<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, 1999
                                           -----------------
     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, 2000, was approximately $15,930,000.

     The number of outstanding shares of the Registrant's Common Stock as of
March 20, 2000 was 28,445,835.


                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 14, 2000, are incorporated by reference into
Part III.

                                  Page 1 of 56

                Exhibit Index on Sequentially Numbered Page 28

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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"), 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 AFMT
technology and related trademarks and, as a result, currently owns the
exclusive, worldwide rights to manufacture, sell and distribute lubrication and
other products based on AFMT and to use 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
their respective former and current officers and directors.  Following a hearing
on December 30, 1998, the Court entered a preliminary injunction, which enjoins
the further consummation of the asset purchase transaction and prevents EPL from
completing its liquidation and dissolution until further notice from the Court.
In December 1999, plaintiffs' counsel was disqualified from the matter on the
grounds of an unwaivable conflict of interest.  Plaintiffs have not yet selected
new counsel.  The Ninth Circuit Court of Appeal did not, however, set aside the
preliminary injunction.  PIC, PSL, and their respective current officers and
directors believe there is no merit to the plaintiffs' claims.  At this time,
due to plaintiffs lack of legal counsel, there are no

                                     Page 2
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

mediation conferences scheduled. Therefore, final resolution of the matter
cannot presently be determined. See "Legal Proceedings".

     Prior to 1996, Prolong's activities generated losses.  However, due, in
part, to PSL's successful marketing campaign based primarily on an infomercial,
Prolong's activities generated a profit in 1996.  Prolong anticipates that its
sales will continue to grow in the future as it takes advantage of the worldwide
market for its current products and the development of new products.  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.  During 1999, Prolong suffered a net
loss of approximately $6,600,000.  Working capital for 1999 was generated
through operations and the utilization of the Company's line of credit with a
bank.  In 2000, Prolong anticipates seeking additional financing in the form of
subordinated debt or equity to finance its activities and the execution of its
strategic plan.

Products

     Prolong markets a variety of products which are based on AFMT.  AFMT is a
patented 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 such as gun oil and brake cleaner.  AFMT bonds to the
metal surfaces with which it comes into contact, resulting in reduced friction,
wear 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 wear, 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, 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, and 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.

                                     Page 3
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     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 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:


<TABLE>
<S>                                       <C>
   .  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
</TABLE>

     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

     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 Gas/Diesel 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 suitable for both gasoline and diesel fuel systems.

     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.

                                     Page 4
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     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.

     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.

     Despite 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.

                                     Page 5
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     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.

     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, jetskis, 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

                                     Page 6
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

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.


     Federal Government.  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.

     Military Sales.  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.

     State Government.  Potential sales to state governments include users such
as the National Guard, highway patrol, state police and other state agencies.

     County and City Government.  Both county and city governments are potential
Prolong customers for use by police, fire, water, gas, waste management and
other local departments.

     Public Transportation.  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 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 the 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

                                     Page 7
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

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 Gas/Diesel Fuel System Treatment can provide benefits similar to those
attained from use in diesel truck engines.

     Railroads

     The railroad industry is currently a large user of lubrication products.
Prolong would have to obtain certain mandatory product certifications prior to
being able to market its products to the railroad industry.  Prolong is not
actively pursuing such certifications for its products at this time, but may do
so in the future.

Geographic Markets

     Prolong currently markets its products in the United States, Canada, China,
Japan, Hong Kong, Sub-Saharan Africa, Brazil, Chile, Mexico, Hungary/Slovakia
and Puerto Rico 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.

     International sales comprised 3.5%, 6.5%, and 4.7% of PIC's revenues in
1997, 1998 and 1999, respectively.  Prolong consummates such sales through
independent distributors and, as such, has no assets attributable to its
international sales.

     If it is economically feasible, Prolong intends to grant distributorships
throughout Europe.  Consistent with this goal, Prolong is analyzing the
economics of the industry, competitive aspects, regulatory matters, and methods
of distribution on a country by country basis in Europe.  Prolong has also
obtained patent protection on its products in several of the EEC member
countries.

Marketing And Distribution Of The Products

     Prolong currently distributes its products through automotive aftermarket
chain stores, mass merchandisers, independent distributors, direct response
television sales and via the internet.  Currently, Prolong has approximately 430
distributors in the United States.  Additionally, Prolong has ten international
distributors located in Europe, Asia, Africa and South America.  Prolong
maintains a direct sales force of 17 persons to service its distributors.

                                     Page 8
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     Prolong distributes its products through both national and regional
automotive retail stores, traditional automotive aftermarket stores, through
mass merchandisers, independent distributors, and directly to consumer end
users.

     Prolong's automotive retailers include Autozone, Advance Auto, CSK, Pep
Boys, Discount Auto, O'Reilly Auto, HalArt/Trak Auto, Strauss Discount Auto,
Murray's Discount Auto, ACO Auto, VIP Discount, Parts Depot, Parts Plus, 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, Target, Ames and Fred Meyer.
Additionally, Prolong products are distributed through approximately 500 car
dealerships throughout the United States.

     Prolong's distribution expanded sharply during 1999 and included the
addition of Advance, Autozone, Genuine Parts Company/NAPA, Automotive Parts
Warehouse, Bennett Auto, Knecht's Discount Auto, Wal-Mart, Target and in March
of 2000, Ames.

     The Company utilizes contract warehouses to store and ship its products.
For fulfillment of direct sales to consumers, the Company utilizes independent
contractors with warehouses based in Burbank, California and New Jersey.  The
direct response fulfillment center stores inventory, packs and ships orders, and
handles customer service inquires related to direct sales to consumers through
television and the Internet.

     The products offered by Prolong have been marketed through endorsements by
well-known spokespersons, event sponsorships, 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 endorsements, Prolong has entered into an agreement in 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.  Prolong has also entered into an agreement
with Smokey Yunick pursuant to which it retained the services of Mr. Yunick to
promote Prolong's products and to act as a spokesman for, and technical
consultant to, Prolong.  Mr. Yunick has agreed to make certain appearances to
assist in marketing Prolong's 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 executed an associate
sponsorship agreement with King Entertainment, Inc. and Kenneth D. Bernstein
pursuant to which Mr. Bernstein will provide promotional services and
appearances and will recognize "Prolong Super Lubricants" as an associate
sponsor of the "Budweiser King Top Fuel Dragster" through the year 2000 in all
National Hot Rod Association (the ""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.

     An additional motorsports sponsorship agreement has been executed between
Prolong and Galles/ECR Racing, LLC whereby Prolong has been granted associate
sponsorship and promotional rights for race cars to be entered into competition
during the 2000 Indy Racing League season by Galles/ECR Racing, LLC.  Such race
cars will be driven by Al Unser, Jr.

                                     Page 9
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     Prolong has an associate sponsorship agreement with Team Sabco relating to
sponsorship of two race cars for all NASCAR Winston Cup Series races during the
1999 racing season and one car during the 2000 racing season.  The arrangement
with Team Sabco provides for display of the Prolong name and logo on the cars,
equipment and uniforms and for promotional services and appearances.  Prolong's
car is driven by two-time Daytona 500 winner Sterling Marlin.  In addition,
Prolong will also be an associate sponsor through Team Sabco on a Busch Grand
National car driven in the NASCAR series by Kenny Irwin, Jr. in a number of, but
not all, the races in the Busch Grand National series during 2000.

     Prolong will be the title rights sponsor in two nationally televised
national drag racing events during 2000.  Prolong Super Lubricants has agreed to
be the title rights sponsor at the NHRA sanctioned Prolong Super Lubricants
Northwest Nationals to be held in early August in the Seattle area.  The
agreement calls 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.  Prolong is also the title rights sponsor
to the International Hot Rod Association (IHRA) Winter Nationals held in
Darlington, South Carolina which is the season opening event for that
sanctioning body.  The television coverage on the IHRA event is through TNN  and
includes similar promotional rights as the NHRA event described above.

     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.

     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
including the "Prolong World Challenge" (debuted January 1996), which is an
infomercial promoting Prolong's lubricant line of products, "Prolong Across
America" (debuted April 1999), which is Prolong's newest lubricant related
television program and the "Ultimate Car Care Challenge" (debuted February
1999), which introduces and demonstrates the company's line of appearance
products including its new Prolong Paint Sealant and Prolong Waterless Wash &
Shine.  Results through the infomercials vary from program to program and from
time slot to time slot but in general have been 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 keep its
infomercials running so long as they continue to be a economically viable, help
to build the brand throughout the marketplace, and drive retail sales.

     During 1999, Prolong premiered its website located at www.prolong.com by
                                                           ---------------
means of a sweepstakes contest advertised in the September issue of "Motor
Trend" magazine.  The website has e-commerce capabilities as well as general
product and company information.  Prolong intends to continue to develop its
website in the future and to further utilize the Internet as a means of
marketing and distributing its products to the public.

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) and Pennzoil-Quaker State Company (Slick 50), both of
which market engine treatments.  Prolong's competitors also include major oil
companies such as Shell Oil Company, Chevron Corporation, Castrol,

                                    Page 10
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

and other companies that manufacture lubrication products, such as WD40 Corp.
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 solely with the
superior lubrication performance of its products relative to that of its
competitors.  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.

     A key marketing strategy for Prolong's continued growth is to use direct
response television ("DRTV") to generate sales, build brand name recognition,
educate consumers about the features and benefits of Prolong's products and lay
the foundation for other, more conventional forms of advertising and marketing.
For example, Prolong believes that its television programs have resulted in the
development of brand name recognition.  This broad public exposure generated by
the television commercials may permit Prolong to position itself favorably among
larger companies competing in both the national and international lubricant and
appearance markets.

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.


     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,

                                    Page 11
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

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.  However, Prolong's
increased volume production and continued expansion may result in shortages or
restrictions in supply and manufacturing capabilities in the future.  Prolong
has not entered into any long term contracts with respect to the supply or
production of its products, preferring to intermittently review quotations
provided by interested parties in order to take advantage of competition among
suppliers and manufacturers.

Customers

     In 1999, Prolong's sales to automotive aftermarket retail chain stores,
mass merchandisers, and independent distributors comprised approximately 80.8%
of its revenues while sales to commercial, industrial and other customers
comprised 7.8% of total revenues. Approximately 11.4% of Prolong's 1999 sales
resulted as a response to the airing of the infomercials. Such sales were made
to large numbers of individual consumers and, accordingly, Prolong does not
consider itself dependent on any particular customers in this market segment. In
1999, one retail customer comprised approximately 13.3% of its revenues. In
1998, two retail customers comprised approximately 31.7% of its revenues. No
customers accounted for more than 10% of Prolong's aggregate sales in 1997.

Intellectual Property

     On February 5, 1998 PIC entered into a definitive agreement with 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,  currently 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), 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), SPL100
(U.S. Reg. No. 2,022,220), THE ULTIMATE IN PROTECTION & PERFORMANCE (U.S. Reg.
No. 2,129,785) and PSL's Oil Drop Logo (U.S. Reg. No. 2,136,576).

Royalty Agreements

     Prolong has entered into a memorandum agreement with the producer (The 2M
Group, Inc.) of its lubricant infomercial entitled the "Prolong World Challenge"
whereby Prolong has agreed to pay 1.5% of gross sales, net of returned product,
generated from direct response television sales made via a toll-free telephone
number which utilize the "Prolong World Challenge" video footage.  The term of
this agreement is dependent upon the life cycle of the

                                    Page 12
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

"Prolong World Challenge." During 1999, Prolong expended $12,319 in royalties
under this agreement. This agreement terminated in May 1999.

     Prolong entered into another memorandum agreement with The 2M Group, Inc.
whereby Prolong agreed to pay  1/2% of all gross sales, net of returned product,
from any and all direct response television campaigns which utilize footage from
its second lubricant infomercial entitled "Prolong Across America."  During
1999, Prolong expended $2,444 in royalties under this agreement.

     Prolong entered into a third memorandum agreement with The 2M Group, Inc.
whereby Prolong agreed to pay 1.5% of gross sales, net of product returns, of
the appearance product kit generated from its appearance product infomercial
entitled "The Ultimate Car Care Challenge".  Additionally, Prolong agreed to pay
5%, 4% and 3%, respectively, for each year of a three-year arrangement of any
and all net retail sales of the paint sealant product.  During 1999, Prolong
expended $42,156 in royalties under this agreement.

     Prolong entered into a personal service agreement with Al Unser whereby
Prolong agreed to pay Mr. Unser 1.0% of gross sales resulting from direct
response television sales from the "Prolong World Challenge."  Royalties earned
commence with the first airing of the "Prolong World Challenge" and continue for
three years and 120 days. During 1999, Prolong paid Mr. Unser $20,330 under this
agreement.

     Further, Prolong has entered into a service and endorsement contract with
Al Unser whereby Prolong has agreed to pay royalties on all net retail sales of
its products 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.  Earnings maximums under
the arrangement are as follows:  $100,000 in year 1; $125,000 in year 2; and
$150,000 in year 3.  The option to extend this agreement for an additional four
years was exercised.  For the four years under the extension, the Company has
agreed to pay royalties at the rate of 1% on all net retail sales.  For each of
these years, the Company pays a guaranteed minimum payment of $75,000.  Maximum
payments are $175,000 in the first year of the renewal period and increase
$25,000 each year thereafter, to a maximum of $250,000 in the last year of the
agreement.  During 1999, Prolong paid Mr. Unser $150,000 under this agreement.

Employees

     As of March 20, 2000, PIC and its subsidiaries collectively employ 55 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
-------  ----------

     At its headquarters, Prolong Super Lubricants, Inc. owns approximately
29,442 square feet of office and warehouse space in a two-story building located
at 6 Thomas in Irvine, California.  PSL 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, respectively, from Bank of America and from CDC Small Business Finance
Corp.  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.  See "Management's Discussion
and Analysis Of Financial Condition and Results of Operations - Liquidity and
Capital Resources."  PIC considers its 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
-------  -----------------

     The AFMT patent on which Prolong's products are based, has been the subject
of litigation, primarily suits contesting the ownership thereof. Should any
litigation result in an adverse ruling precluding Prolong's continued use

                                    Page 13
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

of the AFMT patent, PIC's business, operating results, financial condition and
cash flows would be materially adversely effected. In July 1993, the trial court
ruled in favor of Prolong's former licensor, EPL, awarding EPL damages in excess
of $15.5 million, and made findings of fact that the defendants had signed
certain key documents which evidenced EPL's ownership of the intellectual
property. The defendants appealed the trial court's findings, arguments relating
to which were heard in June 1997. In January 1998, the court of appeal affirmed
the trial court's decision in favor of EPL. The defendants subsequently appealed
the court of appeals affirmation to the California Supreme Court. In June 1998,
the California Supreme Court denied a review of the appeal, thereby
extinguishing the right to any further appeals and rendering the judgment final.

     In another matter, on or about November 17, 1998, Michael Walczak et al, on
behalf of himself and other similarly situated shareholders of EPL filed a
purported class action in the U.S. District Court (the "Court") in San Diego,
California against PIC, PSL, EPL and their respective former and current
officers and directors. The named plaintiffs allege breach of contract, certain
fraud claims, civil RICO, breach of fiduciary duty and conversion, and seek
monetary damages. The named plaintiffs in the action are allegedly current EPL
shareholders who hold less than two percent (2%) of the outstanding shares of
EPL's common stock, in the aggregate. The plaintiffs applied for a preliminary
injunction to halt the sale of the assets of EPL to PIC and to prevent the
dissolution of EPL.

     On November 25, 1998, the Court granted a temporary restraining order
without a hearing and before opposition could be submitted.  On December 30,
1998, the Court held a hearing on whether a preliminary injunction should be
issued in connection with such action.  The Court entered a preliminary
injunction based on the plaintiffs' (a) alleged claim for fraudulent conveyance
in connection with PSL's license agreement with EPL and (b) alleged claim for
breach of fiduciary duty.  The preliminary injunction enjoins the further
consummation of the asset purchase transaction and prevents EPL from completing
its liquidation and dissolution until further notice from the Court.  The
preliminary injunction will last until the case is tried on its merits or until
the preliminary injunction is otherwise dismissed.  The Court ordered the
plaintiffs to post a bond in the amount of $100,000, which bond has been posted.
PIC appealed the Court's preliminary injunction ruling, which appeal was
subsequently denied.  The defendants have each filed and served motions to
dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure.

     The defendants successfully moved to change venue and, effective March 15,
1999, the case was transferred to the federal court in Orange County,
California, where PIC's principal office is located.  In December 1999,
plaintiffs' counsel was disqualified from the matter on the grounds of
unwaivable conflict of interest.  Plaintiffs have not yet selected new counsel.
The Ninth Circuit Court of Appeal did not, however, set aside the preliminary
injunction.  At this time, due to plaintiffs lack of legal counsel, there are no
mediation conferences scheduled.  Therefore, final resolution of the matter
cannot presently be determined. PIC and PSL and their respective current
officers and directors continue to believe that there is no merit to the
plaintiffs' claims and plan to vigorously defend against the claims.

     In a third matter, the U.S. District Court heard a case against PIC whereby
the plaintiffs alleged a variety of business torts, including copyright
infringement and false advertising.  PIC denied the allegations and counter-
claimed against the plaintiffs and multiple other parties, alleging copyright
infringement, false advertising, product disparagement, misappropriation of
trade secrets and unfair trade practices.  The plaintiffs and defendants settled
this matter in 1999 pursuant to a confidential settlement agreement.  Prolong's
obligations under the settlement agreement were fully accrued in 1998.

     PIC and its subsidiaries are subject to 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 effect 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, 1999.

                                    Page 14
<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."
Prior to June 12, 1998, PIC Common Stock was traded on the OTC Bulletin Board
under the symbol "PROL."  PIC Common Stock resumed trading (after approximately
8 years of dormancy) in January 1996.  High and low sales prices for each
quarter during 1998 and 1999 are as indicated below.
<TABLE>
<CAPTION>

          Quarter Ended:          High     Low
          --------------          -----   -----
<S>                               <C>     <C>

          March 31, 1998          $4.63   $2.00
          June 30, 1998           $3.44   $2.44
          September 30, 1998      $2.94   $1.50
          December 31, 1998       $2.19   $1.38
          March 31, 1999          $2.00   $1.13
          June 30, 1999           $1.69   $1.13
          September 30, 1999      $1.25   $0.56
          December 31, 1999       $0.69   $0.25
</TABLE>

     Information during the period has been furnished by AMEX  and the OTC
Bulletin Board.  The quotations furnished by the OTC Bulletin Board reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

     PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share.  As of March 20, 2000, the number of holders of
record of PIC Common Stock is approximately 488 and the high and low sales
prices as reported by AMEX, were $0.56 and $0.50, 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 October 5, 1999, Prolong issued a warrant to purchase 800,000 shares of
Common Stock to Thomas G. Iwanski, in connection with Mr. Iwanski's employment
as an officer of Prolong. The warrant is immediately exercisable at the purchase
price per share equal to: (a) $2.00 for the first 200,000 shares; (b) $3.00 for
the next 200,000 shares; (c) $4.00 for the next 200,000 shares; and (d) $5.00
for the last 200,000 shares. The $2.00 and $3.00 warrants expire on February 28,
2001 and the $4.00 and $5.00 warrants expire on December 31, 2000.

     The sale of the warrant was made in reliance upon the exemption from the
registration provisions of the Securities Act of 1933, as amended, set forth in
Section 4(2) thereof.  Based upon representations made by Mr. Iwanski, Prolong
has reason to believe that he was acquiring the warrant for investment and not
with a view to distribution.  At the time of issuance, the warrant and
underlying shares of Common Stock were deemed restricted securities for purposes
of the Securities Act of 1933, as amended, and all shares of Common Stock issued
upon exercise of the warrant shall bear a legend to that effect.

                                    Page 15
<PAGE>

PROLONG INTERNATIONAL 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 for the year ended
December 31, 1995 is derived from the consolidated financial statements of the
Company that have been audited by Corbin & Wertz.  The financial data set forth
below for the years ended December 31, 1996, 1997, 1998 and 1999, respectively,
is derived from the consolidated financial statements of the Company that have
been audited by Deloitte & Touche, LLP.

<TABLE>
<CAPTION>
                                                                                  Year ended
                                                                                  December 31,
                                                                                  ------------

                                                           1995        1996          1997          1998           1999
                                                           ----        ----          ----          ----           ----
<S>                                                        <C>           <C>       <C>           <C>            <C>
Statement of Operations Data
  Net revenues........................................   $   390,506    $15,813,493   $29,846,795   $35,032,689  $ 34,470,915
  Net profit (loss)...................................      (415,740)       721,178     2,132,553       419,513    (6,580,061)
  Net profit (loss) per share:
     Basic............................................   $     (0.02)   $      0.03   $      0.08   $      0.02   $     (0.23)
     Diluted..........................................   $     (0.02)   $      0.03   $      0.08   $      0.02   $     (0.23)
  Weighted average common shares:
     Basic............................................    17,156,501     23,463,620    25,508,035    25,807,618    28,445,835
     Diluted..........................................    17,156,501     23,463,620    25,690,774    26,011,767    28,445,835
Balance Sheet Data
  Total assets........................................   $   730,760      9,023,317   $13,748,650   $23,210,872   $21,379,648
  Total liabilities...................................        88,218      1,732,467     4,039,796     5,756,537    10,412,463
  Total stockholders' equity..........................       642,542      7,290,850     9,708,854    17,454,335    10,967,185
________________________
</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 to continue 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 16
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


Results of Operations

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

                                                                          Fiscal Year Ended December 31,
                                                       -------------------------------------------------------------------
                                                               1997                     1998                   1999
                                                       ---------------------   ----------------------   ------------------

<S>                                                    <C>                     <C>                      <C>
Net revenues                                                          100.0%                   100.0%                100.0%
Cost of goods sold                                                     19.2                     21.5                  30.5
                                                                      -----                    -----                 -----
     Gross profit                                                      80.8                     78.5                  69.5
Selling and marketing expenses                                         57.8                     56.6                  75.0
General and administrative expenses                                    11.8                     17.2                  22.2
Research and development                                                                         2.0                    .8
                                                                      -----                    -----                 -----
     Operating (loss) income                                           11.2                      2.7                 (28.5)
Interest expense                                                        0.0                     (0.4)                 (1.3)
Interest income                                                         0.8                      0.3                     -
                                                                      -----                    -----                 -----
     Income (loss) before income taxes                                 12.0                      2.6                 (29.8)
(Benefit) provision for income taxes                                    4.8                      1.4                 (10.7)
                                                                      -----                    -----                 -----
     Net (loss) income                                                  7.2                      1.2                 (19.1)
                                                                      =====                    =====                 =====
</TABLE>

     Comparison of the Years Ended December 31, 1999 and December 31, 1998

     Net revenues for the year ended December 31, 1999 were $34,470,915 as
compared to $35,032,689 for the year ended December 31, 1998, a decrease of
$561,774 or 1.6%.  Revenues for 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; international sales of $1,606,000; and other sales and revenues of
$468,000.  Revenues for 1998 were derived from the following sources; direct
response infomercial sales of $5,602,000 (all lubricants); retail sales of
$25,389,000 (all lubricants); industrial sales of $1,045,000, international
sales of $2,274,000 and other sales and revenues of $723,000.   Revenues for the
year ended December 31, 1999 were flat as compared to the year ended December
31, 1998, and fell below expectations.  Direct response lubricant infomercial
sales continued to decline from 1998, decreasing $4,457,000 due to the fact that
the initial infomercial, "Prolong World Challenge", reached the end of the
marketing life.  The new lubricant infomercial, "Prolong Across America", was
supported with limited airtime expenditures due to:  1) delayed completion of
the infomercial, and; 2) weaker return results than expected.  Direct response
appearance infomercial sales contributed $2,796,000 in 1999 from the launch of
the new "The Ultimate Car Care Challenge" television show, but performed below
expectations.  The direct response infomercials for both product lines performed
at lower levels than expected due to debuts occurring late in the selling season
and due to the availability of products in retail stores conveniently located to
end-users.  Retail sales increased $2,468,000 during 1999 mainly due to the
launch of the new appearance products into the retail distribution outlets which
amounted to increased sales of $4,230,000 in 1999, but fell below expectations.
Lubricant product retail sales decreased $1,762,000 during 1999 mainly due to
the fact that the supporting infomercial was aired only on a limited basis
during 1999.  All other sales decreased $1,369,000 during the year mainly in
industrial and international sales due to the Company's concentrated focus on
the launch of the appearance product line.

     Cost of goods sold for the year ended December 31, 1999 was $10,500,586 as
compared to $7,527,361 for the year ended December 31, 1998, an increase of
$2,973,225 or 39.5%.  As a percentage of sales, cost of goods sold for the year
ended December 31, 1999 was 30.5% as compared to 21.5% for the prior year.  This
increase was attributable to a shift in product mix with the appearance products
yielding lower gross margin than the lubricants products. The appearance product
sales amounted to approximately 20% of total revenues for the year ended
December 31, 1999.  Another factor in the increase of the cost of goods sold
pertains to the strategic decision during the fourth quarter of 1999 to focus
future selling efforts on core products thereby requiring an increase in the
inventory obsolescence reserve for non-performing or slow moving inventory
items, such as C.D's, flush machines and special label international products.

                                    Page 17
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


     Selling and marketing expenses were $25,850,474 for the year ended December
31, 1999 as compared to $19,838,689 for the year ended December 31, 1998, an
increase of $6,011,785 or 30.3%.  This increase was primarily the result of
increased expenditures for television airtime related to the launch of the new
appearance products, production costs to produce the new infomercials, one time
marketing and slotting allowances to retail customers to expand the distribution
channels and promotional activities to promote product awareness.  As a
percentage of sales, selling and marketing expenses increased to 75.0% for 1999
versus 56.6% in 1998. A major factor was the increased expenditures associated
with the Company's strategic program to expand its distribution channels while
diversifying its product offerings.  These expenditures included substantial one
time sales slotting allowances and marketing commitments to premier automotive
aftermarket retailers, expenses that are a necessary part of gaining shelf space
in an intensely competitive market place.   Also, the higher than anticipated
expenditures associated with the launch of the new automotive appearance
products were necessary, but costly, to support the introduction to the retail
markets during a short spring season.  These costs were associated with
producing and airing an infomercial that did not perform to expectations.  It is
anticipated that the selling and marketing expenses will decline in the future
as a percentage of sales due to nonrecurring expenses recorded in 1999.

     General and administrative expenses for the year ended December 31, 1999
were $7,645,321 as compared to $6,022,201 for the year ended December 31, 1998,
an increase of $1,623,120 or 27.0%.  This increase was primarily attributable to
unanticipated increases in legal expenses, general insurance expenses, a full
year of amortization expenses from the EPL acquisition in November 1998,
depreciation expense increases relating to building improvements and computer
equipment and costs related to the design of the Company's new e-commerce web-
site.  As a percentage of sales, general and administrative expenses were 22.2%
in 1999 versus 17.2% in 1998 mainly due to the factors discussed above.  It is
anticipated that the general and administrative expenses will decline in the
future as a percentage of sales due to nonrecurring expenses recorded in 1999.

     Research and development expenses for the year ended December 31, 1999 were
$305,297 as compared to $710,531 for the year ended December 31, 1998, a
decrease of $405,234 or 57.0%.  In 1999, these expenses were primarily
attributable to continued testing and market research of  the new appearance
products, while in 1998, the expenses were related to the research, development
and testing of the new appearance and truck fleet products.

     For the year ended December 31, 1999, PIC incurred interest expense, net of
interest income, of $443,224 as compared to $16,504 for the year ended December
31, 1998.  During 1999, PIC maintained an average outstanding balance in
borrowings against its line of credit of approximately $2,900,000 million
compared to no borrowings at any time in 1998, resulting in an increase in
interest expense.  Also, the Company incurred a full year of interest expense on
the loans related to the purchase of Prolong's facility in Irvine, California in
April of 1998.  PIC maintained an average cash balance of approximately $0.8
million in 1999 as compared to approximately $3.6 million during 1998, resulting
in lower interest income for the year.

     Net loss for the year ended December 31, 1999 was $6,580,061 as compared to
net income of $419,513 for the year ended December 31, 1998, a decrease of
$6,999,574.  This decrease was a result of the factors discussed above.  It is
anticipated that selling, marketing, general and administrative expenses will
decline in the future due to an extensive review and cost reduction program
which should yield an overall expense reduction by almost a third compared to
last year.  With this program in place, the Company believes that it will be
profitable in the first quarter of 2000.

     Comparison of the Years Ended December 31, 1998 and December 31, 1997

     Net revenues for the year ended December 31, 1998 were $35,032,689 as
compared to $29,846,795 for the year ended December 31, 1997, an increase of
$5,185,894 or 17.4%.  Revenues for 1998 were derived from the following sources:
direct response infomercial sales of $5,602,000; retail sales of $25,389,000;
industrial sales of $1,045,000; international sales of $2,274,000; and, other
sales and revenues of $723,000.  Revenues for 1997 were derived from the
following sources: direct response infomercial sales of $14,758,000; retail
sales of $11,439,000, industrial sales of $1,739,000; international sales of
$1,058,000; and other sales and revenues of $853,000.

                                    Page 18
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


     Prolong expects that retail and other sales categories will continue to
increase as a percentage of total sales relative to direct response infomercial
sales as Prolong continues to gain momentum in these other markets following the
initiation of the retail sales effort in the fourth quarter of 1996.
Infomercial sales demonstrated a decline in 1998 of return relative to air time
expenditures due to the availability of products in retail stores conveniently
located to end users and the fact that the initial infomercial began to reach
the end of its marketing life.

     Cost of goods sold for the year ended December 31, 1998 was $7,527,361 as
compared to $5,735,238 for the year ended December 31, 1997, an increase of
$1,792,123 or 31.2%.  The increase in absolute dollars was attributable to the
higher volume of purchases to meet the increasing sales demand accompanied by a
more expensive package design change, the cost of which was not passed through
to the consumer as a product price increase.  As a percentage of sales, cost of
goods sold for the year ended December 31, 1998 was 21.5% as compared to 19.2%
for the prior year.  This increase was attributable to the more expensive
package design and product mix due to higher retail and international sales,
which carry a lower gross margin than direct response infomercial sales.

     Selling and marketing expenses were $19,838,689 for the year ended December
31, 1998 as compared to $17,259,469 for the year ended December 31, 1997, an
increase of $2,579,220 or 14.9%.  This increase was primarily the result of
marketing allowances to retail customers, increased endorsement and sponsorship
payments, commissions as a result of increased sales, promotional activities to
promote product awareness, expenditures for print and media advertising,
salaries and benefits for new employees and increases in travel and trade show
expenses.  These increases were partially offset by a reduction in air time
purchases and certain royalties. As a percentage of sales, selling and marketing
expenses however remained relatively constant at 56.6% for 1998 versus 57.8% in
1997. In 1997, selling and marketing expenses consisted primarily of purchases
of television air time, royalties and commissions.

     General and administrative expenses for the year ended December 31, 1998
were $6,022,201 as compared to $3,523,200 for the year ended December 31, 1997,
an increase of $2,499,001 or 70.9%.  This increase was primarily attributable to
salaries for new employees, employee benefits, professional services, computer
related expenses, bad debts, legal expenses, and other administrative costs
required to build the infrastructure necessary to support the increased level of
sales.  As a percentage of sales, general and administrative expenses were 17.2%
in 1998 versus 11.8% in 1997 mainly due to the factors discussed above.

     Research and development expenses for the year ended December 31, 1998 were
$710,531.  There were no comparable expenses in the prior year.  The expenses
were related to the research, development and testing of the new appearance and
truck fleet products.

     For the year ended December 31, 1998, PIC incurred interest expense, net of
interest income, of $16,504 as compared to net interest income of $241,029 for
the year ended December 31, 1997.  During 1998, PIC maintained an average cash
balance of approximately $3.6 million as compared to approximately $5.6 million
during 1997, resulting in lower interest income for the year.  During 1998, PIC
recorded interest expense of $132,102 compared to $8,185 for 1997.  The increase
is attributable to the financing related to the purchase of Prolong's new
facility in Irvine, California.

     Net income for the year ended December 31, 1998 was $419,513 as compared to
$2,132,553 for the year ended December 31, 1997, a decrease of $1,713,040.  This
decrease was a result of the factors discussed above.

Liquidity and Capital Resources

     At December 31, 1999, the Company had net working capital of $41,000 as
compared to $8,373,000 at December 31, 1998 representing a decrease of
$8,332,000.  Operating activities used $3,528,000 during 1999, primarily from
$6,580,000 of losses during the period, a $3,659,000 increase in deferred taxes,
a $1,275,000 increase in reserves, and a $965,000 increase in accounts payable
which were partially offset by decreases in accounts receivable of $2,393,000,
prepaid expenses of $552,000 and prepaid television time of $627,000.
Additionally, the Company used $445,000 for investing activities which were
primarily purchases of property and

                                    Page 19
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

equipment. These uses of cash were funded during the year ended December 31,
1999 primarily by proceeds from the Company's bank credit line in the amount of
$3,985,000.

     In July 1997, PSL entered into a $4 million line of credit, as amended,
with Bank of America National Trust and Savings Association ("Bank of America")
which is collateralized by PSL's inventories and receivables. This line expires
on April 30, 2000. Bank of America has informed the Company that it does not
intend to renew the existing line of credit facility. As of March 20, 2000, PSL
had an outstanding balance under the credit line of $3,200,000, which is the
maximum available under the current amendment to the line of credit. In
addition, PSL has outstanding an aggregate of $1,650,051 as of March 20, 2000
owed to Bank of America pursuant to a loan which was obtained in order to
purchase Prolong's facility in Irvine, California. Such loan is required to be
repaid in monthly installments of approximately $13,050 each, and bears interest
at a rate of 7.875% per year. Further, in connection with the purchase of
Prolong's facility, PSL has outstanding a United States Small Business
Administration loan from CDC Small Business Finance Corp. with a remaining
balance of $714,474 as of March 20, 2000. Such loan is required to be repaid in
monthly installments of approximately $6,376 each, and bears interest at a rate
of 7.65% per year. The Company has no commitments for capital expenditures as of
March 20, 2000. On April 12, 2000, the Company received a commitment letter from
a lender for a $6 million credit facility which will be utilizable based upon
eligible amounts of inventories and receivables. Management signed this lending
commitment letter effective April 12, 2000. Closing of the loan is subject to
the completion and execution of the loan documents. Additionally, the Company is
currently seeking new financing arrangements through subordinated debt and/or
equity providers. The Company has engaged an outside consulting firm to assist
with the establishment of subordinated debt and/or equity relationships. As
discussed in Note 1 of Notes to Consolidated Financial Statements, the Company
incurred a net loss of approximately $6.6 million in 1999 and, at December 31,
1999, had an accumulated deficit of approximately $3.9 million. As a result,
the Company has strictly evaluated all expenditures, improved its credit and
collection functions and revised vendor payment terms to the extent possible.
There are also continued efforts to convert certain assets to cash on an
accelerated basis. Management will also continue to vigorously defend the
litigation described in Note 15 of Notes to Consolidated Financial Statements.
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.

Year 2000 Update


     As described in the Form 10-K for the year ended December 31, 1998, Prolong
had developed plans to address the possible exposures related to the impact on
its computer systems of the Year 2000.  Since entering the Year 2000, Prolong
has not experienced any major disruptions to its business nor is it aware of any
significant Year 2000-related disruptions impacting its customers and suppliers.
Furthermore, Prolong did not experience any material impact on inventories at
calendar year end.  Prolong will continue to monitor its critical systems along
with customer sites to ensure that no Year 2000-related disruptions occur.
However, there can be no assurance that issues regarding Year 2000 compliance
will not surface, but we expect these issues if any, to be relatively
insignificant.

     Costs incurred to achieve Year 2000 readiness, which include contractor
costs to modify existing systems and costs of internal resources dedicated to
achieving Year 2000 compliance, were charged to expense as incurred and were not
material in 1999.

                                    Page 20
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

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 growth 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
        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.

     .  We may be unable to manage our growth effectively.

     .  Sales to customers who respond to our direct response television
        commercials may decrease significantly.

     .  The lubricant or appearance products industries or our operations or
        business may face other unforeseen material adverse changes.

     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.

Our Failure to Manage Growth Could Adversely Affect Us

     We expect to grow rapidly.  This rapid growth will place a significant
strain on our management and financial and other resources.  Our ability to
effectively manage our growth will largely depend on our success at:

     .  Improving our operational, financial and management information systems.

     .  Attracting, training, motivating, managing and retaining our key
        employees.

     If we fail to manage our growth effectively, our operating results,
financial condition and ultimately our business could be adversely affected.

We May Need to Raise Additional Funds in the Future

     We expect that our need for additional funds will increase significantly 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:

                                    Page 21
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


     .  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 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.

Direct Response Sales Will Not Remain Our Key Source of Sales Growth

     Sales to retail customers who responded to our 30 minute direct response
television commercial, or direct response sales, represented approximately 11.4%
($3,941,000) of our revenues in 1999 compared with 16.0% ($5,602,000) of our
revenues in 1998.  In the past, sales to industrial/commercial and international
customers constituted only a limited portion of our revenues.  However, we
expect most of our future sales growth to come from both industrial/commercial
and international customers and less from direct response sales.  We typically
sell to industrial/commercial and international customers through independent
distributors.  We will need to significantly expand our distributor network in
order to increase sales in the industrial/commercial and international markets.
We cannot guarantee that we will successfully locate and engage qualified
distributors for our products, either domestically or internationally, or that
our sales to industrial/commercial and international customers will grow as
expected.

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 2 of our senior executives for
periods ranging from 4 to 5 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 oil treatments. Our competitors also include major oil companies
such as Shell Oil Company, Chevron Corporation, Castrol, and

                                    Page 22
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES


other companies that manufacture lubrication products, such as WD40 Corp.
Further, we believe that major oil 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., 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

     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, we suffered a net loss of approximately $6,600,000.  We cannot
guarantee our operating success and ability to generate net income in the
future.

                                    Page 23
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

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.  However, we recently increased production and plan to further
increase production to meet an increase in demand.  Such production increases
could put strain on the production capacity of our existing suppliers.  While we
continue to work actively with each supplier in order to increase production of
our components, we cannot guarantee that each supplier will increase its
production in time to satisfy our increased 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.

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 lubricants and appearance
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 expanded our product line to diversify our
limited product mix and we plan to continue such expansion in the future.
However, we cannot guarantee that our new AFMT-based products will be widely
accepted by our customers.

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
lower 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 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 4.7% of revenues in 1999 as compared to 6.5%
of revenues in 1998.  We plan to expand international sales in the future.  This
will require significant financial resources and management attention.  In order
to expand sales on a worldwide basis, we plan to do the following:

     .  Establish additional marketing and sales operations.
     .  Hire additional employees.
     .  Recruit additional international distributors.

     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.

                                    Page 24
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

     Currently, our worldwide sales are denominated in United States 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.

     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.  In November 1998, a lawsuit was filed by certain EPL shareholders
against PIC, PSL, EPL and each of our former and current officers and directors.
The plaintiffs in the lawsuit allege breach of contract, certain fraud claims,
civil RICO, breach of fiduciary duty and conversion, and seek monetary damages.
We, along with PSL and each of our directors and officers, deny the allegations
of wrongdoing and intend to vigorously defend the lawsuit, although we cannot
presently determine the ultimate outcome of this proceeding.  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.

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.

                                    Page 25
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

We Are Controlled by Management and Certain Stockholders

     As of March 20, 2000, our directors, executive officers and principal
stockholders collectively held approximately 38.3% 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
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.

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

     PIC's financial instruments include cash and long-term debt. At December
31, 1999, 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, 1999.

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

     Consolidated balance sheets of PIC as of December 31, 1999 and 1998,
respectively, statements of income and cash flows for each of the three years in
the period ended December 31, 1999, 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
--------------------

     Not applicable.

                                    Page 26
<PAGE>

                                    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 2000 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 1999.

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 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 1999.

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 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999.

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 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999.

                                    Page 27
<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,
          1999, 1998 and 1997 with Notes and Independent Auditors' Reports

     (2)  Financial Statement Schedules

          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).

          10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
               d.b.a. Prolong International, dated November 10, 1993
               (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).

          10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
               dated October 24,

                                    Page 28
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

               1995 (incorporated by reference to the same numbered Exhibit to
               the Registrant's Registration Statement on Form 10 filed July 3,
               1997).

          10.6 Telemarketing Agreement between PSL and West Telemarketing
               Corporation, dated October 24, 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).

          10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
               Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated by
               reference to the same numbered Exhibit to the Registrant's
               Registration Statement on Form 10 filed July 3, 1997).

         10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
               Inc. and Barnes Dyer Marketing, Inc., dated December 15, 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).

         10.13 The Registrant's Revolving Credit Agreement with Bank of America
               National Trust and Savings Association, dated July 14, 1997
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).

         10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba
               Nemco Motorsports, dated February 13, 1997 (incorporated by
               reference to the same numbered Exhibit to the Registrant's Annual
               Report on Form 10-K filed March 23, 1998). *

         10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
               December 19, 1997 (incorporated by reference to the same numbered
               Exhibit to the Registrant's Annual Report on Form 10-K filed
               March 23, 1998). *

         10.17 Purchase and Sale Agreement between Huck International, Inc. (a
               subsidiary of Thiokol Corporation) and PSL for the property
               located at 6 Thomas, Irvine, California, dated February 23, 1998
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Annual Report on Form 10-K filed March 23, 1998).

         10.18 Sponsorship Agreement between PSL and Commonwealth Service &
               Supply Corp. T/A Jim Yates Racing, dated November 22, 1997;
               Addendum dated December 17, 1997 (both documents incorporated by
               reference to the same numbered Exhibit to the Registrant's Annual
               Report on Form 10-K filed March 23, 1998). *

         10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
               dated November 1, 1996 (incorporated by reference to the same
               numbered Exhibit to the Registrant's Annual Report on Form 10-K
               filed March 23, 1998). *

         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).

                                    Page 29
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

         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).

         10.23 Contract Packaging Agreement between PSL and Premier Packaging,
               Inc., dated September 11, 1998. (incorporated by reference to the
               same numbered Exhibit to the Registrant's annual Report on Form
               10-K filed March 25, 1999).

         10.24 Employment Agreement, dated October 5, 1999, by and among the
               Company, Prolong Super Lubricants, Inc. and Thomas G. Iwanski,
               including the following exhibits: (i) Warrant Agreement, dated
               October 5, 1999, and (ii) Form of Stock Option Agreement
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Quarterly Report on Form 10-Q filed November 12,
               1999).

         10.25 Registration Rights Agreement, dated October 5, 1999, between the
               Company and Thomas G. Iwanski (incorporated by reference to the
               same numbered Exhibit to the Registrant's Quarterly Report on
               Form 10-Q filed November 12, 1999).

         10.26 Associate Sponsorship Agreement between PSL, King Entertainment,
               Inc. and Kenneth D. Bernstein, dated December 17, 1999.*

         10.27 Employment Agreement, dated January 21, 2000, between PSL and
               Elton Alderman.

         10.28 Employment Agreement, dated January 21, 2000, between PSL and
               Thomas C. Billstein.

         10.29 Sponsorship Agreement between PSL and Sabco Racing, Inc. dated
               February 15, 2000.*

         10.30 Sponsorship Agreement between PSL and Galles/ECR Racing, LLC,
               dated March 10, 2000.*

         10.31 Service and Endorsement Contract between PSL and Smokey Yunick,
               dated January 11, 2000.*

          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.

          24.1 Power of Attorney (included as part of the signature page of this
               Annual Report).

          27.1 Financial Data Schedule.
------------------
*    Portions of this Exhibit are omitted and were filed separately with the
     Secretary of the Commission pursuant to the Registrant's application
     requesting confidential treatment under Rule 24b-2 of the Securities
     Exchange Act of 1934.

(b)  Reports on Form 8-K.

     There were no Form 8-K's filed during the fourth quarter of 1999.

                                    Page 30
<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



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


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

                                    Page 31
<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            April 14, 2000
--------------------------  Officer and Chairman of the Board
Elton Alderman              (Principal Executive Officer)

/s/  Thomas C. Billstein    Vice President, Secretary             April 14, 2000
--------------------------  and Director
Thomas C. Billstein

/s/  Nicholas M. Rosier     Chief Financial Officer               April 14, 2000
--------------------------  (Principal Financial Officer)
Nicholas M. Rosier

/s/  Bruce F. Barnes        Director                              April 14, 2000
--------------------------
Bruce F. Barnes

/s/  William J. Howell      Director                              April 14, 2000
--------------------------
William J. Howell

/s/  Tom T. Kubota          Director                              April 14, 2000
--------------------------
Tom T. Kubota

</TABLE>
                                    Page 32
<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 sheets of Prolong
International Corporation and subsidiaries (the Company) as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999.  Our audits also included the financial statement schedule 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 audits 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, 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.


DELOITTE & TOUCHE LLP

Costa Mesa, California
March 8, 2000, except for notes 1 and 8, as to
which the date is April 12, 2000

                                    Page 33
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     1999              1998
<S>                                                                <C>              <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                          $ 1,094,779       $ 1,127,861
Accounts receivable, net of allowance for doubtful accounts
  of $390,000 and $580,000 in 1999 and 1998, respectively            2,747,459         4,950,055
Inventories                                                          2,171,728         2,915,249
Prepaid expenses                                                       182,646         1,316,443
Income taxes receivable                                                 94,275           444,371
Prepaid television time                                                   ----           627,050
Advances to employees                                                  218,523           308,630
Deferred tax asset                                                   1,617,442            63,645
                                                                   -----------       -----------

    Total current assets                                             8,126,852        11,753,304

Property and equipment, net                                          3,554,176         3,372,509

Intangible assets, net                                               7,036,670         7,543,354

Deferred tax asset, non-current                                      2,545,238           439,791

Other assets                                                           116,712           101,914
                                                                   -----------       -----------

TOTAL ASSETS                                                       $21,379,648       $23,210,872
                                                                   ===========       ===========
</TABLE>

                See notes to consolidated fnancial statements.

                                    Page 34
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998 (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                      1999             1998
<S>                                                                <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                                                   $ 2,843,843       $ 1,878,418
Accrued expenses                                                     1,210,126         1,460,163
Line of credit                                                       3,985,000
Notes payable, current                                                  46,446            41,951
                                                                   -----------       -----------
    Total current liabilities                                        8,085,415         3,380,532

Notes payable, noncurrent                                            2,327,048         2,376,005

COMMITMENTS AND CONTINGENCIES

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;
  28,445,835 shares issued and outstanding in 1999
  and 1998                                                              28,446            28,446
Additional paid-in capital                                          14,809,349        14,716,438
Retained earnings (Accumulated deficit)                             (3,870,610)        2,709,451
                                                                   -----------       -----------
    Total stockholders' equity                                      10,967,185        17,454,335
                                                                   -----------       -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $21,379,648       $23,210,872
                                                                   ===========       ===========
</TABLE>

                See notes to consolidated fnancial statements.

                                    Page 35
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     1999                  1998                  1997
<S>                                                               <C>                    <C>                   <C>
NET REVENUES                                                      $ 34,470,915           $35,032,689           $29,846,795

COST OF GOODS SOLD                                                  10,500,586             7,527,361             5,735,238
                                                                  ------------           -----------           -----------

GROSS PROFIT                                                        23,970,329            27,505,328            24,111,557

OPERATING EXPENSES:
Selling and marketing expenses                                      25,850,474            19,838,689            17,259,469
General and administrative expenses                                  7,645,321             6,022,201             3,523,200
Research and development                                               305,297               710,531             _________
                                                                  ------------           -----------

  Total operating expenses                                          33,801,092            26,571,421            20,782,669
                                                                  ------------           -----------           -----------

OPERATING (LOSS) INCOME                                             (9,830,763)              933,907             3,328,888

OTHER INCOME (EXPENSE), net:
Interest expense                                                      (454,142)             (132,102)               (8,185)
Interest income                                                         10,918               115,598               249,214
                                                                  ------------           -----------           -----------

  Total other income (expense)                                        (443,224)              (16,504)              241,029
                                                                  ------------           -----------           -----------

(LOSS) INCOME BEFORE (BENEFIT) PROVISION
  FOR INCOME TAXES                                                 (10,273,987)              917,403             3,569,917

(BENEFIT) PROVISION FOR INCOME TAXES                                (3,693,926)              497,890             1,437,364
                                                                  ------------           -----------           -----------

NET (LOSS) INCOME                                                 $ (6,580,061)          $   419,513           $ 2,132,553
                                                                  ============           ===========           ===========

NET (LOSS) INCOME PER SHARE:
Basic                                                                   $(0.23)                $0.02                 $0.08
                                                                  ============           ===========           ===========
Diluted                                                                 $(0.23)                $0.02                 $0.08
                                                                  ============           ===========           ===========

WEIGHTED AVERAGE COMMON SHARES:
Basic                                                               28,445,835            25,807,618            25,508,035
                                                                  ============           ===========           ===========
Diluted                                                             28,445,835            26,011,767            25,690,774
                                                                  ============           ===========           ===========
</TABLE>

                See notes to consolidated fnancial statements.

                                    Page 36
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                            Common stock                  (Accumulated
                                      Common stock           Subscribed      Additional      Deficit)                     Total
                                ------------------------------------------     paid-in       Retained       Note       stockholders'
                                  Shares      Amount    Shares     Amount      capital       Earnings     receivable      equity
<S>                             <C>          <C>       <C>         <C>       <C>          <C>            <C>            <C>
BALANCES, December 31, 1996     25,453,700   $25,454    155,800     $ 156    $ 7,767,855    $   157,385    $(660,000)   $ 7,290,850

Shares issued for cash               5,000         5                              12,495                                     12,500
Shares issued for services         180,000       180                             229,270                                    229,450
Issuance of shares previously
  subscribed                       155,800       156   (155,800)     (156)
Cancellation of shares
 previously issued                (330,000)     (330)                           (659,670)                    660,000
Compensation costs related
  to options                                                                      43,501                                     43,501
Net income                                                                                    2,132,553                   2,132,553
                                ----------   -------   --------    -----     -----------    -----------    ---------     ----------
BALANCES, December 31, 1997     25,464,500    25,465         --       --       7,393,451      2,289,938           --      9,708,854
Shares issued for cash                 300                                           600                                        600
Compensation costs related to
  options                                                                         133,312                                    133,312
Issuance of common stock in
  exchange for the
     net assets of EPL           2,981,035     2,981                           7,189,075                                  7,192,056
Net income                                                                                      419,513                     419,513
                                ----------   ------    --------    -----     -----------    -----------    ---------     ----------
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      (6,580,061)                    92,911
Net loss                                                                                                                 (6,580,061)
                                ----------   ------    --------    -----     -----------    -----------    ---------     -----------
BALANCES, December 31, 1999     28,445,835   $28,446        ---    $----     $14,809,349    $(3,870,610)   $    ----     $10,967,185
                                ==========   =======   ========    =====     ===========    ===========    =========     ===========

</TABLE>

                See notes to consolidated fnancial statements.

                                    Page 37
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            1999                 1998                 1997
<S>                                                                        <C>                   <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                          $(6,580,061)          $   419,513         $ 2,132,553
Adjustments to reconcile net (loss) income to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                                872,088               247,937              82,172
  Provision for doubtful accounts                                             (190,268)              337,276             148,442
  Deferred taxes                                                            (3,659,244)             (527,129)             67,982
  Reserve for obsolescence                                                     884,024                25,000             100,000
  Reserve for other assets                                                     581,713                   ---                 ---
  Common stock issued in exchange for services                                     ---                   ---             229,450
  Compensation costs related to options                                         92,911               133,312              43,501
  Changes in assets and liabilities, net of effects of
   acquisition:
    Accounts receivable                                                      2,392,864            (1,472,608)         (2,667,135)
    Inventories                                                               (140,503)           (1,639,558)            134,247
    Prepaid expenses                                                           552,084              (600,584)           (530,633)
    Prepaid television time                                                    627,050               395,094            (654,983)
    Deposits                                                                   (26,298)               49,552             (78,254)
    Accounts payable                                                           965,425               804,320             325,228
    Accrued expenses                                                          (250,037)             (203,158)            960,099
    Income taxes                                                               350,096            (1,723,055)          1,027,121
                                                                           -----------           -----------         -----------

      Net cash (used in) provided by operating activities                   (3,528,156)           (3,754,088)          1,319,790

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                           (535,571)             (847,874)           (151,359)
Employee advances                                                               90,107               (80,734)           (224,221)
                                                                           -----------           -----------         -----------

      Net cash used in investing activities                                   (445,464)            ( 928,608)           (375,580)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other current liabilities                                              ---                   ---             (28,812)
Payments on notes payable                                                      (44,462)              (24,044)
Proceeds from line of credit                                                 3,985,000                   ---                 ---
Proceeds from issuance of common stock                                             ---                   600              12,500
Proceeds from subscriptions receivable                                             ---                   ---             189,500
Registration costs                                                                 ---              (346,982)                ---
                                                                           -----------           -----------         -----------

      Net cash provided by (used in) financing activities                    3,940,538              (370,426)            173,188
                                                                           -----------           -----------         -----------
</TABLE>

                See notes to consolidated fnancial statements.


                                    Page 38
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                         1999                 1998                1997

<S>                                                                      <C>                 <C>                   <C>
NET (DECREASE) INCREASE IN CASH
  AND CASH EQUIVALENTS                                                   $  (33,082)         $(5,053,122)          $1,117,398

CASH AND CASH EQUIVALENTS,
  Beginning of year                                                       1,127,861            6,180,983            5,063,585
                                                                         ----------          -----------           ----------

CASH AND CASH EQUIVALENTS, end of year                                   $1,094,779          $ 1,127,861           $6,180,983
                                                                         ==========          ===========           ==========
SUPPLEMENTAL DISCLOSURES -
  Cash paid during the year for:
    Income taxes                                                         $      ---          $ 2,748,076           $  366,000
                                                                         ==========          ===========           ==========
    Interest                                                             $  454,142          $   132,102           $    8,186
                                                                         ==========          ===========           ==========
</TABLE>

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

During 1998, the Company completed the following transaction:
 Financed the purchase of the office and warehouse facility with $2,442,000 in
 long term notes payable.
 Recorded $133,312 to additional paid-in-capital for compensation costs related
 to options.
 Issued 2,981,035 shares of common stock valued at $7,539,038, in exchange for
 the fair value of assets acquired of EPL in the amount of $7,604,886 and
 liabilities assumed of $65,848.

During 1997, the Company completed the following transactions:
 Issued 180,000 shares of common stock in exchange for services valued at
 $229,450.
 Issued 155,800 shares of common stock previously committed.
 Canceled 330,000 previously issued shares of common stock and a related note
 receivable of $660,000.
 Recorded $43,501 to additional paid-in capital for compensation costs related
 to options.

                See notes to Consolidated Financial Statements

                                    Page 39
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------

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.

    Managements' Plans Regarding Financial Results and Liquidity - During 1999,
    the Company incurred a net loss of approximately $6.6 million and, at
    December 31, 1999, had an accumulated deficit of approximately $3.9 million.
    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 inventory, other assets and accounts
    receivable. As discussed in Note 8, the Company's existing bank line of
    credit expires on April 30, 2000 and the lender has informed the Company
    that it does not intend to renew the existing credit facility. On April 12,
    2000, the Company signed a commitment letter from another lender for a $6
    million credit facility which will be utilizable based upon eligible amounts
    of inventories and receivables. Closing of the loan is subject to the
    completion and execution of the loan documents. Additionally, management is
    pursuing financing through subordinated debt and/or equity providers.
    Internally, the Company has strictly evaluated all expenditures, improved
    its credit and collection functions and revised vendor payment terms to the
    extent possible. There are also continued efforts to convert certain assets
    to cash on an accelerated basis. Management will also continue to vigorously
    defend the litigation described in Note 12. Management believes that the
    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 SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation - The accompanying consolidated financial
    statements 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 significant intercompany accounts 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.

    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.

    Prepaid Expenses - Prepaid expenses includes $78,641 and $162,978 at
    December 31, 1999 and 1998, 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.  $529,942 and $0
    were expensed in 1999 and 1998.

    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 1999, 1998 and 1997, the
    total amounts expensed for television time were $5,668,818, $4,220,093 and
    $7,095,400, respectively.  As of December 31, 1999 and 1998, prepaid
    television time was $0 and $627,050 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:

                                    Page 40
<PAGE>

          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, and deposits.

    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.

    Fair Value of Financial Instruments - Statement of Financial Accounting
    Standards (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, 1999 and 1998, management believes
    that the carrying amounts of cash and cash  equivalents, accounts
    receivable, subscriptions receivable, notes 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 as products are shipped.

    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, 1999, 1998 and 1997, revenues
    under this arrangement were $189,380, $347,771 and $593,388, 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.

                                    Page 41
<PAGE>

    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, 1999, 1998 and 1997, there was no difference between net income
    and comprehensive income.

    Net Income (Loss) 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 year ended December 31, 1999, no options or warrants were included
    as common stock equivalents as their effect would be antidilutive.  For the
    years ended December 31, 1998 and 1997, the diluted weighted average common
    shares outstanding included 204,149 and 182,739, respectively, of dilutive
    options.

    Use of Estimates - The preparation of financial statements in conformity
    with generally accepted accounting principles 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.

    Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
    Compensation, which 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.

3.  INVENTORIES

    Inventories at December 31, 1999 and 1998 consist of the following:

<TABLE>
<CAPTION>
                                      1999           1998
<S>                                <C>            <C>
    Raw materials                  $  985,785     $  936,451
    Finished goods                  1,185,943      1,430,797
    Promotional items                     -0-        548,001
                                   ----------     ----------

                                   $2,171,728     $2,915,249
                                   ==========     ==========
</TABLE>

                                    Page 42

<PAGE>

4.  PROPERTY AND EQUIPMENT

    Property and equipment at December 31, 1999 and 1998 consists of the
    following:

<TABLE>
<CAPTION>
                                                1999               1998
<S>                                           <C>                <C>
    Building and improvements                 $2,280,783         $2,268,559
    Computer equipment                           276,729            230,264
    Office equipment                              55,753             54,073
    Furniture and fixtures                       581,324            255,669
    Automotive equipment                          35,925             35,925
    Exhibit equipment                            115,143            115,143
    Machinery and equipment                       17,953             12,174
    Molds and dies                               206,961             63,193
                                              ----------         ----------

                                               3,570,571          3,035,000
    Less accumulated depreciation               (554,395)          (200,491)
                                              ----------         ----------

                                               3,016,176          2,834,509
    Land                                         538,000            538,000
                                              ----------         ----------

                                              $3,554,176         $3,372,509
                                              ==========         ==========
</TABLE>

5.  ACQUISITION OF EPL PRO-LONG, INC.

    Prior to February 5, 1998, the Company was subject to a license agreement,
    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 royalty expense under this arrangement for
    the years ended December 31, 1999, 1998 and 1997 approximated $0, $122,450
    and $1,023,869, respectively.  The agreement also called for an initial one-
    time license fee of $106,190, which the Company capitalized and was
    amortizing over a five-year period.  The Company amortized $19,468, and
    $21,238 for the years ended December 31, 1998 and 1997, respectively,
    resulting in an accumulated amortization balance of $63,716 as of December
    31, 1997.  As of the closing date of the acquisition of EPL Pro-Long, Inc.,
    the Company wrote off the remaining unamortized balance of $23,006.

    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 12).  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.  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 1999 and 1998 was
    $506,684 and $56,915, respectively, resulting in accumulated amortization of
    $563,599 and $56,915 as of December 31, 1999 and 1998, respectively.

                                    Page 43
<PAGE>

    The following unaudited combined pro forma information shows the results of
    the Company's operations as if the transaction had occurred on January 1:
<TABLE>
<CAPTION>

                                                     1997          1998

<S>                                               <C>           <C>
    Net revenues                                  $29,846,795   $35,032,689
    Net income                                    $ 2,301,856   $   155,197
    Net income per common share:
          Basic                                   $      0.08   $      0.01
          Diluted                                 $      0.08   $      0.01
</TABLE>

6.  ACCRUED EXPENSES

    Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
                                              1999             1998

<S>                                        <C>              <C>
    Accrued royalties                      $   18,090       $   46,748
    Accrued legal expenses                    363,984          573,000
    Payroll and payroll taxes                 296,880          482,620
    Accrued commissions                       124,353          280,610
    Purchase commitments                      301,509              ---
    Other                                     105,310           77,185
                                           ----------       ----------

                                           $1,210,126       $1,460,163
                                           ==========       ==========
</TABLE>

                                    Page 44
<PAGE>

7.  NOTES PAYABLE

    During 1998, the Company obtained loans for the financing of the purchase of
    its office and warehouse facility.  The terms of the loans and outstanding
    balances as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                           1999          1998
<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 each with a final payment of
        all remaining unpaid principal and
        interest due on May 1, 2008.                     $1,653,757   $1,677,954



    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 each
        through July 1, 2018.                               719,737      740,002
                                                         ----------   ----------
                                                          2,373,494    2,417,956
        Less current maturities                             (46,446)     (41,951)
                                                         ----------   ----------
                                                         $2,327,048   $2,376,005
                                                         ==========   ==========
        Borrowings have the following
        scheduled maturities:
        Year ending December 31,
         2000                                            $   46,446
         2001                                                50,256
         2002                                                53,974
         2003                                                57,969
         2004                                                61,909
         Thereafter                                       2,102,940
                                                         ----------
                                                         $2,373,494
                                                         ==========
</TABLE>

8.  LINE OF CREDIT

    In July 1997, the Company entered into a $4,000,000 line of credit
    arrangement, as amended, with a bank. Such line is collateralized by
    accounts receivable and inventories. The line contains certain financial
    covenants including a minimum quick ratio and tangible net worth. As of
    December 31, 1999, $3,985,000 was outstanding which was the maximum
    available under the current amendment to the line of credit. As of December
    31, 1999, the Company was in compliance or has received waivers for all
    financial convenants. The effective interest rate was 10% at December 31,
    1999. The line expires on April 30, 2000 and the bank has informed the
    Company that it does not intend to renew its existing credit facility. On
    April 12, 2000, the Company received a commitment letter from a lender for a
    $6 million credit facility which will be utilizable based upon eligible
    amounts of inventories and receivables. Management signed this commitment
    letter effective April 12, 2000. Closing of the loan is subject to the
    completion and execution of the loan documents. Additionally, the Company is
    currently seeking new financing arrangements through subordinated debt
    and/or equity providers.

9.  STOCKHOLDERS' EQUITY

    In 1996, the Company received subscriptions receivable aggregating $209,500
    for the sale of 155,800 shares of restricted unregistered common stock.
    Subscriptions of $20,000 were collected in fiscal 1996, with the balance of
    $189,500 being collected in the first quarter of 1997.  During 1997, the
    Company issued these 155,800 shares of restricted unregistered common stock.

    In January 1997, the Company issued 5,000 shares of restricted unregistered
    common stock in exchange for cash of $12,500 or $2.50 per share.

    During 1997, the Company issued 180,000 shares of restricted unregistered
    common stock for services performed by outside consultants.  Consulting
    expense was recorded at share prices ranging from $1.00 to $2.00 per share.
    The charge is recorded as a component of selling, general and administrative
    expenses.

                                    Page 45
<PAGE>

    During 1998, the Company issued 2,981,035 shares of common stock in exchange
    for the business assets of EPL at a per share price of $2.529.  Registration
    costs totaling $346,982 were charged against additional paid-in capital.
    (See Note 5)

10. 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, and 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.

    In October 1996, the Company granted an option to an employee to purchase
    30,000 shares of the common stock of the Company at an exercise price of
    $5.38 per share, which represented the market value at the date of grant.
    This option was canceled in 1997 and reissued under the Plan.

    Stock option activity is as follows:
<TABLE>
<CAPTION>
                                                                     Weighted
                                                                      average
                                                Shares under      exercise price
                                                   option            per share

    <S>                                         <C>                 <C>
    OUTSTANDING, December 31, 1996                   30,000           $ 5.38
      Granted                                     1,358,688           $ 2.10
      Canceled                                      (33,310)          $(5.04)
                                                  ---------

    OUTSTANDING, December 31, 1997                1,355,378           $ 2.10
      Granted                                       160,000           $ 2.19
      Canceled                                     (109,834)          $(2.57)
      Exercised                                        (300)          $(2.00)
                                                  ---------

    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
                                                  =========
</TABLE>

    Outstanding options vest over periods ranging from one to five years.
    During 1999, the Company issued 74,000 options with fair values ranging from
    $.44 to $2.00 to outside consultants.  During 1999, the Company recorded
    $92,911 in compensation costs related to the partial vesting of options
    granted to outside consultants with vesting periods during 1999.

    As of December 31, 1999 and 1998, options to purchase 581,038 and 301,806
    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-

                                    Page 46
<PAGE>

    Based Compensation, the Company's net income (loss) would have been the pro
    forma amounts indicated below:

<TABLE>
<CAPTION>
                                               1999        1998         1997

    <S>                                     <C>            <C>        <C>
    Net (loss) income, as reported          $(6,580,061)   $419,513   $2,132,553
    Net (loss) income, pro forma            $(7,031,336)   $(19,148)  $1,888,150
    Net (loss) per share, as reported:
      Basic                                 $     (0.23)   $   0.02   $     0.08
      Diluted                               $     (0.23)   $   0.02   $     0.08
    Pro forma net (loss) income per share:
      Basic                                 $     (0.25)   $   0.00   $     0.07
      Diluted                               $     (0.25)   $   0.00   $     0.07
</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
    253.79%, risk-free interest rates of 6.0% in 1999 and 1998, and 6.9% in
    1997, and an expected life of 7 1/2 years.

11. INCOME TAXES

    The (benefit) provision for income taxes consists of the following for the
    years ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                 1999             1998              1997
<S>                           <C>              <C>               <C>

Current:
  Federal                     $   (21,990)      $  814,550       $1,063,979
  State                           (12,692)         210,469          301,725
  Foreign                             ---              ---            3,678
                              -----------       ----------       ----------

                                  (34,682)       1,025,019        1,369,382

Deferred:
  Federal                      (3,406,716)        (432,316)          52,462
  State                          (252,528)         (94,813)          15,520
                              -----------       ----------       ----------

                               (3,659,244)        (527,129)          67,982
                              -----------       ----------       ----------

                              $(3,693,926)      $  497,890       $1,437,364
                              ===========       ==========       ==========
</TABLE>

                                    Page 47
<PAGE>

    The provision for income taxes differs from the amount that would result
    from applying the federal statutory rate, as follows:

<TABLE>
<CAPTION>
                                               1999         1998         1997

    <S>                                     <C>            <C>          <C>
    Federal statutory income tax rate       $(3,595,895)   $321,091   $1,213,772
    State income taxes, net of federal
       benefit                                 (172,394)     75,176      209,381
     Other                                       74,363     101,623       14,211
                                            -----------    --------   ----------

                                            $(3,693,926)   $497,890   $1,437,364
                                            ===========    ========   ==========
</TABLE>

    Temporary differences which give rise to deferred tax assets and liabilities
    are as follows at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                    1999            1998
<S>                                              <C>              <C>
   Deferred tax liabilities:
      Prepaid television time                    $      ---       $(274,899)
      State taxes                                  (119,729)        (31,344)
      Fixed assets                                  (38,745)        (36,759)
   Deferred tax assets:
      Accrued vacation                               42,340          33,662
      Allowance for doubtful accounts                71,459         254,272
      Inventory reserve                             442,356          54,800
      Accrued expenses                            1,061,287         371,956
      Net operating loss                          2,560,864
      Other                                         142,848         131,748
                                                 ----------       ---------

                                                 $4,162,680       $ 503,436
                                                 ==========       =========
</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 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, 1999, the Company estimated federal and state net operating
loss carryforwards, which are available to offset future taxable income through
2019, of approximately $6.8 million and $4.0 million, respectively.

12. 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
    approximately $75,758, $115,171 and $137,500 for the years ended December
    31, 1999, 1998 and 1997, 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 years ended December 31, 1999, 1998 and 1997, the
    Company expensed $12,319, $63,661 and $174,266 respectively, 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, $42,105 and
    $116,177 under this arrangement for the years ended December 31, 1999, 1998
    and 1997, respectively.  The agreement terminated in May 1999.

                                    Page 48
<PAGE>

    The Company is obligated to pay royalties to the same producer at the rate
    of  1/2% 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, 1999, 1998 and 1997, the Company expensed $2,444,
    $0 and $0, respectively, under this arrangement.

    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, 1999, 1998 and 1997, the
    Company expensed $42,156, $0 and $0, respectively, under this arrangement.

    The Company has an arrangement with an individual whereby it has agreed to
    pay royalties on all net 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 four years was exercised.  For the four years
    under the extension, the Company has agreed to pay royalties at the rate of
    1% on all net retail sales.  For each of these years, the Company pays a
    guaranteed minimum payment of $75,000.  Maximum payments are $175,000 in the
    first year of the renewal period and increase $25,000 each year thereafter,
    to a maximum of $250,000 in the last year of the agreement.  For the years
    ended December 31, 1999, 1998 and 1997, the Company expensed approximately
    $150,000, $114,931 and $134,753, 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 remaining
    terms for individual agreements range from one to three years.  The Company
    is committed to aggregate future payments under these agreements as follows:

<TABLE>
<CAPTION>
<S>                                                           <C>
       Year ending December 31:
         2000                                                 $855,000
         2001                                                  100,000
                                                              --------
                                                              $955,000
                                                              ========
    </TABLE>

    Endorsement and sponsorship expenses charged to operations related to these
    agreements was approximately $2,082,000, $1,904,000, and $956,000 for the
    years ended December 31, 1999, 1998 and 1997, respectively.

    Purchase Commitments - The Company has outstanding noncancelable inventory
    purchase commitments with a contract packager of approximately $1,270,000 as
    of December 31, 1999.  Under the terms of the agreement, the packager
    purchases components, manufactures, warehouses and distributes certain car
    care products for the Company.  When inventories held by the packager exceed
    approximately 75 days from the date of production, the Company may be
    obligated to pay a storage handling fee of 1 1/2% per month, and /or
    purchase these inventories at the option of the packager.

    Employment Contracts - In October, 1999, the Company entered into an
    employment agreement with an officer and director of the Company for a
    period of 4 years.  In March 2000, the agreement was terminated.  Under the
    terms of the related separation agreement, the officer and director resigned
    from both positions.  Additionally, all warrants and stock options became
    immediately exercisable at the exercise prices in the original agreement,
    which are:  i) 200,000 warrants at an exercise price of $2.00 per share; ii)
    200,000 warrants at an exercise price of $3.00 per share; iii) 200,000
    warrants at an exercise price of $4.00 per share; iv) 200,000 warrants at an
    exercise price of $5.00 per share; v) 100,000 incentive stock options at an
    exercise price of $.056 per share; and, vi) 100,000 incentive stock options
    at an exercise price of $1.06 per share.  All warrants and stock options
    expire on December 31, 2000.  The individual will continue as a business
    consultant to the Company through October 4, 2000.  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

                                    Page 49
<PAGE>

    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.

    Litigation - The AFMT patent on which Prolong's products are based, has been
    the subject of litigation, primarily suits contesting the ownership thereof.
    Should any litigation result in an adverse ruling precluding Prolong's
    continued use of the AFMT patent, PIC's business, operating results,
    financial condition and cash flows would be materially adversely effected.
    In July 1993, the trial court ruled in favor of Prolong's licensor, EPL,
    awarding EPL damages in excess of $15.5 million, and made findings of fact
    that the defendants had signed certain key documents which evidenced EPL's
    ownership of the intellectual property.  The defendants appealed the trial
    court's findings, arguments relating to which were heard in June 1997.  In
    January 1998, the court of appeal affirmed the trial court's decision in
    favor of EPL.  The defendants subsequently appealed the court of appeals
    affirmation to the California Supreme Court.  In June 1998, the California
    Supreme Court denied a review of the appeal, thereby extinguishing any
    further appeals and rendering the judgment final.

    In another matter, on or about November 17, 1998, Michael Walczak et al, on
    behalf of himself and other similarly situated shareholders of EPL filed a
    class action in the U.S. District Court (the "Court") in San Diego,
    California against PIC, PSL, EPL and their respective former and current
    officers and directors.  The named plaintiffs allege breach of contract,
    certain fraud claims, civil RICO, breach of fiduciary duty and conversion
    and seek monetary damages.  The named plaintiffs in the action are allegedly
    current EPL shareholders who hold less than two percent (2%) of the
    outstanding shares of EPL's common stock, in the aggregate.  The plaintiffs
    applied for a preliminary injunction to halt the sale of the assets of EPL
    to PIC and to prevent the dissolution of EPL.

    On November 25, 1998, the Court granted a temporary restraining order
    without a hearing and before opposition could be submitted.  On December 30,
    1998, the Court held a hearing on whether a preliminary injunction should be
    issued in connection with such action.  The Court entered a preliminary
    injunction based on the plaintiffs' (a) alleged claim for fraudulent
    conveyance in connection with PSL's license agreement with EPL and (b)
    alleged claim for breach of fiduciary duty.  The preliminary injunction
    enjoins the further consummation of the asset purchase transaction and
    prevents EPL from completing its liquidation and dissolution until further
    notice from the Court.  The preliminary injunction will last until the case
    is tried on its merits or until the preliminary injunction is otherwise
    dismissed.  The Court ordered the plaintiffs to post a bond in the amount of
    $100,000, which bond has been posted.  PIC has appealed the Court's
    preliminary injunction ruling, which appeal was subsequently denied.  The
    defendants have each filed and served motions to dismiss the complaint
    pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

    The defendants successfully moved to change venue and the case has just been
    ordered transferred to the federal court in Orange County, California, where
    PIC's principal office is located.  In December 1999, plaintiffs' counsel
    was disqualified from the matter on the grounds of unwaivable conflict of
    interest.  Plaintiffs have not yet selected new counsel.  The Ninth Circuit
    Court of Appeal, however, set aside the preliminary injunction.  At this
    time, due to plaintiffs lack of counsel, there are no mediation conferences
    scheduled.  Therefore, final resolution of the matter cannot presently be
    determined.  PIC and PSL and their respective current officers and directors
    continue to believe that there is no merit to the plaintiff's claims and
    plan to vigorously defend against the claims.

    In a third matter, the U.S. District Court heard a case against PIC whereby
    the plaintiffs alleged a variety of business torts, including copyright
    infringement and false advertising.  The Company denied the allegations and
    counter-claimed against the plaintiffs and multiple other parties, alleging
    copyright infringement, false advertising, product disparagement,
    misappropriation of trade secrets and unfair trade practices.  The
    plaintiffs and defendants settled this matter in 1999 pursuant to a
    confidential settlement agreement.  Prolong's obligations under the
    settlement agreement were accrued in 1998.

                                    Page 50
<PAGE>

    PIC and its subsidiaries are subject to 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 effect on PIC's consolidated financial position, results of
    operations, or cash flows.


13. 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 1999, one customer accounted
    for 13.3% of net revenues.  During 1998, two customers accounted for 17.2%
    and 14.5%, respectively, of net revenues.  During 1997, no single customer
    accounted for 10% of net revenues.  As of December 31, 1999 and 1998, one
    customer each year accounted for 32.8% and 33.0% respectively, of the
    balance of accounts receivable.

                                    Page 51
<PAGE>

14. QUARTERLY FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
                                                      Net         Net Income
                            Net         Gross       Income    (Loss) per Share
                         Revenues      Profit       (Loss)     Basic   Diluted
                        -----------  -----------  -----------  ------  -------
<S>                     <C>          <C>          <C>          <C>     <C>
   Quarter ended:
    March 31, 1998      $10,848,742  $ 8,843,328  $ 1,606,568  $ 0.06  $ 0.06
    June 30, 1998         8,399,828    6,758,028      115,724    0.01    0.01
    September 30, 1998    9,662,580    7,201,989      484,131    0.02    0.02
    December 31, 1998     6,121,539    4,701,983   (1,786,910)  (0.07)  (0.07)
                        -----------  -----------  -----------  ------  ------
                        $35,032,689  $27,505,328  $   419,513  $ 0.02  $ 0.02
                        ===========  ===========  ===========  ======  ======

   Quarter ended:
    March 31, 1999      $ 9,749,872  $ 7,091,933  $  (127,891) $(0.00) $(0.00)
    June 30, 1999        12,001,207    8,971,702   (1,556,502)  (0.06)  (0.06)
    September 30, 1999    9,758,596    7,276,008     (416,272)  (0.01)  (0.01)
    December 31, 1999     2,961,240      630,686   (4,479,396)  (0.16)  (0.16)
                        -----------  -----------  -----------  ------  ------
                        $34,470,915  $23,970,329  $(6,580,061) $(0.23) $(0.23)
                        ===========  ===========  ===========  ======  ======
</TABLE>

Fourth Quarter Adjustments
--------------------------

1999 - The net loss for the fourth quarter of 1999 includes the following: 1) a
       reserve of approximately $893,000 for excess inventory quantities and
       discontinued products; 2) a reserve of approximately $582,000 against an
       other asset; 3) a reserve of approximately $326,000 against certain
       accounts receivable; and, 4) a reserve of approximately $400,000 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 1999.

                                    Page 52
<PAGE>

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                           Additions
                                     -------------------                 Balance
                         Balance at  Charged to Charged                  of End
                        Beginning of  Costs and to Other                   of
     Description           Period     Expenses  Accounts Deductions      Period
     -----------        ------------ ---------- -------- ----------      -------
<S>                     <C>          <C>        <C>      <C>         <C>
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
                          ========   ==========   =====   ========    ==========

Year ended December 31,
 1998:
Allowance for doubtful
 accounts receivable       $242,724  $  372,020   $----   $ 34,744    $  580,000
Inventory reserves          100,000      25,000    ----       ----       125,000
                           --------  ----------   -----   --------    ----------
Total                      $342,724  $  397,020   $----   $ 34,744    $  705,000
                           ========  ==========   =====   ========    ==========

Year ended December 31,
 1997:
Allowance for doubtful
 accounts receivable       $ 94,282  $  241,751   $----   $ 93,309    $  242,724
Inventory reserves             ----     100,000    ----       ----       100,000
                           --------  ----------  ------   --------    ----------
                           $ 94,282  $  341,751   $----   $ 93,309    $  342,724
                           ========  ==========  ======   ========    ==========
</TABLE>


                                    Page 53
<PAGE>

                       PROLONG INTERNATIONAL CORPORATION

                                   FORM 10-K

                                 Exhibit Index
                                 -------------


                                                                      Sequential
                                                                     Page Number
                                                                     -----------

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).                                                              ---
10.2  Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
      d.b.a. Prolong International, dated November 10, 1993
      (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).                                                              ---
10.5  Service Agreement between PSL and Tylie Jones & Associates, Inc.,
      dated October 24, 1995 (incorporated by reference to the same
      numbered Exhibit to the Registrant's Registration Statement on
      Form 10 filed July 3, 1997).                                        ---
10.6  Telemarketing Agreement between PSL and West Telemarketing
      Corporation, dated October 24, 1995 (incorporated by reference
      to the same numbered Exhibit to the Registrant's Registration
      Statement on Form 10 filed July 3, 1997).                           ---

                                    Page 54
<PAGE>

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).                                        ---
10.8  Associate Sponsorship Agreement between PSL, King Entertainment,
      Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated
      by reference to the same numbered Exhibit to the Registrant's
      Registration Statement on Form 10 filed July 3, 1997).              ---
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
      Inc. and Barnes Dyer Marketing, Inc., dated December 15, 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).                                               ---
10.13 The Registrant's Revolving Credit Agreement with Bank of
      America National Trust and Savings Association, dated July 14,
      1997 (incorporated by reference to the same numbered Exhibit to
      the Registrant's Registration Statement on Form 10 filed
      July 3, 1997).                                                     ---
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba
      Nemco Motorsports, dated February 13, 1997 (incorporated by
      reference to the same numbered Exhibit to the Registrant's
      Annual Report on Form 10-K filed March 23, 1998). *                ---
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc.,
      dated December 19, 1997 (incorporated by reference to the same
      numbered Exhibit to the Registrant's Annual Report on Form 10-K
      filed March 23, 1998). *                                           ---
10.17 Purchase and Sale Agreement between Huck International, Inc. (a
      subsidiary of Thiokol Corporation) and PSL for the property
      located at 6 Thomas, Irvine, California, dated February 23, 1998
      (incorporated by reference to the same numbered Exhibit to the
      Registrant's Annual Report on Form 10-K filed March 23, 1998).     ---
10.18 Sponsorship Agreement between PSL and Commonwealth Service &
      Supply Corp. T/A Jim Yates Racing, dated November 22, 1997;
      Addendum dated December 17, 1997 (both documents incorporated by
      reference to the same numbered Exhibit to the Registrant's
      Annual Report on Form 10-K filed March 23, 1998). *                ---
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
      dated November 1, 1996 (incorporated by reference to the same
      numbered Exhibit to the Registrant's Annual Report on Form 10-K
      filed March 23, 1998). *                                           ---
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).             ---
10.23 Contract Packaging Agreement between PSL and Premiere Packaging,
      Inc., dated September 11, 1998.                                    ---
10.24 Employment Agreement, dated October 5, 1989, by and among the
      Company, Prolong Super Lubricants, Inc. and Thomas G. Iwanski,
      including the following exhibits:  (i) Warrant Agreement, dated
      October 5, 1999, and (ii) Form of

                                    Page 55
<PAGE>

      Stock Option Agreement (incorporated by reference to the same
      numbered Exhibit to the Registrant's Quarterly Report on
      Form 10-Q filed November 12, 1999).                                ---
10.25 Registration Rights Agreement, dated October 5, 1999, between
      the Company and Thomas G. Iwanski (incorporated by reference to
      the same numbered Exhibit to the Registrant's Quarterly Report
      on Form 10-Q filed November 12, 1999).                             ---
10.26 Associate Sponsorship Agreement between PSL, King Entertainment,   57
      Inc. and Kenneth D. Bernstein, dated December 17, 1999.*           ---
10.27 Employment Agreement, dated January 21, 2000, between PSL and      67
      Elton Alderman.                                                    ---
10.28 Employment Agreement, dated January 21, 2000, between PSL and      78
      Thomas C. Billstein.                                               ---
10.29 Sponsorship Agreement between PSL and Sabco Racing, Inc. dated     88
      February 15, 2000.*                                                ---
10.30 Sponsorship Agreement between PSL and Galles/ECR Racing, LLC,      93
      dated March 10, 2000.*                                             ---
10.31 Service and Endorsement Contract between PSL and Smokey Yunick,    100
      dated January 11, 2000.*                                           ---
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.                                  108
24.1  Power of Attorney (included as part of the signature page of
      this Annual Report).                                               ---
27.1  Financial Data Schedule (Article 5 of Regulation S-X).             109
-----------
*     Portions of this Exhibit are omitted and were filed separately with the
      Secretary of the Commission pursuant to the Registrant's application
      requesting confidential treatment under Rule 24b-2 of the Securities
      Exchange Act of 1934.

                                    Page 56