---



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly
period ended September 30, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | -----------------------------------------------------------------------------------------



For the transition
period from

to



Commission File No.
        0-22803



PROLONG INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)



|Nevada (State or other jurisdiction of incorporation or organization) |  | 6 Thomas Irvine, CA 92618 (Address of principal executive offices) (Zip Code) |  | 74-2234246 (IRS Employer Identification No.)
|--------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------------------------------------



(949) 587-2700

(Registrants telephone number,

including area code)



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.



(1) Yes x   No ̈



(2) Yes x   No ̈



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).



Yes ̈No x



There were 29,789,598 shares of the
registrants common stock ($0.001 par value) outstanding as of November 13, 2003.



Page 1 of 19 pages

Exhibit Index on Sequentially Numbered Page 18



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PROLONG INTERNATIONAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS



|        |  |                                                                                                                  |  | Page
|------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|PART 1  |  | FINANCIAL INFORMATION                                                                                            |  |     
|        |  |                                                                                                                 
|Item 1: |  | Financial Statements                                                                                             |  |     
|        |  |                                                                                                                 
|        |  | Consolidated Condensed Balance Sheets  September 30, 2003 (unaudited) and December 31, 2002                     |  | 3   
|        |  |                                                                                                                 
|        |  | Consolidated Condensed Statements of Operations  Three months and Nine months ended September 30, 2003 and 2002 |  | 4   
|        |  |                                                                                                                 
|        |  | Consolidated Condensed Statements of Cash Flows  Nine months ended September 30, 2003 and 2002                  |  | 5   
|        |  |                                                                                                                 
|        |  | Notes to Consolidated Condensed Financial Statements                                                             |  | 6   
|        |  |                                                                                                                 
|Item 2: |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 12  
|        |  |                                                                                                                 
|Item 3: |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 16  
|        |  |                                                                                                                 
|Item 4: |  | Controls and Procedures                                                                                          |  | 17  
|        |  |                                                                                                                 
|PART II |  | OTHER INFORMATION                                                                                                |  |     
|        |  |                                                                                                                 
|Item 1: |  | Legal Proceedings                                                                                                |  | 18  
|        |  |                                                                                                                 
|Item 2: |  | Changes in Securities and Use of Proceeds                                                                        |  | 18  
|        |  |                                                                                                                 
|Item 6: |  | Exhibits and Reports on Form 8-K                                                                                 |  | 18  





2



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Item 1.  Financial Statements



PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS



|                                                                                                                                               |  | September 30, 2003 |            |   | December 31, 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                                                                                                                                               |  | (Unaudited)        |            |   |                   |  
|ASSETS                                                                                                                                         |  |                    |            |   |                   |  
|CURRENT ASSETS:                                                                                                                                |  |                    |            |   |                   |  
|Cash and cash equivalents                                                                                                                      |  | $                  | 53,097     |   |                   | $
|Accounts receivable, net of allowance for doubtful accounts of $273,040 and $351,361 at September 30, 2003 and December 31,
2002, respectively |  |                    | 1,483,073  |   |                   |  
|Note receivable, current portion                                                                                                               |  |                    | 20,000     |   |                   |  
|Inventories, net                                                                                                                               |  |                    | 515,730    |   |                   |  
|Prepaid expenses, net                                                                                                                          |  |                    | 330,015    |   |                   |  
|Advances to employees, current portion                                                                                                         |  |                    | 23,660     |   |                   |  
|Deferred tax asset                                                                                                                             |  |                    | 168,850    |   |                   |  
|                                                                                                                                               |  |                    |            |   |                   |  
|Total current assets                                                                                                                           |  |                    | 2,594,425  |   |                   |  
|Property and equipment, net (Note 4)                                                                                                           |  |                    | 258,024    |   |                   |  
|Patents, net                                                                                                                                   |  |                    | 371,951    |   |                   |  
|Intangible assets, net                                                                                                                         |  |                    | 6,058,007  |   |                   |  
|Deferred tax asset, noncurrent                                                                                                                 |  |                    | 586,279    |   |                   |  
|Investment in affiliate                                                                                                                        |  |                    | 271,044    |   |                   |  
|Other assets, net                                                                                                                              |  |                    | 476,856    |   |                   |  
|                                                                                                                                               |  |                    |            |   |                   |  
|TOTAL ASSETS                                                                                                                                   |  | $                  | 10,616,586 |   |                   | $
|                                                                                                                                               |  |                    |            |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                           |  |                    |            |   |                   |  
|CURRENT LIABILITIES:                                                                                                                           |  |                    |            |   |                   |  
|Accounts payable                                                                                                                               |  | $                  | 1,158,061  |   |                   | $
|Accrued expenses                                                                                                                               |  |                    | 566,570    |   |                   |  
|Line of credit (Note 5)                                                                                                                        |  |                    | 857,393    |   |                   |  
|Notes payable, current (Note 6)                                                                                                                |  |                    | 660,306    |   |                   |  
|                                                                                                                                               |  |                    |            |   |                   |  
|Total current liabilities                                                                                                                      |  |                    | 3,242,330  |   |                   |  
|Notes payable, noncurrent (Note 6)                                                                                                             |  |                    | 132,079    |   |                   |  
|                                                                                                                                               |  |                    |            |   |                   |  
|Total liabilities                                                                                                                              |  |                    | 3,374,409  |   |                   |  
|COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 6 and 7)) STOCKHOLDERS EQUITY:                                                                     |  |                    |            |   |                   |  
|Preferred stock, $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding                                               |  |                    |           |   |                   |  
|Common stock, $0.001 par value; 150,000,000 shares authorized; 29,789,598 shares issued and outstanding in 2003 and 2002,
respectively         |  |                    | 29,789     |   |                   |  
|Additional paid-in capital                                                                                                                     |  |                    | 15,450,854 |   |                   |  
|Accumulated deficit                                                                                                                            |  |                    | (8,238,466 | ) |                   |  
|                                                                                                                                               |  |                    |            |   |                   |  
|Total stockholders equity                                                                                                                     |  |                    | 7,242,177  |   |                   |  
|                                                                                                                                               |  |                    |            |   |                   |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                     |  | $                  | 10,616,586 |   |                   | $
|                                                                                                                                               |  |                    |            |   |                   |  





See notes to consolidated financial statements



3



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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                                                                                |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                                                                                                                                |  | 2003                             |            |   | 2002                            |  
|NET REVENUES                                                                                                                                    |  | $                                | 2,223,794  |   |                                 | $
|COST OF GOODS SOLD                                                                                                                              |  |                                  | 769,836    |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|GROSS PROFIT                                                                                                                                    |  |                                  | 1,453,958  |   |                                 |  
|                                                                                                                                                |  |                                  |            |  
|OPERATING EXPENSES:                                                                                                                             |  |                                  |            |   |                                 |  
|Selling and marketing                                                                                                                           |  |                                  | 824,717    |   |                                 |  
|General and administrative                                                                                                                      |  |                                  | 632,431    |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|Total operating expenses                                                                                                                        |  |                                  | 1,457,148  |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|OPERATING (LOSS) INCOME                                                                                                                         |  |                                  | (3,190     | ) |                                 |  
|                                                                                                                                                |  |                                  |            |  
|OTHER INCOME (EXPENSE):                                                                                                                         |  |                                  |            |   |                                 |  
|Interest expense                                                                                                                                |  |                                  | (93,973    | ) |                                 |  
|Interest income                                                                                                                                 |  |                                  | 5,786      |   |                                 |  
|Other income                                                                                                                                    |  |                                  | 124,968    |   |                                 |  
|Gain on sale of building                                                                                                                        |  |                                  |           |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|Total other income (expense)                                                                                                                    |  |                                  | 36,781     |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND PROVISION OF INCOME TAXES                                                                           |  |                                  | 33,591     |   |                                 |  
|                                                                                                                                                |  |                                  |            |  
|EXTRAORDINARY ITEM  gain from forgiveness of debt, net of income taxes of $270,985 for the nine month period ended September 30, 2002 (Note 1) |  |                                  |           |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES                                                                                                 |  |                                  | 33,591     |   |                                 |  
|PROVISION FOR INCOME TAXES                                                                                                                      |  |                                  | 490,000    |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|NET (LOSS) INCOME                                                                                                                               |  | $                                | (456,409   | ) |                                 | $
|                                                                                                                                                |  |                                  |            |   |                                 |  
|NET (LOSS) INCOME PER SHARE                                                                                                                     |  |                                  |            |   |                                 |  
|Basic and Diluted:                                                                                                                              |  |                                  |            |   |                                 |  
|(Loss) income per share before extraordinary item                                                                                               |  | $                                | (0.01      | ) |                                 | $
|Extraordinary item                                                                                                                              |  |                                  |           |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  
|Net (loss) income                                                                                                                               |  | $                                | (0.01      | ) |                                 | $
|                                                                                                                                                |  |                                  |            |   |                                 |  
|WEIGHTED AVERAGE COMMON SHARES                                                                                                                  |  |                                  |            |   |                                 |  
|Basic and Diluted:                                                                                                                              |  |                                  | 29,789,598 |   |                                 |  
|                                                                                                                                                |  |                                  |            |   |                                 |  



See notes to
consolidated condensed financial statements



4



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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                   |  | Nine Months Ended September 30, |           
|-------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----------
|                                                                                                   |  | 2003                            |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                                 |           
|Net (loss) income                                                                                  |  | $                               | (1,332,598
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |  |                                 |           
|Gain from forgiveness of debt                                                                      |  |                                 |          
|Gain from sale of building                                                                         |  |                                 |          
|Sublease income from affiliate                                                                     |  |                                 | (58,331   
|Depreciation and amortization                                                                      |  |                                 | 137,882   
|Provision for doubtful accounts                                                                    |  |                                 | (78,321   
|Deferred taxes                                                                                     |  |                                 | 790,000   
|Reserve for inventory obsolescence                                                                 |  |                                 | (23,250   
|Gain from conversion of notes payable sub-debt                                                     |  |                                 | (92,833   
|Amortization of debt discount related to warrants issued to sub-debt creditors                     |  |                                 | 97,755    
|Write-off in connection with accounts receivable conversion to note receivable                     |  |                                 | 80,000    
|Changes in assets and liabilities:                                                                 |  |                                 |           
|Accounts receivable                                                                                |  |                                 | (209,775  
|Note receivable                                                                                    |  |                                 | 4,000     
|Inventories                                                                                        |  |                                 | 20,115    
|Prepaid expenses                                                                                   |  |                                 | 21,622    
|Prepaid television time                                                                            |  |                                 |          
|Other assets                                                                                       |  |                                 | 16,556    
|Accounts payable                                                                                   |  |                                 | 176,673   
|Accrued expenses                                                                                   |  |                                 | 165,812   
|                                                                                                   |  |                                 |           
|Net cash (used in) provided by operating activities                                                |  |                                 | (284,693  
|                                                                                                   |  |                                
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                                 |           
|Purchases of property and equipment                                                                |  |                                 | (11,043   
|Employee advances                                                                                  |  |                                 | 22,837    
|                                                                                                   |  |                                 |           
|Net cash provided by investing activities                                                          |  |                                 | 11,794    
|                                                                                                   |  |                                
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                                 |           
|Proceeds from notes payable sub-debt                                                               |  |                                 | 260,000   
|Payments on notes payable sub-debt                                                                 |  |                                 | (189,428  
|Net proceeds (payments) on line of credit from bank                                                |  |                                 | (6,199    
|Deposits under sales contracts                                                                     |  |                                 |          
|                                                                                                   |  |                                 |           
|Net cash provided by (used in) financing activities                                                |  |                                 | 64,373    
|                                                                                                   |  |                                
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                          |  |                                 | (208,526  
|                                                                                                   |  |                                
|CASH AND CASH EQUIVALENTS, beginning of period                                                     |  |                                 | 261,623   
|                                                                                                   |  |                                 |           
|CASH AND CASH EQUIVALENTS, end of period                                                           |  | $                               | 53,097    
|                                                                                                   |  |                                 |           
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                                                                |  |                                 |           
|Income taxes paid                                                                                  |  | $                               | 1,600     
|                                                                                                   |  |                                 |           
|Interest paid                                                                                      |  | $                               | 200,323   
|                                                                                                   |  |                                 |           



SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES

During the nine months ended September 30, 2003, the Company provided an affiliate with office space, and recorded increases in
other income and investment in affiliate of $58,331.



The Company also
converted $427,437 of accounts receivable to a $347,437 note receivable and recorded a related charge of $80,000.



The holders of $260,000 of notes payable sub-debt converted their notes, $8,000 of accrued interest thereon, and warrants to purchase 167,063 shares of the Companys
common stock at $0.20 per share into 767,000 shares of Oryxe Energy International common stock with a net book value of $112,000 and warrants to purchase 400,000 shares of the Companys common stock at $0.09 per share with an estimated fair
value of $63,000. In connection with this transaction, the Company recognized a gain upon conversion of the notes of $93,000.



During the nine month period ended September 30, 2002, the Company completed the following transactions:

Provided an affiliate with office space, and recorded increases in other income and investment in affiliate of $74,997.

Completed the sale of its corporate headquarters at a one time-net gain of $983,400. The transaction resulted in a net decrease in property and equipment (land, building & improvements) of approximately $2,414,000 and reduced long-term
liabilities, (notes payable & deposits under sales contracts) of approximately $3,398,000.



See notes to consolidated condensed financial statements



5



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PROLONG INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)



|1. | BUSINESS
|-- | --------



Prolong International Corporation (PIC) is a Nevada corporation originally organized on August 24, 1981. In September 1995, PIC acquired 100% of the outstanding stock of Prolong Super Lubricants, Inc. (PSL), a Nevada
corporation. In 1998, Prolong International Holdings Ltd., was formed as a wholly-owned subsidiary of PIC. At the same time, Prolong International Ltd., was formed as a wholly-owned subsidiary of Prolong International Holdings Ltd. PIC, through its
subsidiaries, is engaged in the manufacture, sale and worldwide distribution of a patented complete line of high-performance and high-quality lubricants and appearance products.



Managements Plans Regarding Financial Results and Liquidity At September 30, 2003, the Company had
negative working capital of approximately $648,000 and an accumulated deficit of approximately $8,238,500. The Company initiated vigorous expense-reduction strategies during the years 2001 and 2002 and continued this strategy during the first nine
months ended September 30, 2003. During 2001, 2002 and during the first nine months ended September 30, 2003, the Company reduced personnel, discontinued certain of its endorsement and sponsorship contracts and aggressively reduced selling and
general and administrative expenses. Additionally, the Company improved its credit and collections function and worked with its vendors to improve payment terms. The Company initiated an Accounts Payable Discounted Debt Restructure
Program, which was successfully executed and the program reduced the accounts payable balance by approximately $1,300,000 and recognized debt forgiveness income of $677,000 (before taxes), during the year ended December 31, 2002. The Company
also recognized a one-time gain of $983,400, on the sale of its corporate headquarters during the year ended December 31, 2002. During 2002, the Company raised additional working capital of $1,125,000 through private placements of subordinated
secured promissory notes to accredited investors. During the first nine months ended September 30, 2003, the Company raised additional working capital of $260,000 through a private placement offering of convertible promissory notes to accredited
investors (see Note 8). If these measures are not adequate, the Company will pursue additional expense reductions during 2003. The Company is continuing to seek financing on favorable terms, including subordinated debt and/or equity placements.
There can be no assurance that such financing will be available on favorable terms, or at all. The Company has executed a Term Sheet with an investment firm to sell and issue $2,500,000 in new secured promissory notes. The Company anticipates that
this transaction will close before the end of November 2003 (see Note 11). If additional funds are raised by issuing equity securities, dilution to existing stockholders is likely to result. Management believes that a portion of the shares of common
stock in Oryxe Energy International, Inc. owned by the Company could be sold to provide additional working capital (see Note 8). Management believes that the aforementioned plans, if successfully executed, will provide adequate financial resources
to sustain the Companys operations and enable the Company to continue as a going concern.



|2. | BASIS OF PRESENTATION
|-- | ---------------------



The accompanying unaudited consolidated condensed financial statements include the accounts of PIC and its wholly-owned subsidiaries, PSL, Prolong
International Holdings Ltd. and its wholly-owned subsidiary, Prolong International Ltd. (collectively, the Company or Prolong). All intercompany accounts have been eliminated in consolidation. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the Form 10-K
for the year ended December 31, 2002 filed by the Company with the Securities and Exchange Commission.



6



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|
|

|3. | INVENTORIES
|-- | -----------



Inventories consist of the following:



|                     |  | September 30, 2003 |         |   | December 31, 2002 |  
|-------------------- |  | ------------------ | ------- | - | ----------------- | -
|                     |  | (Unaudited)        |         |   |                   |  
|Raw materials        |  | $                  | 313,648 |   |                   | $
|Finished goods       |  |                    | 249,270 |   |                   |  
|Obsolescence reserve |  |                    | (47,188 | ) |                   |  
|                     |  |                    |         |   |                   |  
|                     |  | $                  | 515,730 |   |                   | $
|                     |  |                    |         |   |                   |  



|4. | PROPERTY AND EQUIPMENT
|-- | ----------------------



Property and equipment consists of the following:



|                              |  | September 30, 2003 |            |   | December 31, 2002 |  
|----------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                              |  | (Unaudited)        |            |   |                   |  
|Computer equipment            |  | $                  | 293,879    |   |                   | $
|Office equipment              |  |                    | 55,753     |   |                   |  
|Furniture and fixtures        |  |                    | 585,168    |   |                   |  
|Automotive equipment          |  |                    | 35,925     |   |                   |  
|Exhibit equipment             |  |                    | 130,482    |   |                   |  
|Machinery and equipment       |  |                    | 19,817     |   |                   |  
|Molds and dies                |  |                    | 233,117    |   |                   |  
|                              |  |                    |            |   |                   |  
|                              |  |                    | 1,354,141  |   |                   |  
|Less accumulated depreciation |  |                    | (1,096,117 | ) |                   |  
|                              |  |                    |            |   |                   |  
|                              |  | $                  | 258,024    |   |                   | $
|                              |  |                    |            |   |                   |  



|5. | LINE OF CREDIT
|-- | --------------



Effective February 26, 2003, the Company entered into a $1,500,000 credit facility with a financial institution that, unless terminated earlier by its
terms, has an initial term through February 26, 2005 with automatic renewals for successive one-year periods thereafter. The credit facility provides for advances of funds up to 75% of the gross face value of eligible trade accounts receivable based
on agreed terms. Such facility is collateralized by accounts receivable, inventory, equipment and other assets. Interest is payable monthly at the financial institutions base index, which was 4.75% at September 30, 2003, plus 2.25%.
Additionally, the Company is obligated to pay the lender (i) a monthly purchasing fee of 0.25% of the total monthly average advances outstanding and (ii) an annual facility fee of 0.75% of the purchasing limit (which limit is currently $1,500,000).
As of September 30, 2003, $857,393 was outstanding under the credit facility.



7



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6.    NOTES PAYABLE



Notes payable consist of the following as of September 30, 2003:



|a) |  | Various subordinated secured promissory notes payable to accredited investors bearing interest at 15% per annum to be repaid under various terms in monthly principal and interest
through June 30, 2005. |  | $ | 883,007  |  
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------- | -
|   |  |                                                                                                                                                                                                          
|   |  | Less current maturities                                                                                                                                                                                   |  |   | (660,306 | )
|   |  |                                                                                                                                                                                                           |  |   |          |  
|   |  |                                                                                                                                                                                                           |  |   | 222,701  |  
|   |  | Less unamortized debt discount relating to the relative estimated fair value of warrants issued                                                                                                           |  |   | (90,622  | )
|   |  |                                                                                                                                                                                                           |  |   |          |  
|   |  |                                                                                                                                                                                                           |  | $ | 132,079  |  
|   |  |                                                                                                                                                                                                           |  |   |          |  



The
following are annual minimal principal payments due under notes payable:

| |  |                          | 
| |  | ------------------------ | 
| |  | Year ending December 31, | 
| |  | 2003                     | 
| |  | 2004                     | 
| |  | 2005                     | 
| |  |                          | 
| |  |                          | 
| |  |                          | 



In connection with
the Companys issuance of the subordinated secured promissory notes described in (a) above, the Company issued warrants to purchase an aggregate of 2,250,000 shares of common stock to related note holders and warrants to purchase an aggregate
of 247,000 shares of common stock as broker commissions. Each warrant allows the holder to purchase one share of the Companys common stock at $0.09 per share for a period of five years. In accordance with APB No. 14, the Company has presented
the relative estimated fair value of the warrants issued to note holders of $209,000 as a debt discount and such amount is being amortized over the expected terms of the promissory notes.



7.    CONTINGENCIES



Legal Proceedings On April 8, 1997, a lawsuit was filed by Francis Helman et al vs. EPL Prolong Inc. and PIC
et al in the Court of Common Pleas, Columbiana County, Ohio. The operative complaint alleges breach of contract, fraudulent conveyance of corporate assets, breach of fiduciary duties, breach of an alleged novation and fraud in the inducement
relating to the alleged novation. Plaintiffs allege that they purchased certain pre-primary shares of stock in a Canadian company known as Prolong Industries Inc. from Defendant Ronald Sloan and other agents of the Canadian company
during the period of May 1985 through October 1987, a period prior in time to the formation of EPL Prolong, Inc. It remains undisputed that the EPL Defendants had no involvement in the solicitation or sale of the pre-primary shares that were
allegedly sold to the plaintiffs between 1985 and 1987. The court has ruled that the case can proceed as a class action. Management believes that there is no merit to the plaintiffs complaint, is vigorously defending against the claims, and
does not believe the outcome will have a material adverse affect on the Companys financial position or results of operations.



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



Other  On June 3, 2003, the Company entered into an Infomercial Participation Agreement with a
non-related individual (Participant), in which the Company received $100,000 to be used towards the production of



8



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| | the infomercial. In exchange the Participant shall receive a portion of the infomercial gross revenue, a credit for purchases of product and a warrant to purchase 100,000 shares of
Prolongs common stock at $0.18 per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | INVESTMENT IN AFFILIATE
|-- | -----------------------



| | On March 31, 2001, the Company entered into an Organization Agreement with Prolong Environmental Energy Corporation (PEEC), a California Corporation, whereby the Company agreed to
contribute up to $150,000 to PEEC as required to meet the operating working capital obligations for PEEC. In exchange PIC was issued common stock in PEEC. In December 2001, PEEC was merged into Oryxe Energy International, Inc., a Delaware
corporation (Oryxe) and PIC was issued Oryxe common stock as well as warrants to purchase additional shares of common stock. The Company provided Oryxe with administrative and facilities services support in the amount of $233,324 during
the period April 1, 2001 through July 31, 2003. The Companys contribution, and the services provided (total investment of $383,324), has been considered a capital contribution for PEEC in return for approximately 10% of the issued and
outstanding common stock of Oryxe. During the quarter ended June 30, 2003, the Company issued convertible promissory notes which are automatically convertible into new convertible promissory notes, which on September 30, 2003, were cancelled in
exchange for the transfer of 766,875 shares of Oryxe Common Stock. The transaction reduced the Companys investment in Oryxe to $271,044, which represents an approximate 7% interest in Oryxe.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | INTANGIBLE ASSETS
|-- | -----------------



| | Effective the beginning of the first quarter of 2002, the Company completed the adoption of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. As required by SFAS
No. 142, the Company discontinued amortizing the remaining balances of goodwill as of the beginning of fiscal 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential
impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. In conjunction with the implementation of SFAS No. 142, the Company has completed a goodwill impairment review as of the beginning of 2002 and 2003 with the assistance of an independent valuation company. Management has
determined that no impairment existed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Upon adoption of the new rules described above, the Company separately identified the estimated fair value of its patents and such amount has been presented on a separate line item,
net of related accumulated amortization of $128,049, in the accompanying consolidated condensed balance sheets. Patents are amortized over their estimated useful lives of 15 years. Intangible assets are comprised of goodwill and trademarks and are
not being amortized in accordance with the provisions of SFAS No. 142.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | STOCK OPTIONS
|--- | -------------



| | SFAS No. 123 and No. 148 require the determination and disclosure of compensation costs implicit in stock option grants or other stock rights. The Company has adopted certain
required provisions of this standard for nonemployee transactions. Under the employee transaction provisions, companies are encouraged, but not required, to adopt the fair value of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The following table illustrates the effect on net (loss) income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



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|                                                                                                             |  | Nine Months Ended September 30, 2003 |            |   | 2002 |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ---------- | - | ---- | -
|Net (loss) income, as reported                                                                               |  | $                                    | (1,332,598 | ) |      | $
|Total stock-based employee compensation determined under fair value based method, net of related tax effects |  |                                      | (62,100    | ) |      |  
|                                                                                                             |  |                                      |            |   |      |  
|Net (loss) income, pro forma                                                                                 |  | $                                    | (1,394,698 | ) |      | $
|                                                                                                             |  |                                      |            |   |      |  
|Earnings (loss) per share:                                                                                   |  |                                      |            |   |      |  
|Basic and diluted  as reported                                                                              |  | $                                    | (0.04      | ) |      | $
|Basic and diluted  pro forma                                                                                |  | $                                    | (0.05      | ) |      | $



Effective June 4,
1997, the Company adopted the Prolong International Corporation 1997 Stock Incentive Plan (the Plan). Under the Plan, the Company may grant nonqualified or incentive stock options for the benefit of qualified employees, officers,
directors, consultants and other service providers. On June 26, 2002, the Companys stockholders approved an increase of 1,500,000 shares of common stock issuable under the Plan, bringing the total number of authorized shares to 4,000,000. The
term of the option is fixed by the administrator of the Plan, but no option may be exercisable more than 10 years after the date of grant.



Stock option activity is as follows:



|                                |  | Shares underoption |   |  | Weightedaverage exerciseprice per share
|------------------------------- |  | ------------------ | - |  | ---------------------------------------
|OUTSTANDING, December 31, 2001  |  | 913,500            |   |  | $                                      
|Granted                         |  | 1,482,500          |   |  | $                                      
|Canceled                        |  | (329,500           | ) |  | $                                      
|Exercised                       |  | 0                  |   |  |                                        
|                                |  |                    |   |  |                                        
|OUTSTANDING, December 31, 2002  |  | 2,066,500          |   |  | $                                      
|Granted                         |  | 0                  |   |  |                                        
|Canceled                        |  | (186,000           | ) |  | $                                      
|Exercised                       |  | 0                  |   |  |                                        
|                                |  |                    |   |  |                                        
|OUTSTANDING, September 30, 2003 |  | 1,880,500          |   |  | $                                      
|                                |  |                    |   |  |                                        



Outstanding options vest over periods
ranging from one to five years. During the nine months ended September 30, 2003, there were no options issued by the Company to either outside consultants or employees.



As of September 30, 2003, options to purchase 731,625 shares of common stock were exercisable.



The fair value of options granted is estimated on the date of grant using the Black-Scholes
option-pricing model that considers various weighted average assumptions, including dividend yields, expected volatility of Company stock, risk-free interest rates, and expected option life.



10



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|11. | SUBSEQUENT EVENT
|--- | ----------------



| | On September 29, 2003, the Company entered into a Term Sheet and or a Proposal Letter with an investment firm (the Lenders) to provide up to $2,500,000 in
working capital financing to Prolong Super Lubricants, Inc. (Borrower) through the issuance of secured promissory notes. This Proposal Letter does not constitute a binding commitment. Any commitment on the part of the Lenders to provide
financing on the agreed terms is subject to, among other things the execution and delivery of definitive legal documents mutually agreed to by the parties and completion of due diligence satisfactory to the Lender. The Company anticipates that this
transaction will be completed before the end of November 2003, although there can be no assurance that the transaction will be consummated by such date or at all.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



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ITEM 2:



PROLONG INTERNATIONAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



RISK FACTORS AND FORWARD LOOKING STATEMENTS



This report contains certain forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. In addition, the Company may from time to time make oral forward looking statements. The words
estimate, project, potential, intended, expect, anticipate, believe and similar expressions or words are intended to identify forward looking statements. The forward
looking statements included herein are based on current expectations, which involve a number of risks and uncertainties and assumptions regarding the Companys business and technology. These assumptions involve judgments with respect to, among
other things, future economic and competitive conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward looking statements will be realized and actual
results may differ materially. In light of the significant uncertainties inherent in the forward looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company undertakes no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date
hereof, or to reflect the occurrence of unanticipated events.



Actual results
are uncertain and may be impacted by the factors discussed in more detail in the Companys Annual Report on Form 10-K for the year ended December 31, 2002 and other periodic reports filed with the Securities and Exchange Commission. In
particular, there are certain risks and uncertainties that may impact the accuracy of the forward looking statements with respect to revenues, expenses and operating results including without limitation, the risks set forth in the risk factors
section of the Annual Report on Form 10-K for the year ended December 31, 2002, which risk factors are hereby incorporated into this report by this reference. As a result, the actual results may differ materially from those projected in the forward
looking statements.



Because of these and other factors that may affect the
Companys operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the
reporting period. The Company regularly evaluates its estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, inventory reserves, goodwill and purchased intangible asset valuations, deferred income tax
asset valuation allowances, warranty reserves, litigation and other contingencies. The Company bases its estimates and assumptions on historical experience, forecasted operating results and expected trends, and on various other factors that it
believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material
differences between the Companys estimates and the actual results, its future results of operations will be affected. The Company believes the following critical accounting policies require it to make significant judgments and estimates in the
preparation of its consolidated financial statements:



Revenue, Receivables
and Inventory - The Company recognizes product revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment. In addition, the Company records
reductions to revenue for estimated product returns and allowances such as competitive pricing programs. Should actual product returns or pricing adjustments exceed the Companys



12



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estimates, additional reductions to revenue would result. The Company provides reserves for estimated product warranty
costs at the time revenue is recognized. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of the Companys customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. The Company writes down its inventory for estimated obsolescence. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs could be required.



Goodwill and Purchased Intangible Assets - The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and
intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to at least annual impairment tests. Management obtains an annual independent, third party valuation of the Company to
assist it in the performance of annual impairment tests. The amounts and useful lives assigned to intangible assets impact future amortization.



Deferred Taxes - If the Company determines that it is more likely than not that it will not realize all or part of its net deferred tax assets in the future, it
will record a valuation allowance against the deferred tax assets, which allowance will be charged to income tax expense in the period of such determination. Management considers the scheduled reversal of deferred tax liabilities, tax planning
strategies and future taxable income in assessing the realizability of deferred tax assets. Management also considers the weight of both positive and negative evidence in determining whether a valuation allowance is needed.



RESULTS OF OPERATIONS



|                                                                        |  | Percentage of Net Revenues      
|----------------------------------------------------------------------- |  | --------------------------------
|                                                                        |  | Three Months Ended September 30,
|                                                                        |  | 2003                            
|Net revenues                                                            |  | 100.0                           
|Cost of goods sold                                                      |  | 34.6                            
|                                                                        |  |                                 
|Gross profit                                                            |  | 65.4                            
|Selling and marketing expenses                                          |  | 37.1                            
|General and administrative expenses                                     |  | 28.4                            
|                                                                        |  |                                 
|Operating (loss) income                                                 |  | (0.1                            
|Other income (expense)                                                  |  | 1.7                             
|                                                                        |  |                                 
|Income (loss) before extraordinary item and provision for income taxes  |  | 1.6                             
|Extraordinary item  gain from forgiveness of debt, net of income taxes |  |                                
|                                                                        |  |                                 
|Income (loss) before provision for income taxes                         |  | 1.6                             
|Provision for income taxes                                              |  | (22.0                           
|                                                                        |  |                                 
|Net (loss) income                                                       |  | (20.4                           
|                                                                        |  |                                 



Three Months Ended September 30,
2003 vs. Three Months Ended September 30, 2002



Net revenues for the three
months ended September 30, 2003 were approximately $2,224,000 as compared to approximately $2,628,000 for the comparable period of the prior year, a decrease of $404,000 or 15.4%. Revenues for the three month period ended September 30, 2003 were
derived from retail sales of $1,879,000 and international



13



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and other sales of $345,000. Revenues for the three month period ended September 30, 2002 were derived from retail sales
of $2,269,000, and international and other sales of $359,000.



During the third
quarter of 2003, retail sales were 84.5% of total revenues while international and other sales comprised 15.5% of total revenues. During the third quarter of 2002, retail sales were 86.3% of total revenues while international and other sales
comprised 13.7% of total revenues. The lower retail sales for the period ended September 30, 2003 versus the same period a year ago are attributable to a decrease in lubricant sales of approximately $390,000. The lubricant retail sales decline is
attributable to a soft market for specialty lubricants, competitive factors and reduced advertising exposure and general economic factors.



Cost of goods sold for the three months ended September 30, 2003 was approximately $770,000 as compared to $934,000 for the comparable period of the prior year, a
decrease of $164,000 or 17.6%. As a percentage of net revenues, cost of goods sold decreased from 35.5% for the three months ended September 30, 2002 to 34.6% for the three months ended September 30, 2003. The decrease in cost of goods as a
percentage of sales was mainly attributable to mix of products sold during such period.



Selling and marketing expenses of $825,000 for the three months ended September 30, 2003 represented a decrease of $149,000 over the comparable period of the prior year. This decrease was primarily the result of decreased expenses for
endorsement and sponsorship payments, advertising and a reduction in personnel. Selling and marketing expenses as a percentage of sales were 37.1% for the three months ended September 30, 2003 versus 37.1% for the comparable period of the previous
year.



General and administrative expenses for the three months ended September
30, 2003 were approximately $632,000 as compared to $639,000 for the three months ended September 30, 2002, a decrease of $7,000 or 1.1%. As a percentage of net revenues, general and administrative expenses increased from 24.3% for the three months
ended September 30, 2002 as compared to 28.4% for the comparable period in 2003. Even though the aggregate expenses declined during the period, the percentage of net revenues increased due to decrease in sales during the three month period ended
September 30, 2003.



Interest expense of $94,000 for the three months ended
September 30, 2003 represented an increase of $23,000 over the comparable period in 2002. The increase is attributable to a noncash charge of $33,000 for the unammortized debt discount on the subordinated secured promissory notes, which was offset
by decreases in the interest rate relating to the credit facility. Other income for the three months ended September 30, 2003 was $125,000 as compared to $40,000 for the three months ended September 30, 2002, an increase of $85,000. This increase
was the result of a one-time net gain of $92,800 from the exchange of approximately 766,000 shares of common stock held in the Companys affiliate, Oryxe Energy International Inc., for the relief of $260,000 of subordinated notes payable,
offset by reduced income from subletting a portion of our facilities.



The
provision for income taxes was $490,000 for the three months ended September 30, 2003, even though the Company reported net income before provision for income taxes of $33,591 for the period. The provision results from an increase in the valuation
allowance of $490,000 recorded against a portion of the Companys deferred tax assets. Such allowance was recorded as management could not determine that it was more likely than not that such deferred tax assets would be realized.



Net loss for the three month period ended September 30, 2003 was approximately $456,000 as
compared to a net income of approximately $30,600 for the comparable period in the prior year, an decrease of $486,600. The decrease is a result of the factors discussed above.



Nine Months Ended September 30, 2003 vs. Nine Months Ended September 30, 2002



Net revenues for the nine months ended September 30, 2003 were approximately $6,446,000 as
compared to approximately $8,001,000 for the comparable period in the prior year, a decrease of $1,555,000 or 19.4%. Revenues for the nine month period ended September 30, 2003 were derived from retail sales of $5,581,000 and international and other
sales of $865,000. Revenues for the nine month period ended September 30, 2003 were derived from retail sales of $7,083,000 and international and other sales of $918,000.



14



---

For the nine-month period ended September 30, 2003, retail sales were 86.6% of total revenues while international and
other sales comprised 13.4% of total revenues. During the comparable period in 2002, retail sales were 88.5% of total revenues while international and other sales comprised 11.5% of total revenues. The lower retail sales for the nine month period
ended September 30, 2003 versus the same period a year ago are attributable to a decrease in lubricant sales of approximately $1,490,000. The lubricant retail sales decline is attributable to a soft market for specialty lubricants, competitive
factors, reduced advertising exposure and general economic factors.



Cost of
goods sold for the nine months ended September 30, 2003 was approximately $2,247,000 as compared to $2,722,000 for the comparable period of the prior year, a decrease of $475,000 or 17.4%. As a percentage of net revenues, cost of goods sold
increased from 34.0% for the nine months ended September 30, 2002 to 34.9% for the nine months ended September 30, 2003. The increase in cost of goods sold, as a percentage of sales was mainly attributable to mix of products during such period.



Selling and marketing expenses of $2,639,000 for the nine months ended
September 30, 2003 represented a decrease of $343,000 over the comparable period of the prior year. This decrease was primarily the result of decreased expenses for endorsement and sponsorship payments, advertising and a reduction in personnel
Selling and marketing expenses as a percentage of revenues were 40.9% for the nine months ended September 30, 2003 versus 37.3% for the comparable period of the previous year. Even though the aggregate expenses declined during the period, the
percentage of net revenues increased due to decrease in sales during the first nine months of 2003.



General and administrative expenses for the nine months ended September 30, 2003 were approximately $2,003,000 as compared to $2,070,000 for the nine months ended September 30, 2002, a decrease of $67,000 or 3.2%. As
a percentage of net revenues, general and administrative expenses increased from 25.9% in 2002 to 31.1% in 2003. Even though the aggregate expenses declined during the period, the percentage of net revenues increased due to a decrease in sales
during the first nine months of 2003.



Interest expense of $298,000 for the
nine months ended September 30, 2003 represented an increase of $28,000 over the comparable period in 2002. The increase is attributable to a noncash charge of $99,000 for the unamortized debt discount on the subordinated secured promissory notes,
which was partially offset by decreases in the interest rate relating to the credit facilities. Other income for the nine months ended September 30, 2003 was $193,000 as compared to $149,000 for the nine months ended September 30, 2002. This
increase was the result of the one time net gain of $92,800 from the exchange of approximately 766,000 shares of common stock held in the Companys affiliate, Oryxe Energy International Inc., for the relief of $260,000 of subordinated notes
payable, offset by reduced income from subletting a portion of our facilities. Gain on sale of building for the nine months ended September 30, 2002 in the amount of $983,400 represents the one-time net gain on the sale of the Companys
corporate headquarters.



Extraordinary item  gain from forgiveness of
debt, net of income taxes for the nine months ended September 30, 2003 was none as compared to $406,000 for the nine months ended September 30, 2002. The gain in the prior period resulted from the executed settlements during the period of the
Companys Accounts Payable Discounted Debt Restructure Program.



The provision for income taxes was $790,000 for the nine months ended September 30, 2003, even though the Company reported a net loss for the period. The provision results from an increase in the valuation allowance of $790,000 recorded
against a portion of the Companys deferred tax assets. Such allowance was recorded as management could not determine that it was more likely than not that such deferred tax assets would be realized.



Net loss for the nine month period ended September 30, 2003 was approximately $1,333,000 as
compared to a net income of approximately $1,061,000 for the comparable period in the prior year, a decrease of $2,394,000. The decrease is a result of the factors discussed above.



LIQUIDITY AND CAPITAL RESOURCES



At September 30, 2003, the Company had negative working capital of approximately $648,000 as compared to a positive balance of $418,000 at December 31, 2002, representing
a decrease of $1,066,000. Cash used in operating activities during the nine month period ended September 30, 2003, was $284,693, primarily consisting of an increase in accounts receivable which was partially offset by decreases in deferred taxes and
an increase in accounts payable and accrued expenses. Additionally, the Company generated cash of $11,794 from investing activities and



15



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generated cash of $64,373 from financing activities, primarily consisting of proceeds of $260,000 from the convertible
subordinated promissory notes issued in June 2003, offset by payments on outstanding subordinated secured promissory notes.



Effective February 26, 2003, the Company entered into a $1,500,000 credit facility with a financial institution that, unless terminated earlier by its terms, has an
initial term through February 26, 2005 with automatic renewals for successive one-year periods thereafter. The credit facility provides for advances of funds up to 75% of the gross face value of eligible trade accounts receivable based on agreed
terms. Such facility is collateralized by accounts receivable, inventory, equipment and other assets. Interest is payable monthly at the financial institutions base index, which was 4.75% at September 30, 2003, plus 2.25%. Additionally, the
Company is obligated to pay the lender (i) a monthly purchasing fee of 0.25% of the total monthly average advances outstanding and (ii) an annual facility fee of 0.75% of the purchasing limit (which limit is currently $1,500,000). As of September
30, 2003, $857,393 was outstanding under the credit facility.



At September 30,
2003, the Company had a negative working capital of approximately $648,000 and, an accumulated deficit of approximately $8,238,500. The Company initiated vigorous expense-reduction strategies during the years 2001, 2002 and during the first nine
months ended September 30, 2003. During 2001, 2002 and during the first nine months ended September 30, 3003, the Company reduced personnel, discontinued certain of its endorsement and sponsorship contracts and aggressively reduced selling and
general and administrative expenses. Additionally, the Company improved its credit and collections function and worked with its vendors to improve payment terms. The Company initiated an Accounts Payable Discounted Debt Restructure
Program which was successfully executed and the program reduced the accounts payable balance by approximately $1,300,000 and recognized debt forgiveness income of $677,000 (before taxes), during the year ended December 31, 2002. The Company
also recognized a one-time gain of $983,400 on the sale of its corporate headquarters during the year ended December 31, 2002. During 2002, the Company raised additional working capital of $1,125,000 through private placements of subordinated
secured promissory notes to accredited investors. During the first nine months ended September 30, 2003, the Company raised additional working capital of $260,000 through a private placement offering of convertible promissory notes to accredited
investors. If the aforementioned measures are not adequate, the Company will pursue additional expense reductions during 2003. The Company cannot guarantee that the timing of further reductions in operating expenses will be adequate to return to
profitability for 2003 and beyond. The Company is continuing to seek financing on favorable terms, including subordinated debt and/or equity placements. The Company has executed a Term Sheet with an investment firm to sell and issue $2,500,000 in
new secured promissory notes. The Company anticipates that this transaction will close before the end of November 2003 (see Note 11). Management believes that a portion of the shares of common stock in Oryxe Energy International, Inc. owned by the
Company could be sold to provide additional working capital (see Note 8). There can be no assurance that such financing will be available on favorable terms, or at all. If additional funds are raised by issuing equity securities, dilution to
existing stockholders is likely to result. Management believes that the aforementioned plans, if successfully executed, will provide adequate financial resources to sustain the Companys operations and enable the Company to continue as a going
concern.



ITEM 3:





QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



PICs financial
instruments include cash and long-term debt. At September 30, 2003 and December 31, 2002, respectively 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 September 30, 2003 and December 31, 2002, respectively.



The
Company is exposed to market risk from changes in interest rates on borrowings under its credit facility entered into on February 26, 2003, which bears interest at the financial institutions base index, which was 4.75% at September 30, 2003,
plus 2.25%.



16



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ITEM 4:



CONTROLS AND PROCEDURES



The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report.
Under the supervision and with the participation of the Companys management, including the Chief Executive Officer (the CEO) and the Chief Financial Officer (the CFO), the Company evaluated the effectiveness of the
design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the 1934 Act) as of the end of the period covered by this quarterly report. Based upon that evaluation,
the Companys CEO and CFO concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be
included in the Companys periodic filings under the 1934 Act.



There has
been no change in the Companys internal control over financial reporting during the period covered by this report that has materially affected, or is reasonable likely to materially affect, the Companys internal control over financial
reporting.



17



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PROLONG INTERNATIONAL CORPORATION

PART IIOTHER INFORMATION



Item 1.    Legal Proceedings



Reference is made to Note 7 of the notes to consolidated condensed financial statements.



Item 2.    Changes in Securities and Use of Proceeds



On June 5, 2003, the Company issued warrants to purchase an aggregate of 167,063 shares of common stock in connection with the sale and issuance of an aggregate
principal amount of $260,000 of convertible subordinated promissory notes to a total of eleven accredited investors. The warrants have a thirty month term and entitle the holder to acquire shares of the Companys common stock at a price of
$0.20 per share. Additionally, each warrant may be exercised as a result of a net issue or easy sale exercise by the holder. The convertible subordinated promissory notes are automatically convertible into new convertible
promissory notes, which are convertible into shares of common stock of Oryxe Energy International, Inc., that may be issued by the Company prior to September 30, 2003. The proceeds received by the Company from the sale of the convertible
subordinated promissory notes were used for general corporate purposes. On September 30, 2003 the Company cancelled the notes in exchange for (a) the transfer of 766,875 shares of Oryxe Common Stock owned by the Company to the investors (b) the
issuance of warrants to purchase 232,937 shares of Common Stock of the Company at a price of $0.09 per share and (c) the amendment to the per share purchase price of the original warrants from $0.20 to $0.09.



The sales of each of the warrants described above were deemed to be exempt from registration
under the Securities Act of 1933, as amended (the 1933 Act), in reliance on Section 4(2) of the 1933 Act or Regulation D promulgated thereunder. The Company has reason to believe that each purchaser was familiar with or had access to
information concerning the operations and financial condition of the Company, and each purchaser represented that it was an accredited investor and was acquiring the securities for investment only and not with a view to or for sale in connection
with any distribution thereof. At the time of the issuances, each of the warrants and the convertible subordinated promissory notes were deemed to be restricted securities for purposes of the 1933 Act and the instruments representing such securities
(and the share certificates to be issued upon exercise of the warrants) bear legends to that effect.



Item 6.    Exhibits and Reports on Form 8-K



|(a) |  | Exhibits                                                                                                                                                          
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                   
|    |  | 31.1                                                                                                                                                              
|    |  |                                                                                                                                                                   
|    |  | 31.2                                                                                                                                                              
|    |  |                                                                                                                                                                   
|    |  | 32                                                                                                                                                                
|    | 
|(b) |  | Reports on Form 8-K                                                                                                                                               
|    | 
|    |  | On August 11, 2003, the Company filed a Current Report on Form 8-K to report the announcement of the financial results for the second quarter ended June 30, 2003.



18



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SIGNATURES



Pursuant to the requirements 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                                    
|----------------------- |  | ---------------------------------------------------------------------
|                        | 
|Date: November 13, 2003 |  | /s/    NICOLAAS ROSIER                                               
|                        | 
|                        |  | Nicolaas Rosier Chief Financial Officer (Principal Financial Officer)



19