UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(Mark  One)

[X]     Quarterly  report  pursuant to Section 13 or 15(d) of the Securities
        Exchange  Act  of  1934.

          For  the  quarterly  period  ended  December  31,  2000.
                                              -------------------

                                       or

[ ]     Transition  report  pursuant  to  Section  13  or  15(d)  of  the
        Securities  Exchange  Act  of  1934.

                         Commission File Number: 0-24507

                          PILOT NETWORK SERVICES, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                            94-3305774
     (State or other jurisdiction of             (I.R.S. Employer
     incorporation or organization)            Identification Number)

                           1080 MARINA VILLAGE PARKWAY
                                ALAMEDA, CA 94501
          (Address of principal executive offices, including zip code)

                                 (510) 433-7800
              (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.

                                Yes  X   No
                                    ---     ---

At  December  31,  2000, there were 15,370,621 shares of the Registrant's Common
Stock  outstanding.


                                  Page 1 of 22
<PAGE>
<TABLE>
<CAPTION>
                           PILOT NETWORK SERVICES, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                                      INDEX


                                                                           Page  Number


PART I.                           FINANCIAL INFORMATION

Item 1.                           Financial Statements
<S>         <C>                                                                <C>
            Unaudited Condensed Consolidated Balance Sheets as of
            March 31, 2000 and December 31, 2000                                3

            Unaudited Condensed Consolidated Statements of Operations for the
            three and nine months ended December 31, 1999 and 2000              4

            Unaudited Condensed Consolidated Statements of Cash Flows for the
            nine months ended December 31, 1999 and 2000                        5

            Notes to Unaudited Condensed Consolidated Financial Statements      6

Item 2.. .  Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                               9

Item 3.     Quantitative and Qualitative Disclosures about Market Risk         20

PART II. .  OTHER INFORMATION

Item 1.. .  Legal Proceedings                                                  20

Item 3.. .  Defaults Upon Senior Securities                                    21

Item 4.. .  Submission of Matters to a Vote of Security Holders                21

Item 6.     Exhibits and Reports on Form 8-K                                   21


SIGNATURES                                                                     22
</TABLE>


                                  Page 2 of 22
<PAGE>
<TABLE>
<CAPTION>
PART  I.  FINANCIAL  INFORMATION

ITEM  1.  FINANCIAL  STATEMENTS

                                       PILOT NETWORK SERVICES, INC.

                             UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (in thousands, except share data)


                                                                               March 31,    December 31,
                                                                                 2000           2000
                                                                              -----------  --------------
<S>                                                                           <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . .  $    7,920   $       1,819
  Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . .         898           1,865
  Trade receivables, less allowance for doubtful accounts of $389
    and $909 as of March 31, 2000, and December 31, 2000, respectively . . .       7,233           6,281
  Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . .         843           1,560
                                                                              -----------  --------------
    Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . .      16,894          11,525
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . .      24,624          28,162
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1,639             738
                                                                              -----------  --------------
                                                                              $   43,157   $      40,425
                                                                              ===========  ==============

          LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
                   AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
  Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $    5,352   $       9,582
  Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       2,067           3,802
  Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4,652           3,768
  Term loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3,000           3,000
  Current portion of capital lease obligations . . . . . . . . . . . . . . .       2,275           2,380
  Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1,200           1,626
                                                                              -----------  --------------
    Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . .      18,546          24,158
Capital lease obligations, net of current portion. . . . . . . . . . . . . .       3,561           5,205
                                                                              -----------  --------------
    Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . .      22,107          29,363
                                                                              -----------  --------------

Redeemable convertible preferred stock, net of related warrant and issuance
  costs, $0.01 par value; 15,000 shares authorized, 15,000 shares issued
  and 14,736 shares outstanding as of December 31, 2000; aggregate
  liquidation preference of $14,736,000 as of December 31, 2000. . . . . . .           -          11,248


Stockholders' (deficit) equity:
  Common stock, $0.001 par value; 40,000,000 shares authorized;
    15,487,063 and  15,821,557 shares issued and outstanding as of March
    31, 2000, and December 31, 2000, respectively. . . . . . . . . . . . . .          15              16
  Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . .      77,035          81,734
  Stock dividends payable. . . . . . . . . . . . . . . . . . . . . . . . . .           -              79
  Accumulated other comprehensive income (loss). . . . . . . . . . . . . . .          39             (66)
  Deferred stock compensation. . . . . . . . . . . . . . . . . . . . . . . .        (326)           (206)
  Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . .     (53,019)        (79,049)
  Treasury stock, 450,936 shares of common stock at cost
    as of March 31, 2000 and December 31, 2000, respectively . . . . . . . .      (2,694)         (2,694)
                                                                              -----------  --------------
    Total stockholders' (deficit) equity . . . . . . . . . . . . . . . . . .      21,050            (186)
                                                                              -----------  --------------
                                                                              $   43,157   $      40,425
                                                                              ===========  ==============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


                                  Page 3 of 22
<PAGE>
<TABLE>
<CAPTION>
                                PILOT NETWORK SERVICES, INC.

                 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (in thousands, except per share data)


                                                  Three months ended     Nine months ended
                                                      December 31,          December 31,
                                                    1999      2000       1999       2000
                                                  --------  ---------  ---------  ---------
<S>                                               <C>       <C>        <C>        <C>

Service revenues . . . . . . . . . . . . . . . .  $ 7,465   $  9,666   $ 20,411   $ 30,855
Technology access revenues        .. . . . . . .    1,000          -      1,000          -
                                                  --------  ---------  ---------  ---------
    Total revenues . . . . . . . . . . . . . . .    8,465      9,666     21,411     30,855

Cost of revenues . . . . . . . . . . . . . . . .    8,188     10,784     21,997     31,287
                                                  --------  ---------  ---------  ---------

Gross margin . . . . . . . . . . . . . . . . . .      277     (1,118)      (586)      (432)
                                                  --------  ---------  ---------  ---------

Operating expenses:
  Sales and marketing. . . . . . . . . . . . . .    3,342      4,354      9,498     13,235
  Engineering and development. . . . . . . . . .    1,134      1,815      2,536      5,146
  General and administrative . . . . . . . . . .      983      1,815      2,713      4,188
                                                  --------  ---------  ---------  ---------

  Total operating expenses . . . . . . . . . . .    5,459      7,984     14,747     22,569
                                                  --------  ---------  ---------  ---------

Operating loss . . . . . . . . . . . . . . . . .   (5,182)    (9,102)   (15,333)   (23,001)

Interest income. . . . . . . . . . . . . . . . .       60        249        594        790
Interest expense . . . . . . . . . . . . . . . .     (472)      (701)    (1,293)    (2,219)
                                                  --------  ---------  ---------  ---------

Net loss . . . . . . . . . . . . . . . . . . . .   (5,594)    (9,554)   (16,032)   (24,430)
                                                  --------  ---------  ---------  ---------

Beneficial conversion feature of redeemable. . .        -      1,600          -      1,600
  convertible preferred stock
Dividends on redeemable convertible preferred
  stock. . . . . . . . . . . . . . . . . . . . .        -         79          -        236
                                                  --------  ---------  ---------  ---------
Net loss applicable to common stockholders . . .  $(5,594)  $(11,233)  $(16,032)  $(26,266)
                                                  ========  =========  =========  =========

Basic and diluted net loss per common share. . .  $ (0.40)  $  (0.74)  $  (1.17)  $  (1.74)
                                                  ========  =========  =========  =========


Weighted average common shares used in
  computing basic and diluted net loss per share
                                                   13,859     15,226     13,705     15,129
                                                  ========  =========  =========  =========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


                                  Page 4 of 22
<PAGE>
<TABLE>
<CAPTION>
                              PILOT NETWORK SERVICES, INC.

                      UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
                                     (in thousands)


                                                                    Nine months ended
                                                                       December 31,
                                                                   --------------------
                                                                     1999       2000
                                                                   ---------  ---------
<S>                                                                <C>        <C>
Cash flows from operating activities:
  Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . .  $(16,032)  $(24,430)
  Adjustments to reconcile net loss to net cash used in operating
  activities:
    Depreciation and amortization . . . . . . . . . . . . . . . .     5,294      8,615
    Amortization of deferred compensation . . . . . . . . . . . .       225        120
    Amortization of loan fees . . . . . . . . . . . . . . . . . .       275        631
    Provision for doubtful accounts . . . . . . . . . . . . . . .         -      1,464
    Changes in operating assets and liabilities:
      Trade receivables . . . . . . . . . . . . . . . . . . . . .    (3,316)      (512)
      Prepaid and other assets. . . . . . . . . . . . . . . . . .      (624)      (447)
      Accounts payable. . . . . . . . . . . . . . . . . . . . . .     2,040      4,230
      Accrued expenses. . . . . . . . . . . . . . . . . . . . . .       181      1,735
      Deferred revenue. . . . . . . . . . . . . . . . . . . . . .      (133)       426
                                                                   ---------  ---------
        Net cash used in operating activities . . . . . . . . . .   (12,090)    (8,168)
                                                                   ---------  ---------
Cash flows used in investing activities:
  Purchases of property and equipment . . . . . . . . . . . . . .   (10,496)    (8,153)
  Purchases of short-term investments . . . . . . . . . . . . . .         -    (13,000)
  Proceeds from short-term investments. . . . . . . . . . . . . .    11,168     12,033
                                                                   ---------  ---------
        Net cash provided by (used in) investing activities . . .       672     (9,120)
                                                                   ---------  ---------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . . . . . .       864        584
Proceeds from issuance of redeemable convertible preferred
    stock and related warrants, net of issuance costs . . . . . .         -     14,000
Payments of dividends . . . . . . . . . . . . . . . . . . . . . .         -       (157)
Proceeds from term loan . . . . . . . . . . . . . . . . . . . . .     3,000          -
Payments of term loan . . . . . . . . . . . . . . . . . . . . . .    (3,000)         -
Proceeds from working capital line of credit. . . . . . . . . . .     3,391     34,077
Payments of working capital line of credit. . . . . . . . . . . .         -    (34,961)
Principal payments of obligations under capital leases. . . . . .    (1,738)    (2,251)
                                                                   ---------  ---------
      Net cash provided by  financing activities. . . . . . . . .     2,517     11,292
                                                                   ---------  ---------
Effect of exchange rate changes on cash and cash equivalents. . .         -       (105)
                                                                   ---------  ---------
Net decrease in cash and cash equivalents . . . . . . . . . . . .    (8,901)    (6,101)

Cash and cash equivalents, beginning of period. . . . . . . . . .    10,660      7,920
                                                                   ---------  ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . .  $  1,759   $  1,819
                                                                   =========  =========

Supplemental disclosure of cash flow information:
  Cash paid during the period for interest. . . . . . . . . . . .  $  1,014   $  2,069
                                                                   =========  =========
  Non-cash financing activities:
    Assets acquired under capital lease obligations . . . . . . .  $  1,174   $  4,000
                                                                   =========  =========
    Stock dividends on redeemable convertible preferred stock . .  $      -   $     79
                                                                   =========  =========
    Beneficial conversion feature of convertible preferred stock.  $      -   $  1,600
                                                                   =========  =========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


                                  Page 5 of 22
<PAGE>
PILOT  NETWORK  SERVICES,  INC.

NOTES  TO  UNAUDITED  CONDENSED  CONSOLIDATED  FINANCIAL  STATEMENTS


1.   Basis of presentation

     The  unaudited  condensed consolidated financial statements included herein
for  Pilot  Network Services, Inc. (the "Company" or "Pilot") have been prepared
by  the  Company  pursuant  to  the  rules  and regulations for Form 10-Q of the
Securities  and  Exchange  Commission.  In  management's  opinion,  the  interim
financial data presented includes all adjustments (which include only normal and
recurring  adjustments)  necessary  for a fair presentation. Certain information
and  footnote disclosures normally included in the financial statements prepared
in  accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. The results of operations for
the  periods  presented  are not necessarily indicative of the operating results
expected for the entire year. The condensed financial statements included herein
should  be  read in conjunction with other documents the Company files from time
to  time  with  the  Securities and Exchange Commission, including the Company's
Annual  Report  on  Form  10-K  for  the  fiscal  year  ended  March  31,  2000.

2.     Basic  and  diluted  net  loss  per  share

     Basic and diluted net loss per share is computed using the weighted average
number  of  common  shares outstanding during the period. Inclusion of potential
common  shares  would  be  anti-dilutive  and  have been excluded from per share
calculations.  The  following  options  and warrants to acquire shares of common
stock  were  excluded from the computation of diluted earnings per share because
their  effects  would  be  anti-dilutive:

                    December 31, 1999            December 31, 2000
               ---------------------------  ---------------------------
                Shares    Exercise Prices    Shares    Exercise Prices
               ---------  ----------------  ---------  ----------------
     Options   2,336,134  $   0.09-$20.063  2,743,590  $   0.20-$49.875
     Warrants    464,086  $    0.365-$2.00    675,453  $   0.365-$25.00
               ---------                    ---------
               2,800,220                    3,419,043
               =========                    =========

Common shares that would result from the conversion of the Company's convertible
preferred  stock  are also excluded from the computation of diluted net loss per
share  for  the  three  and  nine  months  ended  December  31,  2000.

3.   Recent accounting pronouncements

     In  June 1998, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  (SFAS)  No.  133,  "Accounting  for Derivative
Instruments  and  Hedging  Activities." This statement establishes standards for
accounting  for  derivative  instruments  and hedging activities. The Company is
required  to adopt SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, in
the first quarter of fiscal year 2002. The Company does not anticipate that SFAS
No.  133  will  have  a  material  impact  on  its  financial  statements.

     In  December  1999,  the  Securities and Exchange Commission ("SEC") issued
Staff  Accounting  Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," as amended by SAB 101A and SAB 101B, which provides guidance on the
recognition,  presentation,  and  disclosure  of revenue in financial statements
filed  with  the  SEC.  SAB  101 outlines the basic criteria that must be met to
recognize  revenue  and  provides  guidance  for  disclosures related to revenue
recognition  policies.  The  Company  is required to adopt SAB 101 in the fourth
quarter  of  fiscal 2001. The Company is evaluating the impact that the adoption
of  SAB  101  will  have  on  its  financial  position or results of operations.


                                  Page 6 of 22
<PAGE>
     In  March  2000,  the  Financial  Accounting  Standards  Board  issued
Interpretation  No.  44,  "Accounting  for  Certain Transactions involving Stock
Compensation."  Interpretation  No.  44 clarifies the application of APB Opinion
No.  25  for  certain  issues.  The  Company  adopted FASB Interpretation No. 44
effective  July  1,  2000.  The  adoption  did not have a material effect on the
Company's  financial  statements.


4.     Comprehensive  loss

     Total comprehensive loss for the quarters ended December 31, 1999 and 2000,
was  $5.6  million and $9.6 million respectively.  Total comprehensive loss for
the  nine  months  ended December 31, 1999 and 2000, was $16.1 million and $24.5
million  respectively.


5.     Redeemable  convertible  preferred  stock

     In  June  2000,  the  Company  sold 15,000 shares of redeemable convertible
preferred  stock  directly  to  an  investor at a price of $1,000 per share. The
gross  proceeds  were  $15.0  million.  After  transaction  fees  and  costs  of
approximately  $1.0  million, the net proceeds to the Company were approximately
$14.0  million.  As  additional  consideration,  the Company issued a warrant to
purchase  256,621  shares  of  common  stock at 120% of the average market price
immediately  prior  to  the  transaction,  specifically  $17.536  per share. The
Company  calculated  a  fair  value  of  the  warrant  of $2.55 million which is
included  as  a  component  of additional paid-in capital. The fair value of the
warrant  was  calculated  using the Black-Scholes option pricing model using the
following  assumptions: dividend yield-none; contractual life-5 years; risk free
interest  rate-5.5%;  volatility-85%.  The  principal  rights,  preferences  and
privileges  of  the holders of the redeemable convertible preferred stock are as
follows:

     -    At the investor's option, the redeemable  convertible  preferred stock
          may be  converted  into shares of common stock at the lower of $18.266
          per share,  or 101% of the average market price  immediately  prior to
          conversion.

     -    The redeemable  convertible  preferred stock pays a dividend of 3% per
          annum which can be paid in cash or common stock of the Company, at the
          Company's  option.  The  dividends are  cumulative  and payable on the
          first day of each calendar quarter beginning on October 1, 2000.

     -    The  redeemable  convertible  preferred  stock  matures  in 2002.  The
          redeemable  convertible preferred stock may be redeemed at maturity in
          either  cash or common  stock at the option of the  Company,  or under
          certain  circumstances  prior to maturity.  The  mandatory  redemption
          price of each share of the redeemable  convertible  preferred stock is
          equal to the  greater of (i)  $1,000  plus all  unpaid  dividends  and
          default premium thereon; and (ii) an amount determined by dividing the
          aggregate value of the share by the conversion  price in effect on the
          redemption date and multiplying the resulting  quotient by the average
          closing trade price of the Company's  common stock on the five trading
          days immediately preceding the redemption date. Prior to maturity, the
          redeemable  convertible  preferred stock cannot be converted into more
          than  3,014,199 of the Company's  outstanding  shares of common stock.
          This maximum number of shares of common stock upon conversion includes
          shares of common stock that may be issued as  dividends.  At maturity,
          the Company may cause the preferred shares to be converted even if the
          then  market  price of the  Company's  common  stock is low  enough to
          require  issuance of more than 3,014,199 of the Company's  outstanding
          shares of common stock

     -    The  redeemable   convertible   preferred   stock  has  a  liquidation
          preference  of $1,000 per share  plus  accrued  and  unpaid  dividends
          accrued thereon.

     -    The redeemable  convertible  preferred  stock may be redeemed upon the
          occurrence  of  specified  events,  such as changes in control and the
          Company's failure to maintain listing of its common stock on NASDAQ or
          certain   exchanges.   The  Company   believes  that  the   redeemable
          convertible  preferred  stock  should be  accreted  to the  redemption
          amount  only  if it  becomes  probable  that  an  event  triggering  a
          redemption  right will occur.  The Company  presently does not believe
          events that would trigger redemption are probable.


                                  Page 7 of 22
<PAGE>
     In  October  2000,  the  Company  granted  to  the  holder of the Company's
redeemable  convertible  preferred  stock  an  exchange  right  with  respect to
approximately  2,371  shares  of  the  redeemable  convertible  preferred  stock
pursuant  to  which  the holder may exchange one share of redeemable convertible
preferred  stock  for approximately 638 shares of the Company's common stock, up
to  an  aggregate  of  1,512,579  shares; shares issued under the exchange right
count  against  the  overall  limit of 3,014,199 shares of common stock issuable
upon  conversion  of  the redeemable convertible preferred stock.  This exchange
ratio  is  equivalent to a conversion price of $1.567 per share of common stock.
The  holder  could  have  converted  2,371 shares of preferred stock into common
stock  at  that  price  on  the  day the exchange right was granted. The Company
granted  the  exchange  right  to  the  holder in consideration for the holder's
agreement  to  extend  the  deadline  under the redeemable convertible preferred
stock  financing  agreements  related to the timing of the Company's 2000 annual
meeting  of  stockholders.

     The  value  of  the  exchange right is approximately $1.6 million, which is
equal  to  the difference between the $1.5675 per share conversion price and the
$2.625  per  share fair value of the common stock (based on the closing price of
he  Company's  common  stock  on  October  31, 2000) multiplied by the 1,512,579
shares  of  common  stock  subject to the exchange right. The exchange right was
recorded  as a beneficial conversion feature of redeemable convertible preferred
stock.

     On  November  1,  2000,  264 shares of the Company's redeemable convertible
preferred  stock  were  converted  to  168,421  shares  of  common  stock.

6.   Litigation

     During the quarter ended December 31, 2000,  thirteen purported shareholder
class action lawsuits were filed against the Company and certain of its officers
and directors.  The complaints allege generally that certain Company  statements
were false and  misleading  when  made  and  that  those  statements  unlawfully
inflated the market value  of  the  Company's stock.  The lawsuits seek monetary
damages and unspecified injunctive relief.  The  cases  have  been  consolidated
into one action.  The Company  intends  to  vigorously defend itself against all
claims.

7.   Subsequent Event

     On November 10, 1999, the Company completed an $8.0 million credit facility
with a financial  institution  consisting of a $5.0 million line of credit and a
$3.0 million term loan.  The line of credit is renewable in successive  one-year
terms and the term loan  matures one year from the  effective  date.  Both loans
currently bear interest of 11% per annum.  The credit facility is secured by the
Company's  general  assets.  On October  31,  2000,  the  financial  institution
extended the term of the credit facility to January 31, 2001. In connection with
this  extension,  the Company  agreed to certain  covenants  with the  financial
institution.  The cash covenants were modified in an amendment  dated January 9,
2001 with the financial  institution.  In accordance with that amendment and the
financial  institution's  waiver of the loss covenant for the month of December,
the Company was in compliance  through the quarter and at December 31, 2000. The
Company did not repay the credit  facility  at the  January  31,  2000  extended
maturity date. On February 14, 2001, the financial  institution agreed to extend
the credit facility to April 30, 2001.


                                  Page 8 of 22
<PAGE>
ITEM  2.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL CONDITIONS AND
             RESULTS  OF  OPERATIONS.


SPECIAL  NOTE  REGARDING  FORWARD-LOOKING  INFORMATION

     Forward-looking  statements  made  in  this  report  or  in  the  documents
incorporated  by reference herein that are not statements of historical fact are
forward-looking  statements  within the meaning of Section 27A of the Securities
Act  of  1933,  as  amended  (the  "Securities  Act"),  and  Section  21E of the
Securities  Exchange  Act  of 1934, as amended (the "Exchange Act"). A number of
risks  and  uncertainties,  including  those  discussed  under the caption "Risk
Factors"  below  and the documents incorporated by reference herein could affect
such  forward-looking  statements  and  could  cause  actual  results  to differ
materially  from  the  statements  made.

COMPANY  OVERVIEW

     We  provide  a wide range of secure Internet access and application hosting
services  that  incorporate  high-bandwidth  connectivity  and  enable  secure
electronic  business  over  the  Internet.  Our services are offered for a fixed
monthly  fee  on  an  annual  subscription  basis.  Our  services include secure
hosting  and  Internet  connectivity  services  that  enable secure connectivity
between  a  corporate  network  and  the  Internet,  and  secure virtual private
networking and Extranet services that enable remote users and wide-area networks
to  securely  communicate  enterprise-wide  and  over  the  Internet.

     Our  secure Internet services allow customers to avoid the risks associated
with  traditional  approaches  to  Internet  security.  Customers can also avoid
extensive  costs  associated  with  implementing an in-house solution, including
set-up  costs  for  security  and  systems  design, hardware, software, Internet
access  services  provided  by  Internet Service Providers, as well as labor and
ongoing  costs  for  telecommunications,  staffing,  maintenance  and  upgrades.

     The   foundation   of  our   solution  is  the  Pilot   Heuristic   Defense
Infrastructure  , an Internet  security  approach  that Pilot has  developed  to
continuously  manage and monitor Internet traffic to and from customer  networks
in order to respond in  real-time to security  threats.  The  Heuristic  Defense
Infrastructure   consists  of  a  multi-layered   defensive   architecture   and
around-the-clock  security operations delivered through geographically dispersed
service centers called Network  Security  Centers that are connected to customer
networks via dedicated,  high-speed data lines. Our solution aggregates years of
experience  gained from protecting  each customer  against attacks and leverages
such  experience  for the  collective  benefit of all  customers.  The Heuristic
Defense  Infrastructure  offers  benefits  over  other  security  approaches  by
eliminating  single points of failure,  enhancing attack  detection,  delivering
real-time defenses, and adapting continuously to external conditions.  Customers
can  concentrate on their core business  because the secure  infrastructure  for
electronic commerce is provided by us.

RESULTS  OF  OPERATIONS

NINE  MONTHS  ENDED  DECEMBER  31,  1999  AND  2000

     SERVICE  REVENUES.  Service  revenues  consist  of  monthly  fees  for
installation,  recurring  services  and, to a lesser extent, fees for management
and  consulting  services  such  as  security audits. Service revenues were $7.5
million  and  $9.7  million  for  the quarters ended December 31, 1999 and 2000,
respectively,  which  represents  an increase of 29%. We had service revenues of
$30.9  million  in  the  nine months ended December 31, 2000, an increase of 52%
from  $20.4  million  in  the  same  period last year. The growth in our service
revenues  over  this  period resulted from an increase in revenues from both new
and  existing  customers.

     TECHNOLOGY ACCESS REVENUE.  We generate  technology access revenues when we
sell access to our technologies  and  methodologies to enable other companies to
sell and  deliver  Pilot  Protected  access,  hosting,  and  Extranet  services.
Technology  access revenue is recognized upon a signed agreement and delivery of
the  technology  unless there are related  services  that are  considered  to be
essential to the utility of the technology. In the quarter and nine months ended
December 31, 2000,  we did not sell any  technology  and  methodologies.  We had
technology  access  revenues of $1.0 million in the quarter and nine month ended
December 31, 1999.


                                  Page 9 of 22
<PAGE>
     COST OF REVENUES.  Our cost of revenues is comprised  primarily of our cost
for  network  bandwidth,  equipment  costs and  salaries  and  benefits  for our
customer  service and  operations  personnel,  including our network  engineers,
backbone engineers,  network management and systems and installation  personnel.
Network  bandwidth  consists  of  costs  for  access  to and use of  third-party
communications  networks. Cost of revenues increased from $22.0 million, or 103%
of revenue,  in the nine-month  period ended December 31, 1999 to $31.3 million,
or 101% of  revenue,  in  fiscal  2000.  Cost of  revenues  increased  from $8.2
million,  or 97% of revenue,  in the quarter  ended  December  31, 1999 to $10.8
million in the quarter ended December 31, 2000, or 112% or revenue. The increase
in cost of revenues in absolute  dollars was due to increased  costs  associated
with the  build-out  and operation of our network  security  centers,  including
increased costs for network bandwidth, equipment costs and salaries and benefits
for our customer service,  engineering and operations  personnel.  We expect the
cost of revenues to increase on an absolute  basis at least through  fiscal 2001
if customer expansion in our network security centers continues.  As of December
31,  2000,  we employed  147 people in this area,  up from 91 as of December 31,
1999.

     SALES AND  MARKETING.  Our  sales  and  marketing  expenses  are  comprised
primarily of  salaries,  commissions  and  benefits for our sales and  marketing
personnel  and  marketing  expenses  for items such as  tradeshows  and  product
literature.  Our sales and marketing expenses increased from $9.5 million in the
nine-month  period ended  December 31, 1999 to $13.2  million in the  nine-month
period ended December 31, 2000. Our sales and marketing  expenses increased from
$3.3 million  during the quarter ended December 31, 1999 to $4.4 million for the
quarter ended December 31, 2000. The increase was primarily the result of hiring
additional sales and marketing personnel in connection with the expansion of our
operations. As of December 31, 2000, we employed 64 people in this area, up from
51 as of December 31, 1999.

     ENGINEERING  AND  DEVELOPMENT. Our engineering and development expenses are
comprised primarily of salaries and benefits for our engineering and development
personnel  and  fees  paid to consultants. These individuals work on researching
changes  in  security  threats  and technology, development of new processes and
methodologies,  and  integration  of  best-of-breed  components  into our secure
operating  environment.  Our engineering and development expenses increased from
$2.5  million  in the nine-month period ending December 31, 1999 to $5.1 million
in  the  nine-month  period  ended  December  31, 2000. During the quarter ended
December  31,  1999  and 2000, respectively engineering and development expenses
were  $1.1  million  and  $1.8  million.  Our  security and services development
expenses  grew  from fiscal 2000 to fiscal 2001 primarily due to the addition of
engineering  personnel  required  to  create  and  enhance  our expanded service
offerings.  As of December 31, 2000, we employed 37 people in this area, up from
26  as  of  December  31,  1999.

     GENERAL AND  ADMINISTRATIVE.  Our general and  administrative  expenses are
comprised  primarily of salaries and  benefits  for our general  management  and
administrative personnel as well as fees paid for professional services.  During
the  quarter  ended  December  31,  2000,  general and  administrative  expenses
increased to $1.8 million, as compared to $1.0 million in the same period in the
prior year. Our general and administrative  expenses increased from $2.7 million
in the  nine-month  period  ending  December  31,  1999 to $4.2  million  in the
nine-month period ended December 31, 2000. The increase was primarily the result
of increased bad debt expense, recruiting, travel, and costs for consultants and
professional service providers.  During the quarter, bad debt expenses increased
$782,000,  as  compared  to the same  period  in the  prior  year.  Our bad debt
expenses increased $1.5 million in the nine-month period ended December 31, 2000
as compared to the same period in the prior year.  As of December 31,  2000,  we
employed 11 people in this area,  compared to 18 as of December 31,  1999,  with
all of the reductions coming in the third quarter.

     INTEREST  EXPENSE.  During the quarter  ended  December 31, 2000,  interest
expense  increased to $701,000 as compared to $472,000 in the same period in the
prior year.  Interest  expense  increased  from $1.3  million in the  nine-month
period ended  December 31, 1999 to $2.2 million in the  nine-month  period ended
December 31, 2000. The increase in interest  expense was due to full utilization
of our line of credit, and the addition of capital lease agreements.


                                  Page 10 of 22
<PAGE>
     INTEREST  INCOME.  During the quarter  ended  December 31,  2000,  interest
income was $249,000 as compared to $60,000 in the same period in the prior year.
Interest income  increased from $594,000 in the nine month period ended December
31, 2000 to $790,000 in the nine month  period  ended  December  31,  1999.  The
increase  in  interest  income was due to larger  cash and cash  equivalent  and
short-term investments during the period.

LIQUIDITY  AND  CAPITAL  RESOURCES

     As of December 31, 2000, we had $7.6 million in outstanding equipment lease
facilities  that  financed  equipment  purchases  bearing  interest  rates  of
approximately  15%.  Borrowings  under  the  facilities are repayable in monthly
installments of principal and interest over periods ranging from 36 to 48 months
and  are secured by a lien on the financed equipment and other assets. We are in
default  on  the  current  payment  to  Transamerica Business Credit, one of our
equipment  lessors.  We  intend  to  make  the  required  payment of $305,311 on
February  20,  2001.  As of December 31, 2000, we had fully utilized these lease
facilities.  We  intend  to secure additional equipment lease facilities to fund
growth  in  capital  equipment  purchases.

     Cash used in  operating  activities  was $8.2  million  for the  nine-month
period ending December 31, 2000. The primary use of cash in operating activities
was to fund  on-going  operations  and expansion  efforts.  In the quarter ended
December 31, 2000, the primary source of cash was from the collection of account
receivables.  The major source of cash during the nine-month period was from the
issuance  of  redeemable  convertible  preferred  stock,  which  provided  $14.0
million,  net of issuance costs. The primary use of cash in investing activities
was for  capital  equipment  and  leasehold  improvements  to support  increased
capacity  and  services  provided to  customers.  Capital  expenditures  for the
nine-month period were $8.2 million.

     In June 2000,  we sold 15,000 shares of  redeemable  convertible  preferred
stock directly to an investor at a price of $1,000 per share. The gross proceeds
were $15.0  million.  After  transaction  fees and costs of  approximately  $1.0
million,  our net proceeds  were  approximately  $14.0  million.  As  additional
consideration, we issued a warrant to purchase 256,621 shares of common stock at
120%  of  the  average  market  price  immediately  prior  to  the  transaction,
specifically  $17.536 per share.  We  calculated  a fair value of the warrant of
$2.55 million,  which is included as a component of additional  paid-in capital.
The fair value of the  warrant was  calculated  using the  Black-Scholes  option
pricing model using the following assumptions: dividend yield-none;  contractual
life-5  years;  risk free  interest  rate-5.5%;  volatility-85%.  The  principal
rights,  preferences and privileges of the holders of the redeemable convertible
preferred stock are as follows:

     -    At the investor's option, the redeemable  convertible  preferred stock
          may be  converted  into shares of common stock at the lower of $18.266
          per share,  or 101% of the average market price  immediately  prior to
          conversion.

     -    The redeemable  convertible  preferred stock pays a dividend of 3% per
          annum which can be paid in cash or common stock of the Company, at the
          Company's  option.  The  dividends are  cumulative  and payable on the
          first day of each calendar quarter beginning on October 1, 2000.

     -    The  redeemable  convertible  preferred  stock  matures  in 2002.  The
          redeemable  convertible preferred stock may be redeemed at maturity in
          either  cash or common  stock at the option of the  Company,  or under
          certain  circumstances  prior to maturity.  The  mandatory  redemption
          price of each share of the redeemable  convertible  preferred stock is
          equal to the  greater of (i)  $1,000  plus all  unpaid  dividends  and
          default premium thereon; and (ii) an amount determined by dividing the
          aggregate value of the share by the conversion  price in effect on the
          redemption date and multiplying the resulting  quotient by the average
          closing trade price of the Company's  common stock on the five trading
          days immediately preceding the redemption date. Prior to maturity, the
          redeemable  convertible  preferred stock cannot be converted into more
          than  3,014,199 of the Company's  outstanding  shares of common stock.
          This maximum number of shares of common stock upon conversion includes
          shares of common stock that may be issued as  dividends.  At maturity,
          the Company may cause the preferred shares to be converted even if the
          then  market  price of the  Company's  common  stock is low  enough to
          require  issuance of more than 3,014,199 of the Company's  outstanding
          shares of common stock.


                                  Page 11 of 22
<PAGE>
     -    The  redeemable   convertible   preferred   stock  has  a  liquidation
          preference of $1,000 per share plus accrued unpaid  dividends  accrued
          thereon.

     -    The redeemable  convertible  preferred  stock may be redeemed upon the
          occurrence  of  specified  events,  such as changes in control and the
          Company's failure to maintain listing of its common stock on NASDAQ or
          certain   exchanges.   The  Company   believes  that  the   redeemable
          convertible  preferred  stock  should be  accreted  to the  redemption
          amount  only  if it  becomes  probable  that  an  event  triggering  a
          redemption  right will occur.  The Company  presently does not believe
          events that would trigger redemption are probable.

     In  October  2000,  the  Company  granted  to  the  holder of the Company's
redeemable  convertible  preferred  stock  an  exchange  right  with  respect to
approximately  2,371  shares  of  the  redeemable  convertible  preferred  stock
pursuant  to  which  the holder may exchange one share of redeemable convertible
preferred  stock  for approximately 638 shares of the Company's common stock, up
to  an  aggregate  of  1,512,579  shares; shares issued under the exchange right
count  against  the  overall  limit of 3,014,199 shares of common stock issuable
upon  conversion  of  the redeemable convertible preferred stock.  This exchange
ratio  is  equivalent to a conversion price of $1.567 per share of common stock.
The  holder  could  have  converted  2,371 shares of preferred stock into common
stock  at  that  price  on  the  day the exchange right was granted. The Company
granted  the  exchange  right  to  the  holder in consideration for the holder's
agreement  to  extend  the  deadline  under the redeemable convertible preferred
stock  financing  agreements  related to the timing of the Company's 2000 annual
meeting  of  stockholders.

     The  value  of  the  exchange right is approximately $1.6 million, which is
equal  to  the difference between the $1.5675 per share conversion price and the
$2.625  per  share fair value of the common stock (based on the closing price of
he  Company's  common  stock  on  October  31, 2000) multiplied by the 1,512,719
shares  of  common  stock  subject to the exchange right. The exchange right was
recorded  as a beneficial conversion feature of redeemable convertible preferred
stock.

     During  the  nine months ended December 31, 2000, we received funding of an
additional  $4 million in capital equipment lease facilities from two lessors on
terms  substantially  similar  to  previously  existing  equipment  leases.

     On  November  10, 1999, we completed an $8.0 million credit facility with a
financial  institution consisting of a $5.0 million revolving line of credit and
a $3.0 million term loan. The line of credit is renewable in successive one-year
terms  and  the  term  loan matures one year from the effective date. Both loans
currently  bear  interest  of 11% per annum. Additionally, the term loan must be
pre-paid, without penalty, if we raise more than $15 million in equity. For each
of  our  two  subsequent  $15 million equity transactions, the lender waived the
pre-payment  provision. The credit facility is secured by our general assets. As
additional  consideration,  we  issued  a  warrant to purchase 121,212 shares of
common  stock  at  $8.25 per share. We calculated a fair value of the warrant of
$1.0  million  which amount was capitalized and amortized over the expected term
of  the  loan. On October 31, 2000, this financial institution extended our term
to  January  31,  2001.  In connection with this extension, we agreed to certain
covenants with the lender. One such covenant requires us to have $4.5 million of
cash  on  December  15  and  $3.75  million  on  December  31. The cash covenant
requirement  was  renegotiated  on  January 9, 2001 and the amended cash balance
requirement  on  December  31  was  reduced  to  $2.25 million. In addition, the
financial  institution  granted  a waiver for the loss covenant for the month of
December  2000.

     We have fully utilized the $8.0 million  credit  facility and did not repay
the facility on the extended due date of January 31, 2001. On February 14, 2001,
the lender agreed to extend this facility until April 30, 2001.

     If  we  are unable to generate sufficient cash flow from operations, or are
unable  to  extend  our  existing  credit facility past April 30, 2001, cure the
default  with  Transamerica  Business  Credit  or  obtain  additional  equity or
equipment  financing,  we  may  be  required  to  sell  assets,  scale  down our
operations  and  expansion  plans,  refinance  all  or a portion of our existing
indebtedness  or  seek  other  sources of financing earlier than planned, any of
which  could  have  a  material  adverse  impact  on our financial condition and
ability  to  continue  operations  as  we  have conducted them in the past.  Our
working  capital  requirements  depend  upon  several  factors,  including:


     -    plans to incur substantial  additional capital expenditures  primarily
          for additions to and expansions of our network security centers;

     -    developing,  acquiring or licensing new applications and technologies;
          and

     -    the level of  resources  that we  devote  to our  sales and  marketing
          activities.


                                  Page 12 of 22
<PAGE>
     We will require  additional  financing for working  capital and to maintain
current on-going  operating  levels. We estimate a need for $15 - $20 million of
debt or equity financing over the next twelve months in addition to our existing
equipment  lease and line of  credit.  We may not be  successful  in  generating
sufficient  levels  of  cash  from  operations  or  in  obtaining  financing  on
commercially reasonable terms, or at all.

RISK  FACTORS

     You should carefully consider the following and other information contained
in this Form 10-Q before making an investment decision.  If any of the events or
circumstances  described in the  following  risk factors  actually  occurs,  our
business,  financial  condition,  or results of  operations  could be materially
harmed.  In that case, the trading price of our common stock could decline,  and
you may lose all or part of your investment.

     You  should  consider  carefully  whether  an  investment  in  Pilot  is an
appropriate  investment  for you. We do not intend to issue any dividends in the
foreseeable  future,  so the only purpose of investment in Pilot's  shares is in
expectation of a potential  increase in the shares' value.  Because of the risks
mentioned here, and other risks not mentioned  specifically here, it is possible
that Pilot's shares will decline in value in the future. If you cannot afford to
lose the full  value of your  investment,  in  either  the  short or long  term,
purchasing Pilot shares is not appropriate for you.

IF  OUR  EXISTING  FINANCING  SOURCES  OR  OTHER  SOURCES  OF  FINANCING ARE NOT
AVAILABLE,  WE  MAY  NOT  HAVE  SUFFICIENT  CASH  TO SATISFY OUR WORKING CAPITAL
REQUIREMENTS.

     If we are unable to generate  sufficient cash flow from operations,  or are
unable to obtain  additional  equity or  equipment  lease  financing,  we may be
required  to sell  assets,  scale  down  our  operations  and  expansion  plans,
refinance all or a portion of our existing  indebtedness or obtain other sources
of financing  earlier than planned,  any of which could have a material  adverse
impact on our  financial  condition  and  ability to  continue  operations.  Our
working capital requirements depend upon several factors, including:

     -    plans to incur substantial  additional capital expenditures  primarily
          for additions to and expansions of our network security centers;

     -    developing,  acquiring or licensing new applications and technologies;
          and

     -    the level of  resources  that we  devote  to our  sales and  marketing
          activities.

     In addition to the $30.0  million in aggregate  equity  investment  in June
2000 and  December  1999 and the  $8.0  million  credit  facility  completed  in
November  1999,  we believe that we will require  additional  equity  financing.
Additional equity is needed primarily to fund sales and marketing  expenses,  as
well as engineering  expenses  required to implement  services to new customers.
Therefore, the amount of new equity that we are able to raise is a factor in how
fast we are able to grow our customer and revenue  base. To maintain our current
growth rate, we need to raise $15 million to $20 million of new  financing  over
the next twelve  months.  We will need even more  capital if we cannot  renew or
replace our present $8.0 million credit  facility that expires on April 30, 2001
or if we cannot maintain our existing  equipment lease financing.  We may not be
successful in obtaining required financing on commercially  reasonable terms, or
at all.

     We  face several limitations on our ability to raise new capital, including
the  recent  decline  in our stock price. Our ability to raise new capital could
also  be  affected  by  limitations  on  our  ability to sell equity securities,
including  rights  of first refusal and limits on certain offerings contained in
the  securities  purchase  agreement  between Marshall Capital and us. If we are
unable to raise adequate capital, our business could be materially and adversely
affected.


                                  Page 13 of 22
<PAGE>
OUR  ABILITY  TO  EFFECTIVELY  MANAGE  OUR  BUSINESS  MAY BE DISRUPTED BY RECENT
DISCLOSURES  RELATED  TO  WEAKNESSES  IN  OUR  INTERNAL  CONTROLS.

     In  October  2000,  our  Chief  Financial Officer and our Vice President of
Financial  Planning resigned. In addition, our independent auditors have advised
the  Audit  Committee  of  our  board of directors of a material weakness in our
internal  controls.  A  recent review of certain transactions also illustrated a
weakness  with  respect  to quarterly cut-off controls. There likely has been an
absence  of  effective controls and evidence of supervisory overrides related to
cut-off  of  sales  transactions.

     The  investigation undertaken by the Audit Committee into these issues, the
resignations  of our Chief Financial Officer and our Vice President of Financial
Planning  and  the  attention directed at addressing these issues have disrupted
our business and diverted management's attention from the daily operation of our
business.  In  addition,  although  we  have  hired  an  interim Chief Financial
Officer,  he  has  limited  experience working with the remaining members of our
management  team.  Continued  disruption  to  our  business  due  to the factors
described  above  may  impair  our  ability  to  run  our  business effectively.

WE  ARE  EXPERIENCING  OPERATING  LOSSES  AND  MAY  NOT  ACHIEVE  PROFITABILITY.

     We  have  experienced  operating  losses  and  negative  cash  flows  from
operations in each quarterly and annual period since we began operations in 1993
and  expect  to  continue to experience losses for the foreseeable future. As of
December 31, 2000, we had an accumulated deficit of approximately $79.1 million.
We  experienced  an  increase  in  net  loss  in fiscal 1998, 1999 and 2000. The
revenue  and  income  potential  of our business and market is unproven, and our
limited  operating  history  makes  an  evaluation  of  our prospects difficult.

     Failure  of our services to achieve market acceptance would have a material
adverse  effect  on our revenues and results of operations. We cannot assure you
that  we  will  ever  achieve  profitability.

WE  ARE  INVOLVED  IN  SECURITIES  LITIGATION,  WHICH  MAY  BE DISRUPTIVE TO OUR
BUSINESS.

     During  the third quarter, several purported stockholder class action suits
were  filed against us and certain of our officers and directors. The complaints
generally  allege  that  the  market  value  of  our common stock was unlawfully
inflated  as  a  result  of  statements  we  made.  If  we are not successful in
defending against these suits, we may be subject to liability for the claims. In
addition,  the claims are likely to divert management's attention from the daily
operation  of  our  business.

OUR  STOCK  PRICE  IS  VOLATILE, WHICH MAY IMPAIR OUR ABILITY TO RAISE MONEY AND
CAUSE  OUR  INVESTORS  TO  LOSE  MONEY.

     Our  stock  price  is  very  volatile.  For  example,  our  stock price has
fluctuated  from  a  low of $0.781 to a high of $50.38 in the past 12 months. In
addition,  our  revenues  or operating results may not meet the  expectations of
investors  or  securities  analysts, contributing to the volatility of our stock
price.  The  volatility of our stock price may impair our ability to raise money
and  may  cause  our  stockholders  to  lose  all  or  part of their investment.

THE  CONVERSION  OF OUR SERIES A CONVERTIBLE PREFERRED STOCK MAY HAVE A DILUTIVE
IMPACT  ON  OUR  SECURITY  HOLDERS.

     The  number  of  shares  of common stock that may ultimately be issued upon
conversion  or exchange of shares of our Series A convertible preferred stock is
presently  undeterminable  because  the  conversion  price  of  the  Series  A
convertible  preferred  stock  is  based on the price of the common stock at the
time  of  the  conversion.  The  conversion  price  of  the Series A convertible
preferred  stock is equal to the lower of $18.266 and 101% of the average of the
three  lowest  closing  bid  prices  of the common stock for the 10 trading days
immediately  preceding  the day of conversion. The conversion price in effect on
December  31, 2000 was $0.781. Based on this conversion price, the conversion of
approximately  4,725  shares of Series A convertible preferred stock outstanding
would  result  in the issuance of 3,014,199 shares of common stock, which is the
maximum  number  of shares of common stock that may be issued upon conversion or
exchange  of  the  Series  A  convertible preferred stock at the election of the
holders  of the Series A convertible preferred stock and which represents 19.99%
of  the  number  of  shares of common stock outstanding on the issue date of the
Series A convertible preferred stock. The conversion of 4,725 shares of Series A
convertible  preferred  stock  would  leave 10,275 shares unconverted. 3,014,199
shares represents slightly less than 20.0% of our outstanding common stock based
on the number of shares outstanding (prior to conversion of Series A convertible
preferred  stock)  as  of  December  31,  2000.


                                  Page 14 of 22
<PAGE>
     In  October  2000,  we  granted  to  the holder of the Company's redeemable
convertible  preferred  stock  an  exchange  right with respect to approximately
2,371  shares  of  stock  pursuant to which the holder may exchange one share of
Series  A redeemable convertible preferred stock for approximately 638 shares of
the  Company's  common  stock,  up  to  an aggregate of 1,512,579 shares; shares
issued  under  the  exchange  rate  count against the overall limit of 3,014,199
shares  of  common  stock issuable upon conversion of the redeemable convertible
preferred  stock.  This  exchange  ratio  is equivalent to a conversion price of
$1.567 per share of common stock.  The Company granted the exchange right to the
holder  in consideration for the holder's agreement to extend the deadline under
the  redeemable  convertible preferred stock financing agreements related to the
timing  of  the Company's 2000 annual meeting of stockholders. In November 2000,
there  were  264  shares of the Company's redeemable convertible preferred stock
converted  to  168,421  shares  of  common  stock.

     The value of the  exchange  right is equal to the  difference  between  the
$1.5675  per share  conversion  price and the $2.625 per share fair value of the
common stock (based on the closing price of Pilot's  common stock on October 31,
2000),  multiplied  by the  1,512,579  shares of  common  stock  subject  to the
conversion  feature.  The impact of the exchange right on the Company's net loss
available to common  stockholders  for the quarter ending  December 31, 2000 was
$1.6 million.

     The  following  table  illustrates how the number of shares of common stock
issuable  upon conversion of all 15,000 shares of Series A convertible preferred
stock  the  Series  A  convertible  preferred stock would increase if the market
price  of  our  common  stock  were to fall, causing the conversion price of the
Series  A  convertible  preferred  stock  to  decline  as  well:

<TABLE>
<CAPTION>
<S>                                             <C>          <C>          <C>          <C>
Conversion Price . . . . . . . . . . . . . . .  $    15.00   $    12.00   $     8.00   $     5.00
Number of Shares of Common Stock Issuable upon
Conversion . . . . . . . . . . . . . . . . . .   1,000,000    1,250,000    1,875,000    3,000,000
Percentage of Shares of Common Stock
Outstanding (prior to conversion of Series A
redeemable convertible preferred stock) as of
December 31, 2000. . . . . . . . . . . . . . .         6.6%         8.3%        12.4%        19.9%
</TABLE>

     In  addition  to  the  conversion  and  exchange  features  of the Series A
convertible preferred stock, we may elect to issue more than 3,014,199 shares of
common  stock  in  June  2002  upon  redemption  at  maturity  of  the  Series A
convertible  preferred  stock  for  common  stock  rather  than  for  cash.  The
redemption  price  is based on the average closing bid price of our common stock
for  the  five  trading  days  proceeding the date of redemption. Accordingly, a
redemption  for  common  stock at maturity of the Series A convertible preferred
stock  could  result  in  considerable  dilution to our common stockholders. The
following  table  illustrates  this  dilution, in each case giving effect to the
issuance  of  1,512,579  shares  of  common stock pursuant to the exchange right
described  above  and  assuming  that  the  remaining  12,629 shares of Series A
convertible preferred stock remain outstanding on the date of redemption and are
redeemed  for  shares  of  common stock at the redemption price described above:

<TABLE>
<CAPTION>
<S>                                             <C>          <C>          <C>          <C>
Redemption Price                                $    12.00   $     8.00   $     4.00   $     1.57
Number of Shares of Common Stock Issuable upon
Redemption . . . . . . . . . . . . . . . . . .   2,564,996    3,091,204    4,669,829    9,569,378
Percentage of Shares of common Stock
Outstanding (prior to conversion of Series A
redeemable convertible preferred stock as of
December 31, 2000. . . . . . . . . . . . . . .        17.0%        20.5%        30.9%        63.3%
</TABLE>


                                  Page 15 of 22
<PAGE>
THE  ISSUANCE  OF  SHARES  OF  COMMON  STOCK  UPON  CONVERSION  OF  THE SERIES A
CONVERTIBLE  PREFERRED  STOCK  COULD  CAUSE  THE  PRICE  OF  OUR COMMON STOCK TO
DECLINE.

     As  described  above,  the  number  of shares of common stock issuable upon
conversion  of  the  Series  A convertible preferred stock would increase if the
market  price of our common stock were to fall. Those shares of common stock may
be  sold  into  the public market, increasing the number of shares of our common
stock  which  are  freely  tradable.  Accordingly, any increased issuance of our
common  stock  resulting  from a lowered conversion price could place additional
downward  pressure  on  the  price  of  our  common  stock  generally.

THE  INTERESTS  OF  THE  HOLDERS  OF  SERIES  A  CONVERTIBLE PREFERRED STOCK MAY
CONFLICT  WITH  THE  INTERESTS  OF  HOLDERS  OF  COMMON  STOCK.

     The  holders  of  Series  A  convertible preferred stock may benefit from a
reduction  in  the  market  price of our common stock, particularly in the short
term,  because  a  reduction in the market price of our common stock reduces the
conversion  price  of the Series A convertible preferred stock. As a result, the
interests  of  the  holders of Series A convertible preferred stock may, in some
instances,  conflict  with  the  interests  of  the  holders  of  common  stock.

WE  EXPECT THIRD PARTIES TO DELIVER PILOT PROTECTED ACCESS, HOSTING AND EXTRANET
SERVICES  IN  ORDER  TO  GENERATE  REVENUES.

     In  fiscal  2000,  we sold technology and consulting services to enable two
telecommunications carriers to embed Pilot's Heuristic Defense Infrastructure in
several  of  their  security  centers.  As  part  of the relationship with these
carriers,  we  expect  to  receive  a  recurring  fee based on the total revenue
generated  through  the  Heuristic  Defense Infrastructure. In exchange, we will
provide  security  monitoring  for  network  traffic using the Heuristic Defense
Infrastructure.  The success of these relationships and similar relationships we
intend  to  establish  with  other  telecommunications  carriers will impact our
ability  to successfully grow our business in a more profitable and less capital
intensive  manner  than  with  Pilot-owned  Network  Security Centers. While the
telecommunications  carriers have committed capital and operational resources to
these  projects,  as of December 31, 2000, none of these third-party centers are
fully  operational  or  generating any revenue to Pilot. There are no guarantees
that  these centers will ever be operational or that they will generate material
revenues or earnings for us. To the extent one or both of the carriers elect not
to  proceed  with  using  the  Heuristic  Defense  Infrastructure  or  if  the
implementation  is  materially delayed, there could be a material adverse effect
on  our  ability  to  expand  operations  and  improve our operating results and
financial  condition.

WE  MAY  NOT  BE ABLE TO PREVENT UNAUTHORIZED ACCESS TO OUR CUSTOMERS' NETWORKS.

     Despite  our  focus  on  Internet  security,  we  may  not  be able to stop
unauthorized  attempts, whether made unintentionally or by computer "attackers,"
to  gain  access  to  or  disrupt  the  network  operations  of  our  customers.
Accordingly,  our success is substantially dependent on the continued confidence
of our current and potential customers that we provide superior network security
protection.  Any  failure by us to stop unauthorized access from the Internet or
disruptions  to  related  Internet  operations of our customers could materially
harm  our  customers,  our  network  infrastructure  or  our  reputation  in the
marketplace  and  therefore  our  ability  to  attract  and  retain  customers.

     Although we generally limit warranties and liabilities relating to security
in our customer contracts, our customers may seek to hold us responsible for any
losses suffered as a result of unauthorized access to customers' network systems
from  the  Internet.  This  could  result  in  liability  to  us,  which  could
have  a  material adverse effect upon our business. Moreover, computer attackers
from  the  Internet  could  infiltrate  our  network and sabotage our network or
services  by  creating  bugs  or  viruses.  Any adverse publicity resulting from
unauthorized  access  could  deter  future customers from using our services and
could  cause  current  customers to cease using our services, which could have a
material  adverse  effect  upon  our  business.


                                  Page 16 of 22
<PAGE>
WE  MAY  NOT  BE  ABLE  TO  EFFECTIVELY  MANAGE  OUR  GROWTH.

     Any  inability  on  our part to manage effectively our expansion may have a
material  adverse  effect  upon  our  business.  Our current plans are to expand
domestically  and internationally by developing relationships with third parties
that  add  Network  Security  Centers  in  new  locations  and expanding Network
Security  Centers  in  existing locations. This expansion will require us or our
third  party  relationships  to  expend  substantial  resources  for  leases and
improvements  of  facilities, purchases of equipment, implementation of multiple
telecommunications  connections  and hiring of network, administrative, customer
support,  and  sales and marketing personnel. To integrate the components needed
to  deliver the services requires, we use highly skilled security and operations
personnel who are in short supply in today's marketplace. Our ability to execute
on  our  growth  plans  may  be  adversely
impacted  if  we are unable to hire and train additional security and operations
personnel.

     In  addition,  we  have recently hired large numbers of new employees. This
growth  has  placed,  and  may  continue  to  place, a significant strain on our
financial,  management,  operational  and  other  resources.

THE  MARKET  WE  SERVE  IS  HIGHLY  COMPETITIVE  AND WE MAY LOSE MARKET SHARE TO
CURRENT  OR  FUTURE  COMPETITORS.

     We  may  not have the resources or expertise to compete successfully in the
market  we  serve.  The  market  we  serve  is  new,  rapidly  evolving,  highly
competitive  and  largely  undefined.  There  are  few barriers to entry, and we
expect  that  we  will face increasing competition from existing competitors and
new  market  entrants  in  the  future.

     We  believe  our  greatest  competition is not from direct competitors, but
rather  from  a  broad  range of companies that provide individual components of
bundled  services.  Competition  may  include major telecommunications carriers,
Internet  service  providers,  hosting  service  companies and Internet security
software  companies,  many  of  which  have  substantially  greater  financial,
technical  and  marketing  resources,  larger  customer  bases, longer operating
histories,  greater  name  recognition and more established relationships in the
industry  than  we  do.  As  a  result, some of these competitors may be able to
develop  and  expand  their  network  infrastructures and service offerings more
quickly,  adapt  to  new  or  emerging  technologies  and  changes  in  customer
requirements  more  quickly,  take  advantage  of  acquisition  and  other
opportunities  more  readily, devote greater resources to the marketing and sale
of  their  products  and  adopt  more  aggressive  pricing  policies  than  us.

     In  addition, we believe that the businesses with which we compete, such as
telecommunications  carriers  and  Internet  service  providers,  are  likely to
consolidate  in the near future, which could result in increased price and other
competition  that could have a material adverse effect on our ability to compete
in  our  market.

IF  OUR  SYSTEMS  FAIL,  OUR  BUSINESS  WILL  SUFFER.

     Despite existing and planned precautions by us, the occurrence of a natural
disaster  or other unanticipated problems at one or more of our Network Security
Centers  could  result  in interruptions in the services we provide. Our success
depends  on the excellence of security protection and uninterrupted operation of
our  network infrastructure. Any damage to or failure of our systems or those of
our  service  providers  could  result  in  reductions  in,  or terminations of,
services  supplied  to  our customers. If our services are interrupted, then our
customers  may temporarily lose access to the Internet. This means our customers
may  lose business, suffer inefficiencies in their operations and may lose their
customers,  which  could  cause  our customers to elect not to use our services.


                                  Page 17 of 22
<PAGE>
THE  EXPANSION  OF  OUR  INTERNATIONAL  OPERATIONS  EXPOSES  US  TO  RISKS.

     A  key  component of our long-term strategy is to expand into international
markets.  We  are  currently  expanding  in  Europe  and  Australia  through our
relationships  with  telecommunications  carriers.  If  that  strategy  is  not
successful,  then  we  would  have to consider building our own Network Security
Centers  in  these  regions,  which  would require more capital and increase our
expenses.  Operations  in  Europe  and  Australia could expose us to a number of
risks,  including:

     -    staffing and managing foreign operations;

     -    increased financial accounting and reporting complexities;

     -    potentially adverse tax consequences;

     -    the loss of revenues resulting from currency fluctuations;

     -    compliance  with a wide variety of complex  foreign laws and treaties;
          and

     -    licenses, tariffs and other trade barriers.

     If  the  revenue we generate from any international Network Security Center
is  not  adequate to offset the expense of establishing and maintaining any such
international  operation,  our  financial  condition  could  be  materially  and
adversely  affected.

WE  DEPEND  ON  THIRD  PARTY  NETWORK  INFRASTRUCTURE  PROVIDERS  TO DELIVER OUR
SERVICES.

     Our  business  relies on Internet exchange points, or IXPs, to transmit our
customers'  traffic to and from the Internet. If the carriers that operate these
IXPs discontinue their support of the peering points or refuse to offer services
to  us  and  no  alternative  providers  emerge,  or  such alternative providers
increase the cost of utilizing the IXPs, our ability to transmit network traffic
will  be  significantly  constrained.  Our  success  depends upon these Internet
infrastructure  providers.

     In addition, we rely on a number of private peering interconnections (i.e.,
arrangements  among  access providers to carry traffic of each other) to deliver
our  services.  If  we  are  unable  to  access  alternative networks on a cost-
effective  basis  to  distribute  our  customers'  content  or  pass through any
additional costs of utilizing these networks to our customers, our business will
be  materially  harmed.

OUR  ABILITY  TO  DELIVER  OUR  SERVICES  WILL SUFFER IF WE ARE UNABLE TO OBTAIN
COMPONENTS  AVAILABLE  IN  LIMITED  QUANTITIES  OR  FROM  A  SINGLE  SOURCE.

     If  we  fail to obtain hardware or software components that we require on a
timely basis and at an acceptable cost, our ability to provide our services will
suffer.  We  are  dependent on other companies to supply certain key components,
such  as  routers,  servers  and  operating  system  software,  of  our
telecommunications  infrastructure  and  system and network management solutions
that, in the quantities and quality demanded by us, are available only from sole
or  limited  sources.


IF  WE  ARE  NOT  ABLE  TO  ENHANCE OUR SERVICES TO ADAPT TO RAPID TECHNOLOGICAL
CHANGE,  OUR  SERVICES  MAY  NOT  ACHIEVE  MARKET  ACCEPTANCE.

     We  focus  on  delivering  secure Internet services to companies engaged in
electronic  commerce.  This  is  an  emerging  and  rapidly  evolving  market.
Consequently,  the  market for our services is characterized by rapidly changing
and unproven technology, evolving industry standards, changes in customer needs,
emerging  competition  and  frequent  new  service  introductions.  Our  success
depends,  in  part,  on  our  ability to offer services that incorporate leading
technology,  address  the  increasingly  sophisticated  and  varied needs of our
current  and  prospective  customers  and  respond to technological advances and
emerging  industry standards and practices on a timely and cost-effective basis.
Future  advances in technology may not be beneficial to, or compatible with, our
business  or we may not be able to incorporate such advances on a cost-effective
and  timely  basis  into  our  business.  We believe that our ability to compete
successfully  is  also  dependent  upon  the  continued  compatibility  and
interoperability  of  our  services  with  products,  services and architectures
offered  by  various  vendors as part of our services. These products may not be
compatible  with our infrastructure or these products may not adequately address
changing  customer  needs.  In  addition,  products,  services  or  technologies
developed  by  others  may  render our services uncompetitive or obsolete, which
would  materially  harm  our  business.


                                  Page 18 of 22
<PAGE>
IF  WE ARE NOT ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS WILL
NOT  BE  ABLE  TO  GROW.

     Our  success depends in significant part upon the continued services of our
key  technical,  sales  and senior management personnel, including our President
and Chief Executive Officer, Marketta Silvera, and our Chief Technology Officer,
Thomas  Wadlow.  In  addition,  our  Chief  Financial  Officer  and  our  Vice
President of Financial Planning have recently resigned and we have not yet hired
permanent  replacements  for either of them. Any officer or employee of ours can
terminate  his or her relationship with us at any time. The loss of the services
of  one  or  more  of  our  key  employees  or our failure to attract additional
qualified  personnel  could  have  a  material  adverse  effect on our business.

THE  LAW  GOVERNING  THE LIABILITY OF ON-LINE SERVICE PROVIDERS IS UNSETTLED AND
EXPOSES  US  TO  RISKS.

     The  law  relating  to  the  liability of on-line service companies such as
Pilot  and  Internet access providers for information carried on or disseminated
through  their networks is currently unsettled. It is possible that claims could
be  made  against  us  under  both United States and foreign law for defamation,
negligence,  copyright or trademark infringement, or other theories based on the
nature  and  content  of  the  materials  disseminated through our networks. The
imposition  of  liability  upon  us  for  information carried on or disseminated
through  our  systems  could  require  us  to  implement  measures to reduce our
exposure  to  such  liability,  which may require the expenditure of substantial
resources,  or  to  discontinue  some  service  offerings.

OUR  PROPRIETARY  RIGHTS  MAY  BE INADEQUATELY PROTECTED AND INFRINGEMENT CLAIMS
COULD  HARM  OUR  COMPETITIVE  POSITION.

     We  rely on a combination of copyright, trademark, patent, service mark and
trade  secret  laws  and  contractual  restrictions to establish and protect our
proprietary  rights  in  the  technology  underlying  our  services.  Most
significantly,  we  currently  have  three  patent  applications  related to our
Heuristic  Defense  Infrastructure  pending  with  the U.S. Patent and Trademark
Office. If we fail to obtain patents or trademarks from currently pending or any
future  applications, or if any patents or trademarks that are issued or granted
are  not sufficient in scope or strength to provide meaningful protection or any
commercial  advantage  to  us, then our business may be harmed. In addition, the
laws  of  certain  foreign  countries  may  not  protect  our
products,  services or intellectual property rights to the same extent as do the
laws  of  the  United  States.

     The  contractual  arrangements  and  other  steps  we  take  to protect our
intellectual  property  may  not  prove sufficient to prevent infringement of or
misappropriation  of  our  technology  or  may not deter independent third-party
development  of similar technologies. Any such infringement or misappropriation,
should  it occur, could have a material adverse effect on our ability to deliver
our  services.

     We  cannot  assure  you  that  third parties will not claim infringement or
indemnification  by  us  with  respect  to  current or future services. Any such
claim,  whether  meritorious  or  not, is likely to be time-consuming, result in
costly  litigation,  cause  product  installation  delays, prevent us from using
important technologies or methods, subject us to substantial damages, or require
us  to  enter  into royalty or licensing agreements. As a result, any such claim
could  have  a  material  adverse  effect  upon  our  business.

WE  DO  NOT  INTEND  TO  PAY  DIVIDENDS.

     We  do  not  intend  to pay any dividends in the foreseeable future, so the
only  purpose  of  investment in Pilot's shares is in expectation of a potential
increase  in  the shares' value. It is possible that Pilot's shares will decline
in  value  in  the  future.  If you cannot afford to lose the full value of your
investment,  in  either  the  short or long term, purchasing Pilot shares is not
appropriate  for  you.


                                  Page 19 of 22
<PAGE>
ITEM  3.     QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

     We  have  limited  exposure to financial market risks, including changes in
interest  rates.  The  fair  value of our investment portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease in
interest  rates  due mainly to the short-term nature of the major portion of our
investment  portfolio.  An  increase  or  decrease  in  interest rates would not
significantly  increase  or decrease interest expense on debt obligations due to
the  fixed nature of our debt obligations. Our foreign operations are limited in
scope  and  thus we are not materially exposed to foreign currency fluctuations.


PART II.  OTHER  INFORMATION.

ITEM 1.   LEGAL  PROCEEDINGS

          During the third quarter,  thirteen purported shareholder class action
          lawsuits  were  filed  against  Pilot  Network  Services,   Inc.  (the
          "Company")  and certain of its  officers  and  directors in the United
          States District Court for the Northern District of California:

<TABLE>
<CAPTION>
          Case Name  Case No.  Date Filed
          ------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>
          St. John, et al.  v. Pilot Network Services, Inc., et al.  C 00-3862 PJH   10/18/00
          Capece, et al. v. Pilot Network Services, Inc., et al.     C 00-21072 PVT  10/19/00
          Juetten, et al. v. Pilot Network Services, Inc., et al.    C 00-03914 BZ   10/23/00
          Olsen, et al. v. Pilot Network Services, Inc., et al.      C 00-21090 PVT  10/24/00
          Minzer, et al. v. Pilot Network Services, Inc., et al.     C 00-03952 JCS  10/26/00
          Galton, et al. v. Pilot Network Services, Inc., et al.     C 00-03989 MJJ  10/27/00
          Shapiro, et al. v. Pilot Network Services, Inc., et al.    C 00-03966 WDB  10/26/00
          Porter, et al. v. Pilot Network Services, Inc., et al.     C 00-4094 EDL   11/06/00
          Zycherman, et al. v. Pilot Network Services, Inc., et al.  C 00-21143 EAI  11/09/00
          Dimberg, et al. v. Pilot Network Services, Inc., et al.    C 00-4227 WHO   11/14/00
          Jorgensen, et al. v. Pilot Network Services, Inc., et al.  C 00-4417 JL    11/27/00
          Phillips, et al. v. Pilot Network Services, Inc., et al.   C 00-21229 JW   12/06/00
          Wilson, et al. v. Pilot Network Services, Inc., et al.     C 00-4629 EDL   12/08/00
</TABLE>


                                  Page 20 of 22
<PAGE>
          The complaints  allege generally that certain Company  statements were
          false and misleading  when made and that those  statements  unlawfully
          inflated the market value of the  Company's  stock.  The lawsuits seek
          monetary  damages and unspecified  injunctive  relief.  The cases have
          been  consolidated  into one action identified as: In re Pilot Network
          Services,  Inc.  Securities  Litigation,  Case No. C 00-3862  PJH.  In
          accordance  with  the  Private   Securities   Litigation   Reform  Act
          ("PSLRA"),  the Court has appointed a lead  plaintiff to act on behalf
          of the purported  class.  The Court has ordered the lead  plaintiff to
          file a consolidated  complaint.  Under the PSLRA,  discovery is stayed
          until  the  Court  concludes  that  the   consolidated   complaint  is
          sufficient  to  maintain a claim.  The Company  intends to  vigorously
          defend itself against all claims.

ITEM  3.  DEFAULTS  UPON  SENIOR  SECURITIES

          The  Company  is in  default on the  current  payment to  Transamerica
          Business Credit, one if its equipment lessors;  the Company intends to
          make the required payment of $305,311 on February 20, 2001.

ITEM  4.  SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS

          An annual  meeting  of the  stockholders  of the  Company  was held on
          December  20, 2000.  The  Company's  stockholders  elected the Board's
          nominee as a Class II director by the votes indicated:

                    Nominee         Votes For       Abstentions
                  Mr. O'Rourke      14,043,770        125,801
                  ------------      ----------      ------------

          The Class I  directors  are M.  Marketta  Silvera and Thomas B. Kelly,
          with one Class I vacancy,  whose  current terms will end at the Annual
          Meeting of Stockholders in 2001.

          At the  meeting  the  stockholders  also  approved  proposal  number 2
          (authorizing  the Board to issue more than 3,014,199  shares of common
          stock to redeem at  maturity  the  Company's  outstanding  convertible
          redeemable  preferred  stock) and  proposal  number 3  (ratifying  the
          appointment of KPMG LLP as the Company's  auditors for the fiscal year
          ending March 31,  2001).  The vote of proposal  number 2 was 5,488,300
          votes in favor,  206,607 votes against and 13,384  abstentions,  while
          the vote on proposal  number 3 was 14,050,523  votes in favor,  78,534
          votes against and 40,514 abstentions.

ITEM  6.  EXHIBITS  AND  REPORTS  ON  FORM  8-K

          a.  Exhibits

Exhibit Number  Document Description
--------------  ---------------------------------------------------------

                Amendment and Extension Agreement, dated as of
         10.02  October 26, 2000 between Pilot Network Services, Inc.
                and Greyrock Capital, a Division of Banc of America
                Commercial Finance Corporation


                Amendment to Loan Agreement, dated as of January 9,
         10.03  2001 between Pilot Network Services, Inc. and
                Greyrock Capital, a Division of Banc of America
                Commercial Finance Corporation


                                  Page 21 of 22
<PAGE>
                Amendment to Loan Agreement, dated as of February
         10.04  14, 2001 between Pilot Network Services, Inc. and
                Greyrock Capital, a Division of Banc of America
                Commercial Finance Corporation

          b.    Reports  on  Form  8-K

          November 2, 2000. On October 31, 2000,  Pilot Network  Services,  Inc.
          issued a press release announcing: (i) the Company's financial results
          for the fiscal quarter ended September 30, 2000; (ii) the results of a
          formal review undertaken by the Audit Committee of the Company's Board
          of Directors into the Company's  quarterly closing  procedures and its
          revenue recognition practices;  and (iii) that the Company had entered
          into an agreement with Marshall Capital  Management,  Inc.  ("Marshall
          Capital"),  the sole  holder of all  15,000  shares  of the  Company's
          Series A  Convertible  Preferred  Stock  (the  "Series  A  Preferred")
          related to a waiver of the  Company's  failure to hold its 2000 annual
          meeting of stockholders on or before October 1, 2000 as required under
          the  Series  A  Preferred  financing  agreements.   Under  the  letter
          agreement,  the Company  has  granted to Marshall  Capital an exchange
          right with respect to approximately 2,371 shares of Series A Preferred
          pursuant to which Marshall  Capital may exchange one share of Series A
          Preferred for approximately 638 shares of the Company's common stock.

          November 8, 2000.  Purported  stockholder  class action  lawsuits were
          filed against Pilot Networks Services, Inc (the "Company") and certain
          of  its  officers  and  directors   alleging  generally  that  certain
          statements made by the Company were false and misleading when made and
          that those  statements  unlawfully  inflated  the market  value of the
          Company's stock.







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.




February  14,  2000          /S/  Marketta  Silvera
-------------------          ----------------------
                             M.  Marketta  Silvera
                             President  and  Chief  Executive  Officer


                             /s/  Donald  J.  Marsee
                             -----------------------
                             Donald  J.  Marsee
                             Interim  Chief  Financial  Officer
                             (Principal  Financial  and  Accounting  Officer)


                                  Page 22 of 22
<PAGE>