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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-KSB

|           |  |                                                                               
|---------- |  | ------------------------------------------------------------------------------
|(Mark One) |  |                                                                               
|[X]        |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File Number 000-28131

PILOT THERAPEUTICS HOLDINGS, INC.
(Exact name of small business registrant as specified in its charter)

|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 56-2280858         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

2000 Daniel Island Drive
Charleston, SC 29492
843-329-8500
(Address of principal executive offices)
______

Securities Registered Pursuant to Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of each Exchange on which registered
|                    |  |                                          
|None                |  | None                                     

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
o

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o

State the issuers revenues for its most recent fiscal year. $0.00

At February 28, 2003, the aggregate market value of the registrants
common stock held by non-affiliates of the registrant was approximately
$12,196,000.

At February 28, 2003, the number of shares outstanding of registrants
common stock was 11,547,306.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than 120 days after the
registrants fiscal year ended December 31, 2002, and to be delivered to
shareholders in connection with the 2003 Annual Meeting of Shareholders, are
incorporated in Part III by reference.



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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains forward-looking statements that
relate to our plans, objectives, estimates, goals and future financial
performance. Such statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and speak only of the
date of this report. Words such as may, will, should, expects,
intends, plans, anticipates, believes, estimates, predicts,
potential, continue, and variations of such words and similar expressions,
identify such forward-looking statements. Our business is subject to numerous
risks and uncertainties, including our ability to register, commercialize or
license our products successfully and to promote physician and patient
acceptance of our products, our need to obtain substantial additional capital
to fund our operations and product development, and our need to obtain
governmental and regulatory approvals. These and other risks and
uncertainties, many of which are addressed in the section entitled
Managements Discussion and Analysis or Plan of Operations, could cause our
actual results, performance and developments to be materially different from
those expressed or implied by any of these forward-looking statements.

ADDITIONAL INFORMATION

The Pilot Therapeutics name and logo, and the names Functional Liponomics
and Airozin, are our pending trademarks. This Annual Report on Form 10-KSB
also includes trademarks of companies other than the registrant or its
subsidiaries.





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PILOT THERAPEUTICS HOLDINGS, INC.

INDEX

|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                         |  |   
|Item 1:  |  | Description of Business                                                                        |  | 1 
|Item 2:  |  | Description of Property                                                                        |  | 13
|Item 3:  |  | Legal Proceedings                                                                              |  | 13
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                            |  | 13
|         |  | PART II                                                                                        |  |   
|Item 5:  |  | Market for Common Equity and Related Stockholder Matters                                       |  | 14
|Item 6:  |  | Managements Discussion and Analysis or Plan of Operations                                     |  | 15
|Item 7:  |  | Financial Statements                                                                           |  | 26
|Item 8:  |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure           |  | 46
|         |  | PART III                                                                                       |  |   
|Item 9:  |  | Executive Officers, Promoters and Control Persons                                              |  | 47
|Item 10: |  | Executive Compensation                                                                         |  | 47
|Item 11: |  | Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters |  | 47
|Item 12: |  | Certain Relationships and Related Transactions                                                 |  | 47
|Item 13: |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 47
|Item 14: |  | Controls and Procedures                                                                        |  | 48





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PART I

ITEM 1.DESCRIPTION OF BUSINESS

OVERVIEW

Pilot Therapeutics Holdings, Inc. (the Parent) is a holding company for
Pilot Therapeutics, Inc. (Pilot, and together with the Parent, as We or the
Company) is a specialty pharmaceutical company. Through lipid profiling and
metabolism, the Company has developed a proprietary, state-of-the-art lipid and
genomic profiling research platform, termed Functional Liponomics. Using
Functional Liponomics, the Company is developing novel, branded, therapeutic,
pharmaceutical and over the counter (OTC) medical food products that are
specifically designed to safely and effectively address dysfunctional lipid
metabolism in chronic human diseases such as asthma, coronary heart disease,
allergic rhinitis, cancer, cystic acne and rheumatoid arthritis. Pilot expects
to launch its first product, Airozin, for adults and children regionally in
April 2003 and nationally by the first half of 2004.

Since its inception on August 3, 1998, the Company has devoted substantial
effort towards conducting product discovery and development, raising capital,
conducting clinical trials, recruiting personnel and supporting its sales and
marketing organizations and infrastructure in anticipation of the commercial
launch of the Companys first product for asthma, Airozin. In the course of
such activities, the Company has sustained operating losses and expects such
losses to continue for the next several years. The Company is working on
several long-term development projects that involve experimental technology and
may require several years and substantial expenditures to complete. The
Company has not generated any significant revenues or product sales and has not
achieved profitable operations or positive cash flow from operations. The
Companys deficit accumulated during the development stage aggregated
$16,689,109 through December 31, 2002.

The Companys ability to meet its business plan objectives is dependent
upon its ability to raise additional financing, substantiate its product
pipeline and, ultimately, to fund its operations from revenues. There is no
assurance that profitable operations, if ever achieved, could be sustained on a
continuing basis. The Company plans to continue to finance its operations in
2003 with a combination of stock issuances, loan and grant incentives and
availability under its credit facilities. The Company is actively attempting to
secure financing, and continues to take steps to generate revenues from its
commercial launch of Airozin, and minimize operating expenses. However, there
are no assurances that the Company will be successful launching Airozin
profitably or obtaining the capital needed for the long-term development and
commercialization of its products. If the Company does not obtain additional
capital, it may be unable to continue its current operating plan beyond the
third quarter of 2003, which would have a material adverse effect on its
business, financial condition and results of operations.

CORPORATE HISTORY

The Parent, formerly Interallied Group, Inc. (ILRG), is incorporated
under the laws of Delaware. Pilot is a North Carolina corporation incorporated
on August 3, 1998. On August 24, 2001, pursuant to a Stock Exchange Agreement
dated as of August 1, 2001, ILRG issued 7,726,217 shares of its common stock in
exchange for all the issued and outstanding shares of Pilots capital stock in
a recapitalization transaction accounted for as a reverse acquisition. Prior
to the recapitalization transaction, ILRG was a non-operating public shell
corporation with no significant assets. ILRG was treated as the acquired
company in the transaction, but remained a surviving legal entity with Pilot as
its wholly owned subsidiary. Accordingly, the transaction was treated for
accounting purposes as an issuance of stock by Pilot for the net monetary
assets of ILRG, accompanied by a recapitalization. Since this transaction was
in substance a recapitalization of ILRG and not a business combination, a
valuation was not performed and no goodwill was recorded, as all assets and
liabilities are stated at their historical costs. In connection with the
transaction, all redeemable convertible preferred stock of Pilot Therapeutics,
Inc. was converted into common stock of Pilot and then exchanged for common
stock of ILRG.

1



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Subsequent to the recapitalization transaction, on October 2, 2001, the
shareholders of ILRG, a Nevada corporation, approved a proposal to
reincorporate ILRG under the laws of Delaware by merger of ILRG into the
Parent, then its wholly owned subsidiary, pursuant to an Agreement and Plan of
Merger between ILRG and the Parent (the Reincorporation), in which each
outstanding share of ILRGs common stock was converted into one share of the
Parents common stock. The Reincorporation became effective November 30, 2001,
but did not result in any change in the business, assets or liabilities of
ILRG, cause the corporate headquarters or other facilities to be moved, or
result in any relocation of management or other employees. The Parents stock,
which was formerly traded on the OTC Bulletin Board under the symbol ILRG, is
now traded on the OTC Bulletin Board under the symbol PLTT.

By virtue of the operation of Rule 12g-3 under the Securities Exchange Act
of 1934, as amended (the Exchange Act), all shares of the Parents common
stock issued to the holders of issued and outstanding shares of ILRG common
stock immediately prior to the effective time of the Reincorporation are deemed
automatically registered under Section 12(g) of the Exchange Act; and the
Parent continues to be subject to the reporting requirements of Section 13 of
the Exchange Act in the same manner as ILRG had been subject to such
requirements immediately prior to the Reincorporation.

As a result of the Reincorporation, Pilot is now a wholly owned subsidiary
of the Parent.

PILOTS STRATEGY AND PRODUCT PIPELINE

As a foundation for growth, Pilots strategic approach is to:



| |  |  | discover and develop therapeutic OTC and pharmaceutical
products utilizing its proprietary research platform and expertise
in understanding how dysfunctional fatty acid metabolism causes
human disease, referred to as Functional Liponomics;            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | take advantage of the potentially large opportunity in the
OTC asthma market with the scheduled April 2003 launch of Airozin,
believed to be the first OTC medical food for the dietary management
of asthma;                                              
| |  |  | utilize near-term revenues from non-prescription OTC medical food
products to help fund the development of long-term revenues from
prescription pharmaceutical products;                                                                                    
| |  |  | leverage regulatory changes governing the development of
botanicals as drug products (Botanical Drug Guidance, August 2000)
to rapidly move Pilots botanical drug candidates into late-stage
clinical trials leading to a New Drug Application (NDA); and
| |  |  | utilize relationships with a key contract research
organization (CRO) and pharmaceutical partners to co-develop and
support Pilots lead drug candidates during late-stage clinical
development.                                                          

Pilots specialty is its understanding of critical points where
alterations in fatty acid levels lead to chronic human diseases. Understanding
how dysfunctional fatty acid metabolism in the human body causes or contributes
to disease and evaluating methods for preventing and counteracting the
dysfunction are Pilots core competencies. Through a discovery platform that
it has termed Functional LiponomicsTM, Pilot has developed a pipeline of
products for treatment or control of numerous chronic inflammatory and
proliferative disorders, including asthma, rheumatoid arthritis, allergic
rhinitis (hay fever), cardiovascular disease, cystic acne, and cancer. These
innovative products are subjects of 41 issued and 28 pending domestic and
international patents obtained or applied for by Pilot or its licensing
partners.

Pilot is leveraging this core competency into its commercial product
pipeline of novel pharmaceutical and OTC medical food products. These products
are specifically designed to safely and effectively address dysfunctional fatty
acid metabolism in chronic human diseases.

Pilots OTC medical foods and botanical drugs will address a growing need
worldwide for safer and gentler therapies that manage inflammatory diseases
such as asthma and arthritis. Because of the chronic, long-term nature of
these diseases, these populations require sustained use and more complex
regimens of medications, placing them at higher risk for adverse side effects.
These developments have markedly increased the demand for newer therapies

2



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with improved safety profiles. Pilot is uniquely positioned to meet this
demand and to capture new category sales and profits by bringing the first
breakthrough OTC medical foods and prescription botanical drugs to the
marketplace. For example, Airozin, Pilots revolutionary medical food, is the
first, once-a-day, non-steroidal product available OTC for the long-term
management of asthma.

Pilots products are notable for their potency and simplicity with respect
to mechanism of action and regulatory requirements for approval, respectively.
Pilot has taken a pharmaceutical approach to the development and clinical
testing of all of these products. The FDA has adopted regulatory policies
(Orphan Drug Amendment of 1998) creating an OTC Medical Food category
allowing for non-prescription marketing and sales of novel OTC products. Major
advantages of this category include the allowance of disease claims, no
requirement for pre-marketing regulatory approval and the exemption from
nutritional labeling. An OTC medical food is a product that is consumed or
administered internally under the supervision of a physician and which is
intended for the specific dietary management of a disease or condition for
which distinctive nutritional requirements, based on recognized scientific
principles, are established by medical evaluation.

Completely distinct from dietary supplements (that are prohibited from
making medical claims), the medical food category of OTC products can be
positioned and sold alongside OTC pharmaceuticals in sections according to
disease indication (e.g., cough/cold/allergy).

In contrast, physician-directed prescription treatment regimens account
for the vast majority of product used in treating and reducing complications
associated with the so-called silent killers such as cardiovascular disease,
cancer, and diabetes. Therefore, PLT 732 for cardiovascular disease is being
developed for prescription sale as a botanical Rx product. For cancer and
cystic acne indications, Pilot is developing synthetic fatty acid like
compounds (new chemical entities in-licensed from Bristol Myers Squibb) that
bind to nuclear receptors for prescription sale. All pre-clinical validation
is complete for both PLT 99511 (for acne) and PLT 99527 (for cancer), and Pilot
expects to file INDs (Investigational New Drug) with the FDA (and in the case
of PLT 99527, request fast-track status) and initiate clinical trials by
year-end 2004.

Pilots Products

|                                        |  |                             |  |                       
|--------------------------------------- |  | --------------------------- |  | ----------------------
|Products                                |  | Category                    |  | Indication            
|                                        |  |                             |  |                       
|Airozin
for Adults
(ages 12 and
older) |  | Medical Food                |  | Asthma                
|Airozin
for Children
(ages 6-11)       |  | Medical Food                |  | Asthma                
|PLT 1288                                |  | Medical Food                |  | Arthritis             
|PLT 732                                 |  | Pharmaceutical (Botanical)  |  | Cardiovascular Disease
|PLT 99511                               |  | Pharmaceutical              |  | Cystic Acne           
|PLT 99257                               |  | Pharmaceutical (Fast-track) |  | Cancer                
|PLT 2753                                |  | Medical Food                |  | Allergic Rhinitis     

Airozin for Asthma

According to the Center for Disease Control (CDC), approximately 26.7
million Americans have asthma today, and the prevalence of the disease has
doubled over the last 20 years according to the American Academy of Allergy and
Immunology. Another indication of the growing market size is that in 1998 the
costs of asthma reached

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$12.7 billion in the U.S., increasing from $6.2 billion in 19901. Pilot
believes Airozin is the first OTC management product designed to control
elevated leukotriene levels associated with asthma. Leukotrienes are among the
most potent triggers known to cause the signs and symptoms of asthma and
blocking leukotriene production is known to decrease the frequency and severity
of asthma attacks. Airozins safety and efficacy has been demonstrated in
five clinical trials at major medical or FDA trial centers. Results of these
trials have been reported in seven peer-reviewed publications. For example, a
recent randomized, double-blinded clinical study showed that Airozin reduced
leukotriene levels in 78% of asthmatics tested2.

In addition to being
safe and effective, AirozinTM is conveniently
formulated as a once-a-day asthma management product to be sold OTC in the
cough/cold/allergy section of pharmacies in food, drug, and mass merchandise
stores. It is safe as an adjunct therapy for use with prescription medicines,
although ultimately it has the potential to obviate the need for some of these
drugs in some asthma patients. As an OTC solution, Airozin addresses
consumers trend toward self-care in the asthma community.

Airozins active ingredients are natural marine and botanical oils with
long histories of safe use in humans. The marine oil (EPA) is available to
the Company through wholesalers, and the botanical oil (GLA) is produced from
borage seed through the Companys partnership with Kings, Inc., a wholly owned
subsidiary of Associated British Foods, Inc. Currently, borage is grown in the
United Kingdom (UK), Australia, Canada and Chile, and the Company and Kings
have plans to work with South Carolina growers in producing the crop and
harvesting seeds in accordance with Pilots South Carolina Incentive Agreement
(See Strategic Alliances ).

In summary, Airozin is, in essence, an OTC, medical food that provides
effective reduction in leukotrienes.
Airozin has earned endorsements from key thought leaders in the clinical
management of asthma in children (ages 6-11) and adults (ages 12 and older).
Together with its strategic research partner, Quintiles Transnational
Corporation (Quintiles), Pilot has invested over one million dollars in
extensive market research to determine the most appropriate marketing strategy
for introducing Airozin into the emerging medical foods category. The
research consisted of face-to-face interviews with 203 physicians and 91
patients in five major cities conducted by the Lewin Group, a nationally
recognized consulting firm. In a detailed survey of over 200 leading
prescribers of asthma medicines, 63.6% indicated that based on the current data
they would recommend that their patients try AirozinTM, and an additional 28.5%
said that they would not discourage use of AirozinTM among their patients. The
remaining 8.0% would reserve judgment pending further clinical data. This
research was gathered prior to Pilots fifth clinical trial which showed that
Airozin reduced leukotriene levels in 78% of asthmatics tested.

The development and marketing strategies for Airozin combine outstanding
science, a pharmaceutical development approach (e.g., clinical trials in FDA
approved centers, ethical promotion, etc.), and a strong retail strategy to
create what Pilot believes will be a beneficial and profitable OTC product.
Pilot has announced that it expects to launch Airozin in two markets to test
two distinct distribution strategies, retail and direct-to-consumer, in April
2003. Pilot will conduct an AC Nielsen controlled market test in Charleston,
South Carolina  an AC Nielsen designated retail test market  to obtain
volumetric projections of Airozin utilizing a retail model in a midsized
market. The price for a two weeks supply is expected to be $19.99, and the AC
Nielsen test will be carried out for six months measuring critical endpoints
such as a national first year sales forecast (+ 10 %) and trade and
consumer reactions based on actual sales. Simultaneously, Pilot will conduct a
test in Greenville and Spartanburg, South Carolina and Asheville, North
Carolina to determine sales projections utilizing a direct selling approach via
a toll-free number and an Airozin web site.

In both these strategies, the launch will focus on gaining endorsement and
adoption by physicians and other healthcare professionals while engaging in a
targeted consumer advertising and promotional campaign. Key promotional
elements for both launches are planned to include a combination of medical and
direct to consumer advertising and promotion to build brand equity. Results
from these tests will provide critical information that will be utilized in the
national distribution of Airozin.

Pilot believes that gaining ideal retail distribution nationally is
important to the successful launch of Airozin. Pilots initial plans call for
Airozin to be available OTC in the cough/cold/allergy section (not with
vitamins and

1 Redd SC, Environmental Health Perspective, August 2002.2 Surette et al, Clinical Therapeutics, Vol. 25, 2003.

4



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dietary supplements) of pharmacies in major drug chains, food stores and
mass merchandise stores. To accomplish this important task, Pilot has developed
a core competency in the retail selling function through its recruitment of key
senior managers with retail product launching and marketing experience, and in
addition Pilot is working with numerous brokerage groups to provide a broker
sales force with the expertise to get Airozin on the shelves of select
retailers.

Pilots Second OTC Medical Food  PLT 1288 for Arthritis

PLT 1288 is a novel, OTC medical food for the long-term management of
inflammatory joint diseases, including arthritis. Arthritis is a disease that
affects 43 million people in the U.S. alone according to the CDC. Consisting
of a proprietary, once-a-day, clinically-validated formulation, PLT 1288 blocks
the production of two families of substances known to contribute to the
deleterious effects of joint diseases, including pain and swelling, cartilage
loss, bone resorption and joint failure. The newest prescription treatment for
rheumatoid arthritis (RA), Enbrel® (by Amgen), which is a cytokine blocker
(specifically of TNFα, a cytokine known to exacerbate RA) with estimated 2003
sales of $1.2-1.4 billion3, is further evidence that elevated cytokines are
known to contribute to the inflammation associated with RA.

Pilot-sponsored, proof-of-principle clinical trials in humans revealed
that PLT 1288 blocked the production of whole blood TNFα. In addition, PLT 1288
inhibited leukotriene synthesis in a double-blinded, placebo-controlled
clinical trial conducted by Quintiles. Based on its dual mechanism of
anti-inflammatory action, Pilot expects that PLT 1288 will have a substantial
impact on ameliorating the signs and symptoms of inflammatory joint diseases.

Pilots Third OTC Medical Food  PLT 2753 for Allergic Rhinitis

Similar to Airozin, PLT 2753 is an OTC medical food that modulates
leukotriene biosynthesis, a lipid molecule that is produced by immune cells and
is involved in the pathogenesis of inflammatory and allergic disorders,
including asthma and allergic rhinitis. According to WebMD, allergic rhinitis,
or hay fever, affects 20% of the U.S. population.

PLT 2753 targets the production of leukotrienes, the major metabolites of
arachidonic acid produced by inflammatory cells that are known to cause the
inflammation associated with allergic disorders. The current medications
available to treat inflammation associated with allergic rhinitis include
anti-inflammatory steroids administered as nasal sprays. These agents, however,
do not control symptoms in all patients and create undesired side effects,
including possible damage to delicate mucus membranes. The important role that
inflammatory leukotrienes play in allergic rhinitis is widely recognized
through clinical trials that have shown that blocking the action of
leukotrienes resulted in a significant amelioration of the symptoms associated
with allergic rhinitis, and the recent approval of Singulair® for the treatment
of allergic rhinitis is further evidence of the importance of leukotriene
inhibitors in treating allergies. Pilot believes leukotriene blockers such as
PLT 2753 will play an important role in the management of allergic rhinitis as
a safer alternative to steroids.

Pilots Lead Prescription Product  PLT 732 for Cardiovascular Disease and Diabetes

Designed to block triglyceride elevations in diseases such as
cardiovascular disease (CVH), stroke and diabetes (combined market sizes of
$45 billion4), Pilot believes that PLT 732 has the opportunity to become the
first line therapy in the treatment of hypertriglyceridemia. Studies have
identified high triglyceride levels as a major independent risk factor for CVD.
According to the American Heart Association, there are approximately 1.1
million heart attacks per year in the U.S. and approximately 12 million living
survivors at risk for a second heart attack. A recent study in the journal
Circulationrevealed high triglyceride levels are a major risk factor
associated with recurrent stroke in humans5. Diabetes (Type II in particular)
is associated with a concomitant increase in coronary artery disease and
elevated triglycerides.

3 Morgan Stanley, AMGN research report, 1/24/03.4 MedAd News Vol. 21, No. 5; May 2002.5 Vol. 104:2892, Dec. 2001.

5



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Despite recent studies showing elevated triglycerides as a major risk
factor for CVD and stroke, there are few therapeutic options for
hypertriglyceridemia: statins, while effective in lowering cholesterol, often
fail to lower triglycerides; statin-fibrate combinations have a risk of major
side effects, including myopathy; and diet and exercise are often ineffective
in controlling hypertriglyceridemia.

A proof of principle trial in 2000 showed that PLT 732 caused a marked
reduction in triglycerides in hypertriglyceridemic patients. A randomized,
placebo-controlled, double-blinded, Phase I/IIA clinical trial (n=67) carried
out at an FDA approved contract research organization (CRO) and completed in
2002 showed that PLT 732 safely and effectively reduced triglycerides in
hypertriglyceridemia patients. As outlined in the Botantical Rx Guidelines
from the FDA in 2000, there is great potential to fast-track natural products
with a safe history of use. Pilot believes the FDA will determine that the
safe history of botanical use, and safety and efficacy trials conducted by
Pilot to justify advancement of PLT 732 to late Phase II/early Phase III
clinical trials under an IND. Pilot is currently preparing an IND for PLT 732.

Pilots Other Prescription Products  PLT 99511 and PLT 99257, Selective Retinoid Receptor-Gamma Agonists

Pilot is also researching and developing new chemical entities, as opposed
to natural pharmaceutical product candidates, intended for the treatment of
cancer and cystic acne via the activation of nuclear hormone receptors.
Studies over the last five years reveal that the nuclear receptor biology
involving fatty acids or fatty acid like molecules may hold the key to
revolutionary treatments for complex human diseases such as cancer and cystic
acne. Pilot in-licensed two of Bristol-Myers Squibb (BMS) products in
development, PLT 99511, for cystic acne, and PLT 99257, for cancer. Both PLT
99511 and PLT 99257 are synthetic chemicals and the Company plans to file INDs
for these drug candidates and move them into Phase I clinical trials in late
2004.

PLT 99511 and PLT 99257 are selective agonists of the nuclear retinoid
receptor, RARγ. The RARγ receptor has been localized to selected tissues, such
as skin, and activation of this receptor arrests the growth of a number of
cancers.

PLT 99511 is the first RARγ specific oral retinoid for severe acne. It is
an oral product that has been shown in early studies, in a highly predictive
acne model, to be more potent than Accutane® (a general RAR agonist, with
estimated 2002 sales of approximately $900 million6) in oral potency and
superior in terms of maximal efficacy and time to onset of activity. Due to its
RARγ specificity, PLT 99511 does not affect serum triglycerides because the
human liver does not contain the RARγ receptor, which provides a major safety
advantage over Accutane® and other existing therapies.

PLT 99257 is in development as a chemotherapeutic for the treatment of
cancer, especially those cancers that are of squamous/epithelial cell origin,
including squamous cell carcinoma, Kaposis sarcoma, non-small cell lung
carcinoma and cervical intraepithelial neoplasia. PLT 99257 is a selective
RARγ specific oral retinoid that has completed pre-clinical development. It
does not appear to affect serum triglycerides, which again provides a major
safety advantage over existing therapies. The Company is preparing to file an
IND, requesting fast-track status, for PLT 99257 for cancer. In addition,
the National Institutes of Health have selected PLT 99257 for a prestigious
cancer drug-screening program conducted by the National Cancer Institute.

Strategic Alliances

Pilot has the following key strategic alliances:

Intellectual Property and Research and Development Alliances with Leading Academic Centers



| |  |  | Wake Forest University School of Medicine
| | - |  | -----------------------------------------

| |  |  | In-licensed patent portfolio (Dr. Floyd H.
Chiltons inventions while at Wake Forest University School of
Medicine), including 19 issued and approved/pending patents,
relating to Pilots medical food products and anti-cancer
compounds.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6 Morgan Stanley, Pharmaceutical Industry Overview, 1/16/03.

6



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| |  |  | Ongoing research and development using the Functional LiponomicsTM discovery engine.
| | - |  | ------------------------------------------------------------------------------------

| |  |  | Johns Hopkins University School of Medicine
| | - |  | -------------------------------------------

| |  |  | In-licensed patent portfolio (Dr. Chiltons
inventions while at Johns Hopkins University School of
Medicine), including 23 issued and approved/pending patents
relating to Pilots anti-cancer compounds.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Drs. Chilton and Marc Surette, Pilots Vice
President of Research, continue to conduct research and
publish with several faculty members at the Johns Hopkins
Asthma and Allergy Center.                 

| |  |  | Clemson University
| | - |  | ------------------

| |  |  | Agriculture research optimizing growing
conditions and yields of crops that provide active ingredients
for Pilots products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

Intellectual Property and Research and Development Alliance with Leading Pharmaceutical Company

| |  |  | Bristol Myers Squibb
| | - |  | --------------------

| |  |  | In-licensed compounds and intellectual property
for all rights to develop and commercialize selective retinoid
receptor modulators.                                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Worldwide exclusive license to develop and market
a BMS patented class of selective oral retinoid receptor
agonists to treat acne and other disorders. Pilot will pay
license fees and royalties based upon certain milestones and
net sales of products containing the patented compound.

Clinical Development and Market Research Alliance

| |  |  | Quintiles Transnational Corporation and its affiliates.
| | - |  | -------------------------------------------------------

| |  |  | $4.0 million provided to the Company as a credit line which can be converted to equity.                        
| | - |  | ---------------------------------------------------------------------------------------------------------------
| |  |  | Conducted extensive market research in
preparation for regional and national commercial OTC launch of
Airozin.

Financial Support Incentive Program with Regional Governments and Government Agencies

| |  |  | State of South Carolina
| | - |  | -----------------------

| |  |  | On October 4, 2002, Pilot AgBio, Inc. (AgBio),
a wholly-owned subsidiary of Pilot, and Pilot entered into an
Incentive Agreement with various agencies and a county in the
State of South Carolina as well as a banking corporation and
developer, providing AgBio and Pilot a wide range of
performance-based incentives, authorized by state statute,
including Job Tax Credits and Job Development Credits in
addition to assistance through grants and loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | Under the Incentive Agreement, a biopharmaceutical manufacturing
facility (Project
Facility) will be constructed
by a developer and leased to AgBio. Certain funds under the
Incentive Agreement are to be utilized by AgBio for investment in
the Project Facility. Additionally, Pilot has relocated its
corporate headquarters and research and development facilities to
South Carolina.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |   |  | As of December 31 2002, AgBio received $5,125,000 under the
Incentive Agreement in the form of economic development grants
and working capital loans. Specifically, AgBio received the
following: (i) $1,500,000 working capital term loan from a
banking corporation (Banking Loan), bearing interest at Prime
plus 1.5%, having a term of six years with interest only payments
beginning March 15, 2003 and a balloon payment at the end of the
term; (ii) $2,125,000 South Carolina state agency forgivable
working capital loan (Agency Loan), bearing interest at 3% and
a balloon payment at the end of the fifth year; (iii) $500,000 as
an incentive from the developer for the signing of the lease on
the Project Facility; and (iv) $1,000,000 grant to assist the
Company in upfitting and equipping the Project Facility and
commencement of agricultural and production operations. Pilot
also expects to receive a $500,000 grant for the costs associated
with the relocation of its corporate headquarters and research
and development facilities to South Carolina and an additional
$1,000,000 for construction of a research facility, later in
2003. In addition, AgBio and Pilot are eligible for job
development and various other tax incentives and credits that are
expected to be realized over the next five to ten years.

7



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##### 





| |   |  | The Incentive Agreement contains certain capital investment,
employment creation and crop growing milestones and commitments
that are required to be met over the next two to five years. If
these milestones or commitments are not met, certain of the
incentives will be required to be repaid on a pro-rata basis,
based upon the percentage of the milestone or commitment that is
met. In addition, if certain milestones and commitments are met,
the Agency Loan will convert to a grant on a pro-rata basis,
based upon the percentage of the milestone or commitment that is
met.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company is relocating various employees and
offices to South Carolina in which the Company expects to
incur relocation costs. Until the Company has determined the
number of employees relocating and the total cost of moving
the office facilities, the Company cannot reasonably estimate
such costs.                                                                                                                                                                                                                                                                               

|
|
|

| |  |  | SBIR Grant for a clinical trial to test the
safety and efficacy of Airozin in young children (down to age
2)  pending.
| | - |  | ------------------------------------------------------------------------------------------------------------------------
| |  |  | National Institute of Cancer accepted PLT 99257 for its cancer screening program.                                       
| |  |  | SBIR Grant in 2001 to test novel fatty acids in cancer models funded.                                                   

Raw Materials Supply and Manufacturing Alliances

| |  |  | On September 24, 2002, the Company and Pilot
entered into a Purchase Agreement with Kings, Inc. (Kings),
a wholly-owned subsidiary of Associated British Foods (a $15
billion multinational corporation based in the UK), for the
purchase of borage concentrate, which is used in the
production of Airozin. Under the Purchase Agreement, the
Company owed Kings $2,844,864, which was paid in the form of:
(1) $200,000 at the signing of the Purchase Agreement; (2)
delivery of 523,288 restricted shares of the Companys common
stock (Restricted Shares), valued at $1,569,864 at the
signing of the Purchase Agreement; and (3) the remaining
$1,075,000 to be paid to Kings as 50% of any monies (other
than (i) grants or (ii) loans made to Pilot by Academy Venture
Fund LLC or its affiliates in an amount not to exceed
$240,000) raised by Pilot after the signing of the Purchase
Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | Until such time that Kings disposes of or the Company
repurchases the Restricted Shares, interest shall accrue at the
Bank of England Prime Rate plus 1% on the remaining principal
amount of the Restricted Shares computed at $3.00 per share. If
by July 1, 2003, the Company has not purchased from Kings a
number of Restricted Shares which would enable Kings to sell
under Securities Act Rule 144 (Rule 144) the remaining
Restricted Shares on September 24, 2003, the Company shall
commence the preparation of a Registration Statement with
respect to the remaining Restricted Shares. From September 24,
2002 through September 12, 2003, the Company will have the right
to repurchase the Restricted Shares at $3.00 per share plus
accrued interest; in addition Kings may only sell the Restricted
Shares to the Company or its designee. Between September 13,
2003 and September 17, 2003, the Company must repurchase any
remaining Restricted Shares, at $3.00 per share, plus accrued
interest upon written notice from Kings. If all of the
remaining Restricted Shares held by Kings on September 24, 2003
are not repurchased, Kings shall have the right to sell the
remaining Restricted Shares. If the remaining Restricted Shares
are sold by Kings on or prior to March 31, 2004 at a price per
share less than $3.00, the Company will be obligated to pay the
difference between $3.00 and the price that Kings is able to
sell the Restricted Shares, plus accrued interest. Likewise, if
the remaining Restricted Shares are sold by Kings at a price in
excess of $3.00 per share, Kings is obligated to pay the excess
to the Company.
|
| |   |  | As of December 31, 2002, the Company had paid for and received
the initial purchase of borage oil in the amount of $200,000 and
had remitted the remaining cash obligation of $1,075,000 to
Kings. Additionally, the Company has included the value of the
Restricted Shares, $1,569,864, in other long term liabilities,
which will be required to be repurchased by the Company if Kings
is unable to sell the Restricted Shares to a third party. The
remaining                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

8



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| |   |  | outstanding inventory to be received, $2,644,864, is recorded as
inventory deposits pending its physical release to the Company.
This inventory is expected to be utilized over 18 months based
on the Companys current operating plan. The inventory deposits
will be recorded at the lower of cost or market and reviewed for
potential impairment on a periodic basis.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Kings has established an office in the
southeastern U.S. that plans to work with Clemson University
and Orangeburg County, South Carolina farmers to optimize the
growing seasons and conditions for borage in South Carolina.                                                                                                                                            

|
|
|

| |  |  | cGMP production of Airozin.
| | - |  | ----------------------------

Marketing Alliances

| |  |  | AC Nielsen will conduct control market test in Charleston, South Carolina.                                  
| | - |  | ------------------------------------------------------------------------------------------------------------
| |  |  | Quixote Group, LLC will provide consumer marketing and PR services.                                         
| |  |  | Emerson Group will provide a broker sales force to help place Airozin on the shelves of selected retailers.

PATENTS/INTELLECTUAL PROPERTY

The Companys success is dependent in part on its ability to obtain and
maintain patent protection for its products, obtain and maintain adequate
licenses for the use of patents licensed or sublicensed from or to third
parties, maintain trade secret protection, obtain and maintain protection of
proprietary know-how, and operate without infringing the proprietary rights of
others. Pilots policy is to aggressively protect its proprietary technology
through patents, where appropriate, and through trade secrets or other types of
intellectual property in other cases, or in addition to patent protection.
Additionally, Pilot will rely on licenses of patent and other intellectual
property rights from or to third parties. We, or our licensing partners, have
obtained approximately 41 patents, which will expire on various dates between
2015 and 2020. Pilot has filed patent applications for additional patents
covering our products, processes, and methodologies as appropriate, and
currently have approximately 28 patents pending. Management intends to
continue to file patents when needed to protect the Companys proprietary
technologies, and intends to in-license or out-license selected patent rights
where potentially beneficial to the Company.

In December 1998, Pilot entered into a license agreement with Wake Forest
University (Wake Forest) whereby it licensed certain patented or patent
pending inventions from Wake Forest in exchange for common stock. Pilot is
required to pay Wake Forest license fees and milestone payments based upon the
achievement of certain product development events related to licensed products,
as defined in the agreement. In addition, Pilot is obligated to pay royalties,
ranging from 3% to 5%, to Wake Forest based on net sales of products related to
the licenses obtained, with a minimum royalty of $30,000 beginning in the year
ended December 31, 2001. Pilot has the option to issue warrants to Wake
Forest, in an amount determined by the terms of the agreement, to purchase
common stock with an exercise price of $1.00 per share in lieu of the cash
payment of the minimum royalty up until net sales of licensed products exceed
$5 million in a calendar year.

In April 1999, Pilot entered into an exclusive license agreement with
Johns Hopkins University (Johns Hopkins) for the rights to certain patented
or patent pending inventions. The license agreement provides for Pilot to
reimburse Johns Hopkins for the costs of maintaining the patent rights, pay a
processing fee of $5,000, and pay an annual maintenance fee beginning in 2001
of $2,500. Pilot is required to pay royalties of 1.5% of net sales, with
minimum payments until cumulative net sales reach a certain level. There are
also milestone payments based upon the achievement of certain product
development events, as defined in the agreement. In the event the license is
sold there are payments due on the amount of the sale, ranging from 5% to 10%,
as well as 5% of any additional amounts that may be received from any
sublicense. The license agreement terminates concurrently with the expiration
of the patents.

On October 3, 2001, Pilot and Bristol-Myers Squibb (BMS) signed an
agreement granting Pilot a worldwide exclusive license to develop and market a
BMS patented class of oral retinoids. Pilot will pay license fees and royalties
based upon certain milestones and net sales of products containing the patented
compound, respectively.

9



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The Company has several pending trademarks that it intends to use to
uniquely identify and brand its products in the marketplace. The Company
typically seeks to register these marks in the United States, but in the future
may seek to register these marks in other parts of the world where the products
are made, used or consumed. The primary pending trademarks owned by the
Company are Airozin and Functional Liponomics. In addition, trademark
applications for the Airozin design, AIROZIN  ITS FOR BREATHING, NATURALLY,
and the Pilot Therapeutics name and logo are currently pending.

GOVERNMENTAL REGULATIONS

The manufacture and sale of medical food products and botanical and
synthetic drugs are subject to regulation principally by the FDA and state and
local authorities in the United States, and by comparable agencies in certain
foreign countries. The Federal Trade Commission (FTC) and state and local
authorities regulate the advertising of foods and OTC drugs. The Federal Food,
Drug and Cosmetic Act (FDC Act) and the regulations promulgated thereunder,
and other federal and state statutes and regulations, govern, among other
things, the testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of the Companys products.
In general, products falling within the FDAs definition of drugs, whether
botanical or synthetic, require premarketing clearance by the FDA. Products
falling within the definition of medical foods (a legal category recognized
by Congress in 1988 in the Orphan Drug Amendments, 21 U.S.C. Section
360ee(b)(3), incorporated into the FDC Act by the Nutrition Labeling and
Education Act of 1990, Pub. L. 101-535, 104 Stat. 2353, 2357) do not require
premarketing clearance. In addition to the requirement that a medical food be
generally recognized as safe (GRAS), 21 U.S.C. Section 360ee(b)(3) states:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The term medical food means a food which is formulated to be
consumed or administered externally under the supervision of a
physician and which is intended for the specific dietary
management of a disease or condition for which distinctive
nutritional requirements, based on recognized scientific
principles, are established by medical evaluation.

The FDAs regulations further interpret the definition of medical food,
limiting it to a food in pertinent part only if:



| |  |  | It is a specially formulated and processed product as opposed
to a naturally occurring foodstuff used in its natural state;                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | It is intended for the dietary management of a patient who
has special medically determined nutrient requirements, the dietary
management of which cannot be achieved by the modification of the
normal diet alone;    
| |  |  | It provides nutritional support specifically modified for the
management of the unique nutrient needs that result from the
specific disease or condition, as determined by medical evaluation;                         
| |  |  | It is intended to be used under medical supervision; and                                                                                                                                                               
| |  |  | It is intended only for a patient receiving active and
ongoing medical supervision wherein the patient requires medical
care on a recurring basis for, among other things, instructions on
the use of the medical food.

The Company intends to market its lead medical food product, Airozin for
the dietary management of asthma, as a medical food.

The Company also intends to develop and commercialize both botanical and
synthetic prescription drug products. In general, the steps required before a
drug may be marketed in the United States include (i) preclinical laboratory
and animal testing, (ii) submission to the FDA of an Investigational New Drug
(IND) application, which must become effective before clinical trials may
commence, (iii) adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug, (iv) submission to the FDA of a New Drug
Application (NDA) and (v) FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
drug product, each drug-manufacturing establishment must be registered with the
FDA and must comply with good manufacturing practice requirements.

Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a drug. The results of these
studies are submitted to the FDA as a part of an IND application, which must be
approved before clinical trials in humans can begin. Typically, clinical
evaluation involves a time consuming and

10



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costly three-phase process. In Phase I, clinical trials are conducted
with a small number of subjects to determine the early safety profile, the
pattern of drug distribution and metabolism. In Phase II, clinical trials are
conducted with groups of patients afflicted with a specific disease to
determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large-scale, multi-center, controlled trials are
conducted with patients afflicted with a target disease to provide sufficient
data to demonstrate the efficacy and safety required by the FDA. The FDA
closely monitors the progress of each of the three phases of clinical trials
and may, at its discretion, re-evaluate, alter, suspend or terminate the
testing based upon the data that have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient.

In August 2000, the FDA published Draft Guidance for Industry: Botanical
Drug Products (Draft Guidance), which provides, among other things, that
botanical drug products that are generally recognized as safe, (GRAS)
currently legally marketed as dietary supplements or foods, or are demonstrated
to have a safe history of use, may require less preclinical and toxicology
information that synthetic new drugs, which could result in more rapid
advancement from IND filing to late-stage (Phase II and Phase III) clinical
trials than generally expected for synthetic or new chemical entities. Based
on the fact that the Companys botanical ingredients have a history of safe
use, and may have marketed as medical foods with GRAS ingredients, the Company
believes its botanical drug products may obtain this more rapid advancement to
late-stage clinical trials following the filing of INDs.

In addition, see the Section captioned RISK FACTORS in Item 6 herein.

RESEARCH AND DEVELOPMENT

Pilot entered into a research agreement with Wake Forest whereby Wake
Forest will perform sponsored research. Beginning in July 1999, the agreement
requires Pilot to request that Wake Forest perform sufficient research for
which Pilot shall pay Wake Forest a minimum of $50,000 per year through the
year ending December 31, 2002.

In connection with a research agreement with Wake Forest, Pilot entered
into a sponsored research sub-agreement in March 2001. In exchange for research
assistance, Pilot paid $148,000 in fees to Wake Forest over the specified term
of the agreement.

During the fiscal years ended December 31, 2002 and 2001, and the period
from August 3, 1998 (inception) to December 31, 2002, the Company incurred
research and development expenses of $1,095,000, $1,724,000 and $4,402,000,
respectively.

EMPLOYEES

As of December 31, 2002, we had 14 full-time employees, including two (2)
people with Ph.Ds. Of these 14 employees, three (3) employees were engaged in
research and development and contract related research and development
activities, one (1) was engaged in production or production development related
activities and ten (10) were in administrative, business development, or sales
and marketing positions. We consider relations with our employees to be good.
None of our employees are covered by a collective bargaining agreement.

11



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DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Parent and their ages are as
follows:

|                             |  |     |    |          |  |                                                                                      |  |  |  | 
|---------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------------ |  |  |  | 
|Name                         |  | Age |    | Position |  |                                                                                      |  | 
|                             |  |     |    |          |  |                                                                                      |  | 
|Glenn J. Kline               |  |     | 39 |          |  | Chairman of the Board of Directors, Acting Principal
Financial Officer and Secretary
|Floyd H. Chilton, III, Ph.D. |  |     | 45 |          |  | Founder, Director, President, Chief Executive
Officer and Chief Scientific Officer  
|Santo J. Costa, J.D          |  |     | 57 |          |  | Director                                                                            
|James W. Johnston            |  |     | 56 |          |  | Director                                                                            
|Bradley J. Undem, Ph.D.      |  |     | 46 |          |  | Director                                                                            
|Margaret M. Urquhart         |  |     | 53 |          |  | Director                                                                            
|Jack Voller                  |  |     | 56 |          |  | Vice President of Marketing, Pilot Therapeutics, Inc.                               
|John Crain                   |  |     | 55 |          |  | Vice President of Sales, Pilot Therapeutics, Inc.                                   

Glenn J. Kline has been the Chairman of the Board of Directors since the
Companys inception in August 1998. Mr. Kline was elected Secretary of the
Company in February 2003 and Acting Principal Financial Officer of the Company
in March 2003. Since 1997, Mr. Kline has been Managing Partner of The Academy
Funds (Academy), an early stage venture group. Academy actively participated
in the formation of Pilot and continues to help guide our corporate strategy
and raise necessary funding. In the five years prior to joining Academy, Mr.
Kline worked at Del Monte Fresh Foods Co., a $1.5 billion multinational
corporation, where he was a member of the executive management team as Senior
Director in charge of the Business Development and Strategic Planning Group.
Prior to joining Del Monte Fresh Foods Co., Mr. Kline spent seven years at
Ventana Growth Funds, a venture capital firm based in California. He currently
serves on the board of directors for the University of North Carolina General
Administration Partnership for Innovation, Silicon Semiconductor Corporation
and Sharp Vista Technologies, Inc.

Floyd H. Chilton, III, Ph.D., Founder, Director, President, Chief
Executive Officer and Chief Scientific Officer. Dr. Chilton has been a
Director of the Company since inception in August 1998. Prior to joining the
Company as President, CEO and CSO in December 2000, Dr. Chilton was Director of
Molecular Medicine, Professor of Physiology and Pharmacology, Professor of
Internal Medicine and Professor of Biochemistry at the Wake Forest University
School of Medicine from 1991 to 2000 and an Assistant Professor at the Johns
Hopkins School of Medicine from 1986 to 1991. Dr. Chilton holds 18 issued and
25 pending patents. He has authored or co-authored over 100 scientific articles
and book chapters.

Santo J. Costa, J.D. Mr. Costa has been a Director of the Company since
January 2000. Since June 2001, he has been a consultant for Quintiles
Transnational Corp., a premier contract pharmaceutical organization, where he
was Vice Chairman from December 1999 to June 2001 and President from April 1994
to December 1999. He joined Quintiles as President and Chief Operating Officer
in April 1994 at the time of its initial public offering
(IPO). Prior to
joining Quintiles, Mr. Costa spent 23 years in the pharmaceutical industry,
most recently serving as Senior Vice President for Administration and General
Counsel of Glaxo, Inc. Mr. Costa also serves on the Boards of Directors of NPS
Pharmaceuticals, Inc., CV Therapeutics, Inc., Ribapharm Inc., Yonkers
Industries Inc., and Digiscript Inc.

James W. Johnston. Mr. Johnston has been a Director of the Company since
May 1999. He has been President and Chief Executive Officer of Stonemarker
Enterprises, Inc. a consulting and investment company, since July 1996. He
previously served as Vice Chairman of RJR Nabisco, Inc., a holding company,
from 1995 to 1996. He also served as Chief Executive Officer of R.J. Reynolds
Tobacco Co. from 1989 to 1995 and Chairman from 1989 to 1996. Mr. Johnston
also serves on the Board of Directors of Sealy Corporation, Adhesion
Technologies, and Remote Light Inc.

12



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Bradley J. Undem, Ph.D. Dr. Undem has been a Professor of Medicine and
Physiology at the Asthma and Allergy Center of The Johns Hopkins University
School of Medicine since 1987. Mr. Undem has been a Director of the Company
since 1999.

Margaret M. Urquhart. Ms. Urquhart has been a Director of the Company
since April 2001. She was the President of Krispy Kreme Stores, Inc. from
December 1999 to December 2000, and the President of Lowes Foods, Inc. from
November 1995 to December 1999, where she had the distinction of being one of
two women in the country to serve as president of a supermarket chain with more
than 50 stores. Similarly, as Vice President and Officer of Hannaford Bros. Co.
and President of its subsidiary, Wellby Super Drug Stores, she had the
distinction of being the first woman to be President of an American retail drug
store chain.

Jack Voller, Vice President of Marketing, Pilot Therapeutics, Inc. Mr.
Voller has been the Vice President of Marketing, Pilot Therapeutics, Inc. since
January 2002, and he served as the Vice President of Sales for Pilot from
September 2001 to January 2002. Mr. Voller has over 24 years of marketing
experience, most recently as Senior Product Manager at Glaxo SmithKline from
1997 to September 2001. Previously, Mr. Voller spent 10 years with
Warner-Lambert (now Pfizer), most recently as the Director of Professional
Sales and Marketing and was with Bristol-Myers Squibb for the prior 12 years.
Some of the products introduced and/or marketed with Mr. Vollers involvement
include major OTC brands such as Listerine® Mouthwash, Benadryl® Allergy
Medication, and Lubriderm® Skin Care products. He also directed the launches of
innovative products such as Benadryl® Dye Free and Cool Mint Listerine®.

John Crain, Vice President of Sales, Pilot Therapeutics, Inc. Mr. Crain
joined Pilot as Vice President of Sales in January 2002. Mr. Crain has over 30
years of experience in the over-the-counter market, most recently as
Vice-President of Sales and Marketing at Dickinson Brands, Inc., a manufacturer
and distributor of witch hazel products, from June 1997 to February 2001. In
that position he was responsible for developing and directing sales and
marketing efforts. Prior to joining Dickinson Brands, Mr. Crain served as Vice
President of Sales for seven years at Goodys Pharmaceuticals (later the
Goodys Division of Block Drug), where he directed all sales activities for
Goodys Headache Powders®. From 1979 to 1991, Mr. Crain worked for Warner
Lambert (now Pfizer) where he held a variety of management positions, including
Regional Director of Sales as well as Director of Sales Operations. Mr. Crain
has been involved in the introduction and/or marketing of products such as
Listerine®, Efferdent®, Lubriderm® and Benadryl®.

Item 2.Description of Property

The Companys operations are located in approximately 11,400 square foot
facility at 2000 Daniel Island Drive, Charleston, South Carolina. The lease is
for an eighteen-month term expiring in 2004, and provides for monthly rent
payments of approximately $18,000.

The Companys facilities and all of its operations are subject to the
plant and laboratory safety requirements of various federal, state and local
occupational safety and health laws. The Company believes it has complied in
all material respects with regard to governmental regulations applicable to it.

The Company believes that its facilities are in good condition and are
suitable and adequate for the Companys business. In addition, the Company
believes that its facilities are adequately covered by insurance.

Item 3. Legal Proceedings

The Company is not presently involved in any material litigation nor, to
our knowledge, is any material litigation threatened against the Company.

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

None.

13



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PART II

Item 5.Market Common Equity and Related Stockholder Matters

Market for the Registrants Common Equity

The Parents common stock is traded on the OTC Bulletin Board under the
symbol PLTT. Prior to December 1, 2001, the Parents common stock had traded
under the symbol ILRG.

The table below shows the range of high and low per share bid prices for
our common stock for the periods indicated, as quoted by the OTC Bulletin
Board. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

|              |  |      |      |      |  |      |      |     |  |   |      |  |  |   |      | 
|------------- |  | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- | 
|              |  | 2002 |      | 2001
|              |  |      |      |     
|Quarter ended |  | High |      | Low  |  | High |      | Low
|              |  |      |      |      |  |      |      |    
|March 31      |  | $    | 9.35 |      |  | $    | 5.50 |     |  | $ | 6.75 |  |  | $ | 5.50 | 
|June 30       |  |      | 8.00 |      |  |      | 3.25 |     |  |   | 7.50 |  |  |   | 5.50 | 
|September 30  |  |      | 4.20 |      |  |      | 2.40 |     |  |   | 7.00 |  |  |   | 6.15 | 
|December 31   |  |      | 2.90 |      |  |      | 1.50 |     |  |   | 9.25 |  |  |   | 4.75 | 

As of February 28, 2002, there were approximately 326 record holders of
our common stock.

The Company has never declared or paid any cash dividends on shares of our
common stock. The Company currently intends to retain all earnings for future
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.

Recent Sales of Unregistered Securities

During the fourth quarter of 2002, the Parent issued the following
securities that were not registered under the Securities Act of 1933:

On November 14, 2002, the Parent issued 5,100 shares of common stock to a
consultant for services rendered in connection with real estate consultations
and website development assistance exempt from registration under Rule 701 of
the Securities Act of 1933. The securities were issued to the consultant at
par for no additional consideration, thus no cash proceeds were received.

On November 21, 2002, the Parent issued 1,000 shares of common stock to
Academy Venture Funds in return for a loan guarantee exempt from registration
under Rule 701 of the Securities Act of 1933. These securities were issued at
par for no additional consideration, thus no cash proceeds were received.

On December 3, 2002, the Parent issued 1,148 shares of common stock to a
consultant for public relations advice exempt from registration under Rule 701
of the Securities Act of 1933. These securities were issued at par for no
additional consideration, thus no cash proceeds were received.

On December 3, 2002, the Parent issued 10,000 shares of common stock for
consulting services related to proposed state incentive programs, exempt from
registration under Rule 701 of the Securities Act of 1933. These securities
were issued at par for no additional consideration, thus no cash proceeds were
received.

14



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Item 6.Managements Discussion and Analysis or Plan of Operation

Certain statements in this section and elsewhere in this Annual Report on
Form 10-KSB are forward-looking in nature and relate to our plans, objectives,
estimates and goals. Such statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and speak
only as of the date of this report. The terms expect, anticipate,
believe, intend, estimate, plan, and project and similar words or
expressions are intended to identify forward-looking statements. The
forward-looking statements are based on current expectations, are inherently
uncertain, are subject to risks, and should be viewed with caution. Our
business is subject to many risks and uncertainties, including our ability to
register, commercialize or license our products successfully and to promote
physician and patient acceptance of our products, our need to obtain
substantial additional capital to fund our operations and the progress of
product development, and the uncertain regulatory environment (and the
resulting requirements and restrictions regarding pre-marketing approval and
label and promotional claims) surrounding our lead product. These and other
risks and uncertainties, many of which are described in more detail in this
section of our Annual Report on Form 10-KSB under Risk Factors, could cause
actual results and experience to differ materially from those expressed or
implied by any of these forward-looking statements.

OVERVIEW

Because we are a small business issuer in the development stage that has
not yet had revenues from operations, the following discussion and analysis
relates to our plan of operation for the next 12 months. However, we have also
provided a comparative analysis of our financial condition and results of
operations from the years ended December 31, 2002 and December 31, 2001, to the
extent such analysis relates to our plan of operation.

The following discussion, analysis and plan of operation should be read in
conjunction with the accompanying Consolidated Financial Statements and related
notes of Pilot Therapeutics Holdings, Inc., formerly Interallied Group, Inc.
(ILRG), and its wholly owned subsidiaries including Pilot Therapeutics, Inc.
(together referred to as the Company, us or we).

The comparative results of operations for the years ended December 31,
2002 and 2001 include only the historical information of Pilot Therapeutics
Holdings, Inc.s wholly owned subsidiary Pilot Therapeutics, Inc. and not the
operations of ILRG. Prior to the recapitalization transaction with Pilot
Therapeutics, Inc., ILRG was engaged in restaurant operations until the second
quarter of 2000, when such operations were discontinued. Our current
operations are the discovery and development of pharmaceutical products.
Management believes that comparative presentation of the results of
significantly unrelated operations could be misleading.

RESULTS OF OPERATIONS

As a development stage company, our operating activities have been limited
primarily to research and product development (including preclinical and
clinical development) and, accordingly, we have not yet generated any revenues
from operations.

Research and Development Expenses

Since inception, we have been developing products that are created from
our proprietary Functional Liponomics discovery platform. The Functional
Liponomics discovery platform combines state-of-the-art lipid and genomic
profiling to identify points where dysfunctional lipid metabolism impacts human
disease. We expect that over the next 12 months, we will continue: (i) the
development of our medical food product for asthma, Airozin, that we currently
expect to launch in April 2003; (ii) an additional premarketing clinical trial
for PLT 1288, Pilots medical food for arthritis; and (iii) the preparation and
filing of an Investigational New Drug (IND) application and continuation of
clinical trials for our lead botanical drug candidates for coronary heart
disease (PLT 732).

Our research and development expenses in 2002 were $1,095,000, as compared
with $1,724,000 in 2001, a decrease of 36%. This decrease in research and
development expenses is primarily attributable to completion of several
clinical trials of pipeline products generated from our Functional Liponomics
discovery platform, as we

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prepared our lead products for introduction into the marketplace. These
trials started in 2001. Due to cash flow restraints, no new trials were
conducted in 2002. We have included in our research and development expenses
the personnel costs related to our research activities and costs related to
clinical trial expenses.

General and Administrative Expenses

General and administrative expenses decreased from $5,205,000 in 2001 to
$4,291,000 in 2002. Spending in 2001 anticipated a 2002 launch of Airozin.
The launch did not occur as originally planned and, accordingly, spending was
reduced to preserve cash. We expect general and administrative costs to
increase as a result of the selling and marketing costs associated with the
launch of Airozin, including the hiring of additional personnel, over the next
12 months. We have included in our general and administrative expenses the
costs of administrative personnel and related facility costs along with legal,
accounting and professional fees, services, and other costs related to public
disclosure and investor communication activities.

Net Loss

Due to our research and development and general and administrative
expenses, and the lack of any revenues to offset expenses, we had a net loss of
$6,368,000 in 2002, as compared with a net loss of $7,091,000 in 2001. Our
loss per share was $0.59 in 2002 compared to $0.73 in 2001.

PLAN OF OPERATION

Since our inception in August 1998, we have raised sufficient funds from
investors and other financing from strategic alliances to sustain our research
and product development activities to date. At December 31, 2002, we had cash
and cash equivalents totaling $2,208,000, an increase of $1,379,000 compared to
December 31, 2001 and due principally to the receipt of grant funds and
incentives from the State of South Carolina which were received in December
2002. In addition, at December 31, 2001 we had $1,282,000 in escrowed cash
related to capital raised in a private placement of common stock. The private
placement subsequently closed in January 2002, in which we raised capital
totaling $1,781,000, net of placement fees.

Net cash used in operating activities increased to $5,779,000 for the year
ending December 31, 2002 from $4,554,000 for the year ending December 31, 2001.
This increase primarily resulted from the purchase of borage oil concentrate
from Kings in anticipation of the Airozin product launch.

Net cash provided by financing activities increased from $4,365,000 in
2001 to $7,163,000 in 2002. The financing in 2002 was primarily a result of
the $5,125,000 received under the South Carolina incentive agreements and
proceeds from common stock issuance of $2,492,000.

We expect to incur additional losses for the foreseeable future as a
result of our expenditures for research and product development, including
costs associated with conducting preclinical testing and clinical trials, and
charges associated with the purchase of technology, product launches and other
necessary expenditures. We intend to invest significantly in our products
prior to entering into possible collaborative arrangements. This will increase
our need for capital and may result in substantial losses for several years.
We expect the amount of losses will fluctuate significantly from quarter to
quarter as a result of increases in our research and development expenses, the
execution of clinical trials, the execution or termination of collaborative
arrangements, the initiation, success or failure of clinical trials, or the
success or failure of product marketing.

Based on the level of operating cash requirements expected for 2003, we
will require significant additional funding to continue our operations beyond
the third quarter of 2003. Therefore, we are currently seeking to raise
approximately $8 million of additional capital to fund: (i) the development,
marketing and launch of Airozin, our product for asthma; (ii) an additional
premarketing clinical trial for PLT 1288, Pilots medical food for arthritis;
and (iii) the preparation and filing of an IND and clinical trials for our lead
botanical drug candidates for coronary heart disease (PLT 732).

We are aggressively pursuing possible sources of capital, including
possible equity private placements, debt offerings and expanded strategic
alliances or partnerships. We have previously been successful in raising
additional

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capital and believe that we will be successful in the future. However,
there can be no assurance that we will be able to raise sufficient additional
financing. If we are unsuccessful in our efforts to obtain sufficient
additional financing, we may be required to reduce or delay research and
development activities, as well as the development and marketing of the
national launch of Airozin until such time that additional financing is
obtained, or to cease operations. We could also be required to enter into a
strategic alliance or partnership or a possible business combination that could
involve the merger or sale of the Company.

If we raise additional funds by issuing equity securities, substantial
dilution to our existing stockholders may result. There can be no assurance
that we will be successful in raising the necessary additional financing on
acceptable terms, or at all.

Our future liquidity, capital requirements and our ability to achieve
profitability will depend on many factors, including scientific progress in
research and development programs, the size and complexity of our programs, the
scope and results of preclinical studies and clinical trials, our ability to
establish and retain corporate partnerships and collaborative arrangements, the
time and costs involved in obtaining regulatory approvals, the costs involved
in filing, prosecuting and enforcing patent claims, competing technological and
market developments, the cost of establishing our manufacturing capabilities,
commercialization activities and arrangements, the cost of manufacturing
preclinical and clinical material and other factors not within our control.
There can be no assurance that the additional financing necessary to meet our
short and long-term capital requirements will be available on acceptable terms
or at all.

Pursuant to the provisions of our operating and capital leases, our
minimum lease payment commitment for 2003 is approximately $1,387,000.

Contractual Obligations and Commercial Commitments

The following table summarizes the Companys future contractual cash
obligations as of December 31, 2002:

|                                              |  |      |           |      |  |      |           |            |  |   |         |  |  |   |           | 
|--------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | ---------- |  | - | ------- |  |  | - | --------- | 
|                                              |  | 2003 |           | 2004 |  | 2005 |           | Thereafter
|                                              |  |      |           |      |  |      |           |           
|Operating lease commitments                   |  | $    | 245,435   |      |  | $    | 611,203   |            |  | $ | 496,000 |  |  | $ |          | 
|Capital lease obligations                     |  |      | 33,961    |      |  |      |          |            |  |   |        |  |  |   |          | 
|Convertible debt                              |  |      |          |      |  |      | 4,000,000 |            |  |   |        |  |  |   |          | 
|Long-term debt                                |  |      |          |      |  |      |          |            |  |   |        |  |  |   | 1,500,000 | 
|Obligation related to redeemable
common stock |  |      | 1,569,864 |      |  |      |          |            |  |   |        |  |  |   |          | 
|Royalties and license fees                    |  |      | 32,500    |      |  |      | 32,500    |            |  |   | 32,500  |  |  |   |          | 
|                                              |  |      |           |      |  |      |           |            |  |   |         |  |  |   |           | 
|Total contractual cash obligations            |  | $    | 1,881,760 |      |  | $    | 4,643,703 |            |  | $ | 528,500 |  |  | $ | 1,500,000 | 
|                                              |  |      |           |      |  |      |           |            |  |   |         |  |  |   |           | 

On September 1, 2002, Pilot entered into an agreement with Kings granting
Pilot or AgBio the option to purchase all or a portion of approximately 900
metric tons of borage products during the period from January 1, 2003 through
December 31, 2005. During the option period, Pilot must obtain approval from
Kings for the purchase of borage products from a third party.

In connection with the South Carolina Incentive Agreements, AgBio is
committed to acquiring up to 30% of its worldwide borage seed requirements from
qualified South Carolina growers.

The timing, quantity, or value of these commitments cannot be reasonably
determined at this time since the Company has not commenced product sales.

In December 1998, Pilot entered into a license agreement with Wake Forest
whereby it licensed certain patented or patent pending inventions from Wake
Forest in exchange for common stock. Pilot is required to pay Wake Forest
license fees and milestone payments based upon the achievement of certain
product development events related to licensed products, as defined in the
agreement. In addition, Pilot is obligated to pay royalties, ranging from 3%
to 5%, to Wake Forest based on net sales of products related to the licenses
obtained, with a minimum royalty of $30,000 beginning in the year ended
December 31, 2001. Pilot has the option to issue warrants to Wake Forest, in

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an amount determined by the terms of the agreement, to purchase common
stock with an exercise price of $1.00 per share in lieu of the cash payment of
the minimum royalty up until net sales of licensed products exceed $5 million
in a calendar year.

In April 1999, Pilot entered into an exclusive license agreement with
Johns Hopkins for the rights to certain patented or patent pending inventions.
The license agreement provides for Pilot to reimburse Johns Hopkins for the
costs of maintaining the patent rights, pay a processing fee of $5,000, and pay
an annual maintenance fee beginning in 2001 of $2,500. Pilot is required to
pay royalties of 1.5% of net sales, with minimum payments until cumulative net
sales reach a certain level. There are also milestone payments based upon the
achievement of certain product development events, as defined in the agreement.
In the event the license is sold there are payments due on the amount of the
sale, ranging from 5% to 10%, as well as 5% of any additional amounts that may
be received from any sublicense. The license agreement terminates concurrently
with the expiration of the patents.

On October 3, 2001, Pilot and Bristol-Myers Squibb (BMS) signed an
agreement granting Pilot a worldwide exclusive license to develop and market a
BMS patented class of oral retinoids. Pilot will pay license fees and royalties
based upon certain milestones and net sales of products containing the patented
compound, respectively.

On June 22, 2001, Pilot entered into an Investment and Royalty Agreement
and a Loan Agreement with PharmaBio Development, Inc. (PharmaBio) and a
Commercialization Agreement with Innovex LP (Innovex). See Note 11 for
discussion of the terms of the Investment and Royalty, Loan and
Commercialization Agreements. Innovex and PharmaBio are commonly controlled by
Quintiles. The Loan Agreement with PharmaBio is for general working capital
purposes with $4,000,000 outstanding principal balance at December 31, 2002.
PharmBios loan (Loan) accrues interest at the greater of 10% or prime plus
2.5%. Interest on the Loan is payable quarterly and the principal will be due
in a lump sum payment at the end of the 36-month term. The Loan has a
commitment fee in the amount of 1% of each increment outlined above that
becomes available to Pilot, which is paid on the first anniversary of the date
on which the increment becomes available. PharmaBio may at any time elect to
convert the Loan, including the quarterly interest payments and the commitment
fee, into shares of the Companys common stock based on a conversion price as
defined in the Loan Agreement, equal to the price paid in any institutional
round of Company equity financing led by an institutional investor. However,
in no event will the conversion price exceed $1.915 per share. Additionally,
PharmaBio may purchase additional shares of the Companys common stock at the
conversion price up to an amount equal to the difference between the total
credit availability under the Loan and the amounts outstanding under the Loan.

On October 4, 2002, AgBio and Pilot entered into an Incentive Agreement
with various agencies and a county in the State of South Carolina as well as a
banking corporation and developer, providing AgBio and Pilot a wide range of
performance-based incentives, authorized by state statute, including Job Tax
Credits and Job Development Credits in addition to assistance through grants
and loans. Under the Incentive Agreement, a biopharmaceutical manufacturing
facility (Project Facility) will be constructed by a developer and leased to
AgBio. Certain funds under the Incentive Agreement are to be utilized by AgBio
for investment in the Project Facility. Additionally, Pilot has relocated its
corporate headquarters and research and development facilities to South
Carolina.

Off-Balance Sheet Arrangements

The Company does not have any transactions, obligations or relationships
that could be considered off-balance sheet arrangements.

Certain Trading Activities Accounted for at Fair Value

The Company does not engage in any commodity or derivative trading
activities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The Companys discussion and analysis of its Plan of Operation is based
upon the Companys consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the

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United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to licensing agreements, purchase agreements, product
returns, bad debts, inventories, intangible assets, income taxes, financing
operations, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Research and Development

Research and development expenses, including direct and allocated
expenses, consist of independent research and development costs and costs
associated with sponsored research and development.

Patent Costs

The Company capitalizes the costs to purchase patents from external
sources. Expenditures that are related to the development of new products and
processes, including filing and maintenance costs of patents created
internally, are expensed as incurred until such time as technological
feasibility has been established and the products are approved by regulatory
agencies for introduction to the market.

Inventories

The Company writes down its inventory and inventory deposits for
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions or future demand for
the Companys borage-based products are less favorable than those projected by
management, additional inventory write-downs may be required. Inventory
deposits represent amounts paid for inventory that has not been shipped by
Kings, Inc. Once Pilot takes possession of the inventory, the amounts in
inventory deposits will be transferred to Inventory.

Grant revenue recognition

The Company will recognize grants from South Carolina as Other Income when
all conditions stipulated in the grant have been fulfilled. As of December 31,
2002, none of the grant money received had been recognized as Other Income.
Amounts received are shown as a liability on the balance sheet.

Income Taxes

We currently have significant deferred tax assets, which are subject to
periodic recoverability assessments. Realization of our deferred tax assets is
principally dependent upon our achievement of projected future taxable income.
Until such time, a valuation allowance will be recorded for the deferred tax
asset to reduce the amount to a balance that is more likely that not to be
realized.

License Fees

Upon execution and continuation of license agreements, license initiation
and maintenance fees are evaluated as to whether the underlying licensed
compound or drug candidate has alternative uses, and if none, have been
recorded as an expense. License milestones criteria are continuously
evaluated.

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Financial Instruments

Many of our debt and equity transactions are complex transactions, which
require significant judgments in the area of determining fair value. Critical
assumptions such as the expected volatility of our stock and the expected life
of the financial instrument are subject to judgment and may change in the
future.

Recent Accounting Pronouncements

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting For Costs Associated with Exit or Disposal Activities
(SFAS 146). The statement requires costs associated with exit of disposal
activities to be recognized when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The requirements of SFAS 146 are
effective for exit or disposal activities initiated after January 1, 2003. The
Company will adopt the provisions of SFAS 146 on January 1, 2003. The Company
does not expect the impact of adopting this statement to have a material impact
on its consolidated financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition disclosure requirements of SFAS No. 148 are effective for fiscal
year 2002. The interim and annual disclosure requirements are effective for the
first quarter of 2003. The Company does not expect SFAS No. 148 to have a
material effect on its financial condition, results of operations or cash
flows.

RISK FACTORS

The Plan of Operation contains forward-looking statements concerning our
business and operations and we desire to take advantage of the safe harbor
provisions of the Private Securities Litigations Reform Act of 1995. The
following risks and uncertainties could cause our actual results and experience
to differ materially from the results expressed or implied by the
forward-looking statements set forth above under Plan of Operation or
elsewhere in this Annual Report on Form 10-KSB.

There is no assurance that the Company will be able to raise additional
capital necessary to sustain its operations past the third quarter of 2003.

Based on the current level of operating cash requirements expected for
2003 and in anticipation of the commercialization of Airozin, we will require
significant additional funding to continue our operations beyond the third
quarter of 2003. Possible sources of funds include additional or expanded
strategic alliances, additional equity or debt public offerings and/or private
placements, and additional grants and contracts. While we have previously been
successful in raising additional capital, there can be no assurance that we
will be able to raise sufficient capital to continue our current level of
operations beyond the third quarter of 2003. If we are unsuccessful in our
efforts to obtain sufficient additional financing, we may be required to reduce
or cease operations, delay or reduce research activities or enter into a
business combination transaction that would involve the merger or sale of the
Company.

In light of our financial condition and operating results, our independent
Auditors have included in their report on our consolidated financial statements
as of and for the year ended December 31, 2002 an explanatory paragraph that
expresses substantial doubt about our ability to continue as a going concern.

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Since the Companys inception in 1998, it has had operating losses and
does not currently have any products at-market or other activities generating
revenues.

The Companys accumulated deficit as of December 31, 2002 was $16,690,000,
and the Company anticipates that its operating and capital expenditures will
increase significantly in 2003 and in future years primarily due to its
commitment to: (i) manufacture and market its lead OTC medical food product,
Airozin for asthma; (ii) file an IND application, under the FDAs Botanical
Drug Guidance, and continue clinical trials for PLT 732, for elevated
triglycerides, (iii) complete clinical trials for PLT 1288, Pilots OTC medical
food for arthritis; (iv) file INDs for PLT 99511, for cystic acne, and PLT
99527, for cancer; (v) identify and develop additional pharmaceutical products;
and (vi) support the marketing, sales, and distribution of pipeline
pharmaceutical products, including hiring additional personnel and expanding
office and laboratory space and/or entering into strategic alliances for
cost-and-risk-sharing.

The Food and Drug Administration may object to the Companys desired
language on the labels of its medical foods.

Regulations of the Food and Drug Administration (FDA) prescribe
permissible claims that may, and required claims that must, be made on the
labels of medical foods. In the case of Airozin or one or more of the
Companys other medical food products, the FDA may not accept the Companys
desired label language and may require the Company to support its label claims
with additional data or to revise the label. Furthermore, FDA regulations
pertaining to label claims for medical foods may change, or the FDA may take
the position that the Companys medical foods should instead be classified as
dietary supplements, non-medical foods, drugs or any other statutory
category. As a consequence of any of these events, the Company may be required
to change its desired label claims which could materially and adversely affect
the Companys ability to market and sell its products, or may be required to
support the claims by conducting clinical testing that could take several
years, be expensive and yield unpredictable results, any of which could
materially and adversely affect the Companys business, results of operations
or financial condition.

The current regulatory framework governing medical foods could change or
additional regulations could arise at any stage during the Companys product
development.

The basic regulatory framework governing medical foods, including
Airozin, is provided in the Federal Food, Drug and Cosmetic Act (FDC Act)
and the Orphan Drug Amendments of 1988. Currently, the FDC Act and the Orphan
Drug Amendments and associated sections of the Food, Drug and Cosmetic Act and
FDA medical food regulations generally prohibit the FDA from regulating the
active ingredients in dietary supplements or medical foods as drugs unless
product claims are made or promotional activities are conducted that would
trigger classification as a drug. Accordingly, the development time of medical
foods is shorter than that required for pharmaceuticals, and the Company is
seeking to leverage the reduced development time for its medical food products
to reduce development costs and generate earlier revenues than generally
expected for drugs. If the current regulations governing these products were
to change or compliance with such regulations were to become more expensive or
time-consuming, potential profit margins for the Companys medical food
products would be materially reduced and the Company may opt to alter its
development or marketing strategy or to abandon development or product launch,
any of which may materially and adversely affect the Companys business,
results of operations or financial condition.

The Company believes that its medical food products, as they are to be
promoted and intended by the Company for use, will be considered by the FDA to
be medical foods that are exempt from being considered drugs and therefore do
not require pre-marketing clearance. However, there can be no assurance that
the FDA will not take a contrary position. If the FDA were to do so, the
Company may be required to seek FDA approval for such products, market such
products as dietary supplement products or withdraw such products from the
market. The Company believes that such products are subject to regulations
governing product safety, use of ingredients, labeling, promotion and
manufacturing methods.

In addition, the Company also will be subject to foreign regulatory
authorities governing clinical trials and pharmaceutical sales if it seeks to
market its products outside the United States. Whether or not FDA approval has
been obtained, approval of a product by the comparable regulatory authorities
of foreign countries must be obtained

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prior to the commencement of marketing the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval. There can be no
assurance that any foreign regulatory agency will approve any product submitted
for review by the Company.

The Food and Drug Administration could consider the Companys botanical
drug products to be new chemical entities.

There can be no assurance that the FDA will not consider the Companys
botanical drug products to be new chemical entities. If the FDA were to do
so, the Company may be required to conduct additional preclinical and clinical
testing for such products, and even with additional testing may not obtain FDA
approval to market such products nor obtain a period of exclusivity, which
could have a material adverse effect on the Companys business, financial
condition and results of operations.

The Companys long-term success may depend on the acquisition, development
and commercialization of new products, and the results of its research and
development efforts for new products are unpredictable.

The Companys long-term viability and growth will depend on the successful
acquisition, development and commercialization of new products from research
activities and collaborations. The successful development and commercialization
of new products is uncertain and dependent on numerous factors, many of which
are beyond the Companys control. If the Company is unable to commercialize
its pipeline products or to discover or acquire and commercialize new products,
the Companys business, operating results and financial condition would be
materially and adversely affected.

The Company could experience difficulty in managing growth.

The Company currently has limited resources with which to manage rapid
growth. The Companys ability to manage growth successfully will require the
Company to continue to improve its operational, management and financial
systems and controls and to expand its work force. There can be no assurance
that the Company will be able to expand and adapt its infrastructure to manage
growth on a timely basis, at a commercially reasonable cost, or at all. If the
Companys management is unable to utilize and expand its operational,
management, and financial systems and controls to manage growth effectively,
the Companys business, operating results, and financial condition could be
materially and adversely affected.

The Company is dependent on key management and qualified scientific
personnel.

The Company is highly dependent on the efforts of its management. The
loss of the services of one or more members of management could impede the
achievement of the Companys business objectives. Due to the specialized
scientific nature of the Companys business, the Company is also highly
dependent upon its continuing ability to attract and retain qualified
executives and scientific personnel. There is intense competition for
qualified personnel for the Companys activities and there can be no assurance
that the Company can presently, or will be able to continue to, attract and
retain qualified personnel necessary for the development of its existing
business and its expansion into areas and activities requiring additional
expertise. The loss of, or failure to recruit additional, scientific,
technical and executive personnel could have a material adverse effect on the
business of the Company.

The Company is dependent on Quintiles Transnational Corporation and its
other strategic partners.

The Company seeks to leverage its strategic partnerships to reduce costs,
accelerate product development and commercialization and enhance shareholder
value. In particular, the Company substantially relies, and for the
foreseeable future will substantially rely on Quintiles and its subsidiaries,
Innovex and PharmaBio, to provide top level commercialization and financial
resources. In addition, the Company relies on providers of raw material
supplies for its first products, as well as manufacturing support. If any of
the Companys strategic partners were to terminate its relationship with the
Company or were to fail to provide the expected resources and services
successfully and in a timely manner, the Companys business could be materially
and adversely affected.

The Company has limited manufacturing capability.

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The Company does not own sufficient large-scale manufacturing capacity to
manufacture commercial quantities of its lead products or its pipeline products
under development, including Airozin. Accordingly, the Company is in the final
stages of negotiating a Research and Development Services Agreement with a
manufacturer pursuant to which the manufacturer would develop a formulation,
flavoring, and manufacturing process for its products, both for commercial
development testing and for commercial sale. If the Company is unsuccessful in
securing a third party to manufacture commercial quantities of its products,
the Company may need to invest substantial sums to purchase or construct
facilities sufficient to meet long-term manufacturing requirements for Airozin
and its other products.

The Companys lead product requires fatty acids from seeds of plants that
must be grown.

An active fatty acid in the Companys lead product, Airozin, gamma
linolenic acid, is derived from the seed of borage plants. These seeds must be
secured in order to manufacture Airozin. While the Company has secured
sufficient seed to manufacture Airozin for 18 months, there is no guarantee
that a major crop failure would not impact the supply of borage seed or that
the Company will be able to secure seeds at affordable cost in future years.
If the Company were unable to secure sufficient and / or affordable seeds, the
Companys business, results of operations and financial condition could be
materially and adversely affected.

The Company cannot be certain that it is free to market its lead and
pipeline products without infringing on the rights of others.

The Company, through its exclusive license from Wake Forest, has obtained
an issued U.S. Letters Patent relating to its lead product, Airozin, and has
in-licensed or filed additional pending and issued U.S. and foreign patents
relating to Airozin and its pipeline products. The Company has also obtained
opinions of counsel based upon prior art identified through patentability or
freedom-to-operate searches applicable to its business or that was cited by
patent examiners during patent prosecution. No search, however, is exhaustive
or certain to identify all applicable art. There can be no assurance that a
third party will not assert a claim to any art that may prevent the Company
from having the freedom to market its lead and pipeline products, or that may
enable such party to compete effectively with the Company.

The Company relies on patent and trademark protection, trade secrets,
know-how, and continuing technological advancement to develop and maintain its
competitive position.

The Company has both in-licensed and developed a substantial portfolio of
patents and patent applications and has applied to register several trademarks
that it believes will be important in distinguishing its business and providing
barriers-to-entry for potential competitors. There can be no assurance,
however, that the Company will not be precluded from commercialization, or
delayed, by the proprietary rights of others, or by competing products or
technologies, or that it will not be required to expend substantial resources
to preserve or defend its rights, whether because the holders of its licensed
patents fail to secure and protect their rights and the Company must assume
control of patent prosecution, or otherwise. Furthermore, there can be no
assurance that the Companys currently pending patent applications will be
issued as patents, that its issued patents will not be challenged or
invalidated, or that any patent protection will be sufficiently broad to enable
the Company freedom-to-operate or provide a barrier-to-entry for potential
competitors, or that the Companys currently pending trademark applications
will be registered as trademarks.

Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate the technology owned by or licensed
to the Company or design around the patented aspects of such technology. There
can be no assurance that the products and technologies that the Company
currently is developing and intending to market will not infringe patents or
other rights owned by others. A claim or finding of infringement on any of the
Companys products could have a material adverse effect on the Companys
business, financial condition and results of operations.

Management believes that the laws governing the obtaining and enforcing of
foreign patents are different than those for obtaining domestic patents.
Therefore, the Company recognizes that its patent position, if any, may be
different in the United States than in Europe, Asia, or elsewhere. In
addition, the protection provided by foreign patents once they are obtained may
be different or weaker than that provided by domestic patents.

23



---



##### 



The Company relies and expects to continue to rely upon unpatented
proprietary know-how and continuing technological innovation in the development
and manufacture of its principal products. The Companys policy is to require
all its employees, consultants and advisors to enter into confidentiality and
non competition agreements with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Companys trade secrets or proprietary know-how in the event of any
unauthorized use or disclosure of such information, nor can there be no
assurance that others will not obtain access to or independently develop
similar or equivalent trade secrets or know-how. In addition, there can be no
assurance that the Companys former employees will not engage in competition
with the Company, which could potentially require the Company to seek
potentially costly legal remedy to cease competition. Any disclosure of
confidential information including trade secrets or know-how of the Company, or
any competition with the Company by its former employees could have a material
adverse affect of the Companys business, financial condition and results of
operations.

The Companys pharmaceutical products are subject to governmental
regulations and approvals, and required preclinical or clinical testing may be
unsuccessful or expensive.

The FDA and similar governmental agencies in foreign countries impose
substantial requirements on pharmaceutical products, like the Companys
botanical and synthetic drug candidates, before permitting late-stage clinical
development, manufacture, marketing and sales to the public. Thus,
pharmaceutical development is costly and time-consuming, and dependent on a
number of factors such as the type, complexity and novelty of the product and
the ability to enroll patients in necessary clinical trials. There can be no
assurance, however, that the Company will not encounter delays in current or
future clinical trials, which may result in increased costs, program delays, or
both. Furthermore, there can be no assurance that the FDA or other
governmental agencies will approve all or some uses of the Companys products
or will not require that its products undergo additional testing and
surveillance programs.

The Company faces substantial competition.

The Company faces competition from a substantial number of companies that
market dietary supplement products, potentially including from marketers of
prescription leukotriene modifiers or other pharmaceutical products that are
marketed for diseases that the Company intends to address with its products.
The Company may not be or remain the only company intending to market or
marketing a medical food for asthmatics and the Company may not be able to
compete successfully with any competitor or potential competitor with
substantial resources engaged or that may become engaged in the asthma market
Even if the Companys drug candidatesproducts for the treatment of asthma,
elevated triglycerides, severe acne, or cancerare brought to market, they may
not be able to compete successfully with the current treatments or with other
competitors or potential competitors with substantial resources engaged or that
may become engaged in the those markets.

The Company may be required to defend lawsuits or pay damages for product
liability claims.

Product liability is a major risk in the testing and marketing of
biotechnology, natural and pharmaceutical products. The Company faces
substantial product liability exposure in human clinical trials and for
products that may or may not receive regulatory approval for commercial sale.
The Company currently maintains product liability insurance coverage based on
its product portfolio, sales volumes and claims experience to date and intends
to continue and expand such coverage as the Company, in consultation with the
Companys insurance professionals, deems advisable. The Company has retained
and utilizes product liability counsel to assist it in its efforts to reduce
liability risk. However, there can be no assurance that the Company can avoid
liability or that the Companys current or future insurance will provide
adequate coverage against potential liabilities, either for clinical trials or
commercial sales, or that its liability counsel will be successful in avoiding
or prevailing against product liability claims or damages.

The Company may be required to pay damages for environmental accidents and
to incur significant costs for environmental compliance.

The Companys research and development activities involve the controlled
use of hazardous materials, chemicals, viruses and radioactive and teratogenic
compounds which are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal. The Company
cannot eliminate the risk

24



---



##### 



of accidental contamination or injury from these materials. In the event
of such an accident or injury, the Company could be held liable for substantial
damages. Furthermore, the Company may be required to incur significant costs
to comply with environmental laws and regulations in the future.

The Company may not receive third party reimbursement for any of its OTC
medical food products.

The Companys future revenues, profitability and access to capital will be
affected by the continuing efforts of governmental and private third-party
payors to contain or reduce the costs of health care through various means.
The Company expects a number of federal, state and foreign proposals to control
the cost of drugs through governmental regulation. The form that any health
care reform legislation may take, and what actions federal, state, foreign, and
private payors may take in response to the proposed reforms, are uncertain.
The Company does not currently intend to seek reimbursement for the cost of its
medical food products and related treatments from government health
administration authorities, such as Medicare and Medicaid in the United States,
private health insurers and other organizations. As a result, its ability to
achieve market acceptance and its results of operations may be adversely
affected.

There is a limited trading volume for the Companys common stock, and the
Company expects to experience volatility in its common stock price.

The Companys common stock is listed on the OTC Bulletin Board, and is
thinly traded. There can be no assurance that an active or liquid trading
market in the Companys common stock will develop or be sustained.
Furthermore, the market price of the Companys common stock is subject to
significant fluctuations in response to variations in quarterly operating
results, the failure of the Company to achieve operating results consistent
with securities analysts projections of the Companys performance, and other
factors. The stock market has experienced extreme price and volume fluctuations
and volatility that has particularly affected the market prices of many
biotechnology, emerging growth and developmental stage companies. Factors such
as announcements of the introduction of new products by the Company or its
competitors, announcements of joint development efforts or corporate
partnerships in the nutraceutical/pharmaceutical markets, market conditions in
public markets or specifically in the dietary supplement, pharmaceutical,
biochemical and other emerging growth sectors, and rumors relating to the
Company or its competitors may have a significant impact on the market price of
the Companys common stock.

Shares eligible for future sale or registration could have a possible
adverse effect on market price.

At December 31, 2002, the Company had 50,000,000 shares of common stock
authorized with 11,547,306 shares outstanding. Of these shares, 9,980,932
shares are restricted pursuant to Rule 144 but 1,566,374 shares are not
restricted and are freely tradable. Sales of substantial amounts of these
shares in the public market or the prospect of such sales could adversely
affect the market price of the Companys common stock.

25



---



##### 



Item 7.Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

|                                                                                                                                                              |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                              |  | Page
|                                                                                                                                                              |  |     
|Report of Independent Auditors                                                                                                                                |  |      | 27 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                                                  |  |      | 28 | 
|Consolidated Statements of Operations for the years ended December
31, 2002 and 2001 and the period August 3, 1998 (inception) to
December 31, 2002           |  |      | 29 | 
|Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders Deficit for the period of August 3, 1998 (inception) to
December 31, 2002 |  |      | 30 | 
|Consolidated Statements of Cash Flows for the years ended December
31, 2002 and 2001 and the period August 3, 1998 (inception) to
December 31, 2002           |  |      | 31 | 
|Notes to Consolidated Financial Statements                                                                                                                    |  |      | 32 | 

26



---



##### 



REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of
Pilot Therapeutics Holdings, Inc.
(formerly Pilot Therapeutics, Inc.)

We have audited the accompanying consolidated balance sheets of Pilot
Therapeutics Holdings, Inc. and subsidiaries (a development stage company) as
of December 31, 2002 and 2001, and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders deficit
and cash flows for the each of the two years in the period ended December 31,
2002 and for the period from August 3, 1998 (inception) through December 31,
2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pilot
Therapeutics Holdings, Inc. (a development stage company) at December 31, 2002
and 2001, and the consolidated results of its operations and its cash flows for
the each of the two years in the period ended December 31, 2002 and for the
period from August 3, 1998 (inception) through December 31, 2002, in conformity
with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that Pilot Therapeutics Holdings, Inc. will continue as a going concern. As
more fully described in Note 1, the Company is in the development stage, has
incurred recurring operating losses and has an accumulated deficit of
$16,689,109 at December 31, 2002. The Company does not have sufficient
liquidity to meet its obligations and sustain its planned operations for the
year ending December 31, 2003. These conditions raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

|                                            |  |                      
|------------------------------------------- |  | ---------------------
|                                            |  | /s/ ERNST & YOUNG LLP
|                                           
|Greensboro, North Carolina
February 7, 2003 |  |                      

27



---



##### 



PILOT THERAPEUTICS HOLDINGS, INC.
(a development stage company)

Consolidated Balance Sheets

|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---- |  | - | ----------- | -
|                                                                                                                                                                                                            |  | December 31
|                                                                                                                                                                                                            |  | 2002        |             | 2001
|                                                                                                                                                                                                            |  |             |             |     
|Assets                                                                                                                                                                                                      |  |             |             |      |  |   |             |  
|Current assets:                                                                                                                                                                                             |  |             |             |      |  |   |             |  
|Cash and cash equivalents                                                                                                                                                                                   |  | $           | 2,208,161   |      |  | $ | 829,565     |  
|Restricted cash                                                                                                                                                                                             |  |             |            |      |  |   | 1,281,500   |  
|Accounts receivable                                                                                                                                                                                         |  |             |            |      |  |   | 244,014     |  
|Inventories                                                                                                                                                                                                 |  |             | 353,605     |      |  |   | 153,338     |  
|Prepaid and other current assets                                                                                                                                                                            |  |             | 345,920     |      |  |   | 243,188     |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Total current assets                                                                                                                                                                                        |  |             | 2,907,686   |      |  |   | 2,751,605   |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Furniture and equipment, net                                                                                                                                                                                |  |             | 108,448     |      |  |   | 155,209     |  
|Inventory deposits                                                                                                                                                                                          |  |             | 2,644,864   |      |  |   |            |  
|Other                                                                                                                                                                                                       |  |             | 51,904      |      |  |   | 51,904      |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Total assets                                                                                                                                                                                                |  | $           | 5,712,902   |      |  | $ | 2,958,718   |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Liabilities and stockholders deficit                                                                                                                                                                       |  |             |             |      |  |   |             |  
|Current liabilities:                                                                                                                                                                                        |  |             |             |      |  |   |             |  
|Accounts payable                                                                                                                                                                                            |  | $           | 1,382,575   |      |  | $ | 1,326,647   |  
|Accrued expenses and other current liabilities                                                                                                                                                              |  |             | 872,523     |      |  |   | 721,611     |  
|Current portion of capital lease obligation                                                                                                                                                                 |  |             | 31,139      |      |  |   | 35,357      |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Total current liabilities                                                                                                                                                                                   |  |             | 2,286,237   |      |  |   | 2,083,615   |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Long-term portion of capital lease obligation                                                                                                                                                               |  |             |            |      |  |   | 23,573      |  
|Convertible debt, net of imputed value of beneficial conversion                                                                                                                                             |  |             | 3,266,841   |      |  |   | 2,778,068   |  
|Long-term debt                                                                                                                                                                                              |  |             | 1,500,000   |      |  |   |            |  
|Convertible deferred grants                                                                                                                                                                                 |  |             | 3,125,000   |      |  |   |            |  
|Obligation related to redeemable common stock                                                                                                                                                               |  |             | 1,569,864   |      |  |   |            |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Total liabilities                                                                                                                                                                                           |  |             | 11,747,942  |      |  |   | 4,885,256   |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Stockholders deficit:                                                                                                                                                                                      |  |             |             |      |  |   |             |  
|Preferred stock; $.001 par value; 20,000,000 shares authorized
at December 31, 2002; 0 shares issued and outstanding                                                                                        |  |             |            |      |  |   |            |  
|Common stock; $.001 par value; 50,000,000 shares authorized at
December 31, 2002 and 2001, respectively; 11,547,306 and
9,748,873 shares issued and outstanding at December 31, 2002
and 2001, respectively |  |             | 11,547      |      |  |   | 9,749       |  
|Capital in excess of stated value                                                                                                                                                                           |  |             | 11,135,998  |      |  |   | 8,811,085   |  
|Deferred compensation                                                                                                                                                                                       |  |             | (493,476    | )    |  |   | (1,612,674  | )
|Common stock subscriptions                                                                                                                                                                                  |  |             |            |      |  |   | 1,186,005   |  
|Deficit accumulated during development stage                                                                                                                                                                |  |             | (16,689,109 | )    |  |   | (10,320,703 | )
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|Total stockholders deficit                                                                                                                                                                                 |  |             | (6,035,040  | )    |  |   | (1,926,538  | )
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  
|                                                                                                                                                                                                            |  | $           | 5,712,902   |      |  | $ | 2,958,718   |  
|                                                                                                                                                                                                            |  |             |             |      |  |   |             |  

See accompanying notes.

28



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

Consolidated Statements of Operations

|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 
|---------------------------------------------------------------------------------- | -------------------------- | - | ---------------------- | --------- | ------------ | - | ---------- | --------- |  | - | --------------- | ---------- | 
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   | Cumulative from
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   | August 3, 1998 
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   | (inception) to 
|                                                                                   |                            |   | Year ended December 31 |           | December 31,
|                                                                                   |                            |   | 2002                   |           | 2001         |   | 2002      
|                                                                                   |                            |   |                        |           |              |   |           
|Operating expenses:                                                                |                            |   |                        |           |              |   |            |           |  |   |                 |           
|                                                                                   | Research and development   |   | $                      | 1,095,401 |              |   | $          | 1,724,384 |  |   | $               | 4,402,111  | 
|                                                                                   | General and administrative |   |                        | 4,290,624 |              |   |            | 5,204,944 |  |   |                 | 10,582,114 | 
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 
|Loss from operations                                                               |                            |   | (5,386,025             | )         |              |   | (6,929,328 | )         |  |   | (14,984,225     | )         
|Interest expense                                                                   |                            |   | (980,324               | )         |              |   | (207,121   | )         |  |   | (1,304,397      | )         
|Other income (expense), net                                                        |                            |   | (2,057                 | )         |              |   | 45,454     |           |  |   | 78,921          |           
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 
|Net loss                                                                           |                            |   | (6,368,406             | )         |              |   | (7,090,995 | )         |  |   | (16,209,701     | )         
|Accreted redemption value on Series A and B
redeemable convertible preferred stock |                            |   |                       |           |              |   | (479,408   | )         |  |   | (479,408        | )         
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 
|Net loss to common                                                                 |                            | $ | (6,368,406             | )         |              | $ | (7,570,403 | )         |  | $ | (16,689,109     | )         
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |           
|Pro forma basic and diluted loss per common share                                  |                            | $ | (0.59                  | )         |              | $ | (0.73      | )         |  |   |                 |           
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 
|Pro forma weighted average common shares outstanding basic
& diluted              |                            |   | 10,877,750             |           |              |   | 9,725,287  |           |  |   |                 |           
|                                                                                   |                            |   |                        |           |              |   |            |           |  |   |                 |            | 

See accompanying notes.

29



---



##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders Deficit
For the period August 3, 1998 (inception) to December 31, 2002

|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  
|---------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ------------ |  | ------ | ---------- | -------- |  | ----- | ---------- | ------------ |  | ------------ | ------ | ----- |  | ----- | ---------- | - |  | ----------- | ---------- | - |  | - | ---------- | - |  | ------- | ----------- | - |  | - | ---------- | -
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  | Deficit |             |   |  |  
|                                                                                   |  | Redeemable Convertible |            |              |  |        |            |          |  |       |            | Capital in   |  |              |        |       |  |       |            |   |  | Accumulated |            |   |  |  
|                                                                                   |  | Preferred Stock        |            |              |  |        |            |          |  |       |            | Excess of    |  |              |        |       |  |       |            |   |  | During the  |            |   |  |  
|                                                                                   |  | Series A & B           |            | Common Stock |  | Stated |            | Deferred |  | Stock |            | Development  |  |              |        |      
|                                                                                   |  | Shares                 |            | Amount       |  | Shares |            | Amount   |  | Value |            | Compensation |  | Subscription |        | Stage |  | Total
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |      
|Issuance of common stock at inception (August 3, 1998)                             |  |                        |           |              |  | $      |           |          |  |       | 1,350,000  |              |  | $            | 1,350  |       |  | $     |           |   |  | $           |           |   |  | $ |           |   |  | $       |            |   |  | $ | 1,350      |  
|Issuance of common stock in exchange for license fee                               |  |                        |           |              |  |        |           |          |  |       | 562,500    |              |  |              | 563    |       |  |       | 111,937    |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 112,500    |  
|Issuance of Series A preferred stock, net of issuance cost                         |  |                        | 500,000    |              |  |        | 500,000    |          |  |       |           |              |  |              |       |       |  |       | (15,652    | ) |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 484,348    |  
|Net loss                                                                           |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |            |   |  |             |           |   |  |   |           |   |  |         | (191,208    | ) |  |   | (191,208   | )
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  
|Balance at December 31, 1998                                                       |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         | (191,208    | ) |  |   | 406,990    |  
|Issuance of common stock                                                           |  |                        |           |              |  |        |           |          |  |       | 219,125    |              |  |              | 218    |       |  |       | 5,063      |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 5,281      |  
|Repurchase of common stock                                                         |  |                        |           |              |  |        |           |          |  |       | (236,454   | )            |  |              | (236   | )     |  |       |           |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | (236       | )
|Issuance of Series A preferred stock, net of issuance cost                         |  |                        | 250,000    |              |  |        | 250,000    |          |  |       |           |              |  |              |       |       |  |       | (899       | ) |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 249,101    |  
|Net loss                                                                           |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         | (840,036    | ) |  |   | (840,036   | )
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  
|Balance at December 31, 1999                                                       |  |                        | 750,000    |              |  |        | 750,000    |          |  |       | 1,895,171  |              |  |              | 1,895  |       |  |       | 100,449    |   |  |             |           |   |  |   |           |   |  |         | (1,031,244  | ) |  |   | (178,900   | )
|Exercise of common stock options                                                   |  |                        |           |              |  |        |           |          |  |       | 116,114    |              |  |              | 116    |       |  |       | 15,885     |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 16,001     |  
|Issuance of common stock warrants with convertible demand
promissory notes         |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       | 8,642      |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 8,642      |  
|Net loss                                                                           |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         | (1,719,056  | ) |  |   | (1,719,056 | )
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  
|Balance December 31, 2000                                                          |  |                        | 750,000    |              |  |        | 750,000    |          |  |       | 2,011,285  |              |  |              | 2,011  |       |  |       | 124,976    |   |  |             |           |   |  |   |           |   |  |         | (2,750,300  | ) |  |   | (1,873,313 | )
|Conversion of exchangeable demand promissory note                                  |  |                        | 738,179    |              |  |        | 2,827,225  |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 2,827,225  |  
|Issuance of Series B redeemable convertible preferred
stock, net of issuance costs |  |                        | 196,240    |              |  |        | 751,600    |          |  |       |           |              |  |              |       |       |  |       | (13,754    | ) |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 737,846    |  
|Accreted redemption value on Series A and B redeemable
convertible preferred stock |  |                        |           |              |  |        | 479,408    |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         | (479,408    | ) |  |   |           |  
|Exercise of common stock options                                                   |  |                        |            |              |  |        |            |          |  |       | 31,402     |              |  |              | 31     |       |  |       | 9,483      |   |  |             |           |   |  |   |           |   |  |         |             |   |  |   | 9,514      |  
|Imputed value of beneficial conversion on convertible debt                         |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       | 1,221,932  |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 1,221,932  |  
|Deferred compensation related to the issuance of certain
stock options             |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       | 3,030,608  |   |  |             | (3,030,608 | ) |  |   |           |   |  |         |            |   |  |   |           |  
|Amortization of deferred compensation and stock-based
compensation                 |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             | 1,417,934  |   |  |   |           |   |  |         |            |   |  |   | 1,417,934  |  
|Common stock forfeitures                                                           |  |                        |           |              |  |        |           |          |  |       | (20,031    | )            |  |              | (20    | )     |  |       | 20         |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   |           |  
|Common stock subscriptions received                                                |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   | 1,186,005  |   |  |         |            |   |  |   | 1,186,005  |  
|Stock exchange with the Interallied Group, Inc., net                               |  |                        | (1,684,419 | )            |  |        | (4,808,233 | )        |  |       | 7,726,217  |              |  |              | 7,727  |       |  |       | 4,437,820  |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | (362,686   | )
|Net loss                                                                           |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         | (7,090,995  | ) |  |   | (7,090,995 | )
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  
|Balance December 31, 2001                                                          |  |                        |           |              |  |        |           |          |  |       | 9,748,873  |              |  |              | 9,749  |       |  |       | 8,811,085  |   |  |             | (1,612,674 | ) |  |   | 1,186,005  |   |  |         | (10,320,703 | ) |  |   | (1,926,538 | )
|Exercise of common stock options                                                   |  |                        |           |              |  |        |           |          |  |       | 163,436    |              |  |              | 163    |       |  |       | 74,113     |   |  |             |           |   |  |   |           |   |  |         |            |   |  |   | 74,276     |  
|Deferred compensation related to the issuance of certain
stock options             |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       | 258,700    |   |  |             | (258,700   | ) |  |   |           |   |  |         |            |   |  |   |           |  
|Deferred compensation forfeitures of nonvested terminated
stock options            |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       | (524,577   | ) |  |             | 524,577    |   |  |   |           |   |  |         |            |   |  |   |           |  
|Amortization of deferred compensation and stock-based
compensation                 |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             | 853,321    |   |  |   |           |   |  |         |            |   |  |   | 853,321    |  
|Issuance of common stock                                                           |  |                        |           |              |  |        |           |          |  |       | 1,634,997  |              |  |              | 1,635  |       |  |       | 2,516,677  |   |  |             |           |   |  |   | (1,186,005 | ) |  |         |            |   |  |   | 1,332,307  |  
|Net loss                                                                           |  |                        |           |              |  |        |           |          |  |       |           |              |  |              |       |       |  |       |           |   |  |             |           |   |  |   |           |   |  |         | (6,368,406  | ) |  |   | (6,368,406 | )
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  
|Balance December 31, 2002                                                          |  |                        |           |              |  | $      |           |          |  |       | 11,547,306 |              |  | $            | 11,547 |       |  | $     | 11,135,998 |   |  | $           | (493,476   | ) |  | $ |           |   |  | $       | (16,689,109 | ) |  | $ | (6,035,040 | )
|                                                                                   |  |                        |            |              |  |        |            |          |  |       |            |              |  |              |        |       |  |       |            |   |  |             |            |   |  |   |            |   |  |         |             |   |  |   |            |  

See accompanying notes.

30



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

Consolidated Statements of Cash Flows

|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                 |            |  
|--------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------------------------------------------- | ---------- | ----------------- | ---------- | -------------- | ---------- | --------- | --------- | - | ----------- | --------------- | ---------- | -
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             | Cumulative from
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             | August 3, 1998 
|                                                                            |                                                           |                                                                               |            | For the year      |            | (inception) to
|                                                                            |                                                           |                                                                               |            | ended December 31 |            | December 31,  
|                                                                            |                                                           |                                                                               |            | 2002              |            | 2001           |            | 2002     
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |          
|Operating activities:                                                       |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|Net loss                                                                    |                                                           | $                                                                             | (6,368,406 | )                 |            | $              | (7,090,995 | )         |           | $ | (16,209,701 | )              
|Adjustments to reconcile net loss to
net cash used in operating activities: |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|                                                                            | Depreciation and amortization                             |                                                                               |            | 54,170            |            |                |            | 58,109    |           |   |             | 152,817         |           
|                                                                            | Loss on disposal of furniture and equipment               |                                                                               |            | 15,580            |            |                |            |          |           |   |             | 15,580          |           
|                                                                            | Amortization of beneficial conversion                     |                                                                               |            | 488,773           |            |                |            |          |           |   |             | 488,773         |           
|                                                                            | Compensation related to issuance of certain stock options |                                                                               |            | 853,321           |            |                |            | 1,417,934 |           |   |             | 2,271,255       |           
|                                                                            | Other non-cash charges                                    |                                                                               |            |                  |            |                |            |          |           |   |             | 135,017         |           
|                                                                            | Changes in operating assets and liabilities:              |                                                                               |            |                   |            |                |            |           |           |   |             |                 |           
|                                                                            |                                                           | Accounts receivable                                                           |            |                   | 244,014    |                |            |           | (244,014  | ) |             |                 |           |  
|                                                                            |                                                           | Inventories                                                                   |            |                   | (200,267   | )              |            |           | (153,338  | ) |             |                 | (353,605   | )
|                                                                            |                                                           | Prepaid expenses and other current assets                                     |            |                   | (102,732   | )              |            |           | (209,266  | ) |             |                 | (345,920   | )
|                                                                            |                                                           | Inventory deposits and other assets                                           |            |                   | (1,075,000 | )              |            |           | 2,738     |   |             |                 | (1,126,904 | )
|                                                                            |                                                           | Accounts payable and accrued expenses                                         |            |                   | 311,571    |                |            |           | 1,665,174 |   |             |                 | 2,282,189  |  
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|Net cash used in operating activities                                       |                                                           |                                                                               | (5,778,976 | )                 |            |                | (4,553,658 | )         |           |   | (12,690,499 | )              
|Investing activities:                                                       |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|                                                                            |                                                           | Purchases of furniture and equipment                                          |            |                   | (5,625     | )              |            |           | (29,124   | ) |             |                 | (155,966   | )
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|Net cash used in investing activities                                       |                                                           |                                                                               | (5,625     | )                 |            |                | (29,124    | )         |           |   | (155,966    | )              
|Financing activities:                                                       |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|                                                                            |                                                           | Proceeds from issuance of notes payable                                       |            |                   | 375,000    |                |            |           |          |   |             |                 | 375,000    |  
|                                                                            |                                                           | Payments on notes payable                                                     |            |                   | (375,000   | )              |            |           |          |   |             |                 | (375,000   | )
|                                                                            |                                                           | Proceeds from issuance of long-term debt                                      |            |                   | 1,500,000  |                |            |           |          |   |             |                 | 1,500,000  |  
|                                                                            |                                                           | Proceeds from the issuance of convertible deferred grants                     |            |                   | 3,125,000  |                |            |           |          |   |             |                 | 3,125,000  |  
|                                                                            |                                                           | Proceeds from issuance of convertible debt                                    |            |                   |           |                |            |           | 4,000,000 |   |             |                 | 6,800,000  |  
|                                                                            |                                                           | Payments on capital lease obligation                                          |            |                   | (27,791    | )              |            |           | (19,533   | ) |             |                 | (72,376    | )
|                                                                            |                                                           | Proceeds from issuance of common stock                                        |            |                   | 2,491,712  |                |            |           |          |   |             |                 | 2,593,602  |  
|                                                                            |                                                           | Proceeds from exercise of stock options                                       |            |                   | 74,276     |                |            |           | 9,514     |   |             |                 | 99,791     |  
|                                                                            |                                                           | Stock exchange with Interallied Group, Inc.                                   |            |                   |           |                |            |           | (362,686  | ) |             |                 | (362,686   | )
|                                                                            |                                                           | Net proceeds from issuance of Series A redeemable
convertible preferred stock |            |                   |           |                |            |           |          |   |             |                 | 633,449    |  
|                                                                            |                                                           | Net proceeds from issuance of Series B redeemable
convertible preferred stock |            |                   |           |                |            |           | 737,846   |   |             |                 | 737,846    |  
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|Net cash provided by financing activities                                   |                                                           |                                                                               | 7,163,197  |                   |            |                | 4,365,141  |           |           |   | 15,054,626  |                
|Net increase (decrease) in cash and cash equivalents                        |                                                           |                                                                               | 1,378,596  |                   |            |                | (217,641   | )         |           |   | 2,208,161   |                
|Cash and cash equivalents at beginning of period                            |                                                           |                                                                               | 829,565    |                   |            |                | 1,047,206  |           |           |   |            |                
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                
|Cash and cash equivalents at end of period                                  |                                                           | $                                                                             | 2,208,161  |                   |            | $              | 829,565    |           |           | $ | 2,208,161   |                
|                                                                            |                                                           |                                                                               |            |                   |            |                |            |           |           |   |             |                

See accompanying notes.

31



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Business

Pilot Therapeutics Holdings, Inc. with its wholly-owned subsidiary Pilot
Therapeutics, Inc. (collectively the Company) is a specialty pharmaceutical
company. Through lipid profiling and metabolism, the Company has developed a
proprietary, state-of-the-art lipid and genomic profiling research platform,
termed Functional Liponomics. Using Functional Liponomics, the Company is
developing novel, branded therapeutic pharmaceutical products that are
specifically designed to safely and effectively address dysfunctional lipid
metabolism in chronic human diseases such as asthma, coronary heart disease,
cancer, cystic acne and rheumatoid arthritis.

Since its inception on August 3, 1998, the Company has devoted substantial
effort towards conducting product discovery and development, raising capital,
conducting clinical trials, recruiting personnel and supporting the sales and
marketing organizations and infrastructure in anticipation of the commercial
launch of the Companys first product for asthma, Airozin in the first half of
2003. In the course of such activities, the Company has sustained operating
losses and expects such losses to continue for the next several years. The
Company is working on several long-term development projects that involve
experimental technology and may require several years and substantial
expenditures to complete. The Company has not generated any significant
revenues or product sales and has not achieved profitable operations or
positive cash flow from operations. The Companys deficit accumulated during
the development stage aggregated $16,689,109 through December 31, 2002.

The Companys ability to meet its business plan objectives is dependent upon
its ability to raise additional financing, substantiate its technology and,
ultimately, to fund its operations from revenues. There is no assurance that
profitable operations, if ever achieved, could be sustained on a continuing
basis. The Company plans to continue to finance its operations in 2003 with a
combination of stock issuances, debt issuances, license payments, and payments
from strategic research and development arrangements and, in the longer term,
revenues from product sales. There are no assurances, however, that the
Company will be successful in obtaining an adequate level of financing needed
for the long-term development and commercialization of its planned products.

The Company is considered a development stage company for financial statement
disclosure purposes because the Company is devoting substantially all of its
efforts to establishing new products.

2.     Formation of Company and Basis of Presentation

Pilot Therapeutics Holdings, Inc., formerly Interallied Group, Inc. (ILRG),
is incorporated under the laws of Delaware. On October 2, 2001, the
shareholders of ILRG, a Nevada corporation, approved to reincorporate ILRG
under the laws of Delaware pursuant to an Agreement and Plan of Merger between
ILRG and Pilot Therapeutics Holdings, Inc. (Reincorporation). The
Reincorporation became effective November 30, 2001, at which time ILRGs name
changed to Pilot Therapeutics Holdings, Inc.

On August 24, 2001, pursuant to a Stock Exchange Agreement dated as of August
1, 2001, ILRG issued 7,726,217 shares of its common stock in exchange for all
the issued and outstanding shares of capital stock of Pilot Therapeutics, Inc.,
a North Carolina corporation, in a recapitalization transaction accounted for
as a reverse acquisition. Prior to August 24, 2001, ILRG was a non-operating
public shell corporation with no significant assets and was treated as the
acquired company in the transaction, but remains the surviving legal entity.
Accordingly, the transaction was treated for accounting purposes as an issuance
of stock by Pilot Therapeutics, Inc. for the net monetary assets of ILRG,
accompanied by a recapitalization. Since this transaction is in substance a
recapitalization of ILRG and not a business combination, a valuation was not
performed and no goodwill was recorded, as all assets and liabilities are
stated at their historical costs. In connection with the transaction all
redeemable convertible preferred stock of Pilot Therapeutics, Inc. was
converted into common stock.

32



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     Formation of Company and Basis of Presentation (continued)

As a result of the Reincorporation of ILRG into Pilot Therapeutics Holdings,
Inc., Pilot Therapeutics, Inc. is now a wholly-owned subsidiary of Pilot
Therapeutics Holdings, Inc.

The comparative results of operations for the year ended December 31, 2001
include only the historical information of Pilot Therapeutics Holdings, Inc.s
wholly owned subsidiary Pilot Therapeutics, Inc. (Pilot) and not the
operations of ILRG, now Pilot Therapeutics Holdings, Inc. ILRG was engaged in
restaurant operations until the second quarter of 2000 when such operations
were discontinued, and the Companys current operations are the discovery and
development of novel branded therapeutic pharmaceutical products. Management
believes that comparative presentation of the results of significantly
unrelated operations could be misleading. Given that Pilot is in the
development stage, the consolidated financial statements include the historical
comparative and cumulative results of operations and cash flows of Pilot from
August 3, 1998, its date of inception.

3.     Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Pilot Therapeutics Holdings, Inc. and its wholly owned subsidiaries, including
Pilot Therapeutics, Inc. All inter-company transactions have been eliminated
in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents.

Restricted Cash

Restricted cash is cash received in connection with common stock subscription
agreements and is held in escrow until the subscription period is closed.

Inventories

Inventories, consisting primarily of purchased raw materials, are stated at the
lower of cost (first-in, first-out) or market.

Furniture and Equipment

Furniture and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets ranging
from three to seven years. Assets capitalized under capital leases are
amortized over the shorter of the remaining term of the lease or the estimated
useful life of the asset. Accumulated depreciation at December 31, 2002 and
2001 was approximately $153,000 and $99,000, respectively.

Inventory Deposits

Inventory Deposits are recorded based on amounts expended for inventories for
which the Company has not taken physical delivery.

33



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.     Summary of Significant Accounting Policies (continued)

Research and Development

Research and development expenses, including direct and allocated expenses,
consist of independent research and development costs and costs associated with
sponsored research and development and are expensed as incurred.

Convertible Deferred Grants

The Company will recognize grants from South Carolina as Other Income when all
conditions stipulated in the grant have been fulfilled. As of December 31,
2002, none of the grant money received had been recognized as Other Income.
Amounts received have been deferred and are shown as a liability on the balance
sheet.

Patent Costs

The Company capitalizes the costs to purchase patents from external sources.
Expenditures that are related to the development of new products and processes,
including filing and maintenance costs of patents created internally, are
expensed as incurred until such time as technological feasibility has been
established and the products are approved by regulatory agencies for
introduction to the market.

Impairment of Long-Lived Assets

In connection with FAS 144, Accounting for the Impairment or Disposal of Long
Lived Assets,which the Company adopted on January 1, 2002, impairment losses
on long-lived assets used in operations are recorded when events and
circumstances indicate that assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amount of those assets. The Company also records the assets to be disposed of
at the lower of their carrying amount or fair value less cost to sell. To
date, the Company has not experienced any impairment losses on its long-lived
assets used in operations. While the Companys current and historical
operating and cash flow losses are indicators of impairment, the Company
believes the future cash flows to be received support the carrying value of its
long-lived assets and accordingly, the Company has not recognized any
impairment losses at December 31, 2002.

Income Taxes

Income taxes are computed using the asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Companys financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactment of changes
in tax law or rates. If it is more likely than not that some portion or all
of a federal tax asset will not be realized, a valuation allowance is recorded.

License Fees

Upon execution and continuation of license agreements, license initiation and
maintenance fees are evaluated as to whether the underlying licensed compound
or drug candidate has alternative uses, and if none, have been recorded as an
expense. License milestones criteria are continuously evaluated.

34



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.     Summary of Significant Accounting Policies (continued)

Stock Based Compensation

The Company accounts for stock-based compensation arrangements for employees in
accordance with Accounting Principles Board Opinion No. 25 Accounting for
Stock Issued to Employees (APB No. 25) and related interpretations, and
complies with the disclosure provisions of Statement of Financial Accounting
Standards (SFAS No. 123) Accounting for Stock-Based Compensation (SFAS No. 123). Under APB
No. 25, compensation expense
is recognized based on the excess, if any, of the fair value of the Companys
stock over the exercise price of the option on the measurement date.
Compensation expense is recognized over the respective vesting period. All
stock based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123 and related interpretations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition disclosure
requirements of SFAS No. 148 are effective for fiscal year 2002. The interim
and annual disclosure requirements are effective for the first quarter of 2003.
The Company does not expect SFAS No. 148 to have a material effect on its
financial condition, results of operations or cash flows.

Had compensation cost to employees been determined based on the fair value at
the grant dates for awards in 2002 and 2001, consistent with the provisions of
SFAS No. 123, the Companys net loss would have been the pro forma amounts
indicated below:

|                                                   |             |  |            |            |   |  |           |            |  
|-------------------------------------------------- | ----------- |  | ---------- | ---------- | - |  | --------- | ---------- | -
|Net loss available for common stockholders:        |             |  | 2002       |            |   |  | 2001      |           
|                                                   |             |  |            |            |   |  |           |           
|                                                   | As reported |  | $          | (6,368,406 | ) |  | $         | (7,090,995 | )
|                                                   |             |  |            |            |   |  |           |           
|                                                   | Pro forma   |  | $          | (6,787,552 | ) |  | $         | (7,594,917 | )
|                                                   |             |  |            |            |   |  |           |           
|                                                   |             |  |            |            |   |  |           |           
|Pro forma basic and diluted loss per common share: |             |  |            |            |   |  |           |           
|                                                   | As reported |  | $          | (0.59      | ) |  | $         | (0.73      | )
|                                                   |             |  |            |            |   |  |           |           
|                                                   | Pro forma   |  | $          | (0.62      | ) |  | $         | (0.78      | )
|                                                   |             |  |            |            |   |  |           |           
|                                                   |             |  |            |            |   |  |           |           
|Pro forma weighted average shares outstanding      |             |  | 10,877,750 |            |   |  | 9,725,287 |           

The fair value of options granted during the years ending 2002 and 2001 was
estimated on the applicable grant dates using the Black-Scholes option pricing
model. Significant weighted average assumptions used to estimate fair value
for all years include: risk-free interest rates ranging from 3 percent to 4
percent; expected lives of ten years; no expected dividends; and a volatility
factor of 61%.

35



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

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

Segment Information

The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates.

Recent Accounting Pronouncements

In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting For Costs Associated with Exit or Disposal Activities(SFAS
146). The statement requires costs associated with exit or disposal activities
to be recognized when they are incurred rather than at the date of a commitment
to an exit or disposal plan. The requirements of SFAS 146 are effective for
exit or disposal activities initiated after January 1, 2003. The Company will
adopt the provisions of SFAS 145 on January 1, 2003. The Company does not
expect the impact of adopting this statement to have a material impact on its
consolidated financial position, results of operations or cash flows.

4.     Inventory

Inventories consisted of the following at December 31, 2002:

|                |  |   |         | 
|--------------- |  | - | ------- | 
|Raw materials   |  | $ | 353,605 | 
|Work-in-process |  |   |        | 
|Finished goods  |  |   |        | 
|                |  |   |         | 
|                |  | $ | 353,605 | 
|                |  |   |         | 

5.     Loss per Share

The Company has excluded all outstanding stock options from the calculation of
pro forma diluted loss per common share because they are anti-dilutive for all
periods presented. The pro forma weighted average number of shares outstanding
at December 31, 2002 takes into account the stock exchange described in Note 1
and assumes the stock exchange was effective at January 1, 2000, with the
shares outstanding at that time. Using the date of the share exchange the
weighted average number of shares outstanding is 10,877,750 and 9,725,287 for
the years ended December 31, 2002 and 2001, respectively. The loss per common
share for basic and diluted is $0.59 and $0.73 for the years ended December 31, 2002 and 2001, respectively.

36



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.     Convertible Debt

On June 22, 2001, Pilot entered into an Investment and Royalty Agreement and a
Loan Agreement with PharmaBio Development, Inc. (PharmaBio) and a
Commercialization Agreement with Innovex LP (Innovex). See Note 11 for
discussion of the terms of the Investment and Royalty, Loan and
Commercialization Agreements. Innovex and PharmaBio are commonly controlled by
Quintiles Transnational Corporation.

The Loan Agreement with PharmaBio was for general working capital purposes with
$4,000,000 outstanding principal balance at December 31, 2002. The Loan
accrues interest at the greater of 10% or prime plus 2.5%. Interest on the
Loan is payable quarterly and the principal will be due in a lump sum payment
at the end of the 36-month term.

PharmaBio may at any time elect to convert the Loan, including the quarterly
interest payments and the commitment fee, into shares of the Companys common
stock based on a conversion price as defined in the Loan Agreement, of the
lesser of $1.915 per share or the price paid in any institutional round of
Pilot Therapeutics Holdings, Inc. equity financing led by an institutional
investor. Additionally, PharmaBio may purchase additional shares of the
Companys common stock at the conversion price up to an amount equal to the
difference between the total credit availability under the Loan and the amounts
outstanding under the Loan.In connection with the Loan the Company has
recorded the imputed beneficial conversion at a value of $1,221,932 as a result
of the Company not completing a defined equity sale and finalizing the
conversion price at $1.915.

On December 20, 2002, the Company entered into the Intercreditor and
Subordination Agreement with PharmaBio and Business Carolina, Inc. (BCI) in
order to establish First Priority Obligations and Second Priority Obligations
with respect to PharmaBio and the BCI loan executed as part of the South
Carolina Incentive Agreement. Under the agreement, PharmaBio established First
Priority Rights except for the first priority position granted to BCI in the
inventory and accounts receivable of Pilot AgBio, Inc. equal to an aggregate
value of $1,500,000.

37



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     Leases

The Company leases certain lab equipment under capital lease obligations. The
leases are payable in monthly installments of $2,946 and have terms up to 4
years at effective interest rates of 16.5%. The leases are collateralized by
all the leased property and a certificate of deposit equal to 55% of the value
of the leased equipment at inception, or approximately $50,000 at December 31,
2002. The cost and accumulated depreciation of the items under capital lease
were $103,515 and $80,735, respectively, at December 31, 2002.

Additionally, the Company leases office space and certain office equipment
under operating leases with remaining terms of between 1 and 2 years.

Future minimum payments at December 31, 2002 under non-cancelable operating and
capital leases with initial or remaining terms of one year or more are as
follows:

|                                   |  |                  |           |                |  |       |        |   |  |   |           |  
|---------------------------------- |  | ---------------- | --------- | -------------- |  | ----- | ------ | - |  | - | --------- | -
|                                   |  | Operating Leases |           | Capital Leases |  | Total
|                                   |  |                  |           |                |  |      
|2003                               |  | $                | 245,435   |                |  | $     | 33,961 |   |  | $ | 277,965   |  
|2004                               |  |                  | 611,203   |                |  |       |       |   |  |   | 612,634   |  
|2005                               |  |                  | 496,000   |                |  |       |       |   |  |   | 496,000   |  
|                                   |  |                  |           |                |  |       |        |   |  |   |           |  
|Total                              |  |                  | 1,352,638 |                |  |       | 33,961 |   |  |   | 1,386,599 |  
|Less amounts representing Interest |  |                  |          |                |  |       | (2,822 | ) |  |   | (2,822    | )
|                                   |  |                  |           |                |  |       |        |   |  |   |           |  
|                                   |  | $                | 1,352,638 |                |  | $     | 31,139 |   |  | $ | 1,383,777 |  
|                                   |  |                  |           |                |  |       |        |   |  |   |           |  

Rent expense under operating leases was approximately $65,000, $56,000 and
$185,000 for the years ended December 31, 2002 and 2001 and for the period from
August 3, 1998 (inception) to December 31, 2002, respectively.

8.     Income Taxes

A benefit for federal and state income taxes has not been recorded as the
Company has incurred net operating losses since inception.

A reconciliation of the differences between the statutory federal income tax
rate of 34% and the effective tax rate for the years ended December 31, 2002
and 2001 is as follows:

|                                |                                    |  |       |      |      |  |       |      | 
|------------------------------- | ---------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- | 
|                                |                                    |  | 2002  |      | 2001
|                                |                                    |  |       |      |     
|Federal statutory rate          |                                    |  | (34.0 | )%   |      |  | (34.0 | )%  
|                                | Permanent differences and other    |  |       | 0.0  |      |  |       | 0.5  | 
|                                | State taxes net of federal benefit |  |       | 4.6  |      |  |       | 4.9  | 
|                                | Change in valuation allowance      |  |       | 29.4 |      |  |       | 28.6 | 
|                                |                                    |  |       |      |      |  |       |     
|Total gross deferred tax assets |                                    |  | 0.0   | %    |      |  | 0.0   | %   
|                                |                                    |  |       |      |      |  |       |     

38



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liability are as follows:

|                         |                                  |   |           |            |      |   |           |            |  
|------------------------ | -------------------------------- | - | --------- | ---------- | ---- | - | --------- | ---------- | -
|                         |                                  |   | 2002      |            | 2001
|                         |                                  |   |           |            |     
|Deferred tax assets:     |                                  |   |           |            |      |   |           |           
|                         | Net operating loss carry forward |   | $         | 5,541,775  |      |   | $         | 2,909,160  |  
|                         | Deferred compensation            |   |           | 649,111    |      |   |           | 505,961    |  
|                         | Patent and Trademark costs       |   |           | 82,446     |      |   |           | 48,234     |  
|                         | Other                            |   |           | 6,661      |      |   |           | 7,992      |  
|                         |                                  |   |           |            |      |   |           |           
|                         | Total deferred tax assets        |   |           | 6,279,993  |      |   |           | 3,471,347  |  
|Deferred tax liabilities |                                  |   | (7,104    | )          |      |   | (10,661   | )         
|Net deferred tax assets  |                                  |   | 6,272,889 |            |      |   | 3,460,686 |           
|                         | Valuation allowance              |   |           | (6,272,889 | )    |   |           | (3,460,686 | )
|                         |                                  |   |           |            |      |   |           |           
|Net deferred taxes       |                                  | $ |          |            |      | $ |          |           
|                         |                                  |   |           |            |      |   |           |           

At December 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,374,000, which are available
to offset future federal taxable income, if any, in varying amounts from 2018
through 2021. However, the Internal Revenue Code places limitations upon the
future availability of net operating losses based upon the changes in the
equity in the Company. If these changes occur, the ability for the Company to
offset future income with existing net operating losses may be limited. Based
on the Companys history of losses to date, management has provided a valuation
allowance to fully offset the Companys deferred tax assets.

9.     Stockholders Deficit

Preferred Stock
On June 20, 2002, the Company approved the amendment of the Companys
Certificate of Incorporation to create a new class of preferred stock, $.001
par value per share (Preferred Stock), consisting of 20,000,000 shares of
blank check Preferred Stock. The Preferred Stock would have such
preferences, voting rights, dividend or interest rates, conversion prices,
redemption prices, maturity dates, qualifications and other special or relative
rights or
privileges as the Board of Directors, subject to certain limitations, may
determine. Shares of Preferred Stock could be issued publicly or privately, in
one or more series and each series of Preferred Stock could rank senior to the
Common Stock of the Company with regard to dividends and liquidation rights.

Private Placement of Common Stock
As of December 31, 2002, the Company issued 236,836 shares of common stock to
accredited investors in a private placement of securities exempt from
registration under Rule 506 under the Securities Act of 1933. These shares
were sold at a purchase price of $3.00 per share, for aggregate gross and net
proceeds of $710,508. The Chairman of the Board of Directors, through an
affiliate and current shareholder, purchased 83,000 of such shares.

Issuance of Common Stock
During 2002, the Company issued 378,000 shares of common stock to finalize the
share exchange transaction which occurred in August 2001. The securities were
issued at par with no additional consideration, thus no cash proceeds were
received.

39



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.     Stockholders Deficit (continued)

Stock Option Plans
Pilot adopted a stock option plan in 1998 (1998 Plan), which was assumed by
the Company on August 24, 2001, upon consummation of the stock exchange
described in Note 1. Additionally, the Company adopted a 2001 Stock Incentive
Plan (2001 Plan) on August 24, 2001. Under both the 1998 Plan and the 2001
Plan, options to purchase up to 2,665,620 shares of common stock may be granted
to employees, directors, independent contractors, consultants and advisors.
Awards may be made to participants in the form of incentive and non-qualified
stock options, stock appreciation rights, restricted stock, performance awards
and other stock grants or stock-based awards. At December 31, 2002, a total of
1,280,272 shares were available for future stock option grants.

A summary of the Companys stock option plans at December 31, 2002 and 2001 and
changes during the periods then ended is presented in the table below:

|                                               |           |   |           |          |                |   |                  |       |                |   |           |           |                  |   |       |       | 
|---------------------------------------------- | --------- | - | --------- | -------- | -------------- | - | ---------------- | ----- | -------------- | - | --------- | --------- | ---------------- | - | ----- | ----- | 
|                                               |           |   | 2002      |          | 2001          
|                                               |           |   |           |          |               
|                                               |           |   |           |          |                |   | Weighted-Average |       |                |   |           |           | Weighted-Average
|                                               |           |   | Shares    |          | Exercise Price |   | Shares           |       | Exercise Price
|                                               |           |   |           |          |                |   |                  |       |               
|Shares under option:                           |           |   |           |          |                |   |                  |       |                |   |           |           |                  |   |       |      
|Outstanding, beginning of year                 |           |   | 1,529,852 |          |                | $ | 1.460            |       |                |   | 487,772   |           |                  | $ | 0.101 |      
|                                               | Granted   |   |           | 112,000  |                |   |                  |      |                |   |           | 1,151,220 |                  |   | $     | 1.949 | 
|                                               | Exercised |   |           | (163,436 | )              |   | $                | 0.454 |                |   |           | (31,402   | )                |   | $     | 0.302 | 
|                                               | Forfeited |   |           | (256,504 | )              |   | $                | 1.982 |                |   |           | (77,738   | )                |   | $     | 0.361 | 
|                                               |           |   |           |          |                |   |                  |       |                |   |           |           |                  |   |       |      
|Outstanding, end of year                       |           |   | 1,221,912 |          |                | $ | 1.802            |       |                |   | 1,529,852 |           |                  | $ | 1.460 |      
|                                               |           |   |           |          |                |   |                  |       |                |   |           |           |                  |   |       |      
|Exercisable, end of year                       |           |   | 919,382   |          |                | $ | 1.074            |       |                |   | 718,689   |           |                  | $ | 0.465 |      
|                                               |           |   |           |          |                |   |                  |       |                |   |           |           |                  |   |       |      
|Weighted average fair value of
options granted |           | $ | 4.35      |          |                |   |                  |       |                | $ | 3.07      |           |                  |   |       |      

For various price ranges, weighted average characteristics of outstanding stock
options at December 31, 2002 were as follows:

|                  |  |                     |         |                     |  |                  |      |                  |  |                |      |  |  |                  |         |  |  |   |      | 
|----------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | ---- | ---------------- |  | -------------- | ---- |  |  | ---------------- | ------- |  |  | - | ---- | 
|                  |  | Outstanding Options |         | Exercisable Options
|                  |  |                     |         |                    
|                  |  |                     |         |                     |  | Weighted-Average |      |                  |  |                |      |  |  |                  |         |  |  |  
|Range of Exercise |  |                     |         |                     |  | Remaining Life   |      | Weighted-Average |  |                |      |  |  | Weighted-Average
|Prices            |  | Shares              |         | (years)             |  | Exercise Price   |      | Shares           |  | Exercise Price
|                  |  |                     |         |                     |  |                  |      |                  |  |               
|$0.050 - $0.150   |  |                     | 365,668 |                     |  |                  | 6.71 |                  |  | $              | 0.07 |  |  |                  | 358,832 |  |  | $ | 0.07 | 
|$0.300 - $0.425   |  |                     | 474,000 |                     |  |                  | 8.09 |                  |  |                | 0.37 |  |  |                  | 373,610 |  |  |   | 0.36 | 
|$2.500 - $3.500   |  |                     | 135,144 |                     |  |                  | 7.56 |                  |  |                | 2.46 |  |  |                  | 98,966  |  |  |   | 2.48 | 
|$4.000 - $6.500   |  |                     | 134,500 |                     |  |                  | 9.03 |                  |  |                | 4.67 |  |  |                  | 50,431  |  |  |   | 4.64 | 
|$7.150 - $9.900   |  |                     | 112,600 |                     |  |                  | 5.21 |                  |  |                | 9.23 |  |  |                  | 37,543  |  |  |   | 9.23 | 

40



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.     Stockholders Deficit (continued)

The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
Plans. Stock options issued to non-employees are accounted for in accordance
with SFAS 123. Accordingly, the Company records deferred compensation for
stock-based compensation grants based on the excess of the fair market value of
the common stock on the measurement date over the exercise price. In addition,
the Company records the fair value of option issued to non-employee consultants
at the fair value per share, as computed using the Black-Scholes option-pricing
model and variable plan accounting. Deferred compensation amounts are
amortized over the vesting periods of each option.

During the year ended December 31, 2002 and 2001, the Company recorded
aggregate deferred compensation of $258,700 and $3,030,608, respectively,
related to the issuance of stock options, with related amortization of $853,321
and $1,417,934 during 2002 and 2001, respectively.

In addition, the Company has options outstanding to an investment banking
entity for the purchase of 10,000 shares of common stock at a price of one
dollar. The options if not exercised, shall expire in March 2005.

10.     License and Research Agreements

Wake Forest University
In December 1998, Pilot entered into a license agreement with Wake Forest
University (Wake Forest) whereby it licensed certain patented or patent
pending inventions from Wake Forest in exchange for common stock. Pilot is
required to pay Wake Forest license fees and milestone payments based upon the
achievement of certain product development events related to licensed products,
as defined in the agreement. In addition, Pilot is obligated to pay royalties,
ranging from 3% to 5%, to Wake Forest based on net sales of products related to
the licenses obtained, with a minimum royalty of $30,000 beginning in the year
ended December 31, 2001. In February 2003, PTI paid $109,000 to Wake Forest
for 2001 and 2002 royalties and patent expenses. Pilot has the option to issue
warrants to Wake Forest, in an amount determined by the terms of the agreement,
to purchase common stock with an exercise price of $1.00 per share in lieu of
the cash payment of the minimum royalty up until net sales of licensed products
exceed $5 million in a calendar year.

Pilot also entered into a research agreement with Wake Forest whereby Wake
Forest will perform sponsored research. Beginning in July 1999, the agreement
requires Pilot to request that Wake Forest perform sufficient research that
Pilot shall pay Wake Forest a minimum of $50,000 per year through the year
ending December 31, 2002.

In connection with a research agreement with Wake Forest, Pilot entered into a
sponsored research sub-agreement in March 2001. The term of this sub-agreement
is from March 2001 to October 2001, with a final report due in 2002. In
exchange for research assistance, Pilot will pay fees to Wake Forest in the
aggregate of $170,000 over the specified term of the agreement. Certain
research milestones, the initiation of the project and the presentation of the
final report trigger cash payments to be made by Pilot. The Company expensed
$148,000 of the aggregate cost of the research project through the year ending
December 31, 2002.

41



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.     License and Research Agreements (continued)

Johns Hopkins University
In April 1999, Pilot entered into an exclusive license agreement with Johns
Hopkins University (Johns Hopkins) for the rights to certain patented or
patent pending inventions. The license agreement provides for Pilot to
reimburse Johns Hopkins for the costs of maintaining the patent rights, pay a
processing fee of $5,000, and pay an annual maintenance fee beginning in 2001
of $2,500.

Pilot is required to pay royalties of 1.5% of net sales, with minimum payments
until cumulative net sales reach a certain level. There are also milestone
payments based upon the achievement of certain product development events, as
defined in the agreement. In the event the license is sold, there are payments
due on the amount of the sale, ranging from 5% to 10%, as well as 5% of any
additional amounts that may be received from any sublicense. The license
agreement terminates concurrently with the expiration of the patents.

Bristol-Myers Squibb
On October 3, 2001, Pilot and Bristol-Myers Squibb (BMS) signed an agreement
granting Pilot a worldwide exclusive license to develop and market a BMS
patented class of oral retinoids. Pilot will pay license fees and royalties
based upon certain milestones and net sales of products containing the patented
compound, respectively.

11.     Quintiles Transnational Corporation Agreements

On June 22, 2001, Pilot entered into an Investment and Royalty Agreement and a
Loan Agreement with PharmaBio Development, Inc. (PharmaBio) and a
Commercialization Agreement with Innovex LP (Innovex). Innovex and PharmaBio
are commonly controlled by Quintiles Transnational Corporation.

Under the Commercialization Agreement, Innovex will provide sales force
services and certain marketing services on a fee-for-service basis to Pilot in
connection with the development and promotion of certain proprietary technology
specified in the Commercialization Agreement. Innovex will supply a sales
force beginning on the date the sales force is launched, and continuing for
five years. The Commercialization Agreement is non-cancelable by Pilot or
Innovex during the five-year term, except for a material breach by or
bankruptcy of either party, termination of the Investment and Royalty Agreement
or if commercialization of the proprietary technology is no longer being
pursued.

Under the Investment and Royalty agreement, PharmaBio will fund 50% of the
estimated $55,000,000 total commercialization cost under the Innovex
Commercialization Agreement, during the five-year term following launch,
provided that, without the approval of PharmaBio, such obligation will not
exceed (i) $6,000,000 for any single year, or (ii) $30,000,000 in the
aggregate. The funding will be structured so that 10% of the total estimated
commitment amount will be paid upon launch of the Innovex sales force and the
remaining amount will be paid in equal quarterly payments during the five-year
term. Further, in exchange for PharmaBios funding commitments, Pilot shall
pay PharmaBio royalties on sales of a specified product covered by the
Commercialization Agreement with such rates subject to adjustment as set forth
in the Investment and Royalty Agreement to provide PharmaBio a minimum rate of
return.

42



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.     South Carolina Incentive Agreements

On October 4, 2002, Pilot AgBio, Inc. (AgBio), a wholly-owned subsidiary of
Pilot, and Pilot entered into an Incentive Agreement with various agencies and
a county in the State of South Carolina as well as a banking corporation and
developer, providing AgBio and Pilot a wide range of performance-based
incentives, authorized by state statute, including Job Tax Credits and Job
Development Credits in addition to assistance through grants and loans.

Under the Incentive Agreement a biopharmaceutical manufacturing facility
(Project Facility) will be constructed by a developer and leased to AgBio.
Certain funds under the Incentive Agreement are to be utilized by AgBio for
investment in the Project Facility. Additionally, Pilot will relocate its
corporate headquarters and research and development facilities to South
Carolina.

As of December 31 2002, AgBio has received $5,125,000 under the Incentive
Agreement in the form of economic development grants and working capital loans.
Specifically, AgBio received the following: (i) $1,500,000 working capital
term loan from a banking corporation (Banking Loan), bearing interest at
Prime plus 1.5%, having a term of 6 years with interest only payments beginning
March 15, 2003 and a balloon payment at the end of the term; (ii) $2,125,000
South Carolina state agency forgivable working capital loan (Agency Loan),
bearing interest at 3% and a balloon payment at the end of year five; (iii)
$500,000 as an incentive from the developer for the signing of the lease on the
Project Facility; and (iv) $1,000,000 economic development grant to assist the
Company in upfitting and equipping the Project Facility and commencement of
agricultural and production operations. Pilot also expects to receive a
$500,000 grant for the costs associated with the relocation of its corporate
headquarters and research and development facilities to South Carolina and an
additional $1,000,000 for construction of a new research facility. In addition,
AgBio and Pilot are eligible to qualify for job development and various other
tax incentives and credits that are expected to be realized over the next five
to ten years.

The Incentive Agreement contains certain capital investment, employment
creation and crop growing milestones and commitments that are required to be
met over the next two to five years. If these milestones or commitments are
not met, certain of the incentives will be required to be repaid on a pro-rata
basis, based upon the percentage of the milestone or commitment that is met.
In addition, if certain milestones and commitments are met, the Agency Loan
will convert to a grant on a pro-rata basis, based upon the percentage of the
milestone or commitment that is met.

The Company will be relocating various employees and offices to South Carolina
in which the Company expects to incur relocation costs. Until the Company has
determined the number of employees relocating and the total cost of moving the
office facilities, the Company cannot reasonably estimate such costs.

43



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.     Purchase Commitments

On September 1, 2002, Pilot entered into an agreement with Kings, Inc. granting
Pilot the option to purchase all or a portion of approximately 900 metric tons
of borage products during the period from January 1, 2003 through December 31,
2005. During the option period, Pilot must obtain approval from Kings for the
purchase of borage products from a third party.

In connection with the South Carolina Incentive Agreements, Pilot is committed
to acquiring up to 30% of its worldwide borage seed requirements from qualified
South Carolina growers.

The timing, quantity, or value of these commitments cannot be reasonably
determined at this time since the Company has not commenced product sales.

14.     Purchase Agreement with Kings

On September 24, 2002, the Company and Pilot entered into a Purchase Agreement
with Kings, Inc. (Kings) for the purchase of borage concentrate, which is
used in the production of Airozin. Under the Purchase Agreement, the Company
owed Kings $2,844,864, which was to be paid in the form of 1) $200,000 at the
signing of the Purchase Agreement; 2) delivery of 523,288 restricted shares of
the Companys common stock (Restricted Shares) valued at $1,569,864 at the
signing of the Purchase Agreement; and 3) the remaining $1,075,000 to be paid
to Kings as 50% of any monies (other than (i) grants or (ii) loans made to
Pilot by Academy Venture Fund LLC or its affiliates in an amount not to exceed
$240,000) raised by Pilot after the signing of the Purchase Agreement.

Until such a time that Kings disposes of or the Company repurchases the
Restricted Shares, interest shall accrue at the Bank of England Prime Rate plus
1% on the remaining principal amount of the Restricted Shares computed at $3.00
per share. If by July 1, 2003, the Company has not purchased from Kings a
number of Restricted Shares which would enable Kings to sell under Securities
Act Rule 144 (Rule 144) the remaining Restricted Shares on September 24,
2003, the Company shall commence the preparation of a Registration Statement
with respect to the remaining Restricted Shares. From September 24, 2002
through September 12, 2003, the Company will have the right to repurchase the
Restricted Shares at $3.00 per share plus accrued interest; in addition Kings
may only sell the Restricted Shares to the Company or its designee. Between
September 13, 2003 and September 17, 2003, the Company must repurchase any
remaining Restricted Shares, at $3.00 per share, plus accrued interest upon
written notice from Kings. If all of the remaining Restricted Shares held by
Kings on September 24, 2003 are not repurchased, Kings shall have the right to
sell the remaining Restricted Shares. If remaining Restricted Shares are sold
by Kings on or prior to March 31, 2004 at a price per share less than $3.00,
the Company will be obligated to pay the difference between $3.00 and the price
that Kings is able to sell the Restricted Shares, plus accrued interest.
Likewise, if the remaining Restricted Shares are sold by Kings at a price in
excess of $3.00 per share, Kings is obligated to pay the excess to the Company.

As of December 31, 2002, the Company has paid for and received the initial
purchase of borage oil in the amount of $200,000 and has remitted the remaining
cash obligation of $1,075,000 to Kings. Additionally, the Company has included
the value of the Restricted Shares, $1,569,864, in other long term liabilities,
which will be required to be repurchased by the Company if Kings is unable to
sell the Restricted Shares to a third party. The remaining outstanding
inventory to be received, $2,644,864, is recorded as inventory deposits pending
its physical release to the Company. This inventory is expected to be utilized
over eighteen months based on the Companys current operating plan. The
inventory deposits will be recorded at the lower of cost or market and reviewed
for potential impairment on a periodic basis.

44



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##### 



PILOT THERAPEUTICS HOLDINGS, INC.(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.     Supplemental Cash Flow Information

|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | ------------ |  | ---- | --------- |  |  | --------------- | --------- | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  | Cumulative from
|                                                                                                                      |  |                        |           |              |  |      |           |  |  | August 3, 1998 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  | (inception) to 
|                                                                                                                      |  | Year ended December 31 |           | December 31,
|                                                                                                                      |  | 2002                   |           | 2001         |  | 2002
|                                                                                                                      |  |                        |           |              |  |     
|Furniture and equipment obtained with capital leases                                                                  |  | $                      |          |              |  | $    |          |  |  | $               | 103,515   | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Exchange of demand promissory note principle and
interest for convertible demand promissory note                      |  | $                      |          |              |  | $    |          |  |  | $               | 263,875   | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Exchange of convertible demand promissory notes for
Series B redeemable convertible demand promissory
note            |  | $                      |          |              |  | $    | 2,713,875 |  |  | $               | 2,713,875 | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Accrued interest on convertible demand promissory
notes exchanged for Series B redeemable convertible
preferred stock |  | $                      |          |              |  | $    | 113,350   |  |  | $               | 113,350   | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Costs associated with issuance of Series B
redeemable convertible preferred stock                                     |  | $                      |          |              |  | $    | 13,754    |  |  | $               | 13,754    | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Common stock issued for inventory deposits                                                                            |  | $                      | 1,569,864 |              |  | $    |          |  |  | $               | 1,569,864 | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Common stock issued for services                                                                                      |  | $                      | 26,600    |              |  | $    |          |  |  | $               | 26,600    | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 
|Common stock issued for furniture and equipment                                                                       |  | $                      | 17,363    |              |  | $    |          |  |  | $               | 17,363    | 
|                                                                                                                      |  |                        |           |              |  |      |           |  |  |                 |           | 

45



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##### 



Item 8.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

By resolution adopted on August 24, 2001, the board of directors of Interallied
Group, Inc., the predecessor of Pilot Therapeutics Holdings, Inc., elected to
change independent accountants to Ernst & Young, LLP (E&Y). The independent
accounting firm of Richard A. Eisner & Company, LLP was notified on September
10, 2001 that the client auditor relationship between the Company and Richard
A. Eisner & Company, LLP would not be renewed. Richard A. Eisner & Company,
LLP had not yet been retained to review the Companys financial statements for
the quarter ending September 30, 2001. As used in this Item 8, the term
Company means for periods (i) prior to November 30, 2001, Interallied Group,
Inc. and (ii) on and after November 30, 2001, Pilot Therapeutics Holdings, Inc.

The independent auditors report on the consolidated financial statements for
the two years ended December 31, 2000 contained no adverse opinion, no
disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles, except such report did contain the
following explanatory paragraph related to the uncertainty related to the
Companys ability to continue as a going concern: The accompanying financial
statements have been prepared assuming that the Company will continue as a
going concern. As discussed in Note A to the financial statements, as of
December 31, 2000, the Company has a working capital and stockholders
deficiency and is not engaged in any active business operations. These factors
raise substantial doubt about the Companys ability to continue as a going
concern. Managements plans in regard to these matters are also described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

In connection with the audits of the Companys consolidated financial
statements for each of the two years ended December 31, 2000, as well as the
period up to and including August 24, 2001, there have been no disagreements
with Richard A. Eisner & Company, LLP on any matters of accounting principles
or practices, financial statement disclosures, or auditing scope or procedures,
which if not resolved to the satisfaction of Richard A. Eisner & Company, LLP
would have caused Richard A. Eisner & Company, LLP to make reference to the
subject matter of the disagreements in connection with their reports.

Richard A. Eisner & Companys letter addressed to the Securities and Exchange
Commission is attached hereto as Exhibit 16.1.

On August 24, 2001, the Companys board of directors engaged E&Y, 202
CentrePort Drive, Suite 200, Greensboro, North Carolina 27109 as its new
independent auditors to audit the Companys consolidated financial statements
for the year ended December 31, 2001.

The Company, during the two most recent fiscal years and the subsequent interim
periods prior to the engagement of the E&Y, did not consult with the E&Y with
regard to (a) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Companys financial statements; or (b) on any matter
that was either the subject of a disagreement (as defined in Item 304
(a)(1)(iv) of Regulation S-K) or a reportable event (as defined in Item 304
(a)(1)(v) of Regulation S-K).

46



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##### 



PART III

Item 9.  Executive Officers, Promoters and Control Persons, Compliance with
Section 16(a) of the Exchange Act.

The information presented under the captions Information Concerning Nominees
for Election as Class I Directors, Class II (Term Expires at the 2004 Annual
Meeting), Class III (Term Expires at 2005 Annual Meeting), Information
Concerning Executive Officers and Section 16(a) Beneficial Ownership
Reporting Compliance of the Companys definitive Proxy Statement for the 2003
Annual Meeting of Shareholders (the 2003 Proxy Statement) is incorporated
herein by reference. Such 2003 Proxy Statement will be filed with the
Securities and Exchange Commission in March 2003.

Item 10.Executive Compensation

The information presented under the captions Executive Compensation and
Director Compensation of the 2003 Proxy Statement is incorporated herein by
reference.

Item 11.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

The information presented under the captions Equity Compensation Plan
Information and Beneficial Ownership of Directors, Executive Officers and
Certain Beneficial Owners of the 2003 Proxy Statement is incorporated herein
by reference.

Item 12.Certain Relationships and Related Transactions

The information presented under the caption Certain Relationships and Related
Transactions of the 2003 Proxy Statement is incorporated herein by reference.

Item 13.Exhibits, Lists and Reports on Form 8-K

(a)  Exhibits. The following documents are filed as part of this report:



| | (1) |  | Consolidated Financial Statements of the Company are included in Part II, Item 7:                                                                                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Reports of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
|
| | (2) |  | Exhibits                                                                                                                                                                                                                                      
|
| |     |  | See the Exhibit Index following the Signature Page, which is incorporated herein by reference.                                                                                                                                                

(b)  Reports on Form 8-K



| |  | The Company filed a report on Form 8-K, dated September 24, 2002 and filed
on October 11, 2002, pursuant to Item 5 disclosing that the Company
entered into a Purchase Agreement and an Option Agreement with Kings.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47



---



##### 



Item 14.Controls And Procedures

Within the 90 days prior to the filing date of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the principal executive officer and the acting principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our principal
executive officer and acting principal financial officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings.

There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

48



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##### 



SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                     |  |                                   |  |                                                              
|-------------------- |  | --------------------------------- |  | -------------------------------------------------------------
|                     |  | PILOT THERAPEUTICS HOLDINGS, INC.
|                     |  | By:                               |  | /s/ Floyd H. Chilton IIIPresident and Chief Executive Officer
|                    
|Date: March 31, 2003 |  |                                   |  |                                                              

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.

|                                             |  |                                                                                                         |  |               
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                                                   |  | Date          
|                                             |  |                                                                                                         |  |               
|                                            
|/s/ Glenn J. KlineGlenn J. Kline             |  | Chairman of the Board of Directors                                                                      |  | March 31, 2003
|                                            
|/s/ Floyd H. Chilton IIIFloyd H. Chilton III |  | President, Chief Executive Officer,
Chief Scientific Officer and Director
(Principal Executive Officer) |  | March 31, 2003
|                                            
|/s/Glenn J. KlineGlenn J. Kline              |  | Acting Principal Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)       |  | March 31, 2003
|                                            
|/s/ Santo J. CostaSanto J. Costa             |  | Director                                                                                                |  | March 31, 2003
|                                            
|/s/ James W. JohnstonJames W. Johnston       |  | Director                                                                                                |  | March 31, 2003
|                                            
|/s/ Bradley J. UndemBradley J. Undem         |  | Director                                                                                                |  | March 31, 2003
|                                            
|/s/ Margaret M. UrquhartMargaret M. Urquhart |  | Director                                                                                                |  | March 31, 2003

49



---



##### 



Section 302 Certification

I, Floyd H. Chilton III, Ph.D., the Chief Executive Officer of Pilot
Therapeutics Holdings, Inc., certify that:

1.     I have reviewed this annual report on Form 10-KSB of Pilot Therapeutics
Holdings, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|
| | b)     Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c)     Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based
on the most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
|
| | b)     Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                     |  |                                                                                                               
|-------------------- |  | --------------------------------------------------------------------------------------------------------------
|Date: March 31, 2003 |  | /s/ Floyd H. Chilton III, Ph.D.Floyd H. Chilton III, Ph.D.
Chief Executive Officer
Principal Executive Officer

50



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##### 



Section 302 Certification

I, Glenn J. Kline, the Acting Principal Financial Officer of Pilot
Therapeutics Holdings, Inc., certify that:

1.     I have reviewed this annual report on Form 10-KSB of Pilot Therapeutics
Holdings, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|
| | b)     Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c)     Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based
on the most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
|
| | b)     Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                     |  |                                                                    
|-------------------- |  | -------------------------------------------------------------------
|Date: March 31, 2003 |  | /s/ Glenn J. KlineGlenn J. Kline
Acting Principal Financial Officer

51



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##### 



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                          
|2.1         |  | Stock Exchange Agreement dated August 1, 2001 among
Interallied Group, Inc. and the shareholders of Pilot Therapeutics,
Inc., incorporated by reference to Exhibit 2.1 to the Companys Form
8-K filed August 28, 2001.                                                  
|            |  |                                                                                                                                                                                                                                                                          
|2.2         |  | Agreement and Plan of Merger dated October 10, 2001 by and
between ILRG and Pilot Therapeutics Holdings, Inc. incorporated by
reference to Exhibit 99.1 to the Companys Form 8-K filed December
14, 2001.                                                               
|            |  |                                                                                                                                                                                                                                                                          
|3.1         |  | Certificate of Incorporation of Pilot Therapeutics, Inc.,
incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form S-8 filed July 23, 2002.                                                                                              
|            |  |                                                                                                                                                                                                                                                                          
|3.2         |  | Bylaws of Pilot Therapeutics Holdings, Inc., incorporated by
reference to Exhibit 4.2 of the Companys Registration Statement on
Form S-8 filed January 9, 2002.                                                                                                         
|            |  |                                                                                                                                                                                                                                                                          
|4.1         |  | Promissory Note of Pilot Therapeutics, Inc. dated June 22,
2001 payable to PharmaBio Development, Inc., incorporated by
reference to Exhibit 4.1 to the Companys Form 10-QSB filed November
14, 2001.                                                                   
|            |  |                                                                                                                                                                                                                                                                          
|4.2         |  | Loan Agreement dated June 22, 2001 by and between Pilot
Therapeutics, Inc. and PharmaBio Development, Inc., incorporated by
reference to Exhibit 4.2 to the Companys Form 10-QSB filed November
14, 2001.                                                               
|            |  |                                                                                                                                                                                                                                                                          
|4.3         |  | Security Agreement dated June 22, 2001 by and between Pilot
Therapeutics, Inc. and PharmaBio Development, Inc., incorporated by
reference to Exhibit 4.3 to the Companys Form 10-QSB filed November
14, 2001.                                                           
|            |  |                                                                                                                                                                                                                                                                          
|4.4         |  | Amendment to Loan Agreement dated December 21, 2001 by and
between Pilot Therapeutics, Inc. and PharmaBio Development, Inc.,
incorporated by reference to Exhibit 4.1 to the Companys Form 8-K
filed December 21, 2001.                                                 
|            |  |                                                                                                                                                                                                                                                                          
|4.5         |  | Convertible Unsecured Demand Promissory Note, dated September
27, 2002, issued to Academy Centennial Fund, LLC by Pilot
Therapeutics Holdings, Inc., incorporated by reference to Exhibit
10.16 to the Companys Quarterly Report on Form 10-QSB filed
November 14, 2002.
|            |  |                                                                                                                                                                                                                                                                          
|4.6         |  | Guarantee Agreement, dated September 27, 2002, issued to
Academy Centennial Fund, LLC by Pilot Therapeutics Holdings, Inc.,
incorporated by reference to Exhibit 10.17 to the Companys
Quarterly Report on Form 10-QSB filed November 14, 2002.                         
|            |  |                                                                                                                                                                                                                                                                          
|10.1        |  | Interallied Group, Inc. Stock Option Plan, incorporated by
reference to Exhibit 10.1 to the Companys Form 10-QSB filed
November 14, 2001.                                                                                                                               

52



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##### 



|            |  |                                                                                                                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                  
|10.2        |  | Pilot Therapeutics Holdings, Inc. 2001 Stock Incentive Plan
(As Amended and Restated Through June 20, 2002), incorporated by
reference to Exhibit 99 to the Companys Registration Statement on
Form S-8 filed July 23, 2002.                                                    
|            |  |                                                                                                                                                                                                                                                                                  
|10.3        |  | License Agreement dated December 11, 1998 by and between
Pilot Therapeutics, Inc. (formerly known as Pilot Biotechnologies,
Inc.) and Wake Forest University, incorporated by reference to
Exhibit 10.3 to the Companys Form 10-QSB filed November 14, 2001.                    
|            |  |                                                                                                                                                                                                                                                                                  
|10.4        |  | Research Agreement dated December 11, 1998 by and between
Pilot Therapeutics, Inc. (formerly known as Pilot Biotechnologies,
Inc.) and Wake Forest University School of Medicine, incorporated by
reference to Exhibit 10.4 to the Companys Form 10-QSB filed
November 14, 2001.
|            |  |                                                                                                                                                                                                                                                                                  
|10.5        |  | Investment and Royalty Agreement dated June 22, 2001 by and
between Pilot Therapeutics, Inc. and PharmaBio Development, Inc.,
incorporated by reference to Exhibit 10.5 to the Companys Form
10-QSB filed November 14, 2001.                                                    
|            |  |                                                                                                                                                                                                                                                                                  
|10.6        |  | Commercialization Agreement dated June 22, 2001 by and
between Pilot Therapeutics, Inc. and Innovex LP, incorporated by
reference to Exhibit 10.5 to the Companys Form 10-QSB filed
November 14, 2001.                                                                          
|            |  |                                                                                                                                                                                                                                                                                  
|10.7        |  | License Agreement dated October 3, 2001 by and between Pilot
Therapeutics, Inc. Bristol-Myers Squibb Company, incorporated by
reference to Exhibit 10.6 to the Companys Form 10-QSB filed
November 14, 2001.                                                                    
|            |  |                                                                                                                                                                                                                                                                                  
|10.8        |  | Pilot Therapeutics, Inc. 1998 Stock Option Plan (As Amended
and Restated Effective December 19, 2000), incorporated by reference
to Exhibit 99 to the Companys Registration Statement on Form S-8
filed January 9, 2002.                                                        
|            |  |                                                                                                                                                                                                                                                                                  
|10.9        |  | Letter agreement, dated June 2, 1999, between the Company and
Beth Fordham-Meier, incorporated by reference to Exhibit 10.8 to the
Companys Annual Report on Form 10-KSB filed April 16, 2002.                                                                                  
|            |  |                                                                                                                                                                                                                                                                                  
|10.10       |  | Agreement for Supply of Borage and Echium Oil, dated April
2002, between Pilot Therapeutics, Inc. and Kings, Inc., incorporated
by reference to Exhibit 10.8 to the Companys Quarterly Report on
Form 10-QSB filed May 15, 2002.                                                
|            |  |                                                                                                                                                                                                                                                                                  
|10.11       |  | Agreement, dated July 10, 2002, between the Company and Floyd
H. Chilton, III, Ph.D., incorporated by reference to Exhibit 10.10 to
the Companys Quarterly Report on Form 10-QSB filed August 14, 2002.                                                                         

53



---



##### 



|            |  |                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                      
|10.12       |  | Agreement, dated July 10, 2002, between the Company and Jack
Voller, incorporated by reference to Exhibit 10.11 to the Companys
Quarterly Report on Form 10-QSB filed August 14, 2002.                                                              
|            |  |                                                                                                                                                                                                                                                      
|10.13       |  | Agreement, dated July 10, 2002, between the Company and Marc
Surette, incorporated by reference to Exhibit 10.12 to the Companys
Quarterly Report on Form 10-QSB filed August 14, 2002.                                                             
|            |  |                                                                                                                                                                                                                                                      
|10.14       |  | Agreement, dated July 10, 2002, between the Company and David
Mills, incorporated by reference to Exhibit 10.12 to the Companys
Quarterly Report on Form 10-QSB filed August 14, 2002.                                                              
|            |  |                                                                                                                                                                                                                                                      
|10.15       |  | Purchase Agreement, dated as of September 1, 2002, between
Pilot Therapeutics Holdings, Inc., Pilot Therapeutics, Inc. and
Kings, Inc., incorporated by reference to Exhibit 10.14 to the
Companys Current Report on Form 8-K filed October 1, 2002.
|            |  |                                                                                                                                                                                                                                                      
|10.16       |  | Option Agreement, dated as of September 24, 2002, between
Pilot Therapeutics, Inc. and Kings, Inc., incorporated by reference
to Exhibit 10.15 to the Companys Current Report on Form 8-K filed
October 1, 2002.                                    
|            |  |                                                                                                                                                                                                                                                      
|10.17       |  | Lease Agreement, dated October 31, 2002, between Blackbaud,
LLC and Pilot Therapeutics, Inc., incorporated by reference to
Exhibit 10.18 to the Companys Quarterly Report on Form 10-QSB filed
November 14, 2002.                                   
|            |  |                                                                                                                                                                                                                                                      
|16.1        |  | Letter from Richard A. Eisner & Company, LLP, dated January 14,
2002, incorporated by reference to Exhibit 16 to the Companys
Amended Current Report on Form 8-K filed January 16, 2002.                                                            
|            |  |                                                                                                                                                                                                                                                      
|21          |  | Subsidiaries of the Registrant                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                      
|23          |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                      
|99.1        |  | Certification of Floyd H. Chilton, III, Chief Executive
Officer of Pilot Therapeutics Holdings, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                      
|            |  |                                                                                                                                                                                                                                                      
|99.2        |  | Certification of Glenn J. Kline, Acting Principal Financial
Officer of Pilot Therapeutics Holdings, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                  

54