<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, 1998
                                           -----------------
     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.  X

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
22, 1999, was approximately $37,264,044.

The number of outstanding shares of the Registrant's Common Stock as of March
22, 1999 was 28,445,835.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 16, 1999, are incorporated by reference into Part III.

                                 Page 1 of 65

                 Exhibit Index on Sequentially Numbered Page 27
<PAGE>
 
     This Annual Report on Form 10-K contains forward-looking statements
relating to future events or the future financial performance of the Registrant,
including but not limited to statements contained in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Factors Which May Affect Future Operating Results."  Readers are cautioned that
such statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are only
predictions or estimations and are subject to known and unknown risks and
uncertainties.  In evaluating such statements, readers should consider the
various factors identified in this Annual Report on Form 10-K, including matters
set forth in "Factors Which May Affect Future Operating Results," which could
cause actual events, performance or results to differ materially from those
indicated by such statements.

                                     PART I

ITEM 1.  Business
-------  --------

General Description of Business

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

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

     On February 5, 1998, PIC entered into a definitive agreement with EPL Pro-
Long, Inc., a California Corporation ("EPL"), under which PIC purchased the
business assets of EPL.  Under the terms of the agreement, PIC purchased the
principal assets and assumed certain liabilities of EPL for approximately
2,981,035 shares of PIC's common stock, $0.001 par value per share (the "PIC
Common Stock").  With the purchase, PIC acquired the patents for the AFMT
technology and related trademarks and, as a result, currently owns the
exclusive, worldwide rights to manufacture, sell and distribute lubrication and
other products based on AFMT and to use the "Prolong" name.  Prior to this
transaction, PIC, through PSL, held an exclusive license from EPL to use AFMT
and the "Prolong" name.  This transaction closed on November 20, 1998.  On
November 25, 1998, the U.S. District Court in San Diego, California (the
"Court") granted a temporary restraining order without a hearing in response to
a class action filed by a group of plaintiffs representing less than 2% of the
outstanding shares of EPL's common stock against PIC, PSL, EPL and their
respective former and current officers and directors.  Following a hearing on
December 30, 1998, the Court entered a preliminary injunction, which enjoins the
further consummation of the asset purchase transaction and prevents EPL from
completing its liquidation and dissolution until further notice from the Court.
While PIC, PSL, and their respective current officers and directors believe
there is no merit to the plaintiffs' claims, the parties have agreed to attempt
to mediate the dispute.  Mediation conferences are underway, but resolution of
the matter cannot presently be determined.  See "Legal Proceedings".

                                     Page 2
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     Prior to 1996, Prolong's activities generated losses.  However, due, in
part, to PSL's successful marketing campaign based primarily on an infomercial,
Prolong's activities generated a profit in 1996.  Prolong anticipates that its
sales will continue to grow in the future as it takes advantage of the worldwide
market for its products.  Prior to fiscal 1996, PIC raised capital primarily
through the issuance of PIC Common Stock in private placements.  During 1997 and
1998, working capital was generated primarily through operations.

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 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.  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.  Additionally, the use
of AFMT in internal combustion engines has been demonstrated to cause a
reduction in operating temperature and an increased 

                                     Page 3
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resistance to catastrophic failure occasioned by loss of engine oil. AFMT also
has a high resistance to oxidation, which, when combined with other oils,
improves the oxidization resistance of metals. Given the foregoing advantages
demonstrated by AFMT, Prolong has identified a broad market for its lubricant
products.

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


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

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

     Prolong Anti-Friction Metal Treatment "AFMT"

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

     Prolong Engine Treatment

     Formulated for use in the lubrication of internal combustion engines,
Prolong believes that this product reduces friction, heat and wear.  As a result
of enhanced lubrication of the engine, Prolong believes that there is increased
useful life of moving metallic parts.  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 overall
transmission performance.

     Prolong Gas/Diesel Fuel System Treatment

     This product is formulated to increase fuel efficiency, lubricate the "top
end" of internal combustion engines, and clean and maintain fuel injectors and
other fuel system components.  This product is also designed to help maintain
peak engine performance and overall mileage.  The formula is EPA registered and
is suitable for both gasoline and diesel fuel systems.

     Prolong High Performance Multi-Purpose EP-2 Grease

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

                                     Page 4
<PAGE>
 
     Prolong "SPL100" Super Penetrating Lubricant

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

     Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid

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

     Prolong Multi-Purpose Precision Oil

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

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

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

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

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

     Prolong Paint Sealant

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

                                     Page 5
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     Prolong Waterless Wash

     This product is designed to wash and protect a vehicle in as little as 15
minutes through a simple spray and wipe technique.  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 applicator is included with this product.

     Prolong Super Cleaner

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

     Prolong Super Glass Cleaner

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

Current Markets For Prolong's Products

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

     Consumer Automotive

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

     Consumer Household

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

     Industrial

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

                                     Page 6
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casting, boring, drilling, honing and a number of other similar operations could
realize significant cost savings by using the full line of Prolong's products.

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

     Federal, State, & Local Governments

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


     Federal Government.  The federal government represents potential sales by
Prolong to many different agencies such as the Department of Defense, NASA,
Department of Energy, Department of Transportation and other federal
governmental agencies.

     Military Sales.  Procurement procedures require that products used in or on
military equipment must be manufactured according to certain military
specifications ("MIL Specs").  Prolong intends to apply for and receive United
States MIL Specs for certain of its products, and to market products not only to
the United States military, but to foreign militaries as well.  Prolong plans to
develop the military market, both here and abroad, through the utilization of
specialists who are familiar with military procurement procedures and with the
special needs of the military services.

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

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

     Public Transportation.  Public transportation entities are major potential
customers for Prolong's products, and Prolong intends to focus its efforts to
market products to these entities at the various levels of government.  Prolong
believes that rapid transit districts throughout the country are facing a
serious problem with noisy and polluting diesel buses.  The Los Angeles Rapid
Transit District, for example, has 3,300 buses and is currently under heavy
public and regulatory pressure to reduce emissions.  In addition to diesel
buses, there are a significant number of other vehicles currently operated by
county and city public transportation agencies which Prolong believes, if
treated with its products, could run cleaner, quieter, last longer and would
burn less fuel.

Future Markets For Prolong's Products

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

     Commercial Trucking

     Prolong intends to develop a market for its 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 

                                     Page 7
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costs over the useful life of the trucks due to AFMT's propensity to reduce
engine wear and the wear of other "treated" components.

     Agricultural Applications

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

     Marine Applications

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

     Railroads

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

Geographic Markets

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

     International sales comprised 10.3%, 3.5% and 6.5% of PIC's revenues in
1996, 1997 and 1998, respectively.  Prolong consummates such sales through
independent distributors and, as such, has no assets attributable to its
international sales.  Prior to 1996, Prolong had no significant amount of
international sales.

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

Marketing And Distribution Of The Products

     Prolong currently distributes its products through direct response
television, direct distribution, independent distributors and manufacturers
representative organizations.  Specifically, Prolong distributes its industrial
and commercial products, both nationally and internationally, through
independent distributors.  Currently, Prolong has 430 distributors in the United
States and nine international distributors located in Europe, Asia, Africa and
South America.

                                     Page 8
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     Prolong has produced a 30 minute direct response television commercial
entitled the "Prolong World Challenge" which it began airing in January 1996.
The "Prolong World Challenge" features celebrities such as four-time Indy 500
Champion Al Unser, well known TV personality Bob Eubanks, International
Motorsports Champion Roberto Guererro, Olympic Champion and Olympic Gold
Medalist Mark Spitz, former Los Angeles Dodgers baseball star and World Series
MVP Steve Yeager, and renowned motorcyclist Nick Nichols promoting Prolong's
lubricant product line.  The purpose of producing the "Prolong World Challenge"
was to build brand name recognition for Prolong's products in the United States,
while simultaneously marketing its principal consumer lubricant products (i.e.,
the Prolong Car Care Kit) directly to consumers.  Prolong has produced another
30 minute direct response television commercial entitled "Prolong Ultimate Car
Care Challenge" which began airing in February 1999.  The "Prolong Ultimate Car
Care Challenge" was designed to introduce the Company's new line of appearance
products.  Additionally, Prolong is currently in the final production stages of
a new 30 minute direct response television commercial entitled "Prolong Across
America", which further describes the Prolong lubrication products and
demonstrates their diversified uses. Prolong anticipates that "Prolong Across
America" will begin airing in the spring of 1999. Sales made through the direct
response television commercials described above (collectively, the
"Infomercials") are currently completed through third-party order processing
companies and sales fulfillment facilities located in California and New Jersey.
These facilities contain warehouses that are prestocked with Prolong's products
in order to provide quicker and more efficient delivery of its products to the
consumer. Prolong intends to use the exposure generated by the Infomercials,
along with the funds generated by the sales realized therefrom, to further
expand its national retail sales program in the automotive and household
consumer markets as well as other new markets.

     The products offered by Prolong have also been publicized through print and
electronic media, trade shows and motorsports sponsorships.  For example, in the
area of motorsports sponsorship, Prolong executed a co-sponsorship agreement
with King Entertainment and Kenneth D. Bernstein pursuant to which Mr. Bernstein
will provide promotional services and appearances and will recognize "Prolong
Super Lubricants" as a co-sponsor of the "Budweiser King Prolong Top Fuel
Dragster."  The agreement calls for the display of the PSL name and logo on the
dragster and related racing components in all races and other events in which
the dragster appears.  Prolong has also executed an associate sponsorship
agreement with Team Sabco relating to sponsorship of two race cars for all
NASCAR Winston Cup Series races during the 1999 and 2000 racing seasons.  The
arrangement with Team Sabco provides for display of the PSL name and logo on the
cars, equipment and uniforms and for promotional services and appearances.

     In the area of endorsements, Prolong has entered into a separate agreement
in which it retained the services of Al Unser to endorse and promote Prolong's
products.  Mr. Unser has agreed to make certain appearances to assist in
marketing the products and has agreed to license his name and likeness in
connection with the marketing of Prolong's products.  Prolong has also entered
into an agreement with Smokey Yunick pursuant to which it retained the services
of Mr. Yunick to promote Prolong's products and to act as a spokesman for, and
technical consultant to, Prolong.  Mr. Yunick has agreed to make certain
appearances to assist in marketing Prolong's products and has agreed to license
his name and likeness in connection with the marketing of Prolong's products.

     In the area of magazine advertising, Prolong has entered into advertising
contracts with Motor Trend, Hot Rod and various other magazines for print ads
during 1999.  In addition to motorsports sponsorship, endorsements and magazine
advertising, Prolong has also commenced concentrated marketing efforts in order
to increase retail, commercial, industrial, governmental and international
sales.  Prolong believes that the foregoing advertising and marketing efforts,
which began with the production of the "Prolong World Challenge" in 1995, have
resulted in recognition of its lubricant product line as a superior alternative
to other conventional lubricants available within the lubricant industry.

Competition

     The market for Prolong's products is highly competitive and is expected to
increase in the future.  The basic formula of Prolong's lubricant products has
not changed materially since its development in 1986.  The 

                                     Page 9
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formula was granted a United States patent on July 4, 1986. 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 First Brands (STP/TM/) and Quaker State Corporation (Slick
50/TM/), both of which market engine oil treatments. Prolong's competitors also
include major oil companies such as Shell Oil Company, Castrol, Pennzoil
Company, Quaker State Corporation and others who manufacture lubrication
products, such as WD40 Corp. Competition for appearance products comes
principally from companies such as Turtle Wax, Inc., Meguiar's, Inc., Pennzoil
Company, Quaker State Corporation 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 to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products than Prolong.
Additionally, other dealers and distributors may offer similar lubrication and
appearance products at prices below those offered by Prolong, appealing to the
price-sensitive segment of the market.  While Prolong believes that the prices
for Prolong lubrication and appearance products are competitive for the level of
quality obtained by the customer, Prolong relies on PSL's brand name recognition
for selling high quality, state of the art products.  There can be no assurance
that Prolong will be able to compete successfully against current and future
competitors or that competitive pressures faced by Prolong will not materially
adversely effect PIC's business, financial condition and results of operations.

     Prolong believes that its current competitive edge lies solely with the
superior lubrication performance of its products relative to that of its
competitors.  In order for Prolong to draw attention to the superior performance
of its products, Prolong is treating and marketing its products as a unique
specialty line of high performance products as opposed to a high volume product
line.

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

Production

     The AFMT formula contained in certain of Prolong's products and the
formulas for such products themselves are comprised of petroleum-based
components which are readily available from several suppliers.  Prolong does not
foresee any shortages of supply in the near future.  However, Prolong has
recently increased volume production and plans on continued expansion.  This
continued expansion could eventually place a strain on the production capacity
of its existing suppliers.  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 increase its production in time to satisfy
Prolong's increasing 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.

                                    Page 10
<PAGE>
 
Additionally, petroleum products, of which Prolong relies on 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 high
volumes, having been designed to meet the production requirements of major oil
companies.  By utilizing existing third party manufacturing facilities, Prolong
avoids the large capital expenditures associated with mixing and packaging
operations, as well as costly management of human resources.  At present, there
are facilities located throughout the world that are capable of mixing and
packaging the components into finished products.  However, Prolong's increased
volume production and continued expansion may result in shortages or
restrictions in supply and manufacturing capabilities in the future.  Prolong
has not entered into any long term contracts with respect to the supply or
production of its products, preferring to intermittently review quotations
provided by interested parties in order to take advantage of competition among
suppliers and manufacturers.

Customers

     In 1998, approximately 16.0% of Prolong's sales resulted as a response to
the airing of the "Prolong World Challenge".  Such sales were made to large
numbers of individual consumers and, accordingly, Prolong does not consider
itself dependent on any particular customers in this market segment.  In 1998,
Prolong's sales to retail customers, which were derived through independent
manufacturers representatives and distributors, comprised approximately 72.5% of
its revenues while sales to commercial, industrial and other customers comprised
11.5% of total revenues. In 1998, two retail customers comprised approximately
31.7% of its revenues. PIC believes that the loss of either or both of these
customers would not have a material adverse effect on PIC's results of
operations. No customers accounted for more than 10% of Prolong's aggregate
sales in 1997 or 1996.

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 transacton, 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 July 4, 2006.  There are a number of
foreign patents corresponding to the `825 patent, as well as pending U.S. patent
applications covering various aspects of Prolong products.  Additionally, PSL
has obtained or applied for trademark registration protection in numerous
countries for various trademarks utilized in the marketing and promotion of
Prolong products.  Currently, PSL holds the following federally registered
trademarks in the United States: PSL's Oil Drop Logo (U.S. Reg. No. 2,135,230),
PROLONG and the related design (U.S. Reg. Nos. 2,136,672 and 2,136,576).
PROLONG SUPER LUBRICANTS (U.S. Reg. No. 2,136,577), NO EQUAL IN THE WORLD &
DESIGN (U.S. Reg. No. 2,129,784), SPL100 (U.S. Reg. No. 2,022,220) and THE
ULTIMATE IN PROTECTION & PERFORMANCE (U.S. Reg. No. 2,129,785).

                                    Page 11
<PAGE>
 
Royalty Agreements

     Prolong has entered into a memorandum agreement with the producer of its
Infomercial whereby Prolong has agreed to pay The 2M Group, Inc. 1.5% of gross
sales generated from DRTV promotions made via a toll-free telephone number,
which utilize the "Prolong World Challenge" video footage. The term of this
agreement is dependent upon the life cycle of the "Prolong World Challenge."
During 1998, Prolong expended $63,661 in royalties under this agreement.

     Prolong has also entered into a personal service agreement with Al Unser
whereby Prolong has agreed to pay Mr. Unser 1.0% of gross sales resulting from
DRTV sales from the "Prolong World Challenge."  Royalties earned are to commence
with the first airing of the "Prolong World Challenge" and continue for three
years and 120 days, contingent upon (i) the continued airing of the "Prolong
World Challenge" after the 120 day test period and; (ii) after each one-year
period thereafter.  The maximum term of this agreement is until May, 1999.
During 1998, Prolong paid Mr. Unser $47,456 under this agreement.

     Further, Prolong has entered into a service and endorsement contract with
Al Unser whereby Prolong has agreed to pay royalties on all net retail sales of
its products according to the following rates:  1.5% from November 1, 1996
through October 31, 1997; 1.25% from November 1, 1997 through October 31, 1998;
and 1% from November 1, 1998 through October 31, 1999.  For each of the years
included in the arrangement, Prolong must pay a guaranteed minimum amount of
$15,000.  Earnings maximums under the arrangement are as follows:  $100,000 in
year 1; $125,000 in year 2; and $150,000 in year 3.  Either party has the option
to extend the arrangement for an additional 4 years.  If the option to extend is
exercised by either party, the agreement terminates on October 31, 2003.  During
1998, Prolong paid Mr. Unser $125,000 under this agreement.

Employees

     As of March 3, 1999, PIC and its subsidiaries collectively employ 57 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 owns approximately 29,442 square feet of
office and warehouse space in a two-story building located at 6 Thomas in
Irvine, California.  PSL purchased this facility from Huck International, Inc.
(a subsidiary of Thiokol Corporation, PSL's former lessor) pursuant to the
exercise of its lease option on February 23, 1998.  The consideration paid by
PSL for the facility was $2,690,000.  PSL utilized $248,000 in cash on hand and
borrowed funds in the amounts of $1,692,000 and $750,000, respectively, from
Bank of America and from CDC Small Business Finance Corp.  Escrow closed on the
purchase and sale on April 30, 1998.  The outstanding loans from Bank of America
and CDC Small Business Finance Corp. are collateralized by the purchased land
and building.  See "Management's Discussion and Analysis Of Financial Condition
and Results of Operations - Liquidity and Capital Resources."  PIC considers its
present facilities to be adequate for Prolong's current operations and for those
reasonably expected to be conducted during the next twelve months.  Further, PIC
believes that any additional space, if required, will be available on
commercially reasonable terms.

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

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

                                    Page 12
<PAGE>
 
Supreme Court. In June 1998, the California Supreme Court denied a review of the
appeal, thereby extinguishing the right to any further appeals and rendering the
judgment final.

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

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

     PIC and PSL and their respective current officers and directors continue to
believe that there is no merit to the plaintiff's claims and plan to vigorously
defend against the claims.  The defendants have each filed and served motions to
dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure. These motions are scheduled for determination in April 1999.  The
defendants successfully moved to change venue and the case has just been ordered
transferred to the federal court in Orange County, California, where PIC's
principal office is located. The parties have agreed to attempt to mediate
the dispute.  They are engaged in settlement discussions in an effort to resolve
the matter.  However, it is too early to tell whether an acceptable settlement
can be reached.

     In a third matter, a case is pending in the U.S. District Court whereby the
plaintiffs allege a variety of business torts, including copyright infringement
and false advertising.  PIC has denied the allegations and has counter-claimed
against the plaintiffs and multiple other parties, alleging copyright
infringement, false advertising, product disparagement, misappropriation of
trade secrets and unfair trade practices.  The plaintiffs and defendants have
been in settlement negotiations and it appears that the case will be settled,
although final documents have not yet been signed.

     Neither PIC nor any of its subsidiaries is a party to any other pending or
threatened legal, governmental, administrative or judicial proceedings that
Prolong believes will have a material adverse effect upon PIC's or its
subsidiaries' business, operating results, financial condition 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, 1998.

                                    Page 13
<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."
Prior to June 12, 1998, PIC Common Stock was traded on the OTC Bulletin Board
under the symbol "PROL."  PIC Common Stock resumed trading (after approximately
8 years of dormancy) in January, 1996.  High and low bids for each quarter
during 1997 and 1998 are as indicated below.

<TABLE>
<CAPTION>
 
       Quarter Ended:           High Bid        Low Bid
       -------------            --------        -------
<S>                             <C>             <C>   
                                                      
       March 31, 1997             $6.50          $2.88
       June 30, 1997              $3.19          $1.50
       September 30, 1997         $3.25          $2.25
       December 31, 1997          $2.44          $1.50
       March 31, 1998             $4.63          $2.00
       June 30, 1998              $3.44          $2.44
       September 30, 1998         $2.94          $1.50
       December 31, 1998          $2.19          $1.38 
</TABLE>

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

     PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share.  As of March 22, 1999, the number of holders of
record of PIC Common Stock is approximately 475 and the high and low bids were
$1.44 and $1.31, 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

     During the year ended December 31, 1998, there were no issuances of
unregistered securities by the Company.

                                    Page 14
<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 years ended
December 31, 1994 and 1995, respectively, is derived from the consolidated
financial statements of the Company that have been audited by Corbin & Wertz.
The financial data set forth below for the years ended December 31, 1996, 1997
and 1998, 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,
                                                              ---------------------------------------------------------------------
                                                                  1994           1995          1996          1997          1998
                                                              ------------   ------------   -----------   -----------   -----------
<S>                                                           <C>            <C>            <C>           <C>           <C>
Statement of Operations Data                                
  Net revenues..............................................  $    ----      $   390,506    $15,813,493   $29,846,795   $35,032,689
  Net profit (loss).........................................   (134,285)        (415,740)       721,178     2,132,553       419,513
  Net profit (loss) per share:                              
     Basic..................................................      N/A(1)     $     (0.02)   $      0.03   $      0.08   $      0.02
     Diluted................................................      N/A(1)     $     (0.02)   $      0.03   $      0.08   $      0.02
  Weighted average common shares:                                          
     Basic..................................................      N/A(1)      17,156,501     23,463,620    25,508,035    25,807,618
     Diluted................................................      N/A(1)      17,156,501     23,463,620    25,690,774    26,011,767
Balance Sheet Data                                          
  Total assets..............................................  $ 139,984      $   730,760    $ 9,023,317   $13,748,650   $23,210,872
  Total liabilities.........................................     12,452           88,218      1,732,467     4,039,796     5,756,537
  Total stockholders' equity................................    127,532          642,542      7,290,850     9,708,854    17,454,335
________________________
</TABLE>

  (1) Net loss per share and weighted average shares of Common Stock outstanding
      information for the year ended December 31, 1994 have not been provided as
      such period preceded PIC's merger with PSL in June 1995 and, therefore,
      such information would not be meaningful.

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 Infomercials and intends to
continue to utilize this means to gain product recognition for purposes of
directly increasing sales as well as increasing retail, commercial and
industrial and governmental sales resulting from broader public knowledge of its
products.

                                    Page 15
<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,
                                                       -------------------------------------------------------------------
                                                                1996                     1997                  1998
                                                       --------------------    ---------------------   -------------------
<S>                                                    <C>                     <C>                      <C>
Net revenues                                                    100.0%                   100.0%                100.0%         
Cost of goods sold                                               29.5                     19.2                  21.5          
                                                                -----                    -----                 -----          
     Gross profit                                                70.5                     80.8                  78.5          
Selling and marketing expenses                                   52.0                     57.8                  56.6          
General and administrative expenses                              12.9                     11.8                  17.2          
Research and development                                        -----                     ----                   2.0          
                                                                -----                    -----                 -----          
     Operating income                                             5.6                     11.2                   2.7          
Interest expense                                                 (0.3)                     0.0                  (0.4)         
Interest and dividend income                                      0.6                      0.8                   0.3          
                                                                -----                    -----                 -----
     Income before income taxes                                   5.9                     12.0                   2.6          
Provision for income taxes                                        1.3                      4.8                   1.4          
                                                                -----                    -----                 -----          
     Net income                                                   4.6                      7.2                   1.2          
                                                                =====                    =====                 =====   
</TABLE>

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

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

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

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

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

                                    Page 16
<PAGE>
 
     General and administrative expenses for the year ended December 31, 1998
were $6,022,201 as compared to $3,523,200 for the year ended December 31, 1997,
an increase of $2,499,001 or 70.9%.  This increase was primarily attributable to
salaries for new employees, employee benefits, professional services, computer
related expenses, bad debts, legal expenses, and other administrative costs
required to build the infrastructure necessary to support the increased level of
sales.  As a percentage of sales, general and administrative expenses were 17.2%
in 1998 versus 11.8% in 1997 mainly due to the factors discussed above.  It is
anticipated in the future that the general and administrative expenses will
decline as a percentage of sales due to non-recurring expenses recorded in 1998.

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

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

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

     Comparison of the Years Ended December 31, 1997 and December 31, 1996

     Net revenues for the year ended December 31, 1997 were $29,846,795 as
compared to $15,813,493 for the year ended December 31, 1996, an increase of
$14,033,302 or 88.7%.  Revenues for 1997 were derived from the following
sources: direct response infomercial sales of $14,758,000; retail sales of
$11,439,000; industrial sales of $1,739,000; international sales of $1,058,000;
and, other sales and revenues of $853,000.  Revenues for 1996 were derived from
the following sources: direct response infomercial sales of $12,287,000; retail
sales of $951,000; industrial and commercial sales of $946,000; and,
international sales of $1,629,000.

     Prolong expects that retail and other sales categories will continue to
increase as a percentage of total sales relative to direct response infomercial
sales as Prolong continues to gain momentum in these other markets following the
initiation of the retail sales effort in the fourth quarter of 1996.
Infomercial sales have begun to demonstrate a slight decline in 1997 of return
relative to air time expenditures.

     Cost of goods sold for the year ended December 31, 1997 was $5,735,238 as
compared to $4,660,926 for the year ended December 31, 1996, an increase of
$1,074,312 or 23%.  The increase in absolute dollars was attributable to the
higher volume of purchases to meet the increasing sales demand.  As a percentage
of sales, cost of goods sold for the year ended December 31, 1997 was 19.2% as
compared to 29.5% for the prior year.  This favorable decrease was attributable
to increased efficiencies in the outside production processes and volume
discounts available in 1997 that were not available in 1996 due to the
relatively higher costs associated with start-up levels of production.
Management does not anticipate that further significant reductions are likely in
the future.

     Selling and marketing expenses were $17,259,469 for the year ended December
31, 1997 as compared to $8,218,450 for the year ended December 31, 1996, an
increase of $9,041,019 or 110%.  This increase was primarily the result of
marketing allowances to retail customers, increased endorsement and sponsorship
payments, royalties and commissions as a result of increased sales, promotional
activities to promote product awareness and expenditures for print advertising.
Selling and marketing expenses as a percentage of sales were 57.8% for 1997
versus 52.0% in 1996.  In 1996, selling and marketing expenses consisted
primarily of purchases of television air time, royalties and commissions.  The
1997 expenditures included air time purchases as well as the full array of other
expenditures discussed above.  These other expenditures were not included in
1996 as the initiation of retail sales did not occur until the fourth quarter of
1996.

                                    Page 17
<PAGE>
 
     General and administrative expenses for the year ended December 31, 1997
were $3,523,200 as compared to $2,041,102 for the year ended December 31, 1996,
an increase of $1,482,098 or 72.6%.  This increase was primarily attributable to
salaries for new employees, employee benefits, professional services and other
administrative costs required to build the infrastructure necessary to support
the increased level of sales.  As a percentage of sales, general and
administrative expenses were 11.8% in 1997 versus 12.9% in 1996.  The
administrative infrastructure buildup took place in late 1996 and early 1997 in
anticipation of the increase in sales.  An extensive administrative increase,
relative to sales, is not anticipated in the future.

     For the year ended December 31, 1997, PIC generated interest and dividend
income, net of interest expense, of $241,029 as compared to $35,437 for the year
ended December 31, 1996.  During 1997, PIC maintained an average cash balance of
approximately $5.6 million as compared to approximately $2.6 million during
1996.  Additionally, in the third quarter of 1997, PIC transferred its cash
reserves to higher yielding accounts.

     Net income for the year ended December 31, 1997 was $2,132,553 as compared
to $721,178 for the year ended December 31, 1996, an increase of $1,411,375 or
195.7%.  This increase was a result of the factors discussed above.

Liquidity and Capital Resources

     Prior to the fiscal year ended December 31, 1996, PIC had not generated
sufficient revenues to finance its operations and was able to remain in business
primarily with the proceeds from the issuances of its common stock in private
placements.  Currently, PIC has sufficient revenues to meet its current expenses
and does not anticipate the need to raise additional capital in the next twelve
months.  However, PIC believes that it may need to obtain additional financing
in the future to fund its anticipated period of growth.  As of March 3, 1999,
Prolong had commitments for capital equipment acquisitions in the amount of
approximately $107,000 to complete the furnishing of its new facilities.
Prolong anticipates no immediate future need for any material production-related
capital expenditures.  Prolong expects that all future manufacturing will be
sub-contracted out, bypassing the need for any infrastructure investment.
However, despite the minimal capital expenditures anticipated in the near
future, PIC plans to significantly increase its level of operations, and in
particular plans to increase its marketing activities to include additional
markets in the United States and abroad.

     Cash and cash equivalents totaled $1,128,000 at December 31, 1998 compared
to $6,181,000 at December 31, 1997.  Working capital was $8,373,000 at December
31, 1998 as compared to $9,284,000 at December 31, 1997, representing a decrease
of $911,000.

     Operating activities used $3,754,000 during 1998 as compared to cash
generated from operations during 1997 of $1,320,000.  This decrease of
$5,074,000 resulted primarily from lower net income, increases in accounts
receivable and inventories, and a decrease in income taxes payable with a
partial offsetting increase in accounts payable.

     Cash flows used for investing activities totaled $929,000 in 1998.  This
was comprised of property and equipment acquisitions of $848,000 and employee
advances of $81,000.

     Cash flows used for financing activities totaled $371,000 in 1998,
comprised of payments against notes payable of $24,000 and registration costs of
$347,000.

     In July 1997, PSL entered into a $4 million line of credit with Bank of
America National Trust and Savings Association ("Bank of America") which is
collateralized by PSL's inventories and receivables.  This credit line bears
interest at either Bank of America's Reference Rate or the LIBOR rate plus
2.25%, at PSL's option, and expires on July 31, 1999.  As of March 3, 1999, PSL
had an outstanding balance under the Bank of America credit line of $150,000.
In addition, PSL has outstanding an aggregate of $1,673,499 as of March 3, 1999
owed to Bank of America pursuant to a loan which was obtained in order to
purchase Prolong's facility in Irvine, California.  Such loan is required to be
repaid in monthly installments of approximately $13,050 each, and bears interest
at a rate of 7.875% per year.  Further, in connection with the purchase of
Prolong's facility, PSL has outstanding a United 

                                    Page 18
<PAGE>
 
States Small Business Administration loan from CDC Small Business Finance Corp.
with a remaining balance of $735,032 as of March 3, 1999. Such loan is required
to be repaid in monthly installments of approximately $6,376 each, and bears
interest at a rate of 7.65% per year. PIC believes that its current and
anticipated levels of revenues and expenditures, its plans to revise customer
and vendor payment terms, and its plans to accelerate the conversion to cash of
certain of its assets, in addition to the funds provided from the foregoing
credit facility will be sufficient to meet its liquidity needs for fiscal 1999.
PIC anticipates that it may seek additional capital in the future to fund its
growth. Any additional required financings may not be available on terms
satisfactory to PIC, if at all.

Year 2000 Readiness Disclosure

     PIC has developed and is well into implementing a company-wide Year
2000 plan (the "Plan") with the intent to ensure that its computer equipment and
operations will become "Year 2000 compliant". PIC has formed a Year 2000
response team comprised of key members from various business areas to review and
respond quickly to Year 2000 issues as they occur. The response team is expected
to be on call during the millennium change to monitor and provide solutions to
any issues that arise. PIC's Year 2000 Plan is directed to four major areas:
products, internal systems (including information technology (IT) and non-IT
systems), suppliers and dealers. PIC's Plan includes a series of initiatives to
ensure that all of the computer hardware, software and communications systems
will function without incident at the turn of the millennium and beyond. To
date, the cost to identify, assess and remediate PIC's Year 2000 issues is not
expected to be material to PIC's financial condition or impact business
operations. None of PIC's other information technology projects have been
delayed or deferred as a result of Year 2000 assessment and remediation. PIC is
progressing with replacement or enhancement to internal IT systems and
functions.

     During the assessment and remediation phase of the Year 2000 Plan, PIC
identified and corrected problems involving calculations or data manipulation
based on date values. PIC upgraded to software products with proven versions of
Year 2000 compliant products. The use of Year 2000 certified software and
product upgrades has further strengthened PIC's Year 2000 transition position.
In addition, PIC has also assessed and remediated non-IT support systems such as
phone switches, copier/facsimile machines and facility security systems. With
regard to the outside supplier portion of the Plan, PIC is currently assessing
Year 2000 readiness of production and distribution suppliers based on projected
severity levels of Year 2000 outage issues. Suppliers have been asked to respond
to a compliance questionnaire and initial responses to these questionnaires have
been received. Based on the response thus far, PIC believes that the worst case
scenario with respect to Year 2000 issues is the failure of a supplier to become
Year 2000 compliant in time. It is projected that such a failure by a supplier
would result in disruption of manufacturing and distribution functions and the
implementation of manual systems and processes until such a time as the failure
is cured. At the present time, PIC expects to be fully Year 2000 compliant by
the third quarter of 1999.

     PIC presently believes it has an effective Plan to anticipate and resolve
any potential internal Year 2000 issues in a timely manner. In addition, PIC has
reviewed potential Year 2000 failure points and implemented corrective action to
resolve any issues in addition to providing manual systems and procedures to
ensure business needs are being serviced until such time as Year 2000 automated
system failures can be remediated and corrected. PIC plans to have its
contingency plans in place by October 31, 1999.

                                    Page 19
<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 growth rate or may cause sales
to decline.  Such risks and uncertainties include, but are not limited to, the
following:

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

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

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

 .  We may be unable to manage our growth effectively.

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

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

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

Our Failure to Manage Growth Could Adversely Affect Us

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

 .  Improving our operational, financial and management information systems.

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

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

We May Need to Raise Additional Funds in the Future

     Although we are not planning to seek additional funding within the next
twelve months, we expect that our need for additional funds will increase
significantly in the future as our business grows.  We cannot guarantee that we
will be able to obtain adequate funds when we need them or on acceptable terms,
if at all.  Our future need for additional funds will depend on numerous factors
including the following:

                                    Page 20
<PAGE>
 
 .  The success of our product development programs.

 .  The commercial success of our products.

 .  The rate of growth of our business.

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

     We may seek 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 16.0%
($5,602,000) of our revenues in 1998 compared with 49.4% ($14,758,000) of our
revenues in 1997.  In the past, sales to industrial/commercial and international
customers constituted only a limited portion of our revenues.  However, we
expect most of our future sales growth to come from both industrial/commercial
and international customers and less from direct response sales.    We typically
sell to industrial/commercial and international customers through independent
distributors.  We will need to significantly expand our distributor network in
order to increase sales in the industrial/commercial and international markets.
We cannot guarantee that we will successfully locate and engage qualified
distributors for our products, either domestically or internationally, or that
our sales to industrial/commercial and international customers will grow as
expected.

We Depend on Our Key Management Personnel

     We depend on our key management personnel and our future success will
depend in large part upon their contributions, experience and expertise.  We
have not entered into an employment agreement with any of our employees.  We
maintain a key-man life insurance policy in the amount of $2,000,000 on the life
of Elton Alderman, our President, however, we cannot guarantee that such amount
is adequate.  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 First Brands (STP(TM))
and Quaker State Corporation (Slick 50(TM)), both of which market engine oil
treatments. Our competitors also include major oil companies such as Shell Oil
Company, Castrol, Pennzoil Company, and other companies who manufacture

                                    Page 21
<PAGE>
 
lubrication products, such as WD40 Corp. Further, we believe that major oil
companies not presently offering products that compete directly with our
products may enter our markets in the future. With respect to our appearance
products, major competitors include such companies as Turtle Wax, Inc.,
Meguiar's, Inc., Pennzoil Company, Quaker State Corporation and The Clorox
Company. Increased competition could result in any or all of the following,
which could have a material adverse effect on our business, financial condition,
cash flows and results of operations:

 .  Price reductions

 .  Reduced gross margins

 .  Loss of market share

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

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

The Prices of Many of Our Components are Highly Volatile

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

We Have Operated as an Independent Company Only Since 1995

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

     From the Reorganization through December 1995, we generated revenues of
approximately  $391,000 and operating losses of approximately $416,000.  Since
December 1995, our operations have generated net income.  We cannot guarantee
our operating success and ability to generate net income in the future.

                                    Page 22
<PAGE>
 
We Depend on Third Party Suppliers

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

Most of Our Revenue Comes From Two Product Lines

     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 two product lines, lubricants
and appearance products, a decline in the demand for, or in the prices of, our
AFMT-based products as a result of competition, technological advances or
otherwise, could have a material adverse effect on our business, financial
condition, cash flows and operating results.  We recently expanded into other
product lines to diversify our limited product mix and we plan to continue such
expansion in the future.  However, we cannot guarantee that our new AFMT-based
products will be widely accepted by our customers.

Our Average Selling Prices May Decline

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

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

     International sales comprised 6.5% of revenues in 1998 as compared to 3.5%
of revenues in 1997.  We plan to expand international sales in the future.  This
will require significant financial resources and management attention.  In order
to expand sales on a worldwide basis, we plan to do the following:

 .  Establish additional marketing and sales operations.

 .  Hire additional employees.

 .  Recruit additional international distributors.

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

                                    Page 23
<PAGE>
 
     Currently, our worldwide sales are denominated in United States dollars.
An increase in the value of the United States dollar relative to foreign
currencies would make our products more expensive and, therefore, potentially
less competitive in those markets.  Additional risks inherent in our worldwide
business activities include:

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

 .  Costs of localizing products in foreign countries.

 .  Longer accounts receivable collection cycles.

 .  Difficulties in managing foreign operations.

 .  Potential for adverse tax consequences, including restrictions on
   repatriating our earnings.

 .  The burdens of complying with a wide variety of foreign laws.

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

Our Business Is Subject to the Risk of Litigation

  We are subject to various legal proceedings from time to time as part of our
business.  In November 1998, a lawsuit was filed by certain EPL shareholders
against PIC, PSL, EPL and each of our former and current officers and directors.
The plaintiffs in the lawsuit allege breach of contract, certain fraud claims,
civil RICO, breach of fiduciary duty and conversion, and seek monetary damages.
We, along with PSL and each of our directors and officers, deny the allegations
of wrongdoing and intend to vigorously defend the lawsuit, although we cannot
presently determine the ultimate outcome of this proceeding.  Such claims or
litigation, or other claims or litigation, could result in a decision that is
adverse to us.  A decision adverse to us in this or any other matter could have
a material adverse effect on our business, financial condition, cash flows and
results of operations.  In addition, litigation, regardless of its merits, could
result in substantial costs to us and divert management's attention from our
operations.

We Could Be Subject to Environmental Liabilities or Regulatory Compliance Costs

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

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

     Government regulations could be changed to impose additional requirements
on us which could restrict our ability to expand our operations or have an
adverse effect on our business.  The adoption of these types of governmental
regulations or our failure to comply with the applicable environmental and land
use regulations or 

                                    Page 24
<PAGE>
 
restrictions on the discharge of hazardous substances could
subject us to future liability or could cause our operations or those of our
contract manufacturers to be curtailed, relocated or suspended.

We Are Controlled by Management and Certain Stockholders

     As of March 3, 1999, our directors, executive officers and principal
stockholders collectively held approximately 38.3% of our outstanding shares of
common stock.  These stockholders, acting together, have the ability to
significantly influence the election of our directors and most other
stockholders' actions and, as a result, can direct our business affairs.  Such
concentration of voting power could delay or prevent our company from taking
certain actions including, but not limited to, a change in our company's
control.

We Face Risks Associated With Potential Year 2000 Problems of Third Parties

     It is possible that the currently installed computer systems, software
products or other business systems of our suppliers, manufacturers, distributors
or customers, will not accept input of, store, manipulate and output dates in
the year 2000 or thereafter without error or interruption.  We have evaluated
our business systems, including our computer systems, and believe that such
systems will function properly after the year 2000.  However, we are contacting
each of our suppliers, manufacturers, distributors and customers to assess their
state of readiness with respect to the year 2000 and its impact on their
computer systems.  However, we cannot guarantee that we will be able to identify
all such year 2000 problems in the computer systems of our suppliers,
manufacturers, distributors or customers in a timely manner or that they will be
able to fix any problems that they discover.  The expenses of our efforts to
identify and address such problems, or the expenses or liabilities that we may
incur as a result of such problems, should not have a material adverse effect on
our business, operating results and financial condition.  In addition, the
purchasing patterns of existing and potential customers who are affected by a
year 2000 problem could cause our sales volume to fluctuate.

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

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

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

  PIC's financial instruments include cash and long-term debt.  At December 31,
1998, 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, 1998.

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

       Consolidated balance sheets of PIC as of December 31, 1998 and 1997,
respectively, statements of income and cash flows for each of the three years in
the period ended December 31, 1998, 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 25
<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 1999 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 1998.

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 1999 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 1998.

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 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1998.

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 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1998.

                                    Page 26
<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,
          1998, 1997 and 1996 with Notes and Independent Auditors' Reports
     
     (2)  Financial Statement Schedules
     
          Schedule II - Valuation and Qualifying Accounts
     
          All other schedules are omitted because they are not applicable or the
          required information is shown in the financial statements or notes
          thereto.
     
     (3)  Exhibits

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


          2.1  Exchange Agreement between Stockholders of PSL and the Registrant
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).

          2.2  Agreement and Plan of Reorganization, dated as of February 5,
               1998, by and among the Registrant and EPL Pro-Long, Inc.,
               including the following exhibits:  (i) Form of Employee Invention
               and Confidentiality Agreement, (ii) Form of Rule 145 Agreement,
               (iii) Form of Confidentiality Agreement, (iv) Form of Transfer
               Restriction, (v) Form of Amendment to Exclusive License
               Agreement, and (vi) Form of Cancellation Agreement (incorporated
               by reference to the same numbered Exhibit to the Registrant's
               Registration Statement on Form S-4 filed May 4, 1998).

          2.3  Amendment to Agreement and Plan of Reorganization, dated as of
               June 29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form S-4 filed May 4,
               1998).

          3.1  Amended and Restated Articles of Incorporation of the Registrant
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).

          3.3  Bylaws of the Registrant, as amended and restated on April 27,
               1998 (incorporated by reference to the same numbered Exhibit to
               the Registrant's Registration Statement on Form S-4 filed May 4,
               1998).

          4.2  Specimen Certificate of Registrant's Common Stock (incorporated
               by reference to the same numbered Exhibit to the Registrant's
               Registration Statement on Form S-4 filed May 4, 1998).

          10.1 Form of Indemnification Agreement for Executive Officers and
               Directors (incorporated by reference to the same numbered Exhibit
               to the Registrant's Registration Statement on Form 10 filed July
               3, 1997).

          10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
               d.b.a. Prolong International, dated November 10, 1993
               (incorporated by reference to the same numbered Exhibit to the
               Registrant's Registration Statement on Form 10 filed July 3,
               1997).

          10.3 Memorandum of Agreement between PSL and 2M Corporation, dated
               April 24, 1995; Amendment dated March 4, 1996 (incorporated by
               reference to the same numbered Exhibit to the Registrant's
               Registration Statement on Form 10 filed July 3, 1997).

                                    Page 27
<PAGE>
 
          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).

          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).

          10.9   Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb
                 Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated
                 February 21, 1997 (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 28
<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 Premiere Packaging
                 Inc., dated September 11, 1998.
          21.1   Subsidiaries of the Registrant.
          23.1   Consent of Deloitte & Touche LLP.
          24.1   Power of Attorney (included as part of the signature page of
                 this Registration Statement).
          27.1   Financial Data Schedule.
 
-----------------------------------
*    Portions of this Exhibit are omitted and were filed separately with the
     Secretary of the Commission pursuant to the Registrant's application
     requesting confidential treatment under Rule 24b-2 of the Securities
     Exchange Act of 1934.

(b)  Reports on Form 8-K.

     The following Form 8-K's were filed during the fourth quarter of 1998:

     (1)  On December 7, 1998, PIC filed a Form 8-K to disclose: (i) a class
          action filed on or about November 17, 1998 by Michael Walczak, et al.,
          against PIC, PSL, EPL and each of their respective former and current
          officers and directors; (ii) the grant of a temporary restraining
          order in connection with such action on November 25, 1998, and; (iii)
          the scheduling of a hearing on December 14, 1998 to determine whether
          a preliminary injunction should be issued in connection with such
          action. The Form 8-K included unaudited financial statements of EPL
          as of and for the five months ended September 30, 1998 and 1997, the
          eight months ended December 31, 1997 and 1996, and the years ended
          April 30, 1998, 1997, 1996 and 1995.
     (2)  On December 29, 1998, PIC filed a Form 8-K to disclose that a further
          hearing on whether a preliminary injunction should be issued had been
          scheduled for December 30, 1998.

                                    Page 29
<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



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


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

                               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 25, 1999
-------------------------------   Chairman of the Board
Elton Alderman                    (Principal Executive Officer)

/s/  Thomas C. Billstein                                                      March 25, 1999
-------------------------------   Vice President, Secretary and Director
Thomas C. Billstein
                                          
/s/  Tom T. Kubota                Vice President, Investor Relations and      March 25, 1999
-------------------------------   Director
Tom T. Kubota

/s/  Nicholas M. Rosier           Chief Financial Officer                     March 25, 1999
-------------------------------   (Principal Financial Officer)
Nicholas M. Rosier

/s/  Melanie A. McCaffery         Director                                    March 25, 1999
-------------------------------
Melanie A. McCaffery
</TABLE>

                                    Page 30
<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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998.  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 generally accepted auditing
standards.  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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 3, 1999


                                    Page 31
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------------------------------------
                                                                            1998                   1997
<S>                                                                      <C>                  <C>
ASSETS
 
CURRENT ASSETS:
Cash and cash equivalents                                                $ 1,127,861          $ 6,180,983
Accounts receivable, net of allowance for doubtful accounts   
  of $580,000 and $242,724 in 1998 and 1997, respectively                  4,950,055            3,880,571
Inventories                                                                2,915,249            1,300,691
Prepaid expenses                                                           1,316,443              711,242
Income taxes receivable                                                      444,371                 ----
Prepaid television time                                                      627,050            1,022,144
Advances to employees                                                        308,630              227,896
Deferred tax asset                                                            63,645                 ----
                                                                         -----------          -----------
                                                              
    Total current assets                                                  11,753,304           13,323,527
                                                              
Property and equipment, net                                                3,372,509              219,683
                                                              
Intangible assets, net                                                     7,543,354                 ----
                                                              
Deferred tax asset, non-current                                              439,791                 ----
                                                              
Other assets                                                                 101,914              205,440
                                                                         -----------          -----------
                                                              
TOTAL ASSETS                                                             $23,210,872          $13,748,650
                                                                         ===========          ===========
</TABLE>

                See notes to consolidated financial statements.

                                    Page 32
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 (Continued)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                  1998                1997
<S>                                                                            <C>                 <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
Accounts payable                                                               $ 1,878,418         $ 1,074,098
Accrued expenses                                                                 1,460,163           1,663,321
Notes payable, current                                                              41,951                 ---
Income taxes payable                                                                   ---           1,278,684
Deferred income taxes                                                                  ---              23,693
                                                                               -----------         -----------
 
    Total current liabilities                                                    3,380,532           4,039,796
 
Notes payable, noncurrent                                                        2,376,005                 ---
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 50,000,000 shares authorized;
  no shares issued or outstanding
Common stock, $0.001 par value; 150,000,000 shares authorized;
  28,445,835 and 25,464,500 shares issued and outstanding in 1998
  and 1997, respectively                                                            28,446              25,465
Additional paid-in capital                                                      14,716,438           7,393,451
Retained earnings                                                                2,709,451           2,289,938
                                                                               -----------         -----------
 
    Total stockholders' equity                                                  17,454,335           9,708,854
                                                                               -----------         -----------
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $23,210,872         $13,748,650
                                                                               ===========         ===========
</TABLE>

                See notes to consolidated financial statements.

                                    Page 33
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                             1998                1997                1996
 
<S>                                                    <C>                 <C>                 <C>
NET REVENUES                                                $35,032,689         $29,846,795         $15,813,493
 
COST OF GOODS SOLD                                            7,527,361           5,735,238           4,660,926
                                                            -----------         -----------         -----------
 
GROSS PROFIT                                                 27,505,328          24,111,557          11,152,567
 
OPERATING EXPENSES:
Selling and marketing expenses                               19,838,689          17,259,469           8,218,450
General and administrative expenses                           6,022,201           3,523,200           2,041,102
Research and development                                        710,531
                                                            -----------         -----------         -----------
 
  Total operating expenses                                   26,571,421          20,782,669          10,259,552
                                                            -----------         -----------         -----------
 
OPERATING INCOME                                                933,907           3,328,888             893,015
 
OTHER INCOME (EXPENSE), net:
Interest expense                                               (132,102)             (8,185)            (51,666)
Interest income                                                 115,598             249,214              15,224
Dividend income                                                                                          71,879
                                                            -----------         -----------         -----------
 
  Total other income (expense)                                  (16,504)            241,029              35,437
                                                            -----------         -----------         -----------
 
INCOME BEFORE PROVISION
  FOR INCOME TAXES                                              917,403           3,569,917             928,452
 
PROVISION FOR INCOME TAXES                                      497,890           1,437,364             207,274
                                                            -----------         -----------         -----------
 
NET INCOME                                                  $   419,513         $ 2,132,553         $   721,178
                                                            ===========         ===========         ===========
 
NET INCOME PER SHARE:
Basic                                                             $0.02               $0.08               $0.03
                                                            ===========         ===========         ===========
Diluted                                                           $0.02               $0.08               $0.03
                                                            ===========         ===========         ===========
 
WEIGHTED AVERAGE COMMON SHARES:
Basic                                                        25,807,618          25,508,035          23,463,620
                                                            ===========         ===========         ===========
Diluted                                                      26,011,767          25,690,774          23,463,620
                                                            ===========         ===========         ===========
</TABLE>
                See notes to consolidated financial statements.

                                    Page 34
<PAGE>
 
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                                            
                                                                                      Common stock               
                                                        Common stock                   Subscribed               Additional  
                                                --------------------------------------------------------         paid-in
                                                     Shares       Amount         Shares        Amount            capital
                                                                                                                            
<S>                                                <C>           <C>            <C>         <C>                <C>          
BALANCES, December 31, 1995                        19,182,035     $19,182        320,000           $ 320       $ 1,186,833  
                                                                                                                            
Shares issued for cash                              4,891,665       4,892                                        5,317,738  
Shares issued for services                            730,000         730                                          394,270  
Issuance of shares previously subscribed              320,000         320       (320,000)           (320)                   
Shares subscribed                                                                155,800             156           209,344  
Shares issued in exchange for a note receivable       330,000         330                                          659,670  
Net income                                        
                                                   ----------  ----------     ----------      ----------        ---------- 
                                                                                                                            
BALANCES, December 31, 1996                        25,453,700      25,454        155,800             156         7,767,855  
                                                                                                                            
Shares issued for cash                                  5,000           5                                           12,495  
Shares issued for services                            180,000         180                                          229,270  
Issuance of shares previously subscribed              155,800         156       (155,800)           (156)                   
Cancellation of shares previously issued             (330,000)       (330)                                        (659,670) 
Compensation costs related to options                                                                               43,501  
Net income                                                                                                                  
                                                   ----------  ----------     ----------      ----------        ----------
                                                                                                                            
BALANCES, December 31, 1997                        25,464,500      25,465             --              --         7,393,451  
                                                                                                                            
Shares issued for cash                                    300                                                          600  
Compensation costs related to options                                                                              133,312  
Issuance of common stock in exchange for the        
     net assets of EPL                              2,981,035       2,981                                        7,189,075 
Net income                                                                                                                  
                                                   ----------  ----------     ----------      ----------       ----------- 
BALANCES, December 31, 1998                        28,445,835     $28,446                     $                $14,716,438  
                                                   ==========  ==========     ==========      ==========       ===========  
<CAPTION> 

                                                      (Accumulated                       
                                                        Deficit)                       Total    
                                                        Retained        Note       stockholders'
                                                        Earnings     receivable       equity    
                                                                                                
<S>                                                   <C>            <C>           <C>          
BALANCES, December 31, 1995                           $ (563,793)                   $   642,542
                                                                                               
Shares issued for cash                                                                5,322,630
Shares issued for services                                                              395,000
Issuance of shares previously subscribed                                                       
Shares subscribed                                                                       209,500
Shares issued in exchange for a note receivable                      $(660,000)                
Net income                                               721,178                        721,178
                                                      ----------    ----------       ----------
                                                   
BALANCES, December 31, 1996                              157,385      (660,000)       7,290,850
                                                                                               
Shares issued for cash                                                                   12,500
Shares issued for services                                                              229,450
Issuance of shares previously subscribed                                                       
Cancellation of shares previously issued                               660,000                 
Compensation costs related to options                                                    43,501
Net income                                             2,132,553                      2,132,553
                                                      ----------    ----------       ----------
                                                                                               
BALANCES, December 31, 1997                            2,289,938            --        9,708,854
                                                                                               
Shares issued for cash                                                                      600
Compensation costs related to options                                                   133,312
Issuance of common stock in exchange for the                                          
     net assets of EPL                                                                7,192,056 
Net income                                               419,513                        419,513
                                                      ----------    ----------       ----------
BALANCES, December 31, 1998                           $2,709,451    $               $17,454,335
                                                      ==========    ==========      =========== 
</TABLE> 

                See notes to consolidated financial statements.

                                    Page 35
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        1998              1997                1996
<S>                                                                  <C>               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                          $   419,513       $ 2,132,553         $   721,178
Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                         247,937            82,172              42,874
  Provision for doubtful accounts                                       337,276           148,442              89,504
  Deferred taxes                                                       (527,129)           67,982             (44,289)
  Reserve for obsolescence                                               25,000           100,000              (2,432)
  Common stock issued in exchange for services                                            229,450             395,000
  Compensation costs related to options                                 133,312            43,501
  Changes in assets and liabilities, net of effects of
   acquisition:
    Accounts receivable                                              (1,472,608)       (2,667,135)         (1,418,855)
    Inventories                                                      (1,639,558)          134,247          (1,486,298)
    Prepaid expenses                                                   (600,584)         (530,633)            162,669
    Prepaid television time                                             395,094          (654,983)           (367,161)
    Deposits                                                             49,552           (78,254)            (25,000)
    Accounts payable                                                    804,320           325,228             673,252
    Accrued expenses                                                   (203,158)          960,099             692,222
    Income taxes                                                     (1,723,055)        1,027,121             249,963
                                                                    -----------       -----------         -----------
 
      Net cash (used in) provided by operating activities            (3,754,088)        1,319,790            (317,373)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                    (847,874)         (151,359)            (97,489)
Other assets                                                                  -                               (57,500)
Employee advances                                                       (80,734)         (224,221)             (3,313)
                                                                    -----------       -----------         -----------
 
      Net cash (used in) investing activities                          (928,608)         (375,580)           (158,302)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other current liabilities                                                     (28,812)             (5,466)
Payments on notes payable                                               (24,044)
Proceeds from issuance of common stock                                      600            12,500           5,322,630
Proceeds from subscriptions receivable                                                    189,500             100,000
Registration costs                                                     (346,982)                -                   -
                                                                    -----------       -----------         -----------
 
      Net cash (used in) provided by financing activities              (370,426)          173,188           5,417,164
                                                                    -----------       -----------         -----------
</TABLE>
                                                                                
                See notes to consolidated financial statements.

                                    Page 36
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)


<TABLE>
<CAPTION>
                                                                    1998               1997              1996
<S>                                                              <C>                 <C>               <C>
NET (DECREASE) INCREASE IN CASH
  AND CASH EQUIVALENTS                                           $(5,053,122)        $1,117,398        $4,941,489
 
CASH AND CASH EQUIVALENTS,
  Beginning of year                                                6,180,983          5,063,585           122,096
                                                                 -----------         ----------        ----------
 
CASH AND CASH EQUIVALENTS, end of year                           $ 1,127,861         $6,180,983        $5,063,585
                                                                 ===========         ==========        ==========
SUPPLEMENTAL DISCLOSURES -
  Cash paid during the year for:
    Income taxes                                                 $ 2,748,076         $  366,000        $      800
                                                                 ===========         ==========        ==========
    Interest                                                     $   132,102         $    8,186        $   51,666
                                                                 ===========         ==========        ==========
</TABLE>
                                                                                
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
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.

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

During 1996, the Company completed the following transactions:
 Issued 730,000 shares of common stock in exchange for services valued at 
   $395,000.
 Issued 320,000 shares of common stock previously committed.
 Issued 330,000 shares of common stock in exchange for a note receivable of
   $660,000
 Issued subscriptions receivable of $209,500 in exchange for 155,800 shares of
   common stock subscribed.
 Purchased automotive equipment for $34,278 in exchange for a note payable.

                See notes to consolidated financial statements.

                                    Page 37
<PAGE>

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------


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.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation - The accompanying consolidated financial
    statements include the accounts of PIC and its wholly-owned subsidiaries,
    PSL, Prolong Foreign Sales Corporation, Prolong International Holdings Ltd.
    and its wholly-owned subsidiary, Prolong International Ltd. (collectively,
    the Company or Prolong).  All significant intercompany accounts have been
    eliminated in consolidation.

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

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

    Inventories - Inventories are valued at the lower of cost (determined on the
    first-in, first-out basis) or market.

    Prepaid Expenses - Prepaid expenses includes $162,978 and $280,337 at
    December 31, 1998 and 1997, respectively, in advance promotions paid to an
    entity 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.  No amounts were
    expensed in 1998 and  1997 and $223,748 was expensed in 1996.

                                    Page 38
<PAGE>
 
    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 1998, 1997 and 1996, the
    total amounts expensed for television time were $4,220,093, $7,095,400 and
    $5,227,091, respectively.  As of December 31, 1998 and 1997, prepaid
    television time was $627,050 and $1,022,144, 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. These assets are being amortized over a
    period of fifteen years.

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

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

    Fair Value of Financial Instruments - Statement of Financial Accounting
    Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
    Instruments, requires management to disclose the estimated fair value of
    certain assets and liabilities defined by SFAS No. 107 as financial
    instruments.  Financial instruments are generally defined by SFAS No. 107 as
    cash and cash equivalents, evidence of ownership interest in equity, or a
    contractual obligation that both conveys to one entity a right to receive
    cash or other financial instruments from another entity and imposes on the
    other entity the obligation to deliver cash or other financial instruments
    to the first entity.  At December 31, 1998 and 1997, management believes
    that the carrying amounts of cash and cash equivalents, accounts receivable,
    subscriptions receivable, notes receivable, accounts payable, other current
    liabilities, and notes payable approximate fair value because of the short
    maturity of these financial instruments.

                                    Page 39
<PAGE>
 
    Accounting For Income Taxes - The Company follows SFAS No. 109, Accounting
    for Income Taxes, which requires the recognition of deferred tax liabilities
    and assets for the expected future tax consequences of events that have been
    included in the financial statements or tax returns.  Under this method,
    deferred tax liabilities and assets are determined based on the differences
    between the financial statements and the tax bases of assets and liabilities
    using enacted rates in effect for the year in which the differences are
    expected to reverse.  Valuation allowances are established, when necessary,
    to reduce deferred tax assets to the amount expected to be realized.

    Revenue Recognition - Revenue is recognized as products are shipped.

    Revenue is also recognized under an arrangement whereby customers responding
    to television infomercials agree to an upsell.  An upsell is a transaction
    where the customer purchases the advertised product and also purchases one
    or more additional items, all in one transaction.  Revenue from products
    sold under the upsell arrangement is recognized upon shipment of the related
    products.  For the years ended December 31, 1998 and 1997, revenues under
    this arrangement were $347,771 and $593,388, respectively.  There was no
    such revenue for the year ended December 31, 1996.

    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, 1998, 1997 and
    1996, there was no difference between net income and comprehensive income.

    Net Income (Loss) Per Share - The Company has adopted SFAS No. 128, Earnings
    per Share, which replaces the presentation of "primary" earnings per share
    with "basic" earnings per share and the presentation of "fully diluted"
    earnings per share with "diluted" earnings per share.  All previously
    reported earnings per share amounts have been restated based on the
    provisions of the new standard.  Basic earnings per share are based upon the
    weighted average number of common shares outstanding.  Diluted earnings per
    share amounts are based upon the weighted average number of common and
    common equivalent shares for each period presented.  Common equivalent
    shares include stock options assuming conversion under the treasury stock
    method.

    For the year ended December 31, 1998 and 1997, the diluted weighted average
    common shares outstanding included 204,149 and 182,739, respectively, of
    dilutive options.  There were no dilutive securities for the year ended
    December 31, 1996.

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

    Stock-Based Compensation - In October 1995, the Financial Accounting
    Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based
    Compensation, which requires the determination and disclosure of
    compensation costs implicit in stock option grants or other stock rights.
    The Company adopted certain required provisions of this standard for
    nonemployee transactions during fiscal 1996.  Under the employee transaction
    provisions, companies are encouraged, but not required, to adopt the fair
    value of accounting for employee stock-based 

                                    Page 40
<PAGE>
 
    transactions. Companies are also permitted to continue to account for such
    transactions under Accounting Principles Board (APB) Opinion No. 25,
    Accounting for Stock Issued to Employees, but are required to disclose in a
    note to the financial statements pro forma net income and income per share
    as if the Company had adopted SFAS No. 123. The Company will continue to
    account for employee stock-based compensation under APB Opinion No. 25.


3.  INVENTORIES

    Inventories at December 31, 1998, 1997 and 1996 consist of the following:

<TABLE>
<CAPTION>
                                                                  1998              1997              1996
 
<S>                                                      <C>               <C>               <C>
Raw materials                                                 $  936,451        $  415,073        $  416,223
Finished goods                                                 1,430,797           744,595         1,044,776
Promotional items                                                548,001           141,023            73,939
                                                              ----------        ----------        ----------
 
                                                              $2,915,249        $1,300,691        $1,534,938
                                                              ==========        ==========        ==========
</TABLE>
                                                                                
4.  PROPERTY AND EQUIPMENT

    Property and equipment at December 31, 1998 and 1997 consists of the
    following:

<TABLE>
<CAPTION>
                                                                        1998                       1997
 
<S>                                                               <C>                       <C>
Building                                                                $2,268,559          $         ---
Computer equipment                                                         230,264                    135,164
Office equipment                                                            54,073                     24,319
Furniture and fixtures                                                     255,669                     11,649
Automotive equipment                                                        35,925                     35,925
Exhibit equipment                                                          115,143                     19,813
Machinery and equipment                                                     12,174                        ---
Molds and dies                                                              63,193                        ---
                                                               -------------------       --------------------
 
                                                                         3,035,000                    226,870
Less accumulated depreciation                                             (200,491)                   (63,443)
                                                               -------------------       --------------------
 
                                                                         2,834,509                    163,427
Land                                                                       538,000                        ---
Building improvements in progress                                              ---                     56,256
                                                               -------------------       --------------------
 
                                                                        $3,372,509                   $219,683
                                                                        ==========                   ========
</TABLE>
                                                                                

5.  ACQUISITION OF EPL PRO-LONG, INC.

    Prior to February 5, 1998, the Company was subject to a license agreement,
    which required the Company to pay royalties of 3.5% of sales (as defined) of
    the Company's products that utilized 

                                    Page 41
<PAGE>
 
    certain proprietary technology, trademarks and copyrights. The royalty
    expense under this arrangement for the years ended December 31, 1998, 1997
    and 1996 approximated $122,450, $1,023,869 and $553,900, 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, $21,238 and $21,238 for the years ended December
    31, 1998, 1997 and 1996, respectively, resulting in an accumulated
    amortization balance of $63,716 as of December 31, 1997. As of the closing
    date of the acquisition of EPL Pro-Long, Inc., the Company wrote off the
    remaining unamortized balance of $23,006.

    On February 5, 1998, the Company entered into a definitive agreement to
    purchase the assets of EPL Pro-Long, Inc. (EPL), which includes the patents
    for lubrication technology previously under license to the Company, in
    exchange for 2,981,035 shares of the Company's common stock and the
    assumption of certain liabilities.  The total purchase price ascribed to the
    transaction was $7,604,886 (See Note 12).  Following regulatory and EPL
    shareholder approval, the transaction closed on November 20, 1998.  This
    business combination was accounted for as a purchase, and, accordingly, the
    net assets and operations of EPL are included in the Company's consolidated
    financial statements beginning on November 20, 1998.

    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 1998 was $56,915
    resulting in accumulated amortization of the same amount as of December 31,
    1998.

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

<TABLE>
<CAPTION>
 
                                         1997          1998
                                      -----------   -----------
<S>                                   <C>           <C>
    Net revenues                      $29,846,795   $35,032,689
    Net income                        $ 2,301,856   $   155,197
    Net income per common share:
          Basic                       $      0.08   $      0.01
          Diluted                     $      0.08   $      0.01
</TABLE>
6.  ACCRUED EXPENSES

    Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
                                                                          1998                   1997
 
<S>                                                                  <C>                    <C>
Accrued royalties                                                        $   46,748             $  630,113
Accrued legal expenses                                                      573,000                   ----
Payroll and payroll taxes                                                   482,620                567,341
Accrued commissions                                                         280,610                212,338
Other                                                                        77,185                253,529
                                                                         ----------             ----------
 
                                                                         $1,460,163             $1,663,321
                                                                         ==========             ==========
</TABLE>

                                    Page 42
<PAGE>
 
7.  NOTES PAYABLE

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

<TABLE>
<S>                                                                                      <C>
    a)  Note payable to a bank bearing interest at 7.875% per annum to be repaid in
        monthly principal and interest payments of $13,050 each with a final payment of
        all remaining unpaid principal and interest due on May 1, 2008.                       $1,677,954
 
    b)  Loan from CDC Small Business Finance Corporation bearing interest at 7.65%
        per annum to be repaid in monthly principal and interest payments of $6,376 each       
        through July 1, 2018.                                                                     740,002
                                                                                               ----------
                                                                                                2,417,956
         Less current maturities                                                                  (41,951)
                                                                                               ----------
                                                                                               $2,376,005
                                                                                               ==========
         Year ending December 31,
         1999                                                                                  $   41,951
         2000                                                                                      46,446
         2001                                                                                      50,256
         2002                                                                                      53,974
         2003                                                                                      57,969
         Thereafter                                                                             2,167,360
                                                                                               ----------
                                                                                               $2,417,956
                                                                                               ==========
</TABLE>

8.  LINE OF CREDIT

    In July 1997, the Company entered into a $4,000,000 line of credit
    arrangement with a bank. Such line is collateralized by accounts receivable
    and inventories. Borrowings against the line bear interest at either the
    bank's reference rate or the LIBOR rate plus 2.25%, at the Company's option.
    The line expires on July 31, 1999, unless renewed, and is subject to an
    unused commitment fee of .25% per year of the unused balance. The line
    contains certain financial covenants including a minimum quick ratio and
    tangible net worth. As of December 31, 1998, there were no borrowings
    outstanding under this line.

9.  STOCKHOLDERS' EQUITY

    On June 21, 1995, PIC issued 15,967,500 shares of its common stock in
    exchange for 100% of the common stock of PSL.  In addition to these shares,
    the existing stockholders of PIC at that date held 789,535 shares of common
    stock.

    During fiscal 1996, the Company issued 4,891,665 shares of restricted
    unregistered common stock in exchange for $5,322,630, at prices ranging from
    $.25 to $2.70 per share.

    The Company issued 730,000 shares of restricted unregistered common stock
    for services performed by outside consultants during the year ended December
    31, 1996.  Consulting expense 

                                    Page 43
<PAGE>
 
    was recorded at share prices ranging from $.25 to $2.00 per share and is
    included in selling, general and administrative expenses.

    During 1996, the Company issued 320,000 shares of restricted unregistered
    common stock which had been subscribed for $80,000 in fiscal 1995.  The
    $80,000 was collected in the first quarter of 1996.

    In September 1996, the Company entered into an agreement whereby it issued
    330,000 shares of restricted unregistered common stock in exchange for a
    note receivable of $660,000.  In September 1997, the common stock was
    surrendered to the Company in exchange for the cancellation of the note.

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

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

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

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

10. STOCK OPTIONS

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

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

                                    Page 44
<PAGE>
 
    Stock option activity is as follows:
<TABLE>
<CAPTION>
                                                                                                Weighted
                                                                                                 average
                                                                            Shares under     exercise price
                                                                               option           per share
 
 
<S>                                                                         <C>              <C>
OUTSTANDING, December 31, 1996                                                     30,000            $ 5.38
  Granted                                                                       1,358,688            $ 2.10
  Canceled                                                                        (33,310)           $(5.04)
                                                                                ---------
 
OUTSTANDING, December 31, 1997                                                  1,355,378            $ 2.10
  Granted                                                                         160,000            $ 2.19
  Canceled                                                                       (109,834)           $(2.57)
  Exercised                                                                          (300)           $(2.00)
                                                                                ---------
OUTSTANDING, December 31, 1998                                                  1,405,244            $ 2.07
                                                                                =========
</TABLE>

    Outstanding options vest over periods ranging from one to five years.
    During 1998, the Company issued 100,000 options with a fair value of $2.19
    to outside consultants.  During 1998, the Company recorded $133,312 in
    compensation costs related to the partial vesting of options granted to
    outside consultants with vesting periods during 1998.

    As of December 31, 1998, options to purchase 301,806 shares of common stock
    were exercisable.  No options were exercisable at December 31, 1997.

    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 income would have
    been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                   1998             1997               1996
 
<S>                                                             <C>              <C>                 <C>
Net income, as reported                                         $419,513         $2,132,553          $721,178
Net income (loss), pro forma                                    $(19,148)        $1,888,150          $657,630
Net income per share, as reported:
  Basic                                                         $   0.02         $     0.08          $   0.03
  Diluted                                                       $   0.02         $     0.08          $   0.03
Pro forma net income per share:
  Basic                                                         $   0.00         $     0.07          $   0.03
  Diluted                                                       $   0.00         $     0.07          $   0.03
</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 74.11% to 148%,
    risk-free interest rates of 6.0% in 1998, 6.9% in 1997 and 1996, and an
    expected life of 7 1/2 years.

                                    Page 45
<PAGE>
 
11. INCOME TAXES

    The provision for income taxes consists of the following for the years ended
    December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                1998              1997             1996
 
Current:
<S>                                                       <C>                <C>              <C>
  Federal                                                      $  814,550        $1,063,979         $178,816
  State                                                           210,469           301,725           72,747
  Foreign                                                                             3,678     
                                                               ----------        ----------         --------
 
                                                                1,025,019         1,369,382          251,563
 
Deferred:
  Federal                                                        (432,316)           52,462          (34,027)
  State                                                           (94,813)           15,520          (10,262)
                                                               ----------        ----------         --------
 
                                                                 (527,129)           67,982          (44,289)
                                                               ----------        ----------         --------
 
                                                               $  497,890        $1,437,364         $207,274
                                                               ==========        ==========         ========
</TABLE>
                                                                                
    The provision for income taxes differs from the amount that would result
    from applying the federal statutory rate, as follows:

<TABLE>
<CAPTION>
                                                               1998             1997             1996
 
<S>                                                       <C>              <C>              <C>
Federal statutory income tax rate                               $321,091       $1,213,772        $ 315,674
State income taxes, net of federal benefit                        75,176          209,381           41,241
Change in valuation allowance                                                                     (112,900)
Other                                                            101,623           14,211          (36,741)
                                                                --------       ----------        ---------
 
                                                                $497,890       $1,437,364        $ 207,274
                                                                ========       ==========        =========
</TABLE>
                                                                                

                                    Page 46
<PAGE>
 
    Temporary differences which give rise to deferred tax assets and liabilities
    are as follows at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                1998              1997
 
Deferred tax liabilities:
<S>                                                                        <C>               <C>
  Prepaid television time                                                       $(274,899)        $(437,886)
  State taxes                                                                     (31,344)
  Fixed assets                                                                    (36,759)
Deferred tax assets:
  Accrued vacation                                                                 33,662            22,374
  Allowance for doubtful accounts                                                 254,272           103,983
  Inventory reserve                                                                54,800            52,322
  Accrued expenses                                                                371,956           233,725
  Other                                                                           131,748             1,789
                                                                                ---------         ---------
 
                                                                                $ 503,436         $ (23,693)
                                                                                =========         =========
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

    Leases - The Company leases certain office equipment under operating leases
    over lease terms ranging from one to four years.  Lease expense was
    approximately $115,171, $137,500 and $61,900 for the years ended December
    31, 1998, 1997 and 1996, respectively.

    Royalties - The Company is obligated to pay royalties to the producer of a
    one-half hour, direct-response television commercial (infomercial) at the
    rate of 1.5% of gross sales (as defined) generated from direct-response
    television sales made via an 800 telephone number which utilizes the
    infomercial video footage.  For the years ended December 31, 1998, 1997 and
    1996, the Company expensed approximately $63,661, $174,266 and $151,400,
    respectively, under this arrangement.

    In connection with this infomercial, the Company is obligated to pay
    royalties to another individual at the rate of 1% of gross sales 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
    $42,105, $116,177 and $100,900 under this arrangement for the years ended
    December 31, 1998, 1997 and 1996, respectively. The agreement terminates in
    May 1999.

    The Company has an arrangement with an individual whereby it has agreed to
    pay royalties on all net retail sales according to the following rates: 1.5%
    from November 1, 1996 through October 31, 1997; 1.25% from November 1, 1997
    through October 31, 1998; and 1% from November 1, 1998 through October 31,
    1999.  For each of the years included in the arrangement, the Company must
    pay a guaranteed minimum amount of $15,000.  Maximum payments under this
    arrangement are:  $100,000 in year one, $125,000 in year two and $150,000 in
    year three.  Either party has the option to extend this arrangement for an
    additional four years.  For the years ended December 31, 1998, 1997 and
    1996, the Company expensed approximately $114,931, $134,753 and $7,800,
    respectively, under this arrangement.

                                    Page 47
<PAGE>
 
    Endorsement and Sponsorship Agreements - The Company has entered into
    endorsement and sponsorship agreements with various automotive and racing
    personalities for product marketing and promotion purposes.  The remaining
    terms for individual agreements range from one to three years.  The Company
    is committed to aggregate future payments under these agreements as follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                              <C>
  1999                                                             $1,955,000
  2000                                                                730,000
                                                                   ----------
                                                                   $2,685,000
                                                                   ==========
</TABLE>

    Endorsement and sponsorship expense charged to operations related to these
    agreements was approximately $1,904,000, $956,000 and $87,500 for the years
    ended December 31, 1998, 1997 and 1996, respectively.

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

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

    On November 25, 1998, the Court granted a temporary restraining order
    without a hearing and before opposition could be submitted.  On December 30,
    1998, the Court held a hearing on whether a preliminary injunction should be
    issued in connection with such action.  The Court entered a preliminary
    injunction based on the plaintiffs' (a) alleged claim for fraudulent
    conveyance in connection with PSL's license agreement with EPL and (b)
    alleged claim for breach of fiduciary duty.  The preliminary injunction
    enjoins the further consummation of the asset purchase transaction and
    prevents EPL from completing its liquidation and dissolution until further
    notice from the Court.  The preliminary injunction will last until the case
    is tried on its merits or until the preliminary injunction is otherwise
    dismissed.  The Court ordered the plaintiffs to post a bond in 

                                    Page 48
<PAGE>
 
    the amount of $100,000, which bond has been posted. PIC has appealed the
    Court's preliminary injunction ruling.

    PIC and PSL and their respective current officers and directors continue to
    believe that there is no merit to the plaintiff's claims and plan to
    vigorously defend against the claims.  The defendants have each filed and
    served motions to dismiss the complaint pursuant to Rule 12(b)(6) of the
    Federal Rules of Civil Procedure. These motions are scheduled for
    determination in April 1999.  The defendants successfully moved to change
    venue and the case has just been ordered transferred to the federal court in
    Orange County, California, where PIC's principal office is located.  The
    parties have agreed to attempt to mediate the dispute.  They are engaged in
    settlement discussions in an effort to resolve the matter.  However, it is
    too early to tell whether an acceptable settlement can be reached.

    In a third matter, a case is pending in the U.S. District Court whereby the
    plaintiffs allege a variety of business torts, including copyright
    infringement and false advertising.  The Company has denied the allegations
    and has counter-claimed against the plaintiffs and multiple other parties,
    alleging copyright infringement, false advertising, product disparagement,
    misappropriation of trade secrets and unfair trade practices.  The
    plaintiffs and defendants have been in settlement negotiations and it
    appears that the case will be settled, although final documents have not yet
    been signed.

    Neither PIC nor any of its subsidiaries is a party to any other pending or
    threatened legal, governmental, administrative or judicial proceedings that
    Prolong believes will have a material adverse effect upon PIC's or its
    subsidiaries' business, operating results, financial condition 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 1998, two customers accounted
    for 17.2% and 14.5%, respectively, of net revenues.  During 1997 and 1996,
    no single customer accounted for 10% of net revenues.  As of December 31,
    1998 and 1997, one customer each year accounted for 33.0% and 20.1%
    respectively, of the balance of accounts receivable.

                                    Page 49
<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, 1997                    $ 5,784,089      $ 4,365,065      $   279,649             $  0.01          $ 0.01    
  June 30, 1997                       6,987,753        5,752,494          507,013                0.02            0.02    
  September 30, 1997                  8,111,300        6,667,444          687,680                0.03            0.03    
  December 31, 1997                   8,963,653        7,326,554          658,211                0.02            0.02    
                                    -----------      -----------      -----------             -------          ------    
                                    $29,846,795      $24,111,557      $ 2,132,553             $  0.08          $ 0.08    
                                    ===========      ===========      ===========             =======          ======     
 
Quarter ended:
  March 31, 1998                    $10,848,742      $ 8,843,328      $ 1,606,568             $  0.06          $ 0.06    
  June 30, 1998                       8,399,828        6,758,028          115,724                0.01            0.01    
  September 30, 1998                  9,662,580        7,201,989          484,131                0.02            0.02    
  December 31, 1998                   6,121,539        4,701,983       (1,786,910)             ( 0.07)          (0.07)    
                                    -----------      -----------      -----------             -------          ------    
                                    $35,032,689      $27,505,328      $   419,513             $  0.02          $ 0.02    
                                    ===========      ===========      ===========             =======          ======     
</TABLE>


                                    Page 50
<PAGE>
 
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                              Additions
                                               -----------------------------------
                                   Balance at       Charged to        Charged to
                                   Beginning        Costs and           Other                           Balance of
         Description               of Period         Expenses          Accounts        Deductions      End of Period
         -----------               ---------         --------          --------        ----------      -------------
<S>                                <C>                 <C>             <C>                  <C>               <C>
 
Year ended December 31, 1998:
Allowance for doubtful
 accounts receivable                   $242,724         $372,020       $     ----           $34,744           $580,000
Inventory reserves                      100,000           25,000             ----              ----            125,000
                                       --------         --------       ----------           -------           --------
Total                                  $342,724         $397,020       $     ----           $34,744           $705,000
                                       ========         ========       ==========           =======           ========
 
Year ended December 31, 1997:
Allowance for doubtful
 accounts receivable                   $ 94,282         $241,751       $     ----           $93,309           $242,724
Inventory reserves                         ----          100,000             ----              ----            100,000
                                       --------         --------       ----------           -------           --------
                                       $ 94,282         $341,751       $     ----           $93,309           $342,724
                                       ========         ========       ==========           =======           ========
 
Year ended December 31, 1996:
Allowance for doubtful
 accounts receivable                   $  4,778         $ 90,546       $     ----           $ 1,042           $ 94,282
                                       ========         ========       ==========           =======           ========

</TABLE>

                                    Page 51
<PAGE>
 
                       PROLONG INTERNATIONAL CORPORATION

                                   FORM 10-K

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


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

2.1  Exchange Agreement between Stockholders of PSL and the 
     Registrant (incorporated by reference to the same numbered 
     Exhibit to the Registrant's Registration Statement on Form 
     10 filed July 3, 1997).                                              ---
2.2  Agreement and Plan of Reorganization, dated as of February 5, 
     1998, by and among the Registrant and EPL Pro-Long, Inc., 
     including the following exhibits:  (i) Form of Employee Invention 
     and Confidentiality Agreement, (ii) Form of Rule 145 Agreement, 
     (iii) Form of Confidentiality Agreement, (iv) Form of Transfer
     Restriction, (v) Form of Amendment to Exclusive License Agreement, 
     and (vi) Form of Cancellation Agreement (incorporated by reference 
     to the same numbered Exhibit to the Registrant's Registration 
     Statement on Form S-4 filed May 4, 1998).                            ---
2.3  Amendment to Agreement and Plan of Reorganization, dated as of 
     June 29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
     (incorporated by reference to the same numbered Exhibit to the 
     Registrant's Registration Statement on Form S-4 filed May 4, 1998).  ---
3.1  Amended and Restated Articles of Incorporation of the Registrant
     (incorporated by reference to the same numbered Exhibit to the 
     Registrant's Registration Statement on Form 10 filed July 3, 1997).  ---
3.3  Bylaws of the Registrant, as amended and restated on April 27, 1998
     (incorporated by reference to the same numbered Exhibit to the
     Registrant's Registration Statement on Form S-4 filed May 4, 1998).  ---
4.2  Specimen Certificate of Registrant's Common Stock (incorporated by
     reference to the same numbered Exhibit to the Registrant's
     Registration Statement on Form S-4 filed May 4, 1998).               ---
10.1 Form of Indemnification Agreement for Executive Officers and 
     Directors (incorporated by reference to the same numbered Exhibit 
     to the Registrant's Registration Statement on Form 10 filed July 
     3, 1997).                                                            ---
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc., 
     d.b.a. Prolong International, dated November 10, 1993 (incorporated 
     by reference to the same numbered Exhibit to the Registrant's 
     Registration Statement on Form 10 filed July 3, 1997).               ---
10.3 Memorandum of Agreement between PSL and 2M Corporation, dated 
     April 24, 1995; Amendment dated March 4, 1996 (incorporated by 
     reference to the same numbered Exhibit to the Registrant's 
     Registration Statement on Form 10 filed July 3, 1997).               ---
10.4 Agreement between PSL and Al Unser, dated July 28, 1995 
     (incorporated by reference to the same numbered Exhibit to the 
     Registrant's Registration Statement on Form 10 filed July 3, 1997).  ---
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc., 
     dated October 24, 1995 (incorporated by reference to the same 
     numbered Exhibit to the Registrant's Registration Statement on 
     Form 10 filed July 3, 1997).                                         ---
10.6 Telemarketing Agreement between PSL and West Telemarketing 
     Corporation, dated October 24, 1995 (incorporated by reference 
     to the same numbered Exhibit to the Registrant's Registration 
     Statement on Form 10 filed July 3, 1997).                            ---

                                    Page 52
<PAGE>
 
10.7  Service and Endorsement Contract between PSL and Al Unser, 
      dated April 29, 1996 (incorporated by reference to the same 
      numbered Exhibit to the Registrant's Registration Statement 
      on Form 10 filed July 3, 1997).                                      ---
10.8  Associate Sponsorship Agreement between PSL, King Entertainment, 
      Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated by
      reference to the same numbered Exhibit to the Registrant's 
      Registration Statement on Form 10 filed July 3, 1997).               ---
10.9  Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb 
      Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated 
      February 21, 1997 (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).                                      ---

                                    Page 53
<PAGE>
 
10.23 Contract Packaging Agreement between PSL and Premiere Packaging, 
      Inc., dated September 11, 1998.                                      55
21.1  Subsidiaries of the Registrant.                                      63
23.1  Consent of Deloitte & Touche LLP.                                    64
24.1  Power of Attorney (included as part of the signature page of this 
      Registration Statement).                                             30
27.1  Financial Data Schedule (Article 5 of Regulation S-X).               65
-----------------
*     Portions of this Exhibit are omitted and were filed separately with the
      Secretary of the Commission pursuant to the Registrant's application
      requesting confidential treatment under Rule 24b-2 of the Securities
      Exchange Act of 1934.

                                    Page 54