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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2003

OR

For the transition period from ____________________to______________________

Commission File No.          0-22803          

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

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.

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

There were 29,789,598 shares of the registrant’s common stock ($0.001 par value) outstanding as of August 8, 2003.

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Exhibit Index on Sequentially Numbered Page 17

PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS

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Item 1.  Financial Statements

PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

See notes to consolidated condensed financial statements

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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

See notes to consolidated condensed financial statements

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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During the six month periods ended June 30, 2003 and 2002, the Company provided an affiliate with office space and recorded increases in other income and investment in affiliate of $49,998.

During the six month period ended June 30, 2002, the Company 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) approximately $3,398,000.

See notes to consolidated condensed financial statements

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Item 1.  Financial Statements

PROLONG INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

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

As of June 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.

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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 and current 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

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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

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

Net revenues for the three months ended June 30, 2003 were approximately $2,034,000 as compared to approximately $2,487,000 for the comparable period of the prior year, a decrease of $453,000 or 18.2%.  Revenues for the three month period ended June 30, 2003 were derived from retail sales of $1,774,000 and international and other sales of $260,000.  Revenues for the three month period ended June 30, 2002 were derived from retail sales of $2,231,000, and international and other sales of $256,000.

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During the second quarter of 2003, retail sales were 87.2% of total revenues while international and other sales comprised 12.8% of total revenues.  During the second quarter of 2002, retail sales were 89.7% of total revenues while international and other sales comprised 10.3% of total revenues.  The lower retail sales for the period ended June 30, 2003 versus the same period a year ago are attributable to a decrease in lubricant sales of approximately $457,000.  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 three months ended June 30, 2003 was approximately $725,000 as compared to $796,000 for the comparable period of the prior year, a decrease of $71,000 or 8.9%.  As a percentage of net revenues, cost of goods sold increased from 32.0% for the three months ended June 30, 2002 to 35.7% for the three months ended June 20, 2003.  The increase in cost of goods as a percentage of sales was mainly attributable to product mix.

Selling and marketing expenses of $958,000 for the three months ended June 30, 2003 represented a decrease of $25,000 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 47.1% for the three months ended June 30, 2002 versus 39.5% for the comparable period of the previous year due to the decrease in sales during the period.

General and administrative expenses for the three months ended June 30, 2003 were approximately $629,000 as compared to $673,000 for the three months ended June 30, 2002, a decrease of $44,000 or 6.5%.  As a percentage of net revenues, general and administrative expenses increased from 27.1% for the three months ended June 30, 2002 as compared to 30.9% for the comparable period in 2003.  Even though the aggregate expenses declined during the period, the percentage of net revenues increased due to the decrease in sales during the second quarter of 2003.

Interest expense of $90,000 for the three months ended June 30, 2003 represented a decrease of $8,000 over the comparable period in 2002. The decrease 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 June 30, 2003 was $35,500 as compared to $55,300 for the three months ended June 30, 2002, a decrease of $19,800.  This decrease was the result of reduced income from subletting of a portion of our facilities.  Gain on sale of building for the three months ended June 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 three months ended June 30, 2003 was none as compared to $311,500 for the three months ended June 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” discussed elsewhere in this report.

The provision for income taxes was $300,000 for the three months ended June 30, 2003, even though the Company reported a net loss for the period.  The provision results from an increase in the valuation allowance of $300,000 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 June 30, 2003 was approximately $(634,000) as compared to a net income of approximately $899,000 for the comparable period in the prior year, a decrease of $1,533,000.  The decrease is a result of the factors discussed above.

Six Months Ended June 30, 2003 vs. Six Months Ended June 30, 2002

Net revenues for the six months ended June 30, 2003 were approximately $4,222,000 as compared to approximately $5,373,000 for the comparable period in the prior year, a decrease of $1,151,000 or 21.4%.  Revenues for the six month period ended June 30, 2003 were derived from retail sales of $3,709,000 and international and other sales of $513,000.  Revenues for the six month period ended June 30, 2002 were derived from retail sales of $4,817,000 and international and other sales of $556,000.

For the six-month period ended June 30, 2003, retail sales were 87.8% of total revenues while international and other sales comprised 12.2% of total revenues.  During the comparable period in 2002, retail sales were 89.7% of total revenues while international and other sales comprised 10.3% of total revenues.  The lower retail sales for the six month period ended June 30, 2003 versus the same period a year ago are attributable to a decrease in lubricant

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sales of approximately $1,108,000.  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 six months ended June 30, 2003 was approximately $1,477,000 as compared to $1,788,000 for the comparable period of the prior year, a decrease of $311,000 or 17.4%.  As a percentage of net revenues, cost of goods sold increased from 33.3% for the six months ended June 30, 2002 to 35.0% for the six months ended June 30, 2003.  The increase in cost of goods sold, as a percentage of sales was mainly attributable to product mix.

Selling and marketing expenses of $1,815,000 for the six months ended June 30, 2003 represented a decrease of $193,000 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 net revenues were 43.0% for the six months ended June 30, 2003 versus 37.4% for the comparable period of the previous year.

General and administrative expenses for the six months ended June 30, 2003 were approximately $1,371,000 as compared to $1,432,000 for the six months ended June 30, 2002, a decrease of $61,000 or 4.3%.  As a percentage of net revenues, general and administrative expenses increased from 26.6% for the six months ended June 30, 2002 as compared to 32.4% 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 first six months of 2003.

Interest expense of $204,000 for the six months ended June 30, 2003 represented an increase of $5,000 over the comparable period in 2002. The increase is attributable to a noncash charge of $66,000 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 six months ended June 30, 2003 was $68,400 as compared to 108,900 for the six months ended June 30, 2002.  This decrease was the result of reduced income from subletting of a portion or our facilities.  Gain on sale of building for the six months ended June 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 six months ended June 30, 2003 was none as compared to $406,500 for the six months ended June 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 $300,000 for the six months ended June 30, 2003, even though the Company reported a net loss for the period.  The provision results from an increase in the valuation allowance of $300,000 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 six month period ended June 30, 2003 was approximately $(876,000) as compared to a net income of approximately $1,031,000 for the comparable period in the prior year, a decrease of $1,907,000.  The decrease is a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003, the Company had negative working capital of approximately $226,000 as compared to a positive balance of $418,000 at December 31, 2002, representing a decrease of $644,000.  Cash used in operating activities during the six month period ended June 30, 2003, was $390,400, primarily consisting of a decrease in accounts payable, and an increase in accounts receivable, which was partially offset by an increase in accrued expenses and decreases in prepaid expenses and deferred taxes.  Additionally, the Company generated cash of $9,513 from investing activities and generated cash of $214,055 from financing activities which were primarily payments on outstanding subordinated secured promissory notes offset by proceeds from the credit facility entered into on February 26, 2003 and proceeds of $260,000 from the convertible subordinated promissory notes issued in June 2003.

Effective February 26, 2003, the Company entered into a new $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

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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 June 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 June 30, 2003, $920,967 was outstanding under the credit facility.

At June 30, 2003, the Company had a negative working capital of approximately $226,000 and, an accumulated deficit of approximately $7,782,000.  The Company initiated vigorous expense-reduction strategies during the years 2001, 2002 and during the first six months ended June 30, 2003.  During 2001, 2002 and during the first six months ended June 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 a private placement offering of subordinated secured promissory notes to accredited investors.  During the first six months ended June 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 senior secured debt, subordinated debt and/or equity placements.  The Company owns shares of common stock in Oryxe Energy International, Inc.  Management believes that a portion 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 June 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 June 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 June 30, 2003, plus 2.25%.

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.

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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.

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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 June 19, 2003, the Company issued a warrant to purchase 100,000 shares of common stock in connection with an agreement with a third party to provide marketing and related services to the Company.  The warrant has a five year term and entitles the holder to acquire shares of the Company’s common stock at a price of $0.18 per share, subject to adjustment for certain dilutive issuances.  The warrant may be exercised as a result of a “net issue” or “easy sale” exercise by the holder.

The sales of each of the warrants and convertible subordinated promissory notes 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

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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.

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