trust deed loan in favor of ABQ
     Dolphin LP in the amount of approximately $252,000. From the cash down
     payment received by PSL, $423,000 was applied as a principal payment on the
     ABQ Dolphin LP 3rd trust deed loan. The buyer intends to either assume the
     existing first


                                     Page 44

<PAGE>

     and second trust deed loans of record, contingent upon lender approval, or
     alternatively, the buyer will secure a new loan secured by a first deed of
     trust, paying off the three existing loans of record. Until the existing
     first and second trust deed loans are legally assumed by the buyer, PSL
     remains obligated on the loans in the event of a default on the loans by
     the buyer, and PIC remains contingently liable as a guarantor of the
     obligations. Until the 3rd trust deed loan in favor of ABQ Dolphin LP is
     paid off by the buyer, which loan matures on December 31, 2002, PSL remains
     contingently liable as a guarantor of the loan.

     The gain on the sale of the building in the amount of approximately
     $1,223,000, which is reflected on the December 31, 2001 Balance Sheet under
     "Deposits on Building Under Sales Contract", will be recognized in a future
     period when the Company is legally and contractually relieved from these
     liabilities.

     At the closing of the sale of its headquarters building, PSL entered into a
     lease for the premises from the buyer of the building for a period of sixty
     months on the lower floor, and eighteen months on the upper floor, and
     continued its business operations in the building.

     The lease for the lower floor encompasses approximately 14,155 square feet
     of office and warehouse space at a base rent as scheduled below, plus
     payment of actual operating expenses (NNN) related thereto:

        Jan 1, 2002 to Dec 31, 2002: $16,986 per month   $203,832 annually.
        Jan 1, 2003 to Dec 31, 2003: $17,496 per month   $209.952 annually.
        Jan 1, 2004 to Dec 31, 2004: $18,021 per month   $216,252 annually.
        Jan 1, 2005 to Dec 31, 2005: $18,562 per month   $222,744 annually.
        Jan 1, 2006 to Dec 31, 2006: $19,119 per month   $229,428 annually.

     The lease includes an option to extend the term of this lease for one (1)
     additional sixty (60) month period.

     On January 5, 2002, PSL subleased a portion of the office space located on
     the lower floor of the premises to One Source Industries, Inc. for a
     minimum period of six months at a monthly rent of $9,960, or $59,760 for
     the minimum six month term.

     The lease for the upper floor encompasses approximately 15,505 square feet
     of office space at a base rent as scheduled below, plus payment of actual
     operating expenses (NNN) related thereto:

        Jan 1, 2002 to Dec 31, 2002: $13,014 per month   $156,158 annually.
        Jan 1, 2003 to Jun 30, 2003: $13,404 per month;  $ 80,424 one half year.

     Lessor may cancel the lease upon thirty (30) days written notice to lessee.

10.  STOCKHOLDERS' EQUITY

     During 2001, the Company issued 1,350,695 shares of common stock at a per
     share price of $0.07 as additional consideration for the business assets of
     EPL Pro-Long, Inc. (See Note 14).

     During 2000, the Company recorded the exchange of 6,932 shares of common
     stock held by a customer for relief of accounts receivable.

11.  STOCK OPTIONS

     Effective June 4, 1997, the Company adopted the Prolong International
     Corporation 1997 Stock Incentive Plan (the Plan). Under the Plan, the
     Company may grant nonqualified or incentive stock options for the benefit
     of qualified employees, officers, directors, consultants and other service
     providers. A total of 2,500,000 shares of the Company's common stock may be
     issued under the Plan. The term of the option is fixed by the administrator
     of the Plan, but no option may be exercisable more than 10 years after the
     date of grant.


                                     Page 45

<PAGE>

     Stock option activity is as follows:
<TABLE>
<CAPTION>

                                                                                                      Weighted
                                                                                                       average
                                                                                    Shares under   exercise price
                                                                                       option         per share
     <S>                                                                           <C>             <C>
     OUTSTANDING, December 31, 1998                                                  1,405,244        $ 2.07
       Granted                                                                         827,000        $ 0.65
       Canceled                                                                         (2,876)       $(2.00)
       Exercised                                                                           ---          ----
                                                                                    ----------

     OUTSTANDING, December 31, 1999                                                  2,229,368         $1.55
       Granted                                                                         255,000         $0.57
       Canceled                                                                       (303,007)       $(1.29)
       Exercised                                                                           ---          ----
                                                                                    ----------

     OUTSTANDING, December 31, 2000                                                  2,181,361         $1.47
       Granted                                                                         320,000         $0.22
       Canceled                                                                     (1,587,861)       $(1.76)
       Exercised                                                                           ---          ----
                                                                                    ----------

     OUTSTANDING, December 31, 2001                                                    913,500         $0.51
                                                                                    ==========
</TABLE>

     Outstanding options vest over periods ranging from one to five years.
     During 2001 and 2000, the Company issued 110,000 and no options
     respectively to outside consultants. During 2001 and 2000, the Company
     recorded approximately $3,200 and $61,000 in compensation costs related to
     the partial vesting of options granted to outside consultants with vesting
     periods during 2001 and 2000 respectively.

     As of December 31, 2001 and 2000, options to purchase 424,250 and 1,095,616
     respectively, shares of common stock were exercisable.

     The Company applies APB Opinion No. 25, Accounting for Stock Issued to
     Employees, and related interpretations to account for stock options. Had
     compensation cost for the stock options been determined based on the fair
     value at the grant date consistent with the method of SFAS No. 123,
     Accounting for Stock- Based Compensation, the Company's net (loss) income
     would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                 2001             2000              1999
     <S>                                                    <C>               <C>              <C>
     Net (loss) income, as reported                         $ (1,002,544)     $ (1,652,278)     $ (6,580,061)
     Net (loss) income, pro forma                           $ (1,177,454)     $ (2,258,278)     $ (7,031,336)
     Net (loss) per share, as reported:
       Basic                                                   $ (0.04)          $(0.06)           $(0.23)
       Diluted                                                 $ (0.04)          $(0.06)           $(0.23)
     Pro forma net (loss) income per share:
       Basic                                                   $ (0.04)          $(0.08)           $(0.25)
       Diluted                                                 $ (0.04)          $(0.08)           $(0.25)
</TABLE>

     The fair value of options granted was estimated on the date of grant using
     the Black-Scholes option-pricing model with the following weighted average
     assumptions: no dividend yield, expected volatility range of 71.46% to
     355.70%, risk-free interest rate of 5.0%, and an expected life of 7.5
     years.


                                     Page 46

<PAGE>

12.  INCOME TAXES

     The (benefit) provision for income taxes consists of the following for the
     years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
                                                                     2001            2000            1999
     <S>                                                          <C>             <C>            <C>
     Current:
       Federal                                                    $     ---       $(216,766)     $   (21,990)
       State                                                          1,600         310,938          (12,692)
                                                                  ---------       ---------      -----------

                                                                      1,600          94,172          (34,682)

     Deferred:
       Federal                                                     (250,039)       (292,208)      (3,406,716)
       State                                                        (48,703)       (299,209)        (252,528)
                                                                  ---------       ---------      -----------

                                                                   (298,742)       (591,417)      (3,659,244)
                                                                  ---------       ---------      -----------

                                                                  $(297,142)      $(497,245)     $(3,693,926)
                                                                  =========       =========      ===========
</TABLE>

     The (benefit) provision for income taxes differs from the amount that would
     result from applying the federal statutory rate, as follows for the years
     ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
                                                                     2001            2000            1999
     <S>                                                          <C>             <C>            <C>
     Federal statutory income tax rate                            $(375,016)      $(742,511)     $(3,595,895)
     State income taxes, net of federal benefit                     (32,144)          7,624         (172,394)
     Non-deductible goodwill                                        149,500             ---              ---
     Subpart F income (loss)                                        (65,879)            ---              ---
     Other                                                           26,397         237,642           74,363
                                                                  ---------       ---------      -----------

                                                                  $(297,142)      $(497,245)     $(3,693,926)
                                                                  =========       =========      ===========
</TABLE>

     Temporary differences which give rise to deferred tax assets and
     liabilities are as follows at December 31, 2001 and 2000:
<TABLE>
<CAPTION>
                                                                                     2001             2000
    <S>                                                                            <C>               <C>
     Deferred tax liabilities:
       State taxes                                                                $(236,612)      $ (224,452)
     Deferred tax assets:
       Accrued vacation                                                              38,695           45,876
       Allowance for doubtful accounts                                              447,011           41,111
       Inventory reserve                                                             36,289          365,577
       Accrued expenses                                                             101,114          483,284
       Fixed assets                                                                  88,094          (40,982)
       Tax gain in excess of book gain on building sale                             383,393              ---
       Net operating loss                                                         2,207,806        1,955,137
       Other                                                                        161,217          290,013
                                                                                 ----------       ----------

                                                                                 $3,227,007       $2,915,564
                                                                                 ==========       ==========
</TABLE>

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some or all of the deferred tax
     assets will be realized. The ultimate realization of deferred tax assets is


                                     Page 47

<PAGE>

     dependent upon the generation of future taxable income during the periods
     in which those temporary differences become deductible. Management
     considers the scheduled reversal of deferred tax liabilities and tax
     planning strategies in making this assessment. However, there can be no
     assurance that the Company will meet its expectations of future income. As
     a result, the amount of deferred tax assets considered realizable could be
     reduced in the near and long term if estimates of future taxable income are
     reduced. Such an occurrence could materially adversely affect the Company's
     results of operations and financial conditions. The Company will continue
     to evaluate the realizability of the deferred tax assets quarterly by
     assessing the need for and the amount of a valuation allowance.

     As of December 31, 2001, the Company has federal net operating loss
     carryforwards of approximately $5,124,000 which expire in 2018 through 2020
     to offset future taxable income; and the Company has state net operating
     loss carryforwards of approximately $5,266,000 which expire in 2004 and
     2011 to offset future taxable income.

13.  INVESTMENT IN AFFILIATE

     On March 31, 2001 the Company entered into an Organization Agreement with
     Prolong Environmental Energy Corporation (PEEC), a California Corporation,
     whereby the Company agreed to contribute up to $150,000 to PEEC as required
     to meet the operating working capital obligations for PEEC. The Company
     also provided administrative and facilities services support in the amount
     of $74,997 during 2001. The Company contribution, and the services provided
     (total investment of $224,997), shall be considered a capital contribution
     for PEEC in return for approximately 9% of the issued and outstanding
     common stock of PEEC. In 2001, PEEC was merged into ORYXE Energy
     International, Inc.

14.  COMMITMENTS AND CONTINGENCIES

     Leases - The Company leases certain office equipment under operating leases
     over lease terms ranging from one to four years. Lease expense was $96,393,
     $78,306 and $75,758 for the years ended December 31, 2001, 2000 and 1999,
     respectively.

     Royalties - The Company is obligated to pay royalties to the producer of a
     one-half hour, direct-response television commercial entitled "Prolong
     World Challenge" (infomercial) at the rate of 1.5% of gross sales (as
     defined) generated from direct-response television sales of lubricant
     products made via an 800 telephone number which utilizes the infomercial
     video footage. The term of this agreement is dependent upon the life cycle
     of the "Prolong World Challenge." For the year ended December 31, 1999, the
     Company expensed $12,319 under this arrangement. The agreement terminated
     in May 1999.

     In connection with this direct response television commercial, the Company
     is obligated to pay royalties to another individual at the rate of 1% of
     gross sales (as defined) resulting from direct-response sales from the
     infomercial. The agreement has a term of three years and four months
     beginning in January 1996. The Company expensed $20,330 under this
     arrangement for the year ended December 31, 1999. The agreement terminated
     in May 1999.

     The Company is obligated to pay royalties to the same producer at the rate
     of 0.5% of the gross sales, net of returned product, from any and all
     direct response television campaigns which utilize footage from the direct
     response television commercial entitled "Prolong Across America." For the
     years ended December 31, 2001, 2000 and 1999, the Company expensed $862,
     $915 and $2,444, respectively, under this arrangement. The agreement
     terminated in December 2001.

     The Company is obligated to pay royalties to the same producer at the rate
     of 1.5% of gross sales, net of product returns, of the appearance product
     kit generated from any and all direct response television campaigns.
     Additionally, the Company will pay 5% in the first year, 4% in the second
     year, and 3% in the third year of any and all net retail sales of the paint
     sealant product. For the years ended December 31, 2001, 2000 and 1999, the
     Company expensed $437, $13,600 and $42,156, respectively, under this
     arrangement. The agreement terminated in December 2001.

     The Company has an arrangement with an individual whereby it has agreed to
     pay royalties on all net lubricant retail sales according to the following
     rates: 1.5% from November 1, 1996 through October 31, 1997; 1.25% from
     November 1, 1997 through October 31, 1998; and 1% from November 1, 1998
     through October 31, 1999. Maximum payments under this arrangement are:
     $100,000 in year one, $125,000 in year two, and $150,000 in year three. The
     option to extend this agreement for an additional five years was


                                     Page 48

<PAGE>

     exercised. For the five years under the extension, the Company has agreed
     to pay royalties at the rate of 0.5% from November 1, 1999 through October
     31, 2000 and 0.6% from November 1, 2000 through October 31, 2004 on all net
     lubricant retail sales. For each of these years, the Company pays a
     guaranteed minimum payment of $75,000. Maximum payments are $100,000 in the
     first year of the renewal period and $125,000 each year thereafter. For the
     years ended December 31, 2001, 2000 and 1999, the Company expensed
     approximately $74,330, $74,379 and $150,000, respectively, under this
     arrangement.

     Endorsement and Sponsorship Agreements - The Company has entered into
     endorsement and sponsorship agreements with various automotive and racing
     personalities for product marketing and promotion purposes. The Company is
     committed to aggregate future payments under these agreements of $90,000,
     all of which is payable in 2002.

     Endorsement and sponsorship expenses charged to operations related to these
     agreements was approximately $176,125, $1,291,000, and $2,082,000 for the
     years ended December 31, 2001, 2000 and 1999, respectively.

     Employment Contracts - In January 2000, the Company entered into employment
     agreements with two officers of the Company for periods ranging from 4 to 5
     years. The terms of the contracts include base salary, stock options,
     various performance incentives, and severance payments ranging from 2 to 3
     years of base salary in the event of early termination. In April and June
     2000, the Company entered into employment agreements with two officers of
     the Company for periods ranging from 3 to 4 years. The terms of the
     contracts include base salary, stock options, various performance
     incentives, and severance payments of 6 months of base salary in the event
     of early termination. One of the agreements was terminated on June 29,
     2001.

     Litigation - On November 17, 1998, Dr. Michael Walczak on behalf of himself
     and other shareholders of EPL filed a purported class action and derivative
     suit in the U.S. District Court in San Diego, California against EPL, PIC,
     PSL and certain of their respective former and current officers and
     directors alleging breach of contract, certain fraud claims, civil RICO,
     breach of fiduciary duty and conversion and sought monetary damages in
     connection with PIC's acquisition of the assets of EPL Prolong, Inc. On
     October 12, 2001 the case was settled as a class action, dismissing all of
     the claims with prejudice. In settlement, PIC issued 1,350,695 additional
     shares of its common stock to EPL, out of which one-third of those shares
     were distributed to certain of plaintiff's attorneys and two-thirds of
     those shares were distributed to EPL shareholders. PIC agreed to waive its
     claim to reimbursement for EPL's accrued expenses of approximately $430,000
     as additional purchase consideration. The Company recorded this $430,000,
     and the estimated fair values of the additional shares issued of $94,548,
     as an increase in intangible assets as the Company believes that such
     amounts constitute additional purchase consideration. This suit was settled
     without any admission of wrongdoing or liability on the part of PIC or any
     of the defendants. Settlement of this suit had no material adverse affect
     on the Company's financial position or results of operation.

     In February 1999, PSL entered into a negotiated Consent Order with the FTC
     concerning the standards for adequate substantiation of engine treatment
     advertising claims, among others items. As a follow on to the FTC matter,
     four separate lawsuits were filed by individuals purporting to act as class
     representatives for consumers seeking redress based variously on
     allegations of false advertising, unfair competition, violation of various
     state consumer laws, fraud, deceit, negligent misrepresentation, breach of
     warranty and seeking equitable relief. Class counsel and the Company have
     entered into a stipulation of settlement on three of the suits, namely
     Fernandes et al v PSL, Bowland et al v PSL and Mata et al v PSL, which
     settlements was preliminarily approved by the court in February 2002. In
     settlement, the Company will offer a discount cash rebate on certain of its
     products through four major distributors by means of an in-store coupon for
     a period of six months, with the coupons expiring in eighteen months from
     date of settlement. In addition, the Company will reimburse plaintiff's
     legal counsel as a group in an amount not to exceed $65,000. Settlement of
     these as suits as currently proposed will have no material adverse affect
     on the Company's financial position or results of operation, as the Company
     has fully accrued for the anticipated settlements as of December 31, 2001.

     In the fourth and last of the FTC related suits, Kachold v PSL, a separate
     settlement was reached with the individual plaintiff for $1,000 and $1,000
     in attorney fees, with the class claims being dismissed with prejudice
     contingent upon final court approval of the above referenced class action
     settlements.

     On April 8, 1997, a lawsuit was filed by Francis Helman et al v EPL, PIC et
     al in the Court of Common Pleas, Columbiana County, Ohio as a purported
     class action alleging breach of fiduciary duty, breach of oral and


                                     Page 49

<PAGE>

     written contract, and fraud, in thirteen original causes of action. The
     appellate court in Ohio largely affirmed a series of orders by the trial
     judge in favor of EPL, PIC et al, the effect of which was to reduce the
     number of complaining parties from approximately one hundred to less than
     twenty, and dismissing various causes of action. The trial court
     subsequently denied plaintiff's motion to certify the case as a class
     action. The remaining Helman plaintiffs have appealed the trial court's
     order denying certification of the case as a class action. Management
     believes that there is no merit to the plaintiffs' complaint, is vigorously
     defending against the claims, and does not believe the outcome will have a
     material adverse affect on the Company's financial position or results of
     operations.

     PIC and its subsidiaries are subject to other legal proceedings, claims,
     and litigation arising in the ordinary course of business. PIC's management
     does not expect that the ultimate costs to resolve these matters will have
     a material adverse affect on PIC's consolidated financial position, results
     of operations or cash flows.

15.  SEGMENT REPORTING AND CUSTOMER INFORMATION

     The Company engages in business activities in only one operating segment
     which entails the development, manufacture and sale of lubricant and
     appearance products. While the Company offers a wide range of products for
     sale, many are manufactured at common production facilities. In addition,
     the Company's products are marketed through a common sales organization and
     are sold to a similar customer base.

     During 2001, four customers accounted for approximately 20.0%, 18.7%, 14.9%
     and 13.2% respectively, of net revenues. As of December 31, 2001, five
     customers each accounted for over 10.0%, and in aggregate accounted for
     71.9% of the balance of accounts receivable.

16.  QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
                                                                               Net
                                            Net             Gross             Income       Net Income (Loss) per Share
                                         Revenues           Profit            (Loss)         Basic          Diluted
                                         --------           ------            ------       ------------------------
<S>                                      <C>                <C>               <C>          <C>
     Quarter ended:
         March 31, 2000                 $7,757,199       $6,030,288      $    640,820       $ 0.02          $ 0.02
         June 30, 2000                   5,219,521        3,852,337          (511,080)       (0.02)          (0.02)
         September 30, 2000              3,651,886        2,605,238          (504,536)       (0.02)          (0.02)
         December 31, 2000               2,451,612        1,334,755        (1,277,482)       (0.04)          (0.04)
                                       -----------      -----------      ------------       ------          ------
                                       $19,080,218      $13,822,618      $ (1,652,278)      $(0.06)         $(0.06)
                                       ===========      ===========      ============       ======          ======

     Quarter ended:
         March 31, 2001                 $4,151,945      $ 2,844,694      $     44,560       $ 0.00          $ 0.00
         June 30, 2001                   3,929,116        2,764,486           (19,570)       (0.00)          (0.00)
         September 30, 2001              2,858,222        1,928,471          (420,096)       (0.02)          (0.02)
         December 31, 2001               2,701,384        1,757,565          (607,438)       (0.02)          (0.02)
                                       -----------      -----------      ------------       ------          ------
                                       $13,640.667      $ 9,295,216      $ (1,002,544)      $(0.04)         $(0.04)
                                       ===========      ===========      =============      =======         ======
</TABLE>

     FOURTH QUARTER ADJUSTMENTS
     --------------------------

     2000 - The net loss for the fourth quarter of 2000 includes the following:
            1) a reserve of approximately $75,000 against certain accounts
            receivable; and, 2) a reserve of approximately $50,000 for estimated
            sales returns. Each of these reserves was recorded based on
            information, which became available or changes in strategic
            direction which were made during the fourth quarter of 2000.

     2001 - The net loss for the fourth quarter of 2001 includes the following:
            1) a reserve of approximately $225,000 against certain accounts
            receivable; and, 2) a reserve of approximately $115,000 for
            estimated sales returns and, 3) a write off of approximately
            $120,000 of discontinued inventory products. Each of these reserves
            and write off was recorded based on information which became
            available or changes in strategic direction which were made during
            the fourth quarter of 2001.



                                     Page 50

<PAGE>

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                                                  Additions
                                                      ---------------------------------
                                        Balance at      Charged to       Charged to
                                       Beginning of      Costs and         Other                         Balance at End
            Description                   Period         Expenses         Accounts         Deductions       of Period
            -----------                   ------         --------         --------         ----------       ---------
<S>                                      <C>             <C>              <C>              <C>              <C>
Year ended December 31, 200l
Allowance for doubtful accounts
receivable                              $  168,775     $  304,436         $    ---          $ 11,480      $  461,731
Inventory reserves                         943,839            ---              ---           859,131          84,708
Other assets reserve                       581,713            ---              ---               ---         581,713
                                        ----------     ----------         --------          --------      ----------
Total                                   $1,694,327     $  304,436         $    ---          $870,611      $1,128,152
                                        ==========     ==========         ========          ========      ==========

Year ended December 31, 2000:
Allowance for doubtful accounts
receivable                              $  389,732     $   99,049              ---          $320,006      $  168,775
Inventory reserves                       1,009,024            ---              ---            65,185         943,839
Other assets reserve                       581,713            ---              ---               ---         581,713
                                        ----------     ----------         --------          --------      ----------
Total                                   $1,980,469     $   99,049         $    ---          $385,191      $1,694,327
                                        ==========     ==========         ========          ========      ==========

Year ended December 31, 1999:
Allowance for doubtful accounts
receivable                              $  580,000     $  325,637         $    ---           515,905      $  389,732
Inventory reserves                         125,000        892,895              ---             8,871       1,009,024
Other assets reserve                           ---        581,713              ---               ---         581,713
                                        ----------     ----------         --------          --------      ----------
Total                                   $  705,000     $1,800,245         $    ---          $524,776      $1,980,469
                                        ==========     ==========         ========          ========      ==========
</TABLE>




                                     Page 51

<PAGE>

                        PROLONG INTERNATIONAL CORPORATION

                                    FORM 10-K

                                  Exhibit Index
                                  -------------
<TABLE>
<CAPTION>
                                                                                                  Sequential
                                                                                                  Page Number
                                                                                                  -----------
<S>      <C>                                                                                      <C>
2.1      Exchange Agreement between Stockholders of PSL and the Registrant
         (incorporated by reference to the same numbered Exhibit to the
         Registrant's Registration Statement on Form 10 filed July 3, 1997).                          ---
2.2      Agreement and Plan of Reorganization, dated as of February 5, 1998,
         by and among the Registrant and EPL Pro-Long, Inc., including
         the following exhibits: (i) Form of Employee Invention and Confidentiality
         Agreement, (ii) Form of Rule 145 Agreement, (iii) Form of Confidentiality
         Agreement, (iv) Form of Transfer Restriction, (v) Form of Amendment to
         Exclusive License Agreement, and (vi) Form of Cancellation Agreement
         (incorporated by reference to the same numbered Exhibit to the
         Registrant's Registration Statement on Form S-4 filed May 4, 1998).                          ---
2.3      Amendment to Agreement and Plan of Reorganization, dated as of June 29,
         1998, by and among the Registrant and EPL Pro-Long, Inc. (incorporated
         by reference to the same numbered Exhibit to the Registrant's Registration
         Statement on Form S-4 filed May 4, 1998).                                                    ---
3.1      Amended and Restated Articles of Incorporation of the Registrant (incorporated
         by reference to the same numbered Exhibit to the Registrant's Registration
         Statement on Form 10 filed July 3, 1997).                                                    ---
3.3      Bylaws of the Registrant, as amended and restated on April 27, 1998
         (incorporated by reference to the same numbered Exhibit to the Registrant's
          Registration Statement on Form S-4 filed May 4, 1998).                                      ---
4.2      Specimen Certificate of Registrant's Common Stock (incorporated by
         reference to the same numbered Exhibit to the Registrant's Registration
         Statement on Form S-4 filed May 4, 1998).                                                    ---
10.1     Form of Indemnification Agreement for Executive Officers and Directors
         (incorporated by reference to the same numbered Exhibit to the Registrant's
         Registration Statement on Form 10 filed July 3, 1997).                                       ---
10.4     Agreement between PSL and Al Unser, dated July 28, 1995
         (incorporated by reference to the same numbered Exhibit to the Registrant's
         Registration Statement on Form 10 filed July 3, 1997).                                       ---
10.7     Service and Endorsement Contract between PSL and Al Unser, dated April 29,
         1996 (incorporated by reference to the same numbered Exhibit to the Registrant's
         Registration Statement on Form 10 filed July 3, 1997).                                       ---
10.12    The Registrant's 1997 Stock Incentive Plan and form of Stock Option Agreement
         (incorporated by reference to the same numbered Exhibit to the Registrant's
         Registration Statement on Form 10 filed July 3, 1997).                                       ---
10.20    Standing Loan Agreement between PSL and Bank of America Community
         Development Bank, dated April 1, 1998; Promissory Note; Deed of Trust,
         Assignment of Rents and Fixture Filing; Payment Guaranty; and Secured
         and Unsecured Indemnity Agreement (incorporated by reference to the
         same numbered Exhibit to the Registrant's Registration Statement on
         Form S-4 filed May 4, 1998).                                                                 ---
10.22    Authorization For Debenture Guarantee 504 Program between the United States
         Small Business Administration, CDC Small Business Finance Corp. and PSL, dated
         February 2, 1998, as amended March 3, 1998, as amended again on April 10, 1998;
         "504" Note; Deed of Trust and Assignment of Rents; Development Company
         504 Debenture; and Servicing Agent Agreement (incorporated by reference to the
         same numbered Exhibit to the Registrant's Registration Statement on Form S-4
         filed May 4, 1998).                                                                          ---
</TABLE>




                                     Page 52

<PAGE>
<TABLE>
<CAPTION>
<S>      <C>                                                                                        <C>
10.27    Employment Agreement, dated January 21, 2000, between PSL and Elton
         Alderman. (incorporated by reference to the same numbered Exhibit to the Registrant's
         Annual Report on Form 10-K filed April 14, 2000).                                            ---
10.28    Employment Agreement, dated January 21, 2000, between PSL and Thomas C.
         Billstein. (incorporated by reference to the same numbered Exhibit to the
         Registrant's Annual Report on Form 10-K filed April 14, 2000).                               ---
10.32    Employment Agreement, dated June 1, 2000 between PSL and Nicholas Rosier
         (incorporated by reference to the same numbered Exhibit to the Registrant's Quarterly
         Report on Form 10-Q filed August 11, 2001.                                                   ---
10.33    Loan Agreement between PSL and ABQ Dolphin, LP, A California limited partnership,
         dated October 30, 2000; Promissory Note, Third Priority Trust Deed and Warrant
         Agreement, dated November 2, 2000. (incorporated by reference to the same numbered
         Exhibit to the Registrant's Quarterly Report on Form 10-Q filed November 14, 2000)           ---
10.34    Proposal to Purchase Property, dated as of December 5, 2001, by and among PSL,
         Euclid Plaza, LLC, a California limited liability Company, and President Properties,
         a California general partnership (incorporated by reference to the same numbered
         Exhibit to the Registrant's Report on Form 8-K filed on January 31, 2002.)                   ---
10.35    Release Agreement, dated as of December 21, 2001 by and among PIC, a Nevada
         corporation, EPL Pro-long, Inc., a California corporation, Lois M. Miller, and
         individual, Gary C. Wykidal, an individual, Michael R. Davis, and individual and
         Tom Woodward, an individual. (incorporated by reference to the same numbered
         Exhibit to the Registrant's Report on Form 8-K filed on January 31, 2002.)                   ---
10.36    Amendment to the Agreement and Plan of Reorganization, dated December 21, 2001, by
         and between EPL Pro-Long, Inc., a California corporation, and Prolong International
         Corporation, a Nevada corporation.(incorporated by reference to the same numbered
         Exhibit to the Registrant's Report on Form 8-K filed on January 31, 2002.)                   ---
21.1     Subsidiaries of the Registrant (incorporated by reference to the same
         numbered Exhibit to the Registrant's Annual Report on Form 10-K filed March 25, 1999).       ---
23.1     Consent of Deloitte & Touche LLP.                                                            54
23.2     Consent of Haskell & White, LLP.                                                             55
24.1     Power of Attorney (included as part of the signature page of this Annual Report).            ---
</TABLE>




                                     Page 53