<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, 2000
     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
12, 2001, was approximately $4,550,000.

The number of outstanding shares of the Registrant's Common Stock as of March
12, 2001 was 28,438,903.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 20, 2001, are incorporated by reference into Part III.

                                  Page 1 of 57

                Exhibit Index on Sequentially Numbered Page 29
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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" or "the Company"), is engaged in the
manufacture, sale and worldwide distribution of a line of high performance
lubrication and automotive appearance products, several of which are based on a
patented extreme pressure lubricant additive for use in metal lubrication,
commonly referred to as anti-friction metal treatment ("AFMT").

     On February 5, 1998, PIC entered into a definitive agreement with EPL Pro-
Long, Inc., a California Corporation ("EPL"), under which PIC purchased the
business assets of EPL.  Under the terms of the agreement, PIC purchased the
principal assets and assumed certain liabilities of EPL for approximately
2,981,035 shares of PIC's common stock, $0.001 par value per share (the "PIC
Common Stock").  With the purchase, PIC acquired the patents for the 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
certain of 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 subsequently selected new counsel.  PIC, PSL, and their
respective current officers and directors believe there is no merit to the
plaintiffs' claims.  In December 2000, the

                                    Page 2
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parties agreed to and engaged in a mediation conference in an attempt to resolve
the dispute. The mediator is still involved with the parties. While substantive
progress was made toward settling the litigation, final resolution of the matter
cannot presently be determined. See "Legal Proceedings".

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

     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.

                                    Page 3
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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:



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

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

     Prolong Anti-Friction Metal Treatment "AFMT"

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

     Prolong Engine Treatment and Engine Treatment Booster

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

     Prolong Transmission Treatment

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

     Prolong Fuel System Treatment

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

     Prolong "Fast-Fuel"(TM) Octane Power Boost

     This product is a specially formulated gasoline additive that is designed
to help boost octane, help restore lost horsepower, help improve fuel mileage
and help mitigate knocks, pings and engine hesitation.

                                     Page 4
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     Prolong "Fast-Fuel"(TM) Injector Cleaner

     This product is formulated as a fuel additive designed to help remove
deposits on clogged fuel injectors and intake valves, to help clean dirty fuel
injectors, to help keep carburetors, combustion chambers, manifolds and ports
clean, and consequently help maintain optimum engine performance and optimum
mileage.

     Prolong High Performance Multi-Purpose EP-2 Grease

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

     Prolong "SPL100" Super Penetrating Lubricant

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

     Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid

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

     Prolong Multi-Purpose Precision Oil

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

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

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


                                    Page 5
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     In addition to the development of the above-referenced AFMT-based lubricant
products, Prolong is also engaged in efforts to expand its lubricant
formulations beyond its current AFMT-based technology.

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

     Prolong Paint Sealant

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

     Prolong Waterless Wash

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

     Prolong Super Protectant

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

     Prolong Super Cleaner

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

     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

                                    Page 6
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doors, sewing machines, electric hair clippers, bicycles, tricycles, scooters,
skateboards, garage door openers, lawn mowers, snow blowers, drills, saws, door
locks, hinges, rusted bolts, and virtually anything made of metal that must be
lubricated in order to maintain performance. Prolong currently manufactures
"SPL100 Super Penetrating Lubricant" and "Prolong Multi-Purpose Precision Oil"
for this market.

     Industrial

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

     Prolong anticipates pursuing the industrial market through a network of
manufacturer's sales representatives and through established industrial
distributors.

     Federal, State, & Local Governments

     The government market is not only very large, but Prolong believes it is
also extremely varied. It includes cities, counties, states and all of the
federal government agencies.  Prolong believes that these agencies collectively
purchase, operate, and maintain a significant investment in trucks, automobiles,
buses, tanks, airplanes, helicopters, boats, ships, radar equipment, guns,
miscellaneous equipment and tools, as well as many other mechanisms, all of
which require adequate lubrication.


     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.

                                    Page 7
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Future Markets For Prolong's Products

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

     Commercial Trucking

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

     Agricultural Applications

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

     Marine Applications

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

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

                                    Page 8
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     International sales comprised 6.5%, 4.7%, and 7.8% of PIC's revenues in
1998, 1999, and 2000, respectively.  Prolong consummates such sales through
independent distributors and, as such, has nominal assets attributable to its
international sales.

Marketing And Distribution Of The Products

     Prolong distributes its products through both national and regional
automotive aftermarket stores, traditional automotive aftermarket stores, mass
merchandisers, installers, independent distributors, and directly to consumer
end-users via direct response television sales and the internet.  Currently,
Prolong has approximately 450 distributors in the United States.  Additionally,
Prolong has ten international distributors located in Europe, Asia, Africa and
South America.  Prolong currently employs a direct sales force of 10 people to
service its distributors.

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

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

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

     The Company utilizes contract warehouses located in Southern California to
store and ship its lubricant products.  For fulfillment of direct sales to
consumers, the Company utilizes an independent contractor located in Southern
California with a warehouse based in Burbank, California.  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 an ongoing agreement by which it
retained the services of Al Unser to endorse and promote Prolong's products.
Mr. Unser has agreed to make certain appearances to assist in marketing the
products and has agreed to license his name and likeness in connection with the
marketing of Prolong's products.  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 a sponsor of the
"Budweiser King Top Fuel Dragster" through the year 2001 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.

     Prolong was the title rights sponsor in two nationally televised national
drag racing events during 2000.  Prolong Super Lubricants was the title rights
sponsor at the NHRA sanctioned Prolong Super Lubricants Northwest Nationals held
in early August in the Seattle area.  The agreement provided for primary signage
and prominent recognition in all racing promotions including television
advertising to promote the event, tickets, trophies, print ads and all NHRA
printed material relating to the NHRA's national schedule throughout the year.
Prolong was also the title rights sponsor to the International Hot Rod
Association ("IHRA") Winter Nationals held in Darlington, South

                                    Page 9
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Carolina which was the season opening event for that sanctioning body. The
television coverage on the IHRA event was through TNN and included similar
promotional rights as the NHRA event described above. At this time, the Company
has not entered into any definitive agreements to act as the title rights
sponsor at any NHRA or IHRA sanctioned events during 2001.

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

     From time to time, Prolong utilizes direct response television advertising,
commonly called infomercials, in order to educate the public about the benefits
and features of Prolong products, to promote the brand, and to sell products
directly to consumer end users.  To date, Prolong has premiered three separate
infomercials.  Results through the infomercials vary from program to program and
from time slot to time slot but in general have been beneficial to Prolong due
to the fact that they provide television exposure at reduced costs from
traditional television spot advertising, as well as fill the market demand for
mail order purchases.  In general, Prolong believes that no more than 5 to 10%
of its customers will buy Prolong products through infomercials and mail order
delivery, but Prolong does believe that there is a wide viewing audience that is
exposed to its products through the infomercials and ultimately purchases
Prolong products at a retail establishment.  Prolong intends to air infomercials
from time to time so long as they are economically viable, help to build the
brand throughout the marketplace, and drive retail sales.

     During 2000, Prolong operated its website located at www.prolong.com.  The
                                                          ---------------
Prolong website has e-commerce capabilities as well as general product and
company information.  Prolong intends to continue to develop its website during
2001 and to further utilize the Internet as a means of marketing and
distributing its products directly to the public, as well as communicating with
its shareholders and the public in general.

Competition

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

     Increased competition could result in price reductions, reduced gross
margins, and a loss of market share, any of which could have a material adverse
effect on PIC's business, financial condition and results of operations.  In
addition, many of Prolong's competitors have significantly greater financial,
technical, research and product development, marketing and other resources and
greater market recognition than Prolong.  Several of Prolong's competitors also
currently have, or may develop or acquire, substantial customer bases in the
automotive and other related industries.  As a result of these factors,
Prolong's competitors may be able to respond more quickly than Prolong to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products.
Additionally, other dealers and distributors may offer similar lubrication and
appearance products at prices below those offered by Prolong, appealing to the
price-sensitive segment of the market.  While Prolong believes that the prices
for Prolong lubrication and appearance products are competitive for the level of
quality obtained by the customer, Prolong relies on PSL's brand name

                                    Page 10
<PAGE>

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.

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, conditions affecting the component-producing countries, or
otherwise, could have a material adverse effect on PIC's results of operations.

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

Customers

     In 2000, Prolong's sales to automotive aftermarket retail chain stores,
mass merchandisers, and independent distributors comprised approximately 85.8%
of its revenues while sales to commercial, industrial and other customers
comprised 10.8% of total revenues.  Approximately 3.4% of Prolong's 2000 sales
resulted as a response to the airing of the infomercials. In 2000, two retail
customers comprised approximately 27.5% of its revenues.

                                    Page 11
<PAGE>

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) and SPONGE APPLICATOR (U.S.
Design Patent No. 414005), which applicator is currently included in the various
appearance product packages marketed by Prolong.  PSL has obtained or applied
for trademark registration protection in numerous countries for various
trademarks utilized in the marketing and promotion of Prolong lubricant
products.  Currently, PSL holds the following federally registered trademarks in
the United States: PROLONG and the related design (U.S. Reg. Nos. 2,136,672 and
2,136,576), PROLONG SUPER LUBRICANTS (U.S. Reg. No. 2,136,577), NO EQUAL IN THE
WORLD & DESIGN (U.S. Reg. No. 2,129,784), NO EQUAL IN THE WORLD (Word Mark)
(U.S. Reg. No. 2,270,653), SPL100 (U.S. Reg. No. 2,022,220), THE ULTIMATE IN
PROTECTION & PERFORMANCE (U.S. Reg. No. 2,129,785), PSL's Oil Drop Logo (U.S.
Reg. No. 2,135,230), TRIGGER SPRAY BOTTLE CONFIGURATION (U.S. Reg. No.
2,376,247), and TRIGGER SPRAY BOTTLE BLUE COLOR (U.S. Reg. No. 2,376,248).

Royalty Agreements

     Prolong entered into a memorandum agreement with the producer of its
infomercial, The 2M Group, Inc., whereby Prolong agreed to pay 0.5% 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 2000, Prolong expended $915 in royalties under
this agreement.

     Prolong entered into another 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 2000, Prolong
expended $13,600 in royalties 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 lubricant retail
sales according to the following rates: 1.5% from November 1, 1996 through
October 31, 1997; 1.25% from November 1, 1997 through October 31, 1998; and 1%
from November 1, 1998 through October 31, 1999.  Maximum payments under this
arrangement are: $100,000 in year one, $125,000 in year two and $150,000 in year
three.  The option to extend this agreement for an additional five years was
exercised.  For the five years under the extension, the Company has agreed to
pay royalties at the rate of 0.5% from November 1, 1999 through October 31, 2000
and 0.6% from November 1, 2000 through October 31, 2004 on all net lubricant
retail sales.  For each of these years, the Company pays a guaranteed minimum
payment of $75,000.  Maximum payments are $100,000 in the first year of the
renewal period and $125,000 each year thereafter.  During 2000, Prolong expended
$74,379 under this agreement.

                                    Page 12
<PAGE>

Employees

     As of March 5, 2001, PIC and its subsidiaries collectively employed 40
full-time employees, including 4 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.  On October 30, 2000 the
Company entered into a loan agreement with a lender for a $675,000 loan.  The
loan is collateralized by a Third Priority Trust Deed lien against the Company's
real property in Irvine, California.  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
-------  -----------------

Michael Walczak et al
---------------------
     On or about November 17, 1998, Michael Walczak et al ("Walczak"), on behalf
of himself and other similarly situated shareholders of EPL filed a purported
class action and derivative suit in the U.S. District Court (the "Court") in San
Diego, California against PIC, PSL, EPL and certain of 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 per cent (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
Walczak plaintiffs to post a bond for $100,000, which bond was posted.  PIC
appealed the Court's preliminary injunction ruling, which appeal was
subsequently denied.

     The Prolong defendants successfully moved to change venue and the case was
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 selected new counsel, except for three of the plaintiffs who
withdrew from the case.  The Prolong defendants each filed and served motions to
dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure.  The motion has been granted in part and denied in part.  There has
been no ruling to date on the Walczak plaintiffs' request to certify the class
as a class action.  A mediation conference has been held and concluded and
substantial settlement discussions have been undertaken.  However, final
resolution cannot presently be determined.  PIC and PSL and their respective
current officers and directors believe that the settlement, if approved, will
not result in a material adverse affect on the Company's financial statements.
If the settlement as proposed is not consummated, the Company will continue to
vigorously defend against the claims.

                                    Page 13
<PAGE>

Federal Trade Commission
------------------------
     On February 15, 1999, PSL entered into a negotiated Consent Order with the
Federal Trade Commission ("FTC") based upon concerns of the commission related
to inadequate substantiation of certain advertising claims for Prolong Engine
Treatment.  Without admitting any of the allegations, the Company agreed that it
would not make advertising claims without having adequate scientific
substantiation for such claims.  No fine or monetary redress was levied in
connection with the FTC action.

     Four purported class action lawsuits based on the FTC action have been
brought against PIC and/or PSL.  Although meaningful settlement discussions are
proceeding, final resolution of the below referenced FTC based lawsuits cannot
presently be determined.  The suits are identified as follows:

     .  Kachold et al v PSL was filed November 19, 1999 and is pending in the
        U.S. District Court, Northern District of Illinois, file No. 99-CV-
        08349. The case is a purported class action and individual action
        alleging violation of the Illinois Consumer Fraud Act, Magnuson Moss
        Consumer Products Warranty Act, and for damages. Prolong successfully
        filed a motion to dismiss the complaint, and plaintiff thereafter filed
        an amended complaint. PSL's officers and directors believe that there is
        no merit to the plaintiffs' complaint and are vigorously defending
        against the claims. The parties are presently involved in meaningful
        settlement discussions.

     .  Fernandes et al v PSL was filed January 5, 2000 in Los Angeles County
        Superior Court, file No. BC222712. The case is a purported class action
        alleging false advertising, unfair competition, violation of the
        California Consumer Legal Remedies Act, fraud, deceit, negligent
        misrepresentation and for equitable relief. PSL's officers and directors
        believe that there is no merit to the plaintiffs' complaint and are
        vigorously defending against the claims. The parties are presently
        involved in meaningful settlement discussions.

     .  Bowland et al v PSL was filed January 21, 2000 in County Court at Law
        No. 4, Nueces County, Texas, file No. 00-60119-4. The case is a
        purported class action alleging breach of contract, breach of express
        warranty and violations of the Texas Deceptive Trade Practices Act.
        PSL's officers and directors believe that there is no merit to the
        plaintiffs' complaint and are vigorously defending against the claims.
        The parties are presently involved in meaningful settlement discussions.

     .  Mata et al v PSL and PIC was filed February 18, 2000 in the District
        Court of Hidalgo County, Texas, 275/th/ Judicial District, file No. C-
        292-00-E. The case is a purported class action alleging breach of
        contract and breach of express and implied warranty. A special
        appearance and motion to dismiss was filed by PIC and an answer and plea
        in abatement was filed by PSL in order to stay this matter based upon
        the prior filed Bowland case. PSL's officers and directors believe that
        there is no merit to the plaintiffs' complaint and are vigorously
        defending against the claims. The parties are presently involved in
        meaningful settlement discussions.

Helman et al v PSL and PIC et al
--------------------------------
        On April 8, 1997, prior to the filing of the Walczak complaint, the
attorney who was disqualified from representing the plaintiffs in Walczak filed
Helman et al v PSL and PIC et al in the Court of Common Pleas, Columbiana
County, Ohio. The case was filed as a purported class action alleging breach of
fiduciary duty, breach of oral and written contract, and fraud, in 13 original
causes of action. The court subsequently denied plaintiff's motion to certify
the case as a class action. The appellate court in Ohio largely affirmed a
series of orders by the trial judge in favor of PSL, the effect of which was to
reduce the number of complaining parties from approximately one hundred, to
seven. Trial of the remaining plaintiffs' matters is set for January 15, 2002.
PSL's officers and directors believe that there is no merit to the plaintiffs'
complaint and are vigorously defending against the claims.

Minidis v PSL and PIC et al
---------------------------
        Minidis v PSL and PIC et al was filed on February 1, 2000, in the Los
Angeles County Superior Court. Plaintiff has alleged breach of contract and
fraud in connection with an agreement to design a product applicator for
defendant. Plaintiff's deposition and completion of discovery is scheduled
during the second quarter of 2001.

                                    Page 14
<PAGE>

Settlement negotiations have been held. A mandatory settlement conference is
pending. Trial is scheduled for April 16, 2001. PIC and PSL and their respective
officers and directors believe that there is no merit to the plaintiff's
complaint and are vigorously defending against the claims.

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

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

       No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.

                                    Page 15
<PAGE>

                                    PART II

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

Price Range of Common Stock

     PIC Common Stock is currently trading on AMEX under the symbol "PRL."  High
and low sales prices as furnished by AMEX for each quarter during 1999 and 2000
are as indicated below.

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

          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
          March 31, 2000                  $0.75  $0.30
          June 30, 2000                   $0.63  $0.31
          September 30, 2000              $0.50  $0.13
          December 31, 2000               $0.22  $0.02

     PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of March 12, 2001, the number of holders of record
of PIC Common Stock is approximately 460 and the high and low sales prices as
reported by AMEX, were $0.17 and $0.13, respectively. PIC has not declared any
cash dividends since inception, and does not intend to do so in the foreseeable
future. PIC currently intends to retain its earnings for the operation and
expansion of its business. PIC does not have any restrictions on its ability to
pay dividends on common equity. In addition to PIC Common Stock, PIC's Board of
Directors is authorized to issue up to 50,000,000 shares of Preferred Stock with
such rights, preferences and privileges as may be determined by PIC's Board of
Directors. No such shares of Preferred Stock have been issued to date.

Recent Sales of Unregistered Securities

     On November 2, 2000 Prolong issued a warrant to purchase 900,000 shares of
Common Stock to ABQ Dolphin, LP, a California limited partnership, in connection
with a certain loan agreement, dated October 30, 2000.  The warrant is
exercisable at $0.1875 per share (the market value of the Company's Common Stock
when the warrants were issued) and shall expire on the seventh anniversary of
the date of the original issuance of the warrant.

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

                                    Page 16
<PAGE>

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, 1996 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, 1997, 1998, 1999 and 2000, 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,
                                                                                        ------------
                                                                 1996         1997         1998         1999          2000
                                                                 ----         ----         ----         ----          ----
<S>                                                           <C>          <C>          <C>          <C>           <C>
Statement of Operations Data
  Net revenues..............................................  $15,813,493  $29,846,795  $35,032,689  $34,470,915   $19,080,218
  Net income (loss).........................................      721,178    2,132,553      419,513   (6,580,061)   (1,652,278)
  Net income (loss) per share:
     Basic..................................................  $      0.03  $      0.08  $      0.02  $     (0.23)  $     (0.06)
     Diluted................................................  $      0.03  $      0.08  $      0.02  $     (0.23)  $     (0.06)
  Weighted average common shares:
     Basic..................................................   23,463,620   25,508,035   25,807,618   28,445,835    28,442,341
     Diluted................................................   23,463,620   25,690,774   26,011,767   28,445,835    28,442,341
Balance Sheet Data
  Total assets..............................................  $ 9,023,317  $13,748,650  $23,210,872  $21,379,648   $17,715,200
  Total liabilities.........................................    1,732,467    4,039,796    5,756,537   10,412,463     8,174,388
  Total stockholders' equity................................    7,290,850    9,708,854   17,454,335   10,967,185     9,540,812
________________________
</TABLE>



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

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

General

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

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

                                    Page 17
<PAGE>

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,
                                                    -------------------------------------------------------------------
                                                           1998                    1999                 2000
                                                          -----                   -----                -----
<S>                                                   <C>                    <C>                     <C>
Net revenues                                              100.0%                  100.0%               100.0%
Cost of goods sold                                         21.5                    30.5                 27.6
                                                          -----                   -----                -----
     Gross profit                                          78.5                    69.5                 72.4
Selling and marketing expenses                             56.6                    75.0                 55.7
General and administrative expenses                        17.2                    22.2                 24.7
Research and development                                    2.0                      .8                  0.5
                                                          -----                   -----                -----
     Operating income (loss)                                2.7                   (28.5)                (8.5)
Interest expense                                           (0.4)                   (1.3)                (2.8)
Interest income                                             0.3                     ---                  ---
                                                          -----                   -----                -----
     Income (loss) before income taxes                      2.6                   (29.8)               (11.3)
Provision (benefit) for income taxes                        1.4                   (10.7)                (2.6)
                                                          -----                   -----                -----
     Net income (loss)                                      1.2                   (19.1)                (8.7)
                                                          =====                   =====                =====
</TABLE>

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

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


     For the year ended December 31, 2000, retail sales were 85.8% of total
revenues while direct response infomercial sales comprised 3.4% of total
revenues.  For the year ended December 31, 1999, direct response infomercial
sales comprised 11.4% of total revenues while retail sales were 80.8%.  The
decrease in the direct response sales of approximately $3,286,900 is a direct
result of a strategic decision to evaluate other cost-effective advertising
programs.  The lower retail sales for the year ended December 31, 2000 versus
the same period a year ago are attributable to a decrease in appearance sales of
$3,913,000 and lubricants sales of $7,581,600.  The appearance products were
launched during the spring and summer of 1999 when initial stocking orders were
filled at several major retailers and were supported by an aggressive television
and print advertising campaign.  Revenues for the appearance products declined
in part as a result of a shift in advertising strategies to accommodate the
realities of a marketplace in which the Company was not able to spend as much as
it would like on cost-effective promotional activities and also due to decreased
demand and acceptance of the appearance products in Year 2000 and higher then
anticipated product returns.  The Company is continuing an ongoing evaluation in
Year 2001 of the market acceptance of the appearance product line.  The
lubricants sales decline is attributable to a soft market for specialty
lubricants, higher than expected store inventory levels at major retailers,
competitive factors and also the decision to discontinue the direct response
infomercial for lubricants in lieu of an ongoing evaluation of more cost-
effective means of promoting the line.  Industrial, international and other
sales decreased approximately $609,300.  The decrease is attributable to a large
stocking order shipped in 1999 to a new international distributor, which was not
repeated in Year 2000.

     Cost of goods sold for the year ended December 31, 2000 was approximately
$5,257,600 as compared to $10,501,000 for the comparable period of the prior
year, a decrease of $5,243,400 or 49.9%.  As a percentage of sales, cost of
goods sold decreased from 30.5% for the year ended December 31, 1999 to 27.6%
for the year ended December 31, 2000.  This decrease was mainly attributable to
the shift in product mix with the lubricant products

                                    Page 18
<PAGE>

yielding higher gross margins than the appearance products. Also the fourth
quarter of 1999 included an increase in the inventory obsolescence reserve for
non-performing or slow moving inventory items.

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

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

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

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

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

     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

                                    Page 19
<PAGE>

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.

     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.

     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.

     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.

                                    Page 20
<PAGE>

Liquidity and Capital Resources

     At December 31, 2000, the Company had a negative net working capital of
approximately $100,000 as compared to a positive working capital of $41,000 at
December 31, 1999, representing a decrease of $141,000.  Operating activities
provided $295,000 during 2000, primarily from reductions in inventories and
deferred taxes, partially offset by a decrease in payables and accrued expenses
and an increase in accounts receivable.  Additionally, the Company provided
$42,600 from investing activities, which were primarily decreases in employees'
advances.  These additions of cash were offset by uses of cash from financing
activities, which were primarily net reductions in the line of credit of
$1,934,000, which were partially offset by net proceeds from notes payables of
$629,000.

     On May 8, 2000, the Company entered into a new $6,000,000 credit facility
with a financial institution, expiring in May 2003.  Such facility is
collateralized by eligible accounts receivable and inventories.  Interest is
payable monthly at the rate of the financial institution's prime rate (9.50% at
December 31, 2000) plus 1% subject to a minimum interest charge of $50,000 per
quarter.  Effective November 21, 2000 the credit facility was reduced to
$5,000,000 with interest payable monthly at the rate of the financial
institution's prime rate plus 3%.  Effective January 1, 2001 interest is payable
monthly at the rate of the financial institution's prime rate plus 4%.  The
credit facility contains certain defined net income and tangible net worth
covenants.  At December 31, 2000, the Company was in compliance or had received
waivers for all financial covenants.  As of December 31, 2000, $2,050,716 was
outstanding and approximately $205,000 was available under the terms of the line
of credit.

     On October 30, 2000, the Company entered into a loan agreement with a
lender for $675,000 with proceeds of approximately $504,000, net of loan costs
and other payables.  The loan has a maturity date of October 30, 2001 and
includes an option to extend for one additional year.  The loan is
collateralized by a Third Priority Trust Deed lien against the Company's real
property in Irvine, CA.  Interest is payable monthly at the rate of the prime
rate (9.50% at December 31, 2000) plus 2.5%.

     During 2000, the Company reduced headcount, discontinued certain
endorsement and sponsorship contracts, reduced spending for television airtime
and aggressively reduced other operating expenses.  Additionally, the Company
improved its credit and collections function and worked with its vendors to
extend payment terms wherever possible.  The Company's business plan for 2001
provides for positive cash generation.  However, the Company is currently
seeking additional new financing arrangements through subordinated debt and or
equity providers.  Management cannot guarantee that it will be able to obtain
adequate funds when needed or on acceptable terms, if at all.  Any inability to
obtain funds when needed would have a material adverse effect on the Company's
financial condition.  At December 31, 2000 the Company had an accumulated
deficit of approximately $5,523,000.  Many of the expense reductions did not
realize their full affect in 2000.  The Company will continue to search for
areas in which to further reduce expenses.  The Company cannot guarantee that
the timing of further reductions in operating expenses will be adequate to
return to profitability for 2001 and beyond.  There are also continued efforts
to convert certain assets to cash on an accelerated basis, which may include the
sale and/or sale and leaseback of the current facility in Irvine, CA.
Management believes that these plans, if successfully executed, will provide
adequate financial resources to sustain the Company's operations and enable the
Company to continue as a going concern.

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.

     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 21
<PAGE>

Factors Which May Affect Future Operating Results

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

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

     .  Competitive, technological, financial and business challenges may make
        it more difficult for us to continue to sell specialty lubricant and
        appearance products.

     .  We may be unable to retain our existing key sales, technical and
        management personnel.

     .  Increased competition in the specialized lubrication or appearance
        product markets may cause downward pressure on our prices.

     .  We may be unable to manage our growth effectively.

     .  Direct sales to customers via direct response television commercials are
        likely to decrease significantly.

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

     .  We may be unable to generate either through operations, debt placements
        or equity sales, sufficient cash to operate the business profitably.

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

We May Need to Raise Additional Funds in the Future

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

     .  The success of our product development programs.

     .  The commercial success of our products.

     .  The rate of growth of our business.

     .  The availability of cash from our operations and other sources.

                                    Page 22
<PAGE>

     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 3.4%
($654,100) of revenues in 2000 compared with 11.4% ($3,941,000) of revenues in
1999.  In the past, sales to industrial/commercial and international customers
constituted only a limited portion of revenues.  However, we expect most of our
future sales growth to come from domestic consumers, industrial/commercial
resellers and end-users 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 6 of our senior executives for
periods ranging from 3 to 4 years.  In addition, our future success will depend
upon our ability to attract and retain other highly qualified management
personnel.  The loss of any key management personnel or our failure to attract
and retain other qualified management personnel could have a material adverse
effect on our business, operating results and financial condition.

Our Business Is Subject to the Risk of Product Liability Claims

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

The Market in Which We Operate is Highly Competitive

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

                                    Page 23
<PAGE>

     .  Price reductions

     .  Reduced gross margins

     .  Loss of market share

     .  Loss of shelf space

     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 and 2000, we suffered net losses of approximately $6,600,000 and
$1,652,000.  We cannot guarantee our operating success and ability to generate
net income in the future.

We Depend on Third Party Suppliers

     To date, we have succeeded in obtaining enough components from existing
suppliers to produce our AFMT formula in order to meet our current manufacturing
needs. We also believe that adequate supplies will continue to be available in
the near future.  However, we recently increased production and plan to further
increase

                                    Page 24
<PAGE>

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 sustain and at times increase
production of our components, we cannot guarantee that each supplier will be
able to sustain or increase its production in time to satisfy our demand or that
alternate suppliers will be able to meet any supply deficiency. If we fail to
obtain enough components, or if such components fall below our quality
standards, shipments and sales of our products may be delayed or reduced. This
would have a material adverse effect on our business, financial condition and
results of operations.

Most of Our Revenue Comes From A Limited Number of Products

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

Our Average Selling Prices May Decline

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

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

     International sales comprised 7.8% of revenues in 2000 as compared to 4.7%
of revenues in 1999.  We plan to expand international sales in the future.  This
will require significant financial resources and management attention.  In order
to expand sales internationally, we plan to do the following:

     .  Establish additional marketing and sales operations.

     .  Hire additional employees.

     .  Recruit additional international distributors.

     .  Investment in international protection of our trademarks.

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

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

     .  Unexpected changes in regulatory requirements, tariffs and other trade
barriers.

                                    Page 25
<PAGE>

     .  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.

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

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

Our Business Is Subject to the Risk of Litigation

     We are subject to various legal proceedings from time to time as part of
our business. 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 and derivative suit in the U.S. District Court (the "Court") in San
Diego, California against PIC, PSL, EPL and certain of 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 per cent (2%) of the
outstanding shares of EPL's common stock, in the aggregate. The plaintiffs
applied for and were granted a preliminary injunction to halt the sale of the
assets of EPL to PIC and to prevent the dissolution of EPL. Such claims or
litigation, or other claims or litigation, could result in a decision that is
adverse to us. A decision adverse to us in this or any other matter could have a
material adverse effect on our business, financial condition, cash flows and
results of operations. In addition, litigation, regardless of its merits, could
result in substantial costs to us and divert management's attention from our
operations. (see "Legal Proceedings")

We Could Be Subject to Environmental Liabilities or Regulatory Compliance Costs

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

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

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

                                    Page 26
<PAGE>

We Are Controlled by Management and Certain Stockholders

     As of March 5, 2001, our directors, executive officers and principal
stockholders collectively held approximately 37.3% 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.

New Accounting Pronouncements

     In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101").  SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition and accounting for deferred costs in the
consolidated financial statements and is effective no later than the fourth
quarter of fiscal years beginning after December 15, 1999.  SAB 101 did not
materially impact the Company's financial position and results of operations.

     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for all fiscal years beginning after June 15, 2000.  SFAS No. 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities.  Under SFAS No. 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative.  The Company will adopt SFAS No. 133 effective January 1, 2001.
Management does not expect the adoption of SFAS No. 133 to have a significant
impact on the financial position, results of operations, or cash flows of the
Company.

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

     PIC's financial instruments include cash and long-term debt. At December
31, 2000, 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, 2000.

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

       Consolidated balance sheets of PIC as of December 31, 2000 and 1999,
respectively, statements of operations and cash flows for each of the three
years in the period ended December 31, 2000, 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 27
<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 2001 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 2000.

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 2001 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 2000.

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 2001 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
2000.

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 2001 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
2000.

                                    Page 28
<PAGE>

                                    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,
          2000, 1999 and 1998 with Notes and Independent Auditors' Report

     (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 29
<PAGE>

                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 30
<PAGE>

     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 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).

     10.26   Associate Sponsorship Agreement between PSL, King Entertainment,
             Inc. and Kenneth D. Bernstein, dated December 17, 1999.
             (incorporated by reference to the same numbered Exhibit to the
             Registrant's Annual Report on Form 10-K filed April 14, 2000). *

     10.27   Employment Agreement, dated January 21, 2000, between PSL and Elton
             Alderman. (incorporated by reference to the same numbered Exhibit
             to the Registrant's Annual Report on Form 10-K filed April 14,
             2000).

     10.28   Employment Agreement, dated January 21, 2000, between PSL and
             Thomas C. Billstein. (incorporated by reference to the same
             numbered Exhibit to the Registrant's Annual Report on Form 10-K
             filed April 14, 2000).

     10.29   Sponsorship Agreement between PSL and Sabco Racing, Inc. dated
             February 15, 2000. (incorporated by reference to the same numbered
             Exhibit to the Registrant's Annual Report on Form 10-K filed April
             14, 2000).*

     10.30   Sponsorship Agreement between PSL and Galles/ECR Racing, LLC, dated
             March 10, 2000. (incorporated by reference to the same numbered
             Exhibit to the Registrant's Annual Report on Form 10-K filed April
             14, 2000).*

     10.31   Service and Endorsement Contract between PSL and Smokey Yunick,
             dated January 11, 2000. (incorporated by reference to the same
             numbered Exhibit to the Registrant's Annual Report on Form 10-K
             filed April 14, 2000).*

     10.32   Employment Agreement, dated June 1, 2000 between PSL and Nicholas
             Rosier. (incorporated by reference, to the same numbered Exhibit to
             the Registrant's Quarterly Report on Form 10-Q filed August 11,
             2000).

     10.33   Loan Agreement between PSL and ABQ Dolphin, LP, A California
             limited partnership, dated October 30, 2000; Promissory Note, Third
             Priority Trust Deed and Warrant agreement, dated November 2, 2000.
             (incorporated by reference to the same numbered Exhibit to the
             Registrant's Quarterly Report on form 10-Q filed November 14,
             2000).

      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).

_______________________________________________
*    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.

     During the fourth quarter of 2000 the following Form 8-K was filed:

     On October 6, 2000, PIC filed a Form 8-K to disclose the resignation of Mr.
     R. Jack Aplin (Director).

                                    Page 31
<PAGE>

                                   SIGNATURES

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

                                    PROLONG INTERNATIONAL CORPORATION



March 15, 2001                     By:  /s/ Elton Alderman
                                       ----------------------------------------
                                        Elton Alderman,
                                        President, Chief Executive Officer and
                                        Chairman of the Board
                                        (Principal Executive Officer)


March 15, 2001                     By:  /s/ Nicholas M. Rosier
                                       ----------------------------------------
                                        Nicholas M. Rosier,
                                        Chief Financial Officer
                                        (Principal Financial Officer)

                                    Page 32
<PAGE>

                               POWER OF ATTORNEY

     We, the undersigned directors and officers of Prolong International
Corporation. Do hereby constitute and appoint Elton Alderman and Nicholas M.
Rosier, or either of them, with full power of substitution and resubstitution,
our true and lawful attorneys and agents, to do any and all acts and things in
our name and behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, or their substitutes,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
Annual Report on Form 10-K, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments; and we do hereby ratify and
confirm all that the said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
                   Signature                                       Title                             Date
                   ---------                                       -----                             ----
<S>                                               <C>                                           <C>
/s/  Elton Alderman                               President, Chief Executive Officer and        March 15, 2001
------------------------------------------------  Chairman of the Board
Elton Alderman                                    (Principal Executive Officer)

/s/  Thomas C. Billstein                                                                        March 15, 2001
------------------------------------------------  Vice President and Chief Operating
Thomas C. Billstein                               Officer, Secretary and Director
                                                                                                March 15, 2001
                                                  Chief Financial Officer
/s/  Nicholas M. Rosier                           (Principal Financial Officer)
------------------------------------------------
Nicholas M. Rosier

/s/  William J. Howell                            Vice President, General Counsel and           March 15, 2001
------------------------------------------------  Director
William J. Howell

/s/  Bruce F. Barnes                              Director                                      March 15, 2001
------------------------------------------------
Bruce F. Barnes
</TABLE>

                                    Page 33
<PAGE>

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, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000.  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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.  Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.


DELOITTE & TOUCHE LLP

Costa Mesa, California
March 2, 2001

                See notes to consolidated financial statements.

                                    Page 34
<PAGE>

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            2000                 1999
<S>                                                                           <C>                  <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                               $   126,917           $ 1,094,779
Accounts receivable, net of allowance for doubtful accounts
  of $168,775 and $389,732 in 2000 and 1999, respectively                 3,245,892             2,747,459
Inventories, net                                                            970,236             2,171,728
Prepaid expenses, net                                                       360,227               182,646
Income taxes receivable                                                      87,002                94,275
Prepaid television time                                                       5,583                  ----
Advances to employees, current portion                                       57,525               107,250
Deferred tax asset                                                          943,177             1,617,442
                                                                        -----------           -----------

                     Total current assets                                 5,796,559             8,015,579

Property and equipment, net                                               3,193,109             3,554,176

Intangible assets, net                                                    6,529,986             7,036,670

Deferred tax asset, noncurrent                                            1,972,387             2,545,238

Other assets                                                                223,159               227,985
                                                                        -----------           -----------

TOTAL ASSETS                                                            $17,715,200           $21,379,648
                                                                        ===========           ===========
</TABLE>

                See notes to consolidated financial statements.

                                    Page 35
<PAGE>

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999 (Continued)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  2000                       1999
<S>                                                                           <C>                        <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                                                                $ 2,183,482                $ 2,843,843
Accrued expenses                                                                    937,618                  1,210,126
Line of credit                                                                    2,050,716                  3,985,000
Notes payable, current                                                              725,442                     46,446
                                                                                -----------                -----------

    Total current liabilities                                                     5,897,258                  8,085,415

Notes payable, noncurrent                                                         2,277,130                  2,327,048

COMMITMENTS AND CONTINGENCIES (Note 12)

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;
  28,438,903 and 28,445,835 shares issued and outstanding in 2000
  and 1999, respectively                                                             28,439                     28,446
Additional paid-in capital                                                       15,035,261                 14,809,349
Accumulated deficit                                                              (5,522,888)                (3,870,610)
                                                                                -----------                -----------

    Total stockholders' equity                                                    9,540,812                 10,967,185
                                                                                -----------                -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $17,715,200                $21,379,648
                                                                                ===========                ===========
</TABLE>

                See notes to consolidated financial statements.

                                    Page 36
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     2000                 1999                 1998
<S>                                                        <C>                      <C>                  <C>

NET REVENUES                                                      $19,080,218         $ 34,470,915          $35,032,689

COST OF GOODS SOLD                                                  5,257,600           10,500,586            7,527,361
                                                                  -----------         ------------          -----------

GROSS PROFIT                                                       13,822,618           23,970,329           27,505,328

OPERATING EXPENSES:
Selling and marketing expenses                                     10,631,959           25,850,474           19,838,689
General and administrative expenses                                 4,709,504            7,645,321            6,022,201
Research and development                                              104,089              305,297              710,531
                                                                  -----------         ------------          -----------

  Total operating expenses                                         15,445,552           33,801,092           26,571,421
                                                                  -----------         ------------          -----------

OPERATING (LOSS) INCOME                                            (1,622,934)          (9,830,763)             933,907

OTHER INCOME (EXPENSE), net:
Interest expense                                                     (538,802)            (454,142)            (132,102)
Interest income                                                        12,213               10,918              115,598
                                                                  -----------         ------------          -----------

  Total other income (expense)                                       (526,589)            (443,224)             (16,504)
                                                                  -----------         ------------          -----------

(LOSS) INCOME BEFORE (BENEFIT) PROVISION
  FOR INCOME TAXES                                                 (2,149,523)         (10,273,987)             917,403

(BENEFIT) PROVISION FOR INCOME TAXES                                 (497,245)          (3,693,926)             497,890
                                                                  -----------         ------------          -----------

NET (LOSS) INCOME                                                 $(1,652,278)        $ (6,580,061)         $   419,513
                                                                  ===========         ============          ===========

NET (LOSS) INCOME PER SHARE:
Basic                                                             $     (0.06)        $      (0.23)         $      0.02
                                                                  ===========         ============          ===========
Diluted                                                           $     (0.06)        $      (0.23)         $      0.02
                                                                  ===========         ============          ===========

WEIGHTED AVERAGE COMMON SHARES:
Basic                                                              28,442,341           28,445,835           25,807,618
                                                                  ===========         ============          ===========
Diluted                                                            28,442,341           28,445,835           26,011,767
                                                                  ===========         ============          ===========
</TABLE>

                See notes to consolidated financial statements.

                                    Page 37
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                  Retained
                                                                                   Additional     earnings           Total
                                                                Common stock          paid-in   (Accumulated     stockholders'
                                                         ------------------------
                                                              Shares       Amount     capital      (deficit)         equity


<S>                                                        <C>            <C>       <C>           <C>             <C>
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                        92,911
Net loss                                                                                           (6,580,061)     (6,580,061)
                                                           ------------   -------    ----------   -----------     -----------

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

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

BALANCES, December 31, 2000                                  28,438,903   $28,439   $15,035,261   $(5,522,888)    $ 9,540,812
                                                           ============   =======   ===========   ===========     ===========
</TABLE>

                See notes to consolidated financial statements.

                                    Page 38
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    2000                1999                1998
<S>                                                            <C>                   <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                $(1,652,278)        $(6,580,061)        $   419,513
Adjustments to reconcile net (loss) income to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                      886,334             872,088             247,937
  Provision for doubtful accounts                                   (220,957)           (190,268)            337,276
  Deferred taxes                                                   1,247,116          (3,659,244)           (527,129)
  Reserve for inventory obsolescence                                 (65,185)            884,024              25,000
  Reserve for other assets                                                               581,713                 ---
  Loss on exchange of common stock received for                       (3,466)                ---                 ---
   accounts receivable
  Compensation costs related to options                               61,000              92,911             133,312
  Issuance of warrants to lender                                      28,062
  Changes in assets and liabilities, net of effects of
   acquisition:
    Accounts receivable                                             (277,476)          2,392,864          (1,472,608)
    Inventories                                                    1,266,677            (140,503)         (1,639,558)
    Prepaid expenses                                                 (37,272)            552,084            (600,584)
    Income taxes receivable                                            7,273             350,096          (1,723,055)
    Prepaid television time                                           (5,583)            627,050             395,094
    Other assets                                                      (6,674)            (26,298)             49,552
    Accounts payable                                                (660,361)            965,425             804,320
    Accrued expenses                                                (272,508)           (250,037)           (203,158)
                                                                 -----------         -----------         -----------

      Net cash provided by (used in) operating activities            294,702          (3,528,156)         (3,754,088)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                   (7,083)           (535,571)           (847,874)
Employee advances                                                     49,725              90,107             (80,734)
                                                                 -----------         -----------         -----------

      Net cash provided by (used in) investing                        42,642            (445,464)           (928,608)
       activities

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable                                           675,000                 ---                 ---
Payments on notes payable                                            (45,922)            (44,462)            (24,044)
Net (payments) proceeds from line of credit                       (1,934,284)          3,985,000                 ---
Proceeds from issuance of common stock                                   ---                 ---                 600
Registration costs                                                       ---                 ---            (346,982)
                                                                 -----------         -----------         -----------

      Net cash (used in) provided by financing activities         (1,305,206)          3,940,538            (370,426)
                                                                 -----------         -----------         -----------
</TABLE>

                See notes to consolidated financial statements.

                                    Page 39
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 2000                1999                1998
<S>                                                                       <C>                 <C>                 <C>
NET DECREASE IN CASH
  AND CASH EQUIVALENTS                                                       $ (967,862)         $  (33,082)        $(5,053,122)

CASH AND CASH EQUIVALENTS,
  Beginning of year                                                           1,094,779           1,127,861           6,180,983
                                                                             ----------          ----------         -----------

CASH AND CASH EQUIVALENTS, end of year                                       $  126,917          $1,094,779         $ 1,127,861
                                                                             ==========          ==========         ===========
SUPPLEMENTAL DISCLOSURES -
  Cash paid during the year for:
    Income taxes                                                             $   92,000          $      ---         $ 2,748,076
                                                                             ==========          ==========         ===========
    Interest                                                                 $  538,802          $  454,142         $   132,102
                                                                             ==========          ==========         ===========
</TABLE>

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

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

During 1998, the Company completed the following transactions:
 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.

                See notes to consolidated financial statements.

                                    Page 40
<PAGE>

PROLONG INTERNATIONAL CORPORATION SUBIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

1.  BUSINESS

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

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

    Management's Plans Regarding Financial Results and Liquidity - During 1999
    and 2000, the Company incurred net losses of approximately $6.6 million and
    $1.7 million respectively, and at December 31, 2000, had an accumulated
    deficit of approximately $5.5 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
    inventories, other assets and accounts receivable. During 2000, the Company
    suffered a major decline in revenues attributable to a soft market for
    specialty lubricants and also due to the decision to discontinue the direct
    response infomercial for lubricants in lieu of an ongoing evaluation of more
    cost-effective means of promoting the line. Also, the demand for the
    appearance products declined as a result of a shift in advertising
    strategies to accommodate the realities of a marketplace in which the
    Company was not able to spend as much as it would like on cost-effective
    promotional activities to promote this product line. The Company is
    continuing an ongoing evaluation in Year 2001 of the market acceptance of
    the appearance product line.

    As a result, the Company initiated vigorous expense-reduction strategies
    during the Year 2000 to bring expenses in line with anticipated revenues,
    reduced manpower accordingly, improved its credit and collection functions
    and revised vendor payment terms to the extent possible. The Company
    anticipates realizing the full impact of these expense reductions in 2001.
    If these measures are not adequate, the Company will pursue further
    headcount reduction as well as other expense reductions. The Company also is
    redirecting its focus on sales strategies which promote the core lubricant
    product line. The Company is currently seeking additional new financing
    arrangements through subordinated debt and/or equity providers. There are
    also continued efforts to convert certain assets to cash on an accelerated
    basis, which may include the sale and/or sale and leaseback of the current
    facility in Irvine, CA. Management believes that these plans will provide
    adequate financial resources to sustain the Company's operations and enable
    the Company to continue as a going concern.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

    Inventories - Inventories are valued at the lower of cost (determined on the
    first-in, first-out basis) or market.  The Company has a contract with an
    outside company to supply the Company's primary lubricant product, anti-
    friction metal treatment (AFMT), which is used in many of the Company's
    lubricant products.  Currently, the Company utilizes only one manufacturer
    to produce the AFMT product, which is then bottled

                                    Page 41
<PAGE>

    and packaged by other contract vendors. Although there are facilities
    located throughout the world that are capable of producing this particular
    patented product, a change in suppliers could cause a delay in production of
    this product and a possible loss of sales, which would adversely affect the
    Company's operating results.

    Prepaid Expenses - Prepaid expenses include $38,641 and $78,641 at December
    31, 2000 and 1999, respectively, in advance promotions paid to an entity
    previously affiliated with officers of the Company. Amounts are expensed
    when promotional activities occur.

    Capitalized Infomercial Production Costs - The Company capitalizes certain
    incremental direct costs and payroll-related costs associated with its
    infomercial production. Capitalized amounts related thereto are expensed
    over the lesser of six months or the estimated economic life beginning at
    the time of the first public showing of the infomercial. The Company
    expensed $123,848, $529,942 and $0 for production costs in 2000, 1999 and
    1998, respectively.


    Prepaid Television Time - The Company capitalizes the cost of purchasing a
    time slot for the airing of infomercials.  Upon the airing of the
    infomercial, the related cost is expensed.  During 2000, 1999 and 1998, the
    total amounts expensed for television time were $431,293, $5,668,818 and
    $4,220,093, respectively.  As of December 31, 2000 and 1999, prepaid
    television time was $5,583 and $0 respectively.

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


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


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

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

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

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

    Long-Lived Assets - The Company accounts for the impairment and disposition
    of long-lived assets in accordance with Statements of Financial Accounting
    Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
    and for Long-Lived Assets to Be Disposed Of.  In accordance with SFAS No.
    121, long-lived assets to be held are reviewed whenever events or changes in
    circumstances indicate that their carrying value may not be recoverable.
    The Company reviews the carrying value of long-lived assets to determine
    whether or not an impairment to such value has occurred.  Based on the
    Company's analysis at December 31, 2000, there was no impairment of long-
    lived assets.

    Fair Value of Financial Instruments - SFAS No. 107, Disclosures About Fair
    Value of Financial Instruments, requires management to disclose the
    estimated fair value of certain assets and liabilities defined by SFAS No.
    107 as financial instruments.  Financial instruments are generally defined
    by SFAS No. 107 as cash and cash equivalents, evidence of ownership interest
    in equity, or a contractual obligation that both conveys to one entity a
    right to receive cash or other financial instruments from another entity and
    imposes on the other entity the obligation to deliver cash or other
    financial instruments to the first entity.  At December 31, 2000 and 1999,
    management believes that the carrying amounts of cash and cash equivalents,

                                    Page 42
<PAGE>

    accounts receivable, accounts payable, other current liabilities, and notes
    payable approximate fair value because of the short maturity of these
    financial instruments.

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

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

    Revenue is also recognized under an arrangement whereby customers responding
    to television infomercials agree to an upsell.  An upsell is a transaction
    where the customer purchases the advertised product and also purchases one
    or more additional items, all in one transaction.  Revenue from products
    sold under the upsell arrangement is recognized upon shipment of the related
    products.  For the years ended December 31, 2000, 1999 and 1998, revenues
    under this arrangement were $10,915, $189,380 and $347,771 respectively.


    Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
    Comprehensive Income.  This statement establishes standards for the
    reporting of comprehensive income and its components.  Comprehensive income,
    as defined, includes all changes in equity (net assets) during a period from
    non-owner sources.  For each of the years ended December 31, 2000, 1999 and
    1998, there was no difference between net (loss) income and comprehensive
    (loss) income.

    Net (Loss) Income Per Share - The Company has adopted SFAS No. 128, Earnings
    per Share, which replaces the presentation of "primary" earnings per share
    with "basic" earnings per share and the presentation of "fully diluted"
    earnings per share with "diluted" earnings per share.  All previously
    reported earnings per share amounts have been restated based on the
    provisions of the new standard.  Basic earnings per share are based upon the
    weighted average number of common shares outstanding.  Diluted earnings per
    share amounts are based upon the weighted average number of common and
    common-equivalent shares for each period presented.  Common-equivalent
    shares include stock options assuming conversion under the treasury stock
    method.  For the years ended December 31, 2000 and 1999, no options or
    warrants were included as common stock equivalents, as their effect would be
    antidilutive.

    Use of Estimates - The preparation of financial statements in conformity
    with 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.

    Reclassifications - Certain reclassifications have been made to the prior
    year amounts to conform with the 2000 presentation.

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

    Accounting for Derivative Instruments and Hedging Activities - SFAS No. 133,
    as amended, established accounting and reporting standards for derivative
    instruments, including certain derivative instruments embedded in other
    contracts and for hedging activities.  Under SFAS No. 133, certain contracts
    that were not formerly considered derivatives may now meet the definition of
    a derivative.  SFAS No. 133 is effective for all fiscal years beginning
    after June 15, 2000.  The Company will adopt SFAS No. 133 effective January
    1, 2001.  Management does not expect the adoption of SFAS No. 133 to have a
    significant impact on the financial position, results of operations, or cash
    flows of the Company.

                                    Page 43
<PAGE>

    Freight Costs and Reimbursements of Freight Costs - In accordance with
    Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling
    Fees and Costs, reimbursements of freight charges are recorded in sales in
    the accompanying consolidated statements of operations. For the years ended
    December 31, 2000, 1999 and 1998, freight-out costs amounting to $812,353,
    $1,516,754, and $1,322,261, respectively, have been recorded in selling and
    marketing expenses in the accompanying consolidated statements of
    operations.

<TABLE>
<S>   <C>
3.    INVENTORIES
</TABLE>

    Inventories at December 31, 2000 and 1999 consist of the following:

                                          2000                       1999

    Raw materials                        $330,641                 $  985,785
    Finished goods                        639,595                  1,185,943
                                         --------                 ----------

                                         $970,236                 $2,171,728
                                         ========                 ==========


4.  PROPERTY AND EQUIPMENT

    Property and equipment at December 31, 2000 and 1999 consist of the
    following:

                                          2000                        1999

    Building and improvements        $2,280,783                  $2,280,783
    Computer equipment                  272,978                     276,729
    Office equipment                     55,753                      55,753
    Furniture and fixtures              585,168                     581,324
    Automotive equipment                 35,925                      35,925
    Exhibit equipment                   115,143                     115,143
    Machinery and equipment              17,953                      17,953
    Molds and dies                      213,951                     206,961
                                     ----------                  ----------

                                      3,577,654                   3,570,571
    Less accumulated depreciation      (922,545)                   (554,395)
                                     ----------                  ----------

                                      2,655,109                   3,016,176
    Land                                538,000                     538,000
                                     ----------                  ----------

                                     $3,193,109                  $3,554,176
                                     ==========                  ==========

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, 2000, 1999 and 1998 approximated $0, $0 and
    $122,450, 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 for the year ended
    December 31, 1998. As of the closing date of the acquisition of EPL Pro-
    Long, Inc., the Company wrote off the remaining unamortized balance of
    $23,006.

                                     Page 44
<PAGE>

    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 2000 and 1999 was $506,684
    and $506,684, respectively, resulting in accumulated amortization of
    $1,070,283 and $563,599 as of December 31, 2000 and 1999, respectively.

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

                                        1998
    Net revenues                    $35,032,689
    Net income                      $   155,197
    Net income per common share:
               Basic                $      0.01
               Diluted              $      0.01


6.  ACCRUED EXPENSES

    Accrued expenses consist of the following at December 31:

                                                       2000            1999

    Accrued royalties                                $ 13,113      $   18,090
    Accrued legal expenses                            410,792         363,984
    Payroll and payroll taxes                         177,902         296,880
    Accrued commissions                                57,588         124,353
    Purchase commitments                              263,907         301,509
    Other                                              14,316         105,310
                                                     --------      ----------

                                                     $937,618      $1,210,126
                                                     ========      ==========

                                    Page 45
<PAGE>

7.  NOTES PAYABLE

    During 1998, the Company obtained loans for the financing of the purchase of
    its office and warehouse facility.  On October 30, 2000 the Company entered
    into a loan agreement which is collateralized by a Third Priority Trust Deed
    lien against the Company's real property in Irvine, CA.  The terms of the
    loans and outstanding balances as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                                                            2000                  1999
    <S>                                                                                   <C>                   <C>
    a)  Note payable to a bank bearing interest at 7.875% per annum to be
        repaid in monthly principal and interest payments of $13,050 with a final
        payment of all remaining unpaid principal and interest due on May 1, 2008.        $1,629,383            $1,653,757



    b)  Loan from CDC Small Business Finance Corporation bearing interest at
        7.65% per annum to be repaid in monthly principal and interest payments
        of $6,376 through July 1, 2018.                                                      698,189               719,737



    c)  Loan from ABQ Dolphin LP; interest is payable monthly at the rate
        of the prime rate (9.50% at December 31, 2000) plus 2.5%.  The loan
        has a maturity date of October 30, 2001 and includes an option to
        extend for one additional year.  In connection with this loan, the
        Company issued a warrant to purchase 900,000 shares of common stock
        at an exercise price of $0.1875.  If the loan is paid in full on
        October 30, 2001, the Company may repurchase up to an aggregate of
        300,000 of the shares subject to the warrant at a price of $0.05 per
        share.                                                                               675,000                   ---
                                                                                          ----------            ----------

                                                                                           3,002,572             2,373,494
         Less current maturities                                                            (725,442)              (46,446)
                                                                                          ----------            ----------
                                                                                          $2,277,130            $2,327,048
                                                                                          ==========            ==========
         Borrowings have the following scheduled maturities:
         Year ending December 31:
         2001                                                                             $  725,442
         2002                                                                                 53,974
         2003                                                                                 57,969
         2004                                                                                 61,909
         2005                                                                                 66,856
         Thereafter                                                                        2,036,422
                                                                                          ----------
                                                                                          $3,002,572
                                                                                          ==========
</TABLE>

8.  LINE OF CREDIT

    On May 8, 2000, the Company entered into a new $6,000,000 credit facility
    with a financial institution, expiring in May 2003. Such facility is
    collateralized by eligible accounts receivable and inventories. Interest is
    payable monthly at the rate of the financial institution's prime rate (9.50%
    at December 31, 2000), plus 1% subject to a minimum interest charge of
    $50,000 per quarter. Effective November 21, 2000, the credit facility was
    reduced to $5,000,000 and interest is payable monthly at the rate of the
    financial institution's prime rate plus 3%. The credit facility contained
    certain defined net income and tangible net worth financial covenants. At
    December 31, 2000, the Company was in compliance or had received waivers for
    all financial covenants. Effective January 1, 2001, interest is payable
    monthly at the rate of the financial institution's prime rate plus 4% and
    the credit facility contains certain revised defined net income and net
    worth financial covenants for the Year 2001. As of December 31, 2000,
    $2,050,716 was outstanding and approximately $205,000 was available under
    the terms of the line of credit.

                                    Page 46
<PAGE>

9.  STOCKHOLDERS' EQUITY

    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).

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


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, 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.

    Stock option activity is as follows:

                                                               Weighted
                                                                 average
                                           Shares under      exercise price
                                              option           per share


    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
     Granted                                   255,000          $ 0.57
     Canceled                                 (304,007)         $(1.29)
     Exercised                                     ---             ---
                                             ---------

    OUTSTANDING, December 31, 2000           2,180,361          $ 1.47
                                             =========

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

    As of December 31, 2000 and 1999, options to purchase 1,095,616 and 581,038
    respectively, shares of common stock were exercisable.

                                    Page 47
<PAGE>

    The Company applies APB Opinion No. 25, Accounting for Stock Issued to
    Employees, and related interpretations to account for stock options.  Had
    compensation cost for the stock options been determined based on the fair
    value at the grant date consistent with the method of SFAS No. 123,
    Accounting for Stock-
    Based Compensation, the Company's net (loss) income would have been the pro
    forma amounts indicated below:

<TABLE>

                                                                         2000               1999                1998
<S>                                                                 <C>                <C>                    <C>
    Net (loss) income, as reported                                  $(1,652,278)       $(6,580,061)           $419,513
    Net (loss) income, pro forma                                    $(2,258,278)       $(7,031,336)           $(19,148)
    Net (loss) per share, as reported:
      Basic                                                         $     (0.06)       $     (0.23)           $   0.02
      Diluted                                                       $     (0.06)       $     (0.23)           $   0.02
    Pro forma net (loss) income per share:
      Basic                                                         $     (0.08)       $     (0.25)           $   0.00
      Diluted                                                       $     (0.08)       $     (0.25)           $   0.00
</TABLE>

    The fair value of options granted was estimated on the date of grant using
    the Black-Scholes option-pricing model with the following weighted average
    assumptions: no dividend yield, expected volatility range of 71.46% to
    355.70%, risk-free interest rate of 6.0%, and an expected life of 7.5 years.

11. INCOME TAXES

    The (benefit) provision for income taxes consists of the following for the
    years ended December 31, 2000, 1999 and 1998:

<TABLE>

                                                                        2000               1999                1998
<S>                                                                   <C>              <C>                  <C>
    Current:
     Federal                                                          $(216,766)       $   (21,990)         $  814,550
     State                                                              310,938            (12,692)            210,469
                                                                      ---------        -----------          ----------

                                                                         94,172            (34,682)          1,025,019

    Deferred:
     Federal                                                           (292,208)        (3,406,716)           (432,316)
     State                                                             (299,209)          (252,528)            (94,813)
                                                                      ---------        -----------          ----------

                                                                       (591,417)        (3,659,244)           (527,129)
                                                                      ---------        -----------          ----------

                                                                      $(497,245)       $(3,693,926)         $  497,890
                                                                      =========        ===========          ==========
</TABLE>

    The (benefit) provision for income taxes differs from the amount that would
    result from applying the federal statutory rate, as follows for the years
    ended December 31, 2000, 1999 and 1998:

<TABLE>

                                                                           2000               1999               1998
<S>                                                                   <C>              <C>                   <C>
    Federal statutory income tax rate                                 $(742,511)       $(3,595,895)          $321,091
    State income taxes, net of federal benefit                            7,624           (172,394)            75,176
    Other                                                               237,642             74,363            101,623
                                                                      ---------        -----------           --------

                                                                      $(497,245)       $(3,693,926)          $497,890
                                                                      =========        ===========           ========
</TABLE>

                                    Page 48
<PAGE>

    Temporary differences which give rise to deferred tax assets and liabilities
    are as follows at December 31, 2000 and 1999:


<TABLE>

                                                                                           2000               1999
<S>                                                                                  <C>                <C>
    Deferred tax liabilities:
     State taxes                                                                     $ (224,452)          (119,729)
     Fixed assets                                                                       (40,982)           (38,745)
    Deferred tax assets:
     Accrued vacation                                                                    45,876             42,340
     Allowance for doubtful accounts                                                     41,111             71,459
     Inventory reserve                                                                  365,577            442,356
     Accrued expenses                                                                   483,284          1,061,287
     Net operating loss                                                               1,955,137          2,560,864
     Other                                                                              290,013            142,848
                                                                                     ----------         ----------

                                                                                     $2,915,564         $4,162,680
                                                                                     ==========         ==========
</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, 2000, the Company has federal net operating loss
    carryforwards of approximately $4,356,000 which expire in 2018 and 2019 to
    offset future taxable income; and the Company has state net operating loss
    carryforwards of approximately $4,871,000 which expire in 2004 and 2018 to
    offset future taxable income.

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 $78,306,
    $75,758 and $115,171 for the years ended December 31, 2000, 1999 and 1998,
    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 and 1998, the
    Company expensed $12,319, and $63,661 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, and $42,105 under
    this arrangement for the years ended December 31, 1999, and 1998,
    respectively. The agreement terminated in May 1999.

    The Company is obligated to pay royalties to the same producer at the rate
    of 0.5% of the gross sales, net of returned product, from any and all direct
    response television campaigns which utilize footage from the direct response
    television commercial entitled "Prolong Across America."  For the years
    ended December 31, 2000, 1999 and 1998, the Company expensed $915, $2,444
    and $0, respectively, under this arrangement.

                                    Page 49
<PAGE>

    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, 2000, 1999 and 1998, the
    Company expensed $13,600, $42,156 and $0, respectively, under this
    arrangement.

    The Company has an arrangement with an individual whereby it has agreed to
    pay royalties on all net lubricant retail sales according to the following
    rates: 1.5% from November 1, 1996 through October 31, 1997; 1.25% from
    November 1, 1997 through October 31, 1998; and 1% from November 1, 1998
    through October 31, 1999.  Maximum payments under this arrangement are:
    $100,000 in year one, $125,000 in year two, and $150,000 in year three.  The
    option to extend this agreement for an additional five years was exercised.
    For the five years under the extension, the Company has agreed to pay
    royalties at the rate of 0.5% from November 1, 1999 through October 31, 2000
    and 0.6% from November 1, 2000 through October 31, 2004 on all net lubricant
    retail sales.  For each of these years, the Company pays a guaranteed
    minimum payment of $75,000.  Maximum payments are $100,000 in the first year
    of the renewal period and $125,000 each year thereafter.  For the years
    ended December 31, 2000, 1999 and 1998, the Company expensed approximately
    $74,379, $150,000 and $114,931, respectively, under this arrangement.


    Endorsement and Sponsorship Agreements - The Company has entered into
    endorsement and sponsorship agreements with various automotive and racing
    personalities for product marketing and promotion purposes. The Company is
    committed to aggregate future payments under these agreements of $250,000,
    all of which is payable in 2001.

    Endorsement and sponsorship expenses charged to operations related to these
    agreements was approximately $1,291,000, $2,082,000, and $1,904,000 for the
    years ended December 31, 2000, 1999 and 1998, respectively.

    Purchase Commitments - The Company has outstanding noncancelable inventory
    purchase commitments with a contract packager of $654,330 as of December 31,
    2000.  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 1.5% 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. The $4.00 and $5.00 warrants
    expired on December 31, 2000. The $2.00 and $3.00 warrants and the stock
    options expired on February 28, 2001. The individual continued 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 of the contracts include
    base salary, stock options, various performance incentives, and severance
    payments ranging from 2 to 3 years of base salary in the event of early
    termination. In April and June 2000, the Company entered into employment
    agreements with two officers of the Company for periods ranging from 3 to 4
    years. The terms of the contracts include base salary, stock options,
    various performance incentives, and severance payments of 6 months of base
    salary in the event of early termination.

    Litigation - Michael Walczak et al - On or about November 17, 1998, Michael
                 ---------------------
    Walczak et al (Walczak), on behalf of himself and other similarly situated
    shareholders of EPL filed a purported class action and derivative suit in
    the U.S. District Court (the Court) in San Diego, California against PIC,
    PSL, EPL and certain of 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

                                    Page 50
<PAGE>

   per cent (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 Walczak plaintiffs to post a bond for $100,000, which bond was posted.
   PIC appealed the Court's preliminary injunction ruling, which appeal was
   subsequently denied.

   The Prolong defendants successfully moved to change venue and the case was
   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 selected new counsel, except for three of the
   plaintiffs who withdrew from the case. The Prolong defendants each filed and
   served motions to dismiss the complaint pursuant to Rule 12(b)(6) of the
   Federal Rules of Civil Procedure. The motion has been granted in part and
   denied in part. There has been no ruling to date on the Walczak plaintiffs'
   request to certify the class as a class action. A mediation conference has
   been held and concluded and substantial settlement discussions have been
   undertaken. However, final resolution cannot presently be determined. PIC and
   PSL and their respective current officers and directors believe that the
   settlement, if approved, will not result in a material adverse affect on the
   Company's financial statements. If the settlement as proposed is not
   consummated, the Company will continue to vigorously defend against the
   claims.

   Federal Trade Commission - On February 15, 1999, PSL entered into a
   ------------------------
   negotiated Consent Order with the Federal Trade Commission (FTC) based upon
   concerns of the commission related to inadequate substantiation of certain
   advertising claims for Prolong Engine Treatment. Without admitting any of the
   allegations, the Company agreed that it would not make advertising claims
   without having adequate scientific substantiation for such claims. No fine or
   monetary redress was levied in connection with the FTC action.

   Four purported class action lawsuits based on the FTC action have been
   brought against PIC and/or PSL. Although meaningful settlement discussions
   are proceeding, final resolution of the below referenced FTC based lawsuits
   cannot presently be determined. The suits are identified as follows:

   .  Kachold et al v PSL was filed November 19, 1999 and is pending in the U.S.
      District Court, Northern District of Illinois, file No. 99-CV-08349. The
      case is a purported class action and individual action alleging violation
      of the Illinois Consumer Fraud Act, Magnuson Moss Consumer Products
      Warranty Act, and for damages. Prolong successfully filed a motion to
      dismiss the complaint, and plaintiff thereafter filed an amended
      complaint. PSL's officers and directors believe that there is no merit to
      the plaintiffs' complaint and are vigorously defending against the claims.
      The parties are presently involved in meaningful settlement discussions.

   .  Fernandes et al v PSL was filed January 5, 2000 in Los Angeles County
      Superior Court, file No. BC222712. The case is a purported class action
      alleging false advertising, unfair competition, violation of the
      California Consumer Legal Remedies Act, fraud, deceit, negligent
      misrepresentation and for equitable relief. PSL's officers and directors
      believe that there is no merit to the plaintiffs' complaint and are
      vigorously defending against the claims. The parties are presently
      involved in meaningful settlement discussions.

   .  Bowland et al v PSL was filed January 21, 2000 in County Court at Law No.
      4, Nueces County, Texas, file No. 00-60119-4. The case is a purported
      class action alleging breach of contract, breach of express warranty and
      violations of the Texas Deceptive Trade Practices Act. PSL's officers and
      directors believe that there is no merit to the plaintiffs' complaint and
      are vigorously defending against the claims. The parties are presently
      involved in meaningful settlement discussions.

                                    Page 51
<PAGE>

     .    Mata et al v PSL and PIC was filed February 18, 2000 in the District
          Court of Hidalgo County, Texas, 275/th/ Judicial District, file No. C-
          292-00-E. The case is a purported class action alleging breach of
          contract and breach of express and implied warranty. A special
          appearance and motion to dismiss was filed by PIC and an answer and
          plea in abatement was filed by PSL in order to stay this matter based
          upon the prior filed Bowland case. PSL's officers and directors
          believe that there is no merit to the plaintiffs' complaint and are
          vigorously defending against the claims. The parties are presently
          involved in meaningful settlement discussions.

     Helman et al v PSL and PIC et al - On April 8, 1997, prior to the filing of
     --------------------------------
     the Walczak complaint, the attorney who was disqualified from representing
     the plaintiffs in Walczak filed Helman et al v PSL and PIC et al in the
     Court of Common Pleas, Columbiana County, Ohio. The case was filed as a
     purported class action alleging breach of fiduciary duty, breach of oral
     and written contract, and fraud, in 13 original causes of action. The court
     subsequently denied plaintiff's motion to certify the case as a class
     action. The appellate court in Ohio largely affirmed a series of orders by
     the trial judge in favor of PSL, the effect of which was to reduce the
     number of complaining parties from approximately one hundred, to seven.
     Trial of the remaining plaintiffs' matters is set for January 15, 2002.
     PSL's officers and directors believe that there is no merit to the
     plaintiffs' complaint and are vigorously defending against the claims.

     Minidis v PSL and PIC et al - Minidis v PSL and PIC et al was filed on
     ---------------------------
     February 1, 2000, in the Los Angeles County Superior Court. Plaintiff has
     alleged breach of contract and fraud in connection with an agreement to
     design a product applicator for defendant. Plaintiff's deposition and
     completion of discovery is scheduled during the second quarter of 2001.
     Settlement negotiations have been held. A mandatory settlement conference
     is pending. Trial is scheduled for April 16, 2001. PIC and PSL and their
     respective officers and directors believe that there is no merit to the
     plaintiff's complaint and are vigorously defending against the claims.

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

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 2000, two customers accounted for approximately 13.8% and 13.7%
     respectively, of net revenues. As of December 31, 2000, five customers each
     accounted for over 10%, and in aggregate accounted for 84.1% of the balance
     of accounts receivable.

                                    Page 52
<PAGE>

14. QUARTERLY FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
                                                                                 Net
                                            Net              Gross             Income             Net Income (Loss) per Share
                                         Revenues            Profit            (Loss)             Basic                Diluted
                                        ---------            -------           -------            ----------------------------
    Quarter ended:
<S>                                   <C>               <C>              <C>                      <C>                  <C>
      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)
                                        ===========       ===========       ===========           ======               ======

    Quarter ended:
      March 31, 2000                    $ 7,757,199       $ 6,030,288       $   640,820           $ 0.02               $ 0.02
      June 30, 2000                       5,219,521         3,852,337          (511,080)           (0.02)               (0.02)
      September 30, 2000                  3,651,886         2,605,238          (504,536)           (0.02)               (0.02)
      December 31, 2000                   2,451,612         1,334,755        (1,277,482)           (0.04)               (0.04)
                                        -----------       -----------       -----------           ------               ------
                                        $19,080,218       $13,822,618       $(1,652,278)          $(0.06)              $(0.06)
                                        ===========       ===========       ===========           ======               ======
</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.

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

                                    Page 53
<PAGE>

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                                  Additions
                                                     -------------------------------------
                                         Balance at        Charged to            Charged to
                                        Beginning of       Costs and               Other                         Balance at End
           Description                     Period           Expenses             Accounts     Deductions           of Period
          ------------                     ------           --------             ---------    -----------          ---------
<S>                                     <C>                <C>                   <C>          <C>                <C>
Year ended December 31, 2000:
Allowance for doubtful accounts
receivable                               $  389,732        $   99,049                ---         $320,006          $  168,775
Inventory reserves                        1,009,024               ---                ---           65,185             943,839
Other assets reserve                        581,713               ---                ---              ---             581,713
                                         ----------        ----------        -----------         --------          ----------
Total                                    $1,980,469        $   99,049        $       ---         $385,191          $1,694,327
                                         ==========        ==========        ===========         ========          ==========

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

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

                                    Page 54
<PAGE>

                       PROLONG INTERNATIONAL CORPORATION

                                   FORM 10-K

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

<TABLE>
<CAPTION>
                                                                                                  Sequential
                                                                                                 Page Number
                                                                                                 -----------
<S>  <C>                                                                                         <C>
2.1  Exchange Agreement between Stockholders of PSL and the Registrant
     (incorporated by reference to the same numbered Exhibit to the Registrant's
     Registration Statement on Form 10 filed July 3, 1997).                                         ---
2.2  Agreement and Plan of Reorganization, dated as of February 5, 1998, by and
     among the Registrant and EPL Pro-Long, Inc., including the following
     exhibits: (i) Form of Employee Invention and Confidentiality Agreement,
     (ii) Form of Rule 145 Agreement, (iii) Form of Confidentiality Agreement,
     (iv) Form of Transfer Restriction, (v) Form of Amendment to Exclusive
     License Agreement, and (vi) Form of Cancellation Agreement (incorporated by
     reference to the same numbered Exhibit to the Registrant's Registration
     Statement on Form S-4 filed May 4, 1998).                                                      ---
2.3  Amendment to Agreement and Plan of Reorganization, dated as of June 29,
     1998, by and among the Registrant and EPL Pro-Long, Inc. (incorporated by
     reference to the same numbered Exhibit to the Registrant's Registration
     Statement on Form S-4 filed May 4, 1998).                                                      ---
3.1  Amended and Restated Articles of Incorporation of the Registrant
     (incorporated by reference to the same numbered Exhibit to the Registrant's
     Registration Statement on Form 10 filed July 3, 1997).                                         ---
3.3  Bylaws of the Registrant, as amended and restated on April 27, 1998
     (incorporated by reference to the same numbered Exhibit to the Registrant's
     Registration Statement on Form S-4 filed May 4, 1998).                                         ---
4.2  Specimen Certificate of Registrant's Common Stock (incorporated by
     reference to the same numbered Exhibit to the Registrant's Registration
     Statement on Form S-4 filed May 4, 1998).                                                      ---
10.1 Form of Indemnification Agreement for Executive Officers and Directors
     (incorporated by reference to the same numbered Exhibit to the
     Registrant's Registration Statement on Form 10 filed July 3, 1997).                            ---
10.2 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).                                                                                      ---
</TABLE>

                                    Page 55
<PAGE>

<TABLE>
<CAPTION>
<S>   <C>                                                                                           <C>
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.                                                                     ---
10.26 Associate Sponsorship Agreement between PSL, King Entertainment, Inc. and
      Kenneth D. Bernstein, dated December 17, 1999. (incorporated by reference
      to the same numbered Exhibit to the Registrant's Annual Report on Form 10-
      K filed April 14, 2000).*                                                                     ---
</TABLE>

                                    Page 56
<PAGE>

<TABLE>
<CAPTION>
<S>   <C>                                                                                           <C>
10.27 Employment Agreement, dated January 21, 2000, between PSL and Elton
      Alderman. (incorporated by reference to the same numbered Exhibit to the
      Registrant's Annual Report on Form 10-K filed April 14, 2000).                                ---
10.28 Employment Agreement, dated January 21, 2000, between PSL and Thomas C.
      Billstein. (incorporated by reference to the same numbered Exhibit to the
      Registrant's Annual Report on Form 10-K filed April 14, 2000).                                ---
10.29 Sponsorship Agreement between PSL and Sabco Racing, Inc. dated February
      15, 2000. (incorporated by reference to the same numbered Exhibit to the
      Registrant's Annual Report on Form 10-K filed April 14, 2000).*                               ---
10.30 Sponsorship Agreement between PSL and Galles/ECR Racing, LLC, dated March
      10, 2000. (incorporated by reference to the same numbered Exhibit to the
      Registrant's Annual Report on Form 10-K filed April 14, 2000).*                               ---
10.31 Service and Endorsement Contract between PSL and Smokey Yunick, dated
      January 11, 2000. (incorporated by reference to the same numbered Exhibit
      to the Registrant's Annual Report on Form 10-K filed April 14, 2000).*                        ---
10.32 Employment Agreement, dated June 1, 2000 between PSL and Nicholas Rosier
      (incorporated by reference to the same numbered Exhibit to the
      Registrant's Quarterly Report on Form 10-Q filed August 11, 2001.                             ---
10.33 Loan Agreement between PSL and ABQ Dolphin, LP, A California limited
      partnership, dated October 30, 2000; Promissory Note, Third Priority Trust
      Deed and Warrant Agreement, dated November 2, 2000. (incorporated by
      reference to the same numbered Exhibit to the Registrant's Quarterly
      Report on Form 10-Q filed November 14, 2000)                                                  ---
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.                                                              58
24.1  Power of Attorney (included as part of the signature page of this Annual
      Report).                                                                                      ---
</TABLE>

-----------------
*     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.

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