<PAGE>

                                 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 September 30, 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 September 30, 2000, there were 15,106,719 shares of the Registrant's Common
Stock outstanding.

                                 Page 1 of 20
<PAGE>

                         PILOT NETWORK SERVICES, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                                     INDEX

<TABLE>
<CAPTION>
                                                                                     Page Number
<S>                                                                                  <C>
PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements

            Unaudited Condensed Consolidated Balance Sheets as of
            March 31, 2000 and September 30, 2000.................................        3

            Unaudited Condensed Consolidated Statements of Operations for the
            three and six months ended September 30, 1999 and 2000................        4

            Unaudited Condensed Consolidated Statements of Cash Flows for the
            six months ended September 30, 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.................................................        8

Item 3.     Quantitative and Qualitative Disclosures about Market Risk............       19

PART II.    OTHER INFORMATION.....................................................       19

Item 6.     Exhibits and Reports on Form 8-K......................................       19


SIGNATURES........................................................................       19


INDEX TO EXHIBITS.................................................................       20
</TABLE>

                                 Page 2 of 20
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                         PILOT NETWORK SERVICES, INC.

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

<TABLE>
<CAPTION>
                                                                                         March 31,         September 30,
                                                                                           2000                2000
                                                                                       -------------     ----------------
<S>                                                                                    <C>               <C>
                                   ASSETS
Current assets:
 Cash and cash equivalents......................................................         $  7,920            $  5,743
 Short-term investments.........................................................              898               2,079
 Trade receivables, less allowance for doubtful accounts of $389 and $600 as
  of March 31, 2000, and September 30, 2000, respectively.......................            7,233               9,036
 Prepaid and other current assets...............................................              843               2,242
                                                                                         --------            --------
  Total current assets..........................................................           16,894              19,100
Property and equipment, net.....................................................           24,624              29,366
Other assets....................................................................            1,639                 844
                                                                                         --------            --------
                                                                                         $ 43,157            $ 49,310
                                                                                         ========            ========
             LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
                           AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable...............................................................         $  5,352            $  5,494
 Accrued expenses...............................................................            2,067               5,143
 Line of credit.................................................................            4,652               5,019
 Term loan......................................................................            3,000               3,000
 Current portion of capital lease obligations...................................            2,275               2,380
 Deferred revenue...............................................................            1,200               1,874
                                                                                         --------            --------
   Total current liabilities....................................................           18,546              22,910
Capital lease obligations, net of current portion...............................            3,561               5,900
                                                                                         --------            --------
   Total liabilities............................................................           22,107              28,810
                                                                                         --------            --------
Redeemable convertible preferred stock, net of related warrant and issuance
 costs, $0.01 par value; 15,000 shares authorized;  15,000 shares issued and
 outstanding as of September 30, 2000; aggregate liquidation preference of
 $15,000,000 as of September 30, 2000...........................................                -              11,450
                                                                                         --------            --------

Stockholders' equity:
 Common stock, $0.001 par value; 40,000,000 shares authorized; 15,487,063
  and 15,557,655 shares issued and outstanding as of March 31, 2000, and
  September 30, 2000, respectively..............................................               15                  15
 Additional paid-in capital.....................................................           77,035              79,900
 Accumulated other comprehensive income (loss)..................................               39                 (30)
 Deferred stock compensation....................................................             (326)               (246)
 Accumulated deficit............................................................          (53,019)            (67,895)
 Treasury stock, 450,936 shares of common stock at cost
        as of March 31, 2000 and September 30, 2000, respectively...............           (2,694)             (2,694)
                                                                                         --------            --------
   Total stockholders' equity...................................................           21,050               9,050
                                                                                         --------            --------
                                                                                         $ 43,157            $ 49,310
                                                                                         ========            ========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                 Page 3 of 20
<PAGE>

                         PILOT NETWORK SERVICES, INC.

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

<TABLE>
<CAPTION>
                                                              Three months ended                 Six months ended
                                                                 September 30,                     September 30,
                                                            -----------------------         ------------------------
                                                              1999            2000            1999            2000
                                                            -------         -------         --------        --------
<S>                                                         <C>             <C>             <C>             <C>
Service revenues.......................................     $ 7,130         $10,077         $ 12,946        $ 21,189

Cost of revenues.......................................       7,379          10,813           13,809          20,503
                                                            -------         -------         --------        --------

Gross margin...........................................        (249)           (736)            (863)            686
                                                            -------         -------         --------        --------
Operating expenses:
 Sales and marketing...................................       3,218           4,647            6,156           8,881
 Engineering and development...........................         767           1,828            1,402           3,331
 General and administrative............................         970             957            1,730           2,373
                                                            -------         -------         --------        --------
 Total operating expenses..............................       4,955           7,432            9,288          14,585
                                                            -------         -------         --------        --------

Operating loss.........................................      (5,204)         (8,168)         (10,151)        (13,899)

Interest income........................................         245             332              530             541

Interest expense.......................................        (282)           (861)            (817)         (1,518)
                                                            -------         -------         --------        --------

Net loss...............................................      (5,241)         (8,697)         (10,438)        (14,876)

Dividends on redeemable convertible preferred
 stock.................................................           -             157                -             157
Net loss applicable to common stockholders.............     $(5,241)        $(8,854)        $(10,438)       $(15,033)
                                                            =======         =======         ========        ========

Basic and diluted net loss per common share............     $ (0.38)        $ (0.59)        $  (0.77)       $  (1.00)
                                                            =======         =======         ========        ========

Weighted average common shares used in
 computing basic and diluted net loss per share........      13,689          15,093           13,625          15,064
                                                            =======         =======         ========        ========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                 Page 4 of 20
<PAGE>

                         PILOT NETWORK SERVICES, INC.

                 UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                           Six months ended
                                                                             September 30,
                                                                        ------------------------
                                                                          1999            2000
                                                                        --------        --------
<S>                                                                     <C>             <C>
Cash flows from operating activities:
 Net loss..........................................................     $(10,438)       $(14,876)
 Adjustments to reconcile net loss to net cash used in operating
 activities:
  Depreciation and amortization....................................        3,371           5,428
  Amortization of deferred compensation............................          336              80
  Amortization of loan fees........................................          150             506
  Provision for doubtful accounts..................................            -             578
  Changes in operating assets and liabilities:
   Trade receivables...............................................         (824)         (2,381)
   Prepaid and other assets........................................           83          (1,110)
   Accounts payable................................................           93             142
   Accrued expenses................................................          666           2,919
   Deferred revenue................................................         (670)            674
                                                                        --------        --------
    Net cash used in operating activities..........................       (7,233)         (8,040)
                                                                        --------        --------
Cash flows used in investing activities:
 Purchases of property and equipment...............................       (6,863)         (6,170)
 Purchases of short-term investments...............................            -          (1,163)
 Proceeds from short-term investments..............................       10,335               -
                                                                        --------        --------
    Net cash provided by (used in) investing activities............        3,472          (7,333)
                                                                        --------        --------
Cash flows from financing activities:
 Proceeds from issuance of common stock............................          504             472
 Proceeds from issuance of redeemable convertible preferred stock
 and related warrant, net of issuance costs........................            -          14,000

 Payments of term loan.............................................       (3,000)              -
 Proceeds from working capital line of credit......................            -           1,093
 Payments of working capital line of credit........................         (128)           (726)
 Principal payments of obligations under capital leases............       (1,108)         (1,556)
                                                                        --------        --------
    Net cash provided by (used in) financing activities............       (3,732)         13,283
                                                                        --------        --------
Effect of exchange rate changes on cash and cash equivalents.......            -             (87)
                                                                        --------        --------
Net increase (decrease) in cash and cash equivalents...............       (7,493)         (2,177)

Cash and cash equivalents, beginning of period.....................       10,660           7,920
                                                                        --------        --------
Cash and cash equivalents, end of period...........................     $  3,167        $  5,743
                                                                        ========        ========

Supplemental disclosure of cash flow information:
 Cash paid during the period for interest..........................     $    667        $  1,419
                                                                        ========        ========
 Noncash financing activities:
  Assets acquired under capital lease obligations..................     $  1,174        $  4,000
                                                                        ========        ========
  Accrued dividends on redeemable convertible preferred stock......     $      -        $    157
                                                                        ========        ========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                 Page 5 of 20
<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 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 diluted per
share calculations. The following options and warrants to acquire shares of
common stock were excluded from the computation of diluted loss per share
because their effects would be anti-dilutive:

                        September 30, 1999              September 30, 2000
                   ------------------------------  ----------------------------
                    Shares        Exercise Prices   Shares      Exercise Prices
                   ---------      ---------------  ---------    ---------------
     Options       2,251,671       $0.09-$20.063   2,779,357     $0.09-$49.875
     Warrants        217,874       $ 0.365-$2.00     675,453     $0.365-$25.00
                   ---------                       ---------
                   2,469,545                       3,454,810
                   =========                       =========

Common shares that would result from the conversion of the Company's redeemable
convertible preferred stock are also excluded from the computation of diluted
net loss per share for the three months September 30, 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, if any, the
adoption of SAB 101 may have on its financial position or results of operations.

     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

                                 Page 6 of 20
<PAGE>

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 September 30, 1999 and
2000, was $5,283,000 and $8,703,000 respectively. Total comprehensive loss for
the six months ended September 30, 1999 and 2000, was $10,525,000 and
$14,905,000 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 estimated at
$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 amount is included as a component of
additional paid-in capital. The fair value of the warrant was calculated using
the Black-Scholes option pricing using the following assumptions: dividend
yield-none; contractual life-5 years; risk free interest rate-5.5%; volatility-
85%. The rights, preferences and privilege's 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.
          Dividends totalling $157,000 have been accrued as of September 30,
          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, but only if shareholder approval to exceed
          that number is obtained.
     -    The holder of the redeemable convertible preferred stock has a
          liquidation preference of $1,000 plus all unpaid dividends accrued
          thereon.
     -    The holders of the redeemable convertible preferred stock have the
          right to redeem the redeemable convertible preferred stock only 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.

6.   Subsequent Events

     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
                                 Page 7 of 20
<PAGE>

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 common 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. Pursuant to the
original conversion terms, had the holder elected to convert shares of the
redeemable convertible preferred stock into shares of the Company's common
stock, the holder could have converted 2,371 shares of redeemable convertible
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
the Company's common stock on October 31, 2000) multiplied by the 1,512,719
shares of common stock subject to the conversion feature. The impact of the
conversion feature will be to increase the Company's net loss available to
common stockholders for the quarter ending December 31, 2000 by approximately
$1.6 million.

     On October 31, 2000, the Company's $8.0 million credit facility with a
financial institution was extended to January 31, 2001.

ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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

     Pilot provides 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. Pilot's 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.

     Pilot's 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

                                 Page 8 of 20
<PAGE>

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 Pilot.

RESULTS OF OPERATIONS

SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 2000

     Revision to previously reported earnings. Net loss for the quarter and six-
month period ended September 30, 2000 were $8,697,000 and $14,876,000 before
dividends on redeemable convertible preferred stock of $157,000. Net loss per
share was $0.59 and $1.00 for the respective periods. This compares to a net
loss of $8,657,000, or $0.57 per share, and $14,836,000 or $.98 per share for
the quarter and six-month ended September 30, 2000, respectively, as previously
reported in our October 31, 2000 earnings release. The revision was due to
adjustments to correct stock compensation expense and a preferred stock
dividend.

     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 $7.1
million and $10.1 million for the quarters ended September 30, 1999 and 2000,
respectively, which represents an increase of 41%. We had service revenues of
$21.2 million in the six months ended September 30, 2000, an increase of 64%
from $12.9 million in the same period last year. The growth in our service
revenues over this period resulted from an increase in the number of customers,
and to a lesser extent from an increase in the number of customers, and to a
lesser extent from an increase in the number of service offerings and in service
revenues per customer.


     Technology access revenues. 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 six months ended
September 30, 2000, we did not sell any technology and methodologies. We also
did not have any technology access revenues in the same periods last year.

     Cost of revenues. Pilot's 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 $13.8 million, or 107%
of revenue, in the six-month period ended September 30, 1999 to $20.5 million,
or 97% of revenue, in fiscal 2000. Cost of service revenues increased from $7.4
million, or 103% of revenue, in the quarter ended September 30, 1999 to $10.8
million in the quarter ended September 30, 2000, or 107% 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 as a result of expected customer expansion in our network security
centers. As of September 30, 2000, we employed 129 people in this area, up from
80 as of September 30, 1999.

     Sales and marketing. Pilot's 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 $6.2 million in the
six-month period ended September 30, 1999 to $8.9 million in the six-month
period ended September 30, 2000. Our sales and marketing expenses increased from
$3.2 million during the quarter ended September 30, 1999 to $4.6 million for the
quarter ended September 30, 2000. The increase was primarily the result of
hiring additional sales and marketing personnel in connection with our expansion
of our operations. We expect that sales and marketing expenses will continue to
increase in absolute dollars. As of September 30, 2000, we employed 72 people in
this area, up from 40 as of September 30, 1999.

     Engineering and development. Pilot's 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 $1.4 million in the six-month period ending September 30, 1999 to
$3.3 million in the six-month period ended September 30, 2000. During the
quarter ended September 30, 1999 and 2000, respectively engineering and
development expenses were $767,000 and $1.8 million. Our security and services
development expenses

                                 Page 9 of 20
<PAGE>

grew from fiscal 2000 to fiscal 2001 primarily due to the addition of
engineering personnel required to create and enhance our expanded service
offerings. We expect that engineering and development expenses will continue to
increase in absolute dollars as we make additional investments in developing our
secure electronic commerce services. As of September 30, 2000, we employed 38
people in this area, up from 18 as of September 30, 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 September 30, 2000, general and administrative expenses
decreased to $957,000, as compared to $970,000 in the same period in the
prior year. Our general and administrative expenses increased from $1.7 million
in the six-month period ending September 30, 1999 to $2.4 million in the six-
month period ended September 30, 2000. The increase was primarily the result of
additional staff hired to manage Pilot's overall increase in headcount,
increased recruiting, travel as well as costs for consultants and professional
services providers. As of September 30, 2000, we employed 30 people in this
area, compared to 17 as of September 30, 1999.

     Interest income. During the quarter ended September 30, 2000 interest
income increased to $332,000 as compared to $245,000 in the same period in the
prior year. Interest income increased from $530,000 in the six-month period
ended September 30, 1999 to $541,000 in the six-month period ended September 30,
2000. The increase in interest income was due to a larger cash and cash
equivalent and short-term investment balances as of September 30, 2000 as
compared to September 30, 1999.

     Interest expense. During the quarter ended September 30, 2000 interest
expense to $861,000 as compared to $282,000 in the same period in the prior
year. Interest expense increased from $817,000 in the six-month period ended
September 30, 1999 to $1,518,000 in the six-month period ended September 30,
2000. The increase in interest expense was due to full utilization of Pilot's
line of credit, the addition of lease agreements, and amortization of loan fees
associated with warrants issued in connection with debt financing.

LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 2000, we had $8.3 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. As of September 30, 2000,
we had fully utilized these lease facilities. We intend to secure additional
equipment lease facilities to fund growth in capital equipment purchases.


                                 Page 10 of 20
<PAGE>

     Cash used in operating activities was $8.1 million for the six-month period
ending September 30, 2000. The primary use of cash in operating activities for
fiscal 2001 was a result of the Company's net loss offset by depreciation and
amortization during the period. In the six-month period ended September 30,
2000, the primary use of cash in investing activities was for purchases of
capital equipment and leasehold improvements to support increased capacity and
services provided to customers. In the six-month period ended September 30,
2000, the major source of cash provided by financing activities was from the
issuance of redeemable convertible preferred stock which provided $14.0 million,
net of issuance costs.

     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 the 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
Pilot's common stock on October 31, 2000) multiplied by the 1,512,719 shares of
common stock subject to the conversion feature. The impact of the conversion
feature will be to increase our net loss available to common stockholders for
the quarter ending December 31, 2000 by approximately $1.6 million.

     During the six months ended September 30, 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 warrants of
$1.0 million which amount has been and is being capitalized and amortized over
the expected terms of the loans. At September 30, 2000, we had fully utilized
the revolving line of credit.

     Subsequent to the end of the September 30 quarter, the lender agreed to
extend the maturity of the $8.0 million credit facility 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 each of November
17, 30 and December 15, and $3.75 million on December 31.

     If we are unable to generate sufficient cash flow from operations, or are
unable to obtain additional financing, we may be required to sell assets, scale
down our operations and expansion plans, refinance all or a portion of our
existing indebtedness, any or all of which could have an adverse impact on our
financial condition and ability to continue operations.

                                 Page 11 of 20
<PAGE>

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 rates, 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 after its expiration at the end
of January 2001. 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

                                 Page 12 of 20
<PAGE>

securities, including rights of first refusal and limits on certain offerings
contained in the securities purchase agreement between us and Marshall Capital.
If we are unable to raise adequate capital, our business could be materially and
adversely affected.

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
June 30, 2000, we had an accumulated deficit of approximately $58.8 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.

     In October 2000, 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, 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 $1.50 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 redeemable 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 redeemable convertible
preferred stock is presently undeterminable because the conversion price of the
Series A redeemable convertible preferred stock is based on the price of the
common stock at the time of the conversion. The convertible price of the Series
A redeemable convertible preferred stock is equal to the

                                 Page 13 of 20
<PAGE>

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 October 31, 2000 was $1.5675.
Based on this conversion price, the conversion of approximately 4,725 shares of
Series A redeemable 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 redeemable convertible preferred stock at the election of the holders
of the Series A redeemable 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 redeemable convertible preferred stock; Nasdaq regulations
applicable to us prohibit us from allowing the issuance of 20% or more of our
common stock at a discount to market value without stockholder approval. The
conversion of 4,725 shares of Series A redeemable 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 redeemable convertible preferred
stock) as of October 1, 2000.

     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 the redeemable convertible preferred 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 common 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. Pursuant to the
original conversion terms, had the holder elected to convert shares of the
redeemable convertible preferred stock into shares of the Company's common
stock, the holder could have converted 2,371 shares of redeemable convertible
preferred stock into common stock at that price on the day the exchange right
was granted. The Company granted the exchange rate 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 following table illustrates how the number of shares of common stock
issuable upon conversion of all 15,000 shares of Series A redeemable
convertible preferred stock the Series A redeemable convertible preferred stock
would increase if the market price of our common stock were to fall, causing the
conversion price of the Series A redeemable convertible preferred stock to
decline as well:

<TABLE>
<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 October 31, 2000.......         6.6%            8.3%           12.4%           19.9%
</TABLE>

     In addition to the conversion and exchange features of the Series A
redeemable convertible preferred stock, with the approval of our stockholders,
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 redeemable 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
preceding the date of redemption. Accordingly, a redemption for common stock at
maturity of the Series A redeemable 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 redeemable 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>
<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 October 1, 2000.........        17.0%           20.5%           30.9%           63.3%
</TABLE>

                                 Page 14 of 20
<PAGE>

     The value of the exchange right we granted to the holder of the Company's
redeemable convertible preferred stock will have an adverse impact on our
financial results.

     In consideration of a waiver we granted the holder of the Company's
redeemable convertible preferred stock in October 2000 the right to exchange
2,371 shares of Series A redeemable convertible preferred stock for 1,512,579
shares of common stock.

     The value of the conversion feature 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
Pilot's common stock on October 31, 2000), multiplied by the 1,512,719 shares of
common stock subject to the conversion feature. The impact of the conversion
feature on Pilot's net loss available to common stockholders for the quarter
ending December 31, 2000 will also be approximately $1.6 million.

The issuance of shares of common stock upon conversion of the Series A
redeemable 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 redeemable 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 redeemable convertible preferred stock
may conflict with the interests of holders of common stock.

     The holders of Series A redeemable 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 redeemable convertible preferred stock. As
a result, the interests of the holders of Series A redeemable convertible
preferred stock may, in some instances, conflict with the interests of the
holders of common stock.

Pilot expects third parties to deliver Pilot Protected access, hosting and
Extranet and generate revenues.

     In fiscal 2000, Pilot 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 October 1, 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

                                 Page 15 of 20
<PAGE>

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.

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. In order to integrate the components
needed to deliver the services requires that 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.

                                 Page 16 of 20
<PAGE>

     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.

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 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.

                                 Page 17 of 20
<PAGE>

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.

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.

                                 Page 18 of 20
<PAGE>

     To date, we have not been notified that our services infringe the
proprietary rights of third parties, but 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.

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 6.        EXHIBITS AND REPORTS ON FORM 8-K


               a    Exhibits

                    27.1 Financial Data Schedule

               b.   Reports on Form 8-K

                    none


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.


November 14, 2000        /s/ Donald J. Marsee
-----------------        --------------------------------------------
                         Donald J. Marsee
                         Chief Financial Officer
                         (Principal Financial and Accounting Officer)

                                 Page 19 of 20