<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------

                                   FORM 10-KSB
 (MARK ONE)

    [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                        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.)

                            101 NORTH CHESTNUT STREET
                      WINSTON-SALEM, NORTH CAROLINA 27101

                                 (336) 725-2222
                    (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 [ ]

         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. [ ]

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

         At February 28, 2002, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was approximately
$45,954,000.

         At February 28, 2002, the number of shares outstanding of registrant's
common stock was 10,528,498.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                 Not Applicable
================================================================================




<PAGE>



                           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(TM) and Airozin(TM), are our pending trademarks. This Annual Report
on Form 10-KSB also includes trademarks of companies other than the registrant
or its subsidiaries.


<PAGE>



                        PILOT THERAPEUTICS HOLDINGS, INC.

                                      INDEX


<TABLE>
<S>          <C>                                                                          <C>
                                           PART I
Item 1:      Description of Business...................................................     1
Item 2:      Description of Properties.................................................    11
Item 3:      Legal Proceedings.........................................................    11
Item 4:      Submission of Matters to a Vote of Security Holders.......................    11

                                           PART II
Item 5:      Market for the Registrant's Common Equity and Related Stockholder Matters.    12
Item 6:      Management's Discussion and Analysis and Plan of Operations...............    13
Item 7:      Financial Statements......................................................    24
Item 8:      Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosure................................................................    41

                                          PART III
Item 9:      Executive Officers, Promoters and Control Persons.........................    41
Item 10:     Executive Compensation....................................................    41
Item 11:     Security Ownership of Certain Beneficial Owners and Management............    43
Item 12:     Certain Relationships and Related Transactions............................    46

                                           PART IV
Item 13:     Exhibits, Financial Statement Schedules and Reports on Form 8-K...........    49
</TABLE>



<PAGE>


                                     PART I

ITEM 1.  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"), a development stage specialty pharmaceutical company. Pilot is
developing and commercializing its pipeline of novel over the counter ("OTC")
medical food and pharmaceutical products that address what the Company believes
to be large markets including asthma, triglyceride elevation, cystic acne and
cancer. For over 50 years, certain fatty acids have been recognized as molecules
that provide critical signals in organs and tissues. However when over-produced,
these same molecules can cause human diseases. Pilot has expertise in
understanding how dysfunctional fatty acid metabolism in the human body causes
disease. Pilot utilizes a proprietary, state-of-the-art fatty acid and genomic
profiling research platform, termed Functional Liponomics(TM), to discover and
develop important pharmaceutical solutions for chronic human diseases.

         Since inception on August 3, 1998, Pilot has been in the development
stage and its activities have principally consisted of discovering and
developing novel therapeutics, obtaining financing and recruiting personnel.
Pilot is working on several long-term development projects that involve
experimental technology and clinical trials that may require several years and
substantial expenditures to complete. As expected, revenues to date have not
resulted from Pilot's planned principal operations. Pilot'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.

                                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.

         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.


                                       1
<PAGE>


                      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(TM);

-        take advantage of the potentially large opportunity in the OTC asthma
         market with the launch of AIROZIN(TM), 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;

-        take advantage of 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 key contract research organization ("CRO")
         and pharmaceutical partners to co-develop and support Pilot's lead drug
         candidates during late-stage clinical development.

         Through years of research, Dr. Floyd H. Chilton (Pilot's founder and
CEO) has developed Functional Liponomics(TM), a proprietary, state-of-the-art
fatty acid and genomic profiling research platform. This discovery platform
allows Pilot to identify critical points in fatty acid metabolism that lead to
human diseases. More importantly, this platform also enables Pilot to design
therapeutic strategies to control fatty acid signals which impact a wide range
of human diseases, including asthma, stroke, heart disease and cancer.
Functional Liponomics(TM), which explores causal relationships between specific
genes and fatty acids and their effects on human diseases, was developed from
research supported by the National Institutes of Health and major medical
centers including Johns Hopkins and Wake Forest Universities.

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

         Pilot's believes its lead OTC medical food product, AIROZIN(TM), is a
revolutionary way to manage asthma. Over thirty years of research has shown that
leukotrienes, a fatty acid derivative, causes inflammation leading to signs and
symptoms of asthma. AIROZIN(TM) is an anti-inflammatory OTC medical food that
Pilot-sponsored clinical trials have shown to reduce elevated leukotrienes
associated with asthma. AIROZIN(TM) is a once a day formulation for the dietary
management of asthma designed to avoid the side effects of other medications
such as steroids. Specifically, we believe that AIROZIN(TM) is the first
clinically proven product for the dietary management of asthma, a disease that
afflicts approximately 17.3 million Americans, according to the Centers for
Disease Control (1998).

         Pilot is in the process of preparing for filing an Investigational New
Drug Application ("IND") for AIROZIN(TM), to move into late phase clinical
trials. Pilot is also in the process of preparing for filing an IND for its
second product, PLT 732, a prescription pharmaceutical product for the treatment
of high triglyceride levels associated with heart disease and stroke, to enable
it to enter Phase II clinical trials.

         AIROZIN(TM)

         We believe that anti-inflammatory medications have proven to be the
most important class of therapy for asthma patients. Anti-inflammatory
medications such as steroids and leukotriene antagonists block the body's
production of key inflammation-causing substances called leukotrienes and
cytokines. Anti-inflammatory medications lead to fewer symptoms, better airflow,
less sensitive airways, less airway damage, and fewer asthma attacks. These
benefits are often observed within several weeks of medication.


                                       2
<PAGE>

         Anti-inflammatory medications dominate the worldwide asthma market.
According to the SG Cowen, Pharmaceutical Therapeutic Categories Outlook,
October 2001, in 2000, sales of inhaled steroids and leukotriene antagonists
exceeded $3.3 billion and $1 billion, respectively. In addition to treating
asthma, steroids are used extensively for allergic rhinitis, commonly referred
to as hay fever. Worldwide nasal steroid sales exceeded $1.4 billion in 2000.
Recent studies suggest leukotriene antagonists have good efficacy in allergic
rhinitis, indicating positive potential sales growth in the leukotriene
category.

         In spite of their important contribution to asthma disease management,
steroids are associated with a number of side effects because they affect more
genes than those that regulate substances such as leukotrienes. While inhaled
steroids have improved their safety profile, there are still major questions
regarding the long-term use of steroids, especially in children. Thus, a major
clinical endpoint for most new asthma therapeutics is the measure of their
capacity to reduce a patient's reliance on steroids.

         Pilot-sponsored clinical trials indicate that through dietary means
AIROZIN(TM) blocks the production of leukotrienes, a fatty acid derivative,
which cause inflammation leading to asthma. Specifically, AIROZIN(TM) has been
the subject of the following clinical trials:

         -        A proof of principle study (n=67) in the National Institute of
                  Health ("NIH") General Clinical Research Center at Wake Forest
                  University School of Medicine

         -        An optimization of dose and active ingredients (n=30) in the
                  NIH General Clinical Research Center at Wake Forest School of
                  Medicine

         -        A trial to optimize the bioavailability of the active
                  ingredients (n=45) at the Quintiles Transnational Corporation
                  Phase I Clinical Trials Center in Lenexa, Kansas

         -        A Phase I/IIA safety and efficacy trial (n=45) in the
                  Quintiles Transnational Phase I Clinical Trials Center in
                  Lenexa, Kansas

         -        A Phase II efficacy trial (n=50) in asthmatics in the NIH
                  General Clinical Research Center at Wake Forest School of
                  Medicine

         -        A multicenter pediatric dosing trial (n=24) conducted by
                  CompleWare Corporation, Iowa City, Iowa

         -        Five peer-reviewed and one submitted journal articles

         Like steroids, AIROZIN(TM) blocks, through dietary means, leukotrienes,
one family of critical asthma causing mediators. Based on the natural
components' safe history of use and the results of clinical trials, we believe
that AIROZIN(TM) may have a significant safety advantage when compared with
other anti-inflammatory medications, such as steroids. We believe this is
especially significant due to recent consumer trends toward self-medication and
the fact that the only OTC products currently available to treat asthma are
rescue products, unlike AIROZIN(TM), which is a maintenance product.

         Pilot intends to launch AIROZIN(TM) in the marketplace in the second
half of 2002. It is a once-a-day, oral OTC medical food that clinical trials
have shown to be safe and effective for the dietary management of asthma. We
believe that the launch of AIROZIN(TM) would represent the first OTC maintenance
product to enter the asthma market place and the only novel OTC strategy to be
launched for asthma in several years. The two existing OTC asthma medications,
Primatene Mist(TM) and Bronkaid(TM), are rescue medications. They both contain
the drug epinephrine, which works like a bronchodilator and relaxes the muscles
around the airways. They work for about 20-30 minutes and therefore provide
short-term relief of asthma symptoms. Primatene Mist(TM) and Bronkaid(TM) do not
control asthma symptoms or prevent asthma attacks and are not recommended for
people with high blood pressure, diabetes, thyroid disease, or heart disease. In
contrast, we believe that AIROZIN(TM) may have a number of competitive
advantages over these rescue products in that AIROZIN(TM) is a once a day,
non-steroid, safe maintenance product for the dietary management of asthma. We
believe that AIROZIN(TM) will be the first asthma medical food maintenance
product sold over-the counter and has an opportunity to capture and secure a
competitive advantage in a growing market.


                                       3
<PAGE>


         PLT 732 for Triglyceride Elevations Associated with Coronary Heart
Disease, Diabetes and Stroke

         Designed to block triglyceride elevations in diseases such as
cardiovascular disease ("CVD") and diabetes, our second botanical drug product
candidate, PLT 732, has shown promising results in two proof-of-principle
studies in hypertriglyceridemic patients. We believe that PLT 732 may have the
opportunity to become first line therapy in the treatment of
hypertriglyceridemia. Data from two Pilot-sponsored clinical trials (carried out
in CROs) with this botanical show that PLT 732 reduced triglycerides in
hypertriglyceridemia patents with no reported side effects in these limited
studies.

         Studies have identified high triglyceride levels as an independent risk
factor for CVD. 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 Circulation (vol. 104:2892, Dec. 2001) revealed
that high triglyceride levels are a major risk factor associated with stroke in
humans. We believe that PLT 732 has the potential to address these large
markets.

         We believe that the current products on the market for
hypertiglyceridmia are not optimal. While effective in lowering cholesterol, the
statin products often fail to control mixed hyperlipidemia. In addition
statin-fibrate combination therapy has a risk of major side effects, such as
myopathy. We believe that doctors do not currently have adequate tools to manage
triglycerides, and must make difficult decisions to manage them.

         We intend to capitalize upon FDA Botanical Guidance to move PLT 732
into Phase II clinical trials under an IND. PLT 732 will be developed as a
botanical drug and marketed as a prescription product. Based on the Food and
Drug Administration's ("FDA") Guidance for Botanical Drugs, we are preparing an
IND documenting the safe history of botanical use, chemical composition, and
data regarding PLT 732 from our safety and efficacy clinical trials.

         Oral Retinoids for Cystic Acne and Cancer

         We are also researching and developing pharmaceutical product
candidates intended for the treatment of cancer and cystic acne via nuclear
receptors. Studies over the last five years reveal that nuclear receptor (which
belong to the steroid superfamily of receptors) biology may hold the key to
revolutionary treatments for complex human diseases such as cancer and cystic
acne. Two of our products in development, PLT 99511, for cystic acne, and PLT
99257, for cancer have been identified using crucial points in nuclear receptor
signaling that control human diseases. Both PLT 99511 and PLT 99257 are
synthetic chemical entities and we plan to file INDs for these drug candidates
to enable us to move into Phase I clinical trials in 2003.

         PLT 99511 and PLT 99257 are selective agonists of the nuclear steroid
retinoid receptor, RAR(gamma). The RAR(gamma) receptor has been localized to
selected tissues such as skin and transactivation of this receptor induces
terminal differentiation of a number of cancers. We plan to move these products
from late stage preclinical research to the Phase IIA, clinical
proof-of-principle decision point.

     Specifically, PLT 99511:

         -        is a RAR(gamma) specific oral retinoid under investigation
                  for severe acne.

         -        is an oral product that has been shown in early studies in a
                  highly-predictive acne model to be 10-fold more potent than
                  currently available medications in oral potency and superior
                  in terms of maximal efficacy and time to onset of activity.

         -        due to its RAR(gamma) specificity, does not affect serum
                  triglycerides because the human liver does not contain the
                  RAR(gamma) receptor, which may provide a safety advantage
                  over existing therapies.

         -        is currently projected to be ready for Phase I clinical trials
                  in 2003.

     PLT 99257 is a RAR(gamma) specific oral retinoid under investigation for
cancer. Pre-clinical, clinical and epidemiological data provide strong evidence
that RAR(gamma) agonists are potent chemotherapeutic and chemopreventative
agents in cancer. For example, RAR(gamma) agonists have shown efficacy in head
and neck cancers, leukemias and cancers of the skin and cervix. PLT 99257 has
shown potential efficiency in the several pre-clinical


                                       4
<PAGE>

models of cancer. Like PLT 99511, PLT 99257 does not appear to affect serum
triglycerides, which may provide a safety advantage over existing therapies. PLT
99257 is projected to be ready for Phase I clinical trials in 2003.

                             STRATEGIC OUT-SOURCING

         Raw Material Supply

         Pilot is in the final stages of negotiating an agreement pursuant to
which the supplier will supply Pilot with needed oils and provide certain
chemical crop growing expertise to assist in the development of Airozin(TM) and
Pilot's other pipeline products. In addition, this supplier currently develops
plant-based sources and an agricultural system for many of Pilot's required bulk
active ingredients.

         Manufacturing

         Pilot 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 AIROZIN(TM). As
part of this Agreement, the manufacturer would also manufacture test batches of
AIROZIN(TM) suitable for consumer acceptability testing and may ultimately be
engaged to manufacture the final product in their manufacturing facilities.

         Research and Development Collaboration Opportunities

         Pilot has also entered into a research agreement with Wake Forest
University ("WFU"), pursuant to which the clinical research, including dose
tolerance and proof-of-principle studies, to support Pilot's evidence-based
medical foods will be carried out in the WFU School of Medicine's General
Clinical Research Center. Pilot believes that this collaboration is pivotal to
develop discovery-stage bioactive lipid therapeutic products in a cost-effective
manner. Pilot also seeks to leverage funding from the National Institutes of
Health (NIH) and to utilize other laboratories at WFU as research collaborators
and subcontractors in obtaining Small Business Administration (e.g. STTR / SBIR)
funding. Pilot has received a Small Business Innovation Research (SBIR) Grant to
fund research for the development of anti-cancer products.

         Commercialization

         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 the 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.


                                       5
<PAGE>


                          PATENTS/INTELLECTUAL PROPERTY

         The Company's success is dependent in part on our ability to obtain and
maintain patent protection for our 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. Our policy is to aggressively protect our 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, we rely on licenses of patent and other intellectual property
rights from or to third parties. We, or our licensing partners, have obtained
approximately 40 patents which will expire on various dates between 2015 and
2020. We have filed patent applications for additional patents covering our
products, processes, and methodologies as appropriate, and currently have
approximately 29 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.

         The Company has 1) filed and in-licensed (from Wake Forest University)
patent applications related to using Essential Fatty Acids (EFAs) for treating
inflammatory diseases and patents and patent applications related to anti-cancer
components and uses (co-owned by Glaxo-SmithKline); 2) filed patent applications
related to using certain polyunsaturated fatty acids for treating various
disease indications; and 3) in-licensed (from Bristol-Myers Squibb) a patent and
patent application portfolio related to using receptor selective retinoids to
treat acne and other disorders. A number of compounds that the Company intends
to develop into over-the-counter medical food or prescription botanical or
synthetic pharmaceutical products are covered by the patent portfolios described
above, including (a) Airozin(TM) a proprietary medical food product for the
dietary management of asthma; (b) PLT 99511, an in-licensed compound for the
treatment of acne; (c) PLT 99257, an in-licensed compound for the treatment of
cancer; and (d) PLT 732, a botanical drug compound for the treatment of
hypertriglyceridemia. Each of the patents for these compounds will expire on
various dates between 2015 and 2020 and certain patents are pending. Management
expects to develop additional potential commercial compounds from its overall
patent portfolio and Functional Liponomics(TM) research and development
platform, and file additional patent applications relating to such compounds.

         In December 1998, Pilot entered into a license agreement with Wake
Forest University 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 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.

         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(TM) and Functional Liponomics(TM). In


                                       6
<PAGE>

addition, trademark applications for the AIROZIN design, AIROZIN - ITS FOR
BREATHING, NATURALLY, and the Pilot Therapeutics name and logo are currently
pending. This Annual Report on Form 10-KSB also includes trademarks of companies
other than the Company.

                            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(TM) for the dietary management of asthma, as a medical food. Pilot is
pursuing and believes it will obtain self-affirmed GRAS status for AIROZIN(TM)
and, if obtained, believes that AIROZIN(TM) will be marketed as a medical food
product that does not require FDA pre-marketing clearance.

         The Company intends to develop and commercialize both botanical and
synthetic 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


                                       7
<PAGE>

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 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 $170,356 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 has expensed
$148,363 of the aggregate cost of the research project for the year ending
December 31, 2001.

         During the fiscal years ended December 31, 2001 and December 31, 2000,
the Company incurred research and development expenses of $1,724,384 and
$1,106,981, respectively.

                                    EMPLOYEES

         As of December 31, 2001, we had 13 full-time employees, three (3) who
have Ph.D.s. Of these 13 employees, five (5) 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
seven (7) 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.


                                       8
<PAGE>


                        DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
        Name                Age                   Position
        ----                ---                   --------
<S>                         <C>   <C>
Glenn J. Kline              38    Chairman of the Board of Directors

Floyd H. Chilton, Ph.D.     44    Founder, Director, President, Chief Executive Officer
                                    and Chief Scientific Officer

Santo J. Costa, J.D.        56    Director

James W. Johnston           55    Director

Bradley J. Undem, Ph.D.     44    Director

Margaret M. Urquhart        52    Director

Jack Voller                 55    Vice President of Marketing, Pilot Therapeutics, Inc.

John Crain                  54    Vice President of Sales, Pilot Therapeutics, Inc.

Beth Fordham-Meier          36    Vice President of Corporate Development, Pilot
                                    Therapeutics, Inc.

David J. Mills              35    Treasurer, Secretary and Controller
</TABLE>

         Glenn J. Kline has been the Chairman of the Board of Directors since
the Company's inception in August 1998. 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 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 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 Wireless Corporation
and Sharp Vista Technologies, Inc.

         Floyd H. Chilton, 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 13, 2000. Since January 2002, he has been a consultant for Quintiles
Transnational Corp., a premier contract pharmaceutical organization, where he
was Vice Chairman from December 1999 to December 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.

         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
1995-1996. He also served as Chairman of R.J. Reynolds Tobacco Co. and was Chief
Executive Officer. Mr. Johnston also serves on the Board of Directors of Sealy
Corporation.

         Bradley J. Undem, Ph.D. Mr. 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.


                                       9
<PAGE>


         Margaret M. Urquhart. Ms. Urquahart has been a Director of the Company
since April 2001. She was the President of Krispy Kreme Stores, North America,
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. Urquhart serves on the Boards of Trustees for Salem Academy and
College and the North Carolina School of the Arts.

         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 under Mr. Voller include major OTC brands such as
Listerine(R) Mouthwash, Benadryl(R) Allergy Medication, and Lubriderm(R) Skin
Care products. He also directed the launches of innovative products such as
Benadryl(R) Dye Free and Cool Mint Listerine(R).

         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 from 1997 to February
2001. In that position he was responsible for developing and directing sales and
marketing efforts. Prior to that Mr. Crain served as Vice President of Sales for
7 years at Goody's Pharmaceuticals and then Block Drug where he directed all
sales activities for Goody's Headache Powders(R). 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 introduced and or marketed products such as
Listerine(R), Efferdent(R), Lubriderm(R) and Benadryl(R).

         Beth W. Fordham-Meier, Vice President Corporate Development, Pilot
Therapeutics, Inc. Ms. Fordham-Meier has been the Vice President Corporate
Development (formerly Business Development) of Pilot since June 1999. Ms.
Fordham-Meier joined Pilot with over 15 years experience in biotechnology and
pharmaceutical licensing, intellectual property management, and corporate
development and planning. From September 1993 to May 1999, Ms. Fordham-Meier was
with Wake Forest University most recently serving as Patent Administrator and
Director of Technology Transfer and Industry Relations.

         David Mills, Treasurer, Secretary and Controller. Mr. Mills joined the
Company in October 2001. Prior to joining Pilot, Mr. Mills spent over 11 years
with the accounting firm of Ernst & Young LLP, most recently as an audit senior
manager in the North Carolina Entrepreneurial Services Practice. Mr. Mills is a
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants. He received his B.S. in accounting from Virginia Tech.


                                       10
<PAGE>


ITEM 2.  PROPERTIES

         The Company's operations are located in approximately 5,000 square foot
facility located at 101 North Chestnut Street, Winston-Salem, North Carolina.
This facility is used as the Company's corporate headquarters, sales and
marketing offices and a research and development laboratory. The lease is for a
5-year lease term expiring in 2004, and provides for annual rent payments of
approximately $70,000.

         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

         On October 2, 2001, the shareholders of the Parent, holding in excess
of a majority of the issued and outstanding voting stock of the Company and
acting by written consent in lieu of a shareholders' meeting, approved (1) the
Reincorporation and (2) a proposal to approve the Parent's 2001 Stock Incentive
Plan. The number of shares of the Parent's common stock held by the shareholders
executing the consent was 5,483,594.


                                       11
<PAGE>


                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S 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 closing
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.


<TABLE>
<CAPTION>
                                          2001                 2000
                                   ----------------------------------------
          QUARTER ENDED              HIGH       LOW       HIGH      LOW
---------------------------------- --------- ---------- --------- ---------
<S>                                <C>       <C>        <C>       <C>
March 31                           $  7.00   $  5.75    $  5.50   $  5.00
June 30                               7.50      6.00       6.25      5.00
September 30                          7.00      6.25       6.75      5.25
December 31                           9.25      5.25       7.00      6.38
</TABLE>

         As of February 28, 2002, there were approximately 284 record holders of
our common stock.

         We have never declared or paid any cash dividends on shares of our
common stock. We currently intend to retain all earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.

Recent Sales of Unregistered Securities

         During the fourth quarter of 2001, the Parent issued the following
securities that were not registered under the Securities Act of 1933:

         -        On December 1, 2001, the Parent issued 112 shares of common
                  stock to a former employee in connection with the exercise of
                  stock options at an exercise price of $2.50 per share. The
                  securities were issued pursuant to an exemption from
                  registration under Rule 701 under the Securities Act of 1933.

         -        On December 1, 2001, the Parent issued 1,400 shares of common
                  stock to a former employee in connection with the exercise of
                  stock options at an exercise price of $.385 per share. The
                  securities were issued pursuant to an exemption from
                  registration under Rule 701 under the Securities Act of 1933.

         -        On December 27, 2001, the Parent issued 22,390 shares of
                  common stock to a former employee in connection with the
                  exercise of stock options at an exercise price of $.385 per
                  share. The securities were issued pursuant to an exemption
                  from registration under Rule 701 under the Securities Act of
                  1933.

         -        In addition, on January 9, 2002, the Parent issued 479,500
                  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 $4.00 per share, for aggregate gross
                  proceeds of $1,918,000.


                                       12
<PAGE>


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS

         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, 2001 and December 31, 2000, 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,
2001 and 2000 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(TM) discovery platform. The Functional
Liponomics(TM) 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(TM), that we
currently expect to launch in the second half of 2002; (ii) 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), and AIROZIN(TM), our OTC product for asthma.

         Our research and development expenses in 2001 were $1,724,000, as
compared with $1,107,000 in 2000, an increase of 56%. This increase in research
and development expenses is primarily attributable to the intensification of
clinical trials of pipeline products generated from our Functional
Liponomics(TM) discovery platform, as we


                                       13
<PAGE>

prepare our lead products for introduction into the marketplace. Approximately
95% of these research and development expenses related to development and
clinical trials related to products from Functional Liponomics(TM).

         General and Administrative Expenses

         General and administrative expenses have increased from $516,000 in
2000 to $5,205,000 in 2001. This increase is primarily a result of the beginning
of the marketing and commercialization of AIROZIN(TM) Approximately 54% of these
costs relate to commercialization and marketing relating of AIROZIN(TM) and
approximately 27% relates to the non-cash amortization of deferred compensation
on certain stock options issued to employees and consultants. We expect general
and administrative costs to continue to increase as a result of the selling and
marketing costs associated with the launch of AIROZIN(TM), including the hiring
of additional personnel, over the next 12 months.

         Net Loss

         Due to the increased research and development and general and
administrative expenses, and the lack of any revenues to offset expenses, we had
a net loss of $7,090,995 in 2001, as compared with a net loss of $1,719,056 in
2000.

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, 2001, we
had cash and cash equivalents totaling $830,000, a decrease of $218,000 compared
to December 31, 2000. In addition, at December 31, 2001 we had $1,281,000 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 $4,553,000 for the
year ending December 31, 2001, up from $1,459,000 for the year ending December
31, 2000. This increase primarily resulted from the net losses of $7,091,000 and
$1,719,000 for the years ended December 31, 2001 and 2000, respectively. In 2001
this loss was offset by non-cash charges of $1,476,000, relating to the
amortization of deferred compensation on certain stock options issued to
employees and consultants of $1,418,000 and depreciation of property and
equipment of $58,000. At December 31, 2001, we had working capital of $271,000
compared with a working capital of $623,000 at December 31, 2000.

         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 2002, we
will require significant additional funding to continue our operations beyond
the second quarter of 2002. Therefore, we are currently seeking to raise
approximately $5.5 million to $10 million of additional capital to fund: (i) the
development, marketing and launch of AIROZIN(TM), our product for asthma, and
(ii) the preparation and filing of an IND and clinical trials for our lead
botanical drug candidates for coronary heart disease (PLT 732), and AIROZIN(TM),
our OTC product for asthma.

     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 capital and believe that we will be successful in the future.
However, there can be no assurance that we will be able


                                       14
<PAGE>
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 launch of AIROZIN(TM) 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.

         Under our June 2001 Loan Agreement with PharmaBio (an affiliate of
Quintiles), we have a $6,000,000 line of credit (the "Loan"). The Loan is
available to Pilot for general working capital purposes with $4,000,000
outstanding at December 31, 2001. Under the Loan Agreement the final $2,000,000
would have been available had the Company consummated of a defined equity sale
by December 31, 2001, which the Company did not complete. Since a defined equity
sale was not consummated by December 31, 2001, the final $2,000,000 will not
become available to the Company. 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 (June 2004).
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, which ranges from $1.915 to $2.50 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 amount outstanding
under the Loan.

         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.

         In 2002, we currently expect to increase our total number of employees
from 13 to approximately 20, subject to obtaining additional financing. Pursuant
to the provisions of our operating and capital leases, our minimum lease payment
commitment for 2002 is approximately $165,000.

Contractual Obligations and Commercial Commitments

         The following table summarizes the Company's future contractual cash
obligations as of December 31, 2001:

<TABLE>
<CAPTION>
                                                           2002           2003           2004
                                                         ---------      ---------      ---------
<S>                                                      <C>            <C>            <C>
         Operating lease commitments                     $  42,093      $  41,448      $  11,911
         Capital lease obligations                          35,357         32,530          1,431
</TABLE>

         The following table summarizes commercial commitments of the Company
that could potentially require performance by the Company in the event of
demands by third parties or contingent events:

<TABLE>
<CAPTION>
                                                              2002             2003
<S>                                                     <C>              <C>
         Open raw material purchase commitments         $1,600,000       $1,600,000
</TABLE>

         In connection with the manufacturing and distribution of our first
product AIROZIN(TM), expected to launch in the second half of 2002, we have
purchase commitments to suppliers totaling approximately $3,200,000. These
commitments are for the purchase of raw materials over the next 24 months.


                                       15
<PAGE>

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 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

         Patent costs are expensed due to the uncertainties involved in
realizing value in the future from specific patents.

Inventories

         The Company writes down its inventory 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 are less favorable than those projected
by management, additional inventory write-downs may be required.

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.


                                       16
<PAGE>


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.

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 June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Investments and Hedging Activities." SFAS No. 133 established a
new model for accounting for derivatives and hedging activities and supercedes
several existing standards. The provisions of SFAS No. 133, as amended by
Statements 137 and Statement 138, became effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of Statement 133 did
not have an impact on the Company's financial statements, as the Company has not
entered into any hedging or derivative activities.

         In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized,
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized for their useful lives. The amortization provisions of
SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. The adoption did not have an impact on our financial condition or our
results of operations.

         In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with Statement
121. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for impairment
under SFAS No. 142, Goodwill and Other Intangible Assets. The Company is
required to adopt SFAS No. 144 no later than the year beginning after December
15, 2001, and plans to adopt its provisions during the quarter ending March 31,
2002. Management does not expect the adoption of SFAS No. 144 to have a material
impact on the Company's financial statements.


                                       17
<PAGE>


         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 SECOND QUARTER OF 2002.

         Based on the current level of operating cash requirements expected for
2002 and in anticipation of the commercialization of AIROZIN(TM), we will
require significant additional funding to continue our operations beyond the
second quarter of 2002. 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 second quarter of 2002. 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 accountants have included in their report on our consolidated
financial statements as of and for the year ended December 31, 2001 an
explanatory paragraph that expresses substantial doubt about our ability to
continue as a going concern.

         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, 2001 was
$10,321,000, and the Company anticipates that its operating and capital
expenditures will increase significantly into 2002 and in future years primarily
due to its commitment to: (i) file an IND, complete clinical development,
manufacture and market its lead OTC medical food product, AIROZIN(TM) 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)
file INDs for PLT 99511, for cystic acne, and PLT 99527, for cancer; (iv)
identify and develop additional pharmaceutical products; and (v) 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(TM) 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.


                                       18
<PAGE>

         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(TM), 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 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 ABILITY TO MARKET MEDICAL FOOD PRODUCTS COULD BE AFFECTED
BY THE COMPANY'S ABILITY TO OBTAIN GENERALLY RECOGNIZED AS SAFE ("GRAS") STATUS.

         There can be no assurance that Pilot will obtain GRAS status for
AIROZIN(TM) as required to market the product as a medical food. A failure of
the Company to obtain GRAS status for AIROZIN(TM) 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


                                       19
<PAGE>

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 Transnational
Corporation and its subsidiaries, Innovex L.P. and PharmaBio Development, Inc.,
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.

         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(TM). 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. In addition, the Company
is in the final stages of negotiations for an agreement pursuant to which the
supplier will supply Pilot with needed oils and provide certain chemical crop
growing expertise to assist in the development of AIROZIN(TM) and Pilot's other
pipeline products. 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(TM) 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(TM), gamma
linolenic acid, is derived from the seed of borage plants. These seeds must be
secured in order to manufacture AIROZIN(TM). While the Company has secured seed
to manufacture AIROZIN(TM) for one year, 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.


                                       20
<PAGE>

         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 University,
has obtained an issued U.S. Letters Patent relating to its lead product,
AIROZIN(TM), and has in-licensed or filed additional pending and issued U.S. and
foreign patents relating to AIROZIN(TM) 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 or from 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.

         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.


                                       21
<PAGE>


         CLINICAL TRIALS MAY NOT GENERATE RESULTS THAT SUPPORT THE SAFETY OR
EFFICACY OF AIROZIN(TM), THE COMPANY'S LEAD PRODUCT.

         Currently, the Company is sponsoring Phase II-like clinical trials for
AIROZIN(TM) in adult asthmatics and has completed safety and efficacy trials in
adults with no side effects reported. However, market research reveals that
children will represent a large proportion of AIROZIN(TM)'s market. Based on
previous trial results, the Company is or will be sponsoring dosing and safety
clinical trials in children. These trials may not demonstrate that AIROZIN(TM)
is safe or effective in children. As a result, the Company may be forced to
delay the launch of AIROZIN(TM) to conduct further development activities and to
conduct additional clinical trials, which would materially and adversely affect
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 gold-standard 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 in-use, manufacture, storage, handling and disposal.
The Company cannot eliminate the risk of accidental contamination or injury from
these materials. In the event of such an accident or injury, the


                                       22
<PAGE>

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 the nutraceutical,
pharmaceutical, biotech 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, 2001, the Company has 50,000,000 shares of common stock
authorized with 9,748,873 shares outstanding. Of these shares, 8,345,935 million
shares are restricted pursuant to Rule 144 but 1,402,938 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.


                                       23
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                        PILOT THERAPEUTICS HOLDINGS, INC.
                          (A DEVELOPMENT STAGE COMPANY)

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants....................................       25
Consolidated Balance Sheets as of December 31, 2001 and 2000.........       26
Consolidated Statements of Operations for the years ended
   December 31, 2001 and 2000 and the period August 3, 1998
   (inception) to December 31, 2001..................................       27
Consolidated Statements of Redeemable Convertible Preferred Stock
   and Stockholders' Equity (Deficit) for the period of August 3,
   1998 (inception) to December 31, 2001.............................       28
Consolidated Statements of Cash Flows for the years ended
   December 31, 2001 and 2000 and the period August 3, 1998
   (inception) to December 31, 2001..................................       29
Notes to Consolidated Financial Statements...........................       30
</TABLE>


                                       24
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


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, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the each of the
two years in the period ended December 31, 2001 and for the period from August
3, 1998 (inception) through December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated 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,
2001 and 2000, and the consolidated results of their operations and their cash
flows for the each of the two years in the period ended December 31, 2001 and
for the period from August 3, 1998 (inception) through December 31, 2001, 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, and incurred recurring operating losses and has an accumulated deficit of
$10,320,703 at December 31, 2001. The Company does not have sufficient liquidity
to meet its obligations and sustain its planned operations for the year ending
December 31, 2002. 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 22, 2002


                                       25
<PAGE>


                        PILOT THERAPEUTICS HOLDINGS, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                   December 31
ASSETS                                                                        2001                  2000
                                                                         ------------           -----------
<S>                                                                      <C>                    <C>
Current assets:
     Cash and cash equivalents                                           $    829,565           $ 1,047,206
     Restricted Cash                                                        1,281,500                    --
     Accounts receivable                                                      244,014                    --
     Inventories                                                              153,338                    --
     Prepaid and other current assets                                         243,188                33,922
                                                                         ------------           -----------

Total current assets                                                        2,751,605             1,081,128

Furniture and equipment, net                                                  155,209               184,194
Other                                                                          51,904                54,642
                                                                         ------------           -----------

                                                                         $  2,958,718           $ 1,319,964
                                                                         ============           ===========

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
  STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Accounts payable                                                    $  1,326,647           $        --
     Accrued expenses and other current liabilities                           721,611               400,939
     Current portion of capital lease obligation                               35,357                23,698
                                                                         ------------           -----------

Total current liabilities                                                   2,083,615               424,637

Long-term portion of capital lease obligation                                  23,573                54,765
Convertible debt, net of imputed value of beneficial conversion             2,778,068             2,713,875
                                                                         ------------           -----------

Total liabilities and redeemable convertible preferred stock                4,885,256             3,193,277


Commitment and contingencies                                                       --                    --


Redeemable convertible preferred stock, Series A and Series B                      --               750,000

Stockholders' equity (deficit):
     Common stock; $.001 par value; 50,000,000 shares
       authorized; 9,748,873 shares issued and outstanding
       at December 31, 2001                                                     9,749                 2,011
     Capital in excess of stated value                                      8,811,085               124,976
     Deferred compensation                                                 (1,612,674)                   --
     Common stock subscriptions                                             1,186,005                    --
     Deficit accumulated during development stage                         (10,320,703)           (2,750,300)
                                                                         ------------           -----------

Total stockholders deficit                                                 (1,926,538)           (2,623,313)
                                                                         ------------           -----------

                                                                         $  2,958,718           $ 1,319,964
                                                                         ============           ===========
</TABLE>

See accompanying notes.


                                       26
<PAGE>



                        PILOT THERAPEUTICS HOLDINGS, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                                    Cumulative from
                                                                                                     August 3, 1998
                                                                                                    (inception) to
                                                                   Year ended December 31             December 31,
                                                                  2001                2000                2001
                                                              -----------         -----------         ------------

<S>                                                           <C>                 <C>               <C>
Operating expenses:
     License fees                                             $        --         $        --         $    112,500
     Research and development                                   1,724,384           1,106,981            3,306,710
     General and administrative                                 5,204,944             516,134            6,178,990
                                                              -----------         -----------         ------------

Loss from operations                                           (6,929,328)         (1,623,115)          (9,598,200)

Interest expense                                                 (207,121)           (116,952)            (324,073)
Other income, net                                                  45,454              21,011               80,978
                                                              -----------         -----------         ------------

Net loss                                                       (7,090,995)         (1,719,056)          (9,841,295)

Accreted redemption value on Series A and B
     redeemable convertible preferred stock                      (479,408)                 --             (479,408)
                                                              -----------         -----------         ------------

Net loss to common                                            $(7,570,403)        $(1,719,056)        $(10,320,703)
                                                              ===========         ===========         ============

Pro forma basic and diluted loss per common share                   (0.73)              (0.19)

Pro forma weighted Average common shares outstanding -
    basic & diluted                                             9,725,287           9,244,248
</TABLE>


See accompanying notes.


                                       27
<PAGE>
                        PILOT THERAPEUTICS HOLDINGS, INC.
                          (A DEVELOPMENT STAGE COMPANY)

      CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                         STOCKHOLDERS' EQUITY (DEFICIT)
         FOR THE PERIOD AUGUST 3, 1998 (INCEPTION) TO DECEMBER 31, 2001
<TABLE>
<CAPTION>
                                                            REDEEMABLE
                                                            CONVERTIBLE
                                                             PREFERRED                                               CAPITAL IN
                                                               STOCK                                                  EXCESS OF
                                                           SERIES A & B                    COMMON STOCK                STATED
                                                      SHARES          AMOUNT           SHARES         AMOUNT            VALUE
                                                     ----------------------------------------------------------------------------
<S>                                                  <C>            <C>               <C>            <C>             <C>
Issuance of common stock at inception
  (August 3, 1998)                                        --                --        1,350,000       $ 1,350       $        --
Issuance of common stock in exchange for
  license fee                                             --                --          562,500           563           111,937
Issuance of Series A preferred stock, net of
  issuance cost                                      500,000       $   500,000               --            --           (15,652)
Net loss                                                  --                --               --            --                --
                                                   -----------------------------------------------------------------------------
Balance at December 31, 1998                              --                --
Issuance of common stock                                  --                --          219,125           218             5,063
Repurchase of common stock                                --                --         (236,454)         (236)
Issuance of Series A preferred stock, net of
  issuance cost                                      250,000           250,000               --            --              (899)
Net loss                                                  --                --               --            --                --
                                                   -----------------------------------------------------------------------------
Balance at December 31, 1999                         750,000           750,000        1,895,171         1,895           100,449
Exercise of common stock options                          --                --          116,114           116            15,885
Issuance of common stock warrants with
  convertible demand promissory notes                     --                --               --            --             8,642
Net loss                                                  --                --               --            --                --
                                                   -----------------------------------------------------------------------------
Balance December 31, 2000                            750,000           750,000        2,011,285         2,011           124,976
Conversion of exchangeable demand promissory
  note                                               738,179         2,827,225               --            --                --
Issuance of Series B redeemable convertible
  preferred stock, net of issuance costs             196,240           751,600               --            --           (13,754)
Accreted redemption value on Series A and B
  redeemable convertible preferred stock                  --           479,408               --            --                --
Exercise of common stock options                                                         31,402            31             9,483
Imputed value of beneficial conversion on
  convertible debt                                        --                --               --            --         1,221,932
Deferred compensation related to the
  issuance of certain stock options                       --                --               --            --         3,030,608
Amortization of deferred compensation and
  stock--based compensation                               --                --               --            --                --
Common stock forfeitures                                  --                --          (20,031)          (20)               20
Common stock subscriptions received                       --                --               --            --                --
Stock exchange with the Interallied Group,
  Inc., net                                       (1,684,419)       (4,808,233)       7,726,217         7,727         4,437,820
Net loss                                                  --                --               --            --                --
                                                   -----------------------------------------------------------------------------

Balance December 31, 2001                                 --       $        --        9,748,873       $ 9,749       $ 8,811,085
                                                   ============================================================================
<CAPTION>
                                                                                         DEFICIT
                                                                                       ACCUMULATED
                                                                                        DURING THE
                                                    DEFERRED          STOCK            DEVELOPMENT
                                                  COMPENSATION     SUBSCRIPTION           STAGE              TOTAL
                                                  ------------------------------------------------------------------
<S>                                               <C>               <C>               <C>                <C>
Issuance of common stock at inception
  (August 3, 1998)                                $        --       $        --       $         --       $     1,350
Issuance of common stock in exchange for
  license fee                                              --                --                 --           112,500
Issuance of Series A preferred stock, net of
  issuance cost                                            --                --                 --           484,348
Net loss                                                   --                --           (191,208)         (191,208)
                                                  ------------------------------------------------------------------
Balance at December 31, 1998                               --                --           (191,208)          406,990
Issuance of common stock                                   --                --                 --
Repurchase of common stock                                 --                --                 --
Issuance of Series A preferred stock, net of
  issuance cost                                            --                --                 --           249,101
Net loss                                                   --                --           (840,036)         (840,036)
                                                  ------------------------------------------------------------------
Balance at December 31, 1999                               --                --         (1,031,244)         (178,900)
Exercise of common stock options                           --                --                 --            16,001
Issuance of common stock warrants with
  convertible demand promissory notes                      --                --                 --             8,642
Net loss                                                   --                --         (1,719,056)       (1,719,056)
                                                  ------------------------------------------------------------------
Balance December 31, 2000                                  --                --         (2,750,300)       (1,873,313)
Conversion of exchangeable demand promissory
  note                                                     --                --                 --         2,827,225
Issuance of Series B redeemable convertible
  preferred stock, net of issuance costs                   --                --                 --           737,846
Accreted redemption value on Series A and B
  redeemable convertible preferred stock                   --                --           (479,408)               --
Exercise of common stock options                           --                --                                9,514
Imputed value of beneficial conversion on
  convertible debt                                         --                --                 --         1,221,932
Deferred compensation related to the
  issuance of certain stock options                (3,030,608)               --                 --                --
Amortization of deferred compensation and
  stock-based compensation                          1,417,934                --                 --         1,417,934
Common stock forfeitures                                   --                --                 --                --
Common stock subscriptions received                        --         1,186,005                 --         1,186,005
Stock exchange with the Interallied Group,
  Inc., net                                                --                --                 --          (362,686)
Net loss                                                   --                --         (7,090,995)       (7,090,995)
                                                  ------------------------------------------------------------------

Balance December 31, 2001                         $(1,612,674)      $ 1,186,005       $(10,320,703)      $(1,926,538)
                                                  ===================================================================
</TABLE>

See accompanying notes.

                                       28
<PAGE>


                        PILOT THERAPEUTICS HOLDINGS, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                            Cumulative from
                                                                                                             August 3, 1998
                                                                               For the year                  (inception) to
                                                                             ended December 31                December 31,
                                                                          2001                2000                2001
                                                                      -----------         -----------         -----------
<S>                                                                   <C>                 <C>               <C>
Operating activities:
Net loss                                                              $(7,090,995)        $(1,719,056)        $(9,841,295)
Adjustments to reconcile net loss to
 net cash used in operating activities:
     Noncash license fee                                                       --                  --             112,500
     Depreciation and amortization                                         58,109              33,073              98,647
     Noncash promissory notes charges                                          --              22,517              22,517
     Compensation related to issuance of certain stock options          1,417,934                  --           1,417,934
     Changes in operating assets and liabilities:
        Accounts receivable                                              (244,014)                 --            (244,014)
        Inventories                                                      (153,338)                 --            (153,338)
        Prepaid expenses and other current assets                        (209,266)            (15,420)           (243,188)
        Other assets                                                        2,738                  --             (51,904)
        Accounts payable and accrued expenses                           1,665,174             219,729           2,066,113
                                                                      -----------         -----------         -----------
Net cash used in operating activities                                  (4,553,658)         (1,459,157)         (6,816,028)

Investing activities:
Purchases of furniture and equipment                                      (29,124)            (81,833)           (150,341)
                                                                      -----------         -----------         -----------
Net cash used in investing activities                                     (29,124)            (81,833)           (150,341)

Financing activities:
Proceeds from issuance of convertible debt                              4,000,000           2,450,000           6,800,000
Payments on capital lease obligation                                      (19,533)            (15,552)            (44,585)
Proceeds from issuance of common stock                                         --                  --               6,395
Proceeds from exercise of stock options                                     9,514              16,001              25,515
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                               4,365,141           2,450,449           7,795,934

Net (decrease) increase in cash and cash equivalents                     (217,641)            909,459             829,565
Cash and cash equivalents at beginning of period                        1,047,206             137,747                  --
                                                                      -----------         -----------         -----------

Cash and cash equivalents at end of period                            $   829,565         $ 1,047,206         $   829,565
                                                                      ===========         ===========         ===========
</TABLE>


See accompanying notes.


                                       29
<PAGE>



                        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(TM). Using Functional Liponomics(TM), 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(TM) in the second half
of 2002. 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 $10,320,703 through December 31, 2001.

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 2002 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.


                                       30
<PAGE>

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, 2000
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
3 to 7 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, 2001 and 2000 was approximately
$99,000 and $41,000, respectively.

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.

Patent Costs

Patent costs are expensed due to the uncertainties involved in realizing value
in the future from specific patents.


                                       31
<PAGE>


3.  Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations
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, 2001.

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.

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.

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. Accordingly, the Company
does not prepare discrete financial information with respect to separate product
areas or by location and does not have separately reportable segments as defined
by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information".


                                       32
<PAGE>


3.  Summary of Significant Accounting Policies (continued)

Reclassification

Certain prior year amounts have been reclassified to conform to the current year
presentation.

Recent Accounting Pronouncements

In June 1998, The Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Investments and Hedging Activities." SFAS No. 133 established a new
model for accounting for derivatives and hedging activities and supercedes
several existing standards. The provisions of SFAS No. 133, as amended by
Statements 137 and Statement 138, became effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of Statement 133 did
not have an impact on the Company's financial statements as the Company has not
entered into any hedging or derivative activities.

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests. Other intangible assets will
continue to be amortized for their useful lives. The amortization provisions of
SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,
2001. The adoption did not have an impact on our financial condition or our
results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No.
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with Statement 121. SFAS No. 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike SFAS No.
121, an impairment assessment under SFAS No. 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS
No. 142, Goodwill and Other Intangible Assets. The Company is required to adopt
SFAS No. 144 no later than the year beginning after December 15, 2001, and plans
to adopt its provisions during the quarter ending March 31, 2002. Management
does not expect the adoption of SFAS No. 144 to have a material impact on the
Company's financial statements.

4.  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
years presented. The pro forma weighted average number of shares outstanding at
December 31, 2001 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 4,657,212 and 1,338,834 for the years
ended December 31, 2001 and 2000, respectively. The loss per common share for
basic and diluted is $1.52 and $1.28 for the years ended December 31, 2001 and
2000, respectively.

5. 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 10 for
discussion of the terms of the Investment and Royalty, Loan and
Commercialization Agreements. Innovex and PharmaBio are commonly controlled by
Quintiles Transnational Corporation.


                                       33
<PAGE>

5. Convertible Debt (continued)

Under the Loan Agreement Pilot has a $6,000,000 line of credit (the "Loan"). The
Loan is available to Pilot for general working capital purposes with $4,000,000
outstanding at December 31, 2001. Under the Loan Agreement the final $2,000,000
would have been available had the Company consummated of a defined equity sale
by December 31, 2001, which the Company did not complete. 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. 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, of $1.915
to $2.50 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. 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.

In 2000, Pilot Therapeutics, Inc. issued convertible demand promissory notes in
the aggregate principal amount of $2,713,875. The promissory notes accrued
interest at 8.5%. In conjunction with the issuance of the convertible demand
promissory notes warrants to purchase an aggregate of 83,477 shares of common
stock at an exercise price of $3.83. In February 2001, the unpaid principal and
accrued interest on the promissory notes where converted into shares of Pilot
Therapeutics, Inc. Series B Preferred Stock at a price of $3.83 per share.

6. 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,
2001. The cost and accumulated depreciation of the items under capital lease
were $103,515 and $54,857, respectively, at December 31, 2001.

Additionally, the Company leases office space and certain office equipment under
operating leases with remaining terms of between 2 and 3 years.

Future minimum payments at December 31, 2001 under non-cancelable operating and
capital leases with initial or remaining terms of one year or more are as
follows:

<TABLE>
<CAPTION>
                                         Operating       Capital
                                           Leases         Leases            Total
                                          -------        ---------         ---------
<S>                                      <C>             <C>               <C>
2002                                      $42,093        $  35,357         $  77,450
2003                                       41,448           32,530            73,978
2004                                       11,911            1,431            13,342
                                          -------        ---------         ---------
Total                                      95,452           69,318           164,770

Less amounts representing Interest             --          (10,388)          (10,388)
                                          -------        ---------         ---------
                                          $95,452        $  58,930         $ 154,382
                                          =======        =========         =========
</TABLE>

Rent expense under operating leases was approximately $56,000, $37,000 and
$120,000 for the years ended December 31, 2001 and 2000 and for the period from
August 3, 1998 (inception) to December 31, 2001, respectively.


                                       34
<PAGE>


7. 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, 2001 and
2000 is as follows:

<TABLE>
<CAPTION>
                                                             2001           2000
                                                             ----           ----
<S>                                                         <C>            <C>
        Federal statutory rate                              (34.0)%         (34.0)%
           Permanent differences and other                    0.5             0.3
           State taxes net of federal benefit                 4.9             4.9
           Change in valuation allowance                     28.6            28.8
                                                             ----           ----
        Total gross deferred tax assets                       0.0%            0.0%
                                                             ====            ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                       2001                2000
                                                   -----------         -----------
        <S>                                        <C>                 <C>
        Deferred tax assets:
           Net operating loss carry forward        $ 2,909,160         $ 1,039,696
           Deferred compensation                       505,961                  --
           Patent and Trademark costs                   48,234              16,912
           Other                                         7,992                 235
                                                   -----------         -----------
           Total deferred tax assets                 3,471,347           1,056,843
        Deferred tax liabilities                       (10,661)               (978)
                                                   -----------         -----------
        Net deferred tax assets                      3,460,686           1,055,865
           Valuation allowance                      (3,460,686)         (1,055,865)
                                                   -----------         -----------
        Net deferred taxes                         $        --         $        --
                                                   ===========         ===========
</TABLE>

At December 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,152,790, which are available to
offset future federal taxable income, if any, in varying amounts from 2018
through 2021. However, the utilization of the net operating losses will be
subject to certain limitations as prescribed by Section 382 of the Internal
Revenue Code.

8. Stockholders' Equity

On October 2, 2001, the shareholders of the Company approved a proposal to
reincorporate under the laws of Delaware by merger into Pilot Therapeutics
Holdings, Inc., a Delaware corporation and wholly owned subsidiary of ILRG (the
"Reincorporation"). The Reincorporation became effective November 30, 2001.

As a result of the Reincorporation, Pilot Therapeutics, Inc. (a North Carolina
corporation) became a wholly owned subsidiary of Pilot Therapeutics Holdings,
Inc. However, the Reincorporation did not result in any change in the business,
assets or liabilities of the Company, will not cause the corporate headquarters
or other facilities to be moved, and will not result in any relocation of
management or other employees.

Private Placement of Common Stock

In addition, on January 9, 2002, the Company issued 479,500 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 $4.00 per share, for aggregate gross proceeds of
$1,918,000 and net proceeds of $1,784,000.


                                       35
<PAGE>

8. Stockholders' Equity (continued)

Redeemable Convertible Preferred Stock

Prior to the transaction with ILRG in August 2001, Pilot Therapeutics, Inc. had
authorized 2,566,580 shares of redeemable convertible preferred stock
("Preferred Stock") with a par value of $0.001. The Preferred Stock was
designated as 750,000 shares of Series A and 1,566,580 as Series B with the
remaining 250,000 shares undesignated. At December 31, 2000, 750,000 shares of
the Series A Preferred Stock was outstanding, which was converted in August 2001
as part of the transaction with ILRG.

In 1998, Pilot Therapeutics, Inc. issued 500,000 shares of Series A Preferred
Stock in exchange for net cash proceeds of $348,348 and conversion of a note
payable for $100,000. In connection with the transaction, warrants to purchase
250,000 shares of common stock were issued. During 1999, 250,000 additional
shares of Series A Preferred Stock was issued for net cash proceeds of $249,101,
with warrants for the purchase of 62,500 shares of common stock.

During 2001, Pilot Therapeutics, Inc. received $751,600 and converted the
outstanding convertible promissory notes in the aggregate principal and accrued
interest amount of $2,827,225, into shares of Series B Preferred Stock.

In connection with the Stock Exchange Agreement dated as of August 1, 2001,
between Pilot Therapeutics, Inc. and ILRG, all redeemable convertible preferred
stock and related common stock warrants of Pilot Therapeutics, Inc. were
converted into common stock.

The holders of Preferred Stock had the following rights; 1) the holder is
entitled to receive non-cumulative dividends when declared by the Board of
Directors with no dividends payable to common shareholders unless an equivalent
amount is declared on the Preferred Stock; 2) the holder of Preferred Stock had
the right to convert the shares at anytime into shares of common stock one for
one, subject to dilution issued as defined in the Amended Articles of
Incorporation; 3) in the event of a liquidation the holders shall be entitled to
received an amount equal to $1.00 per share, as adjusted for stock splits or
dividends, before payments to common stock holders; 4) after the seventh
anniversary of the issue date, the holders of 50% of the outstanding shares
voting together as a single group may request the Preferred Stock to be redeemed
at the fair market value plus declared but unpaid dividends or the liquidation
preference price.

There are no authorized or issued shares of Preferred Stock or common stock
warrants outstanding at December 31, 2001.

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. The Company adopted a 2001 Stock Incentive Plan ("2001
Plan") on August 24, 2001. Under the 2001 Plan, options to purchase up to
1,200,000 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, 2001, a total of 1,135,768 shares were
available for future stock option grants.


                                       36


<PAGE>
\
8.       Stockholders' Equity (continued)

A summary of the Company's stock option plans at December 31, 2001 and 2000 and
changes during the periods then ended is presented in the table below:

<TABLE>
<CAPTION>
                                                             2001                          2000
                                                   ------------------------        --------------------
                                                                  Weighted-                   Weighted-
                                                                   Average                     Average
                                                                   Exercise                    Exercise
                                                    Shares          Price           Shares      Price
                                                   ----------     ---------        --------    --------
         <S>                                        <C>           <C>              <C>         <C>
         Shares under option:
         Outstanding, beginning of year               487,772      $ 0.101          580,000     $ 0.058
           Granted                                  1,151,220      $ 1.949          140,000     $ 0.150
           Exercised                                  (31,402)     $ 0.302         (232,228)    $ 0.024
           Forfeited                                  (77,738)     $ 0.361               --       --
                                                    ---------                      --------
         Outstanding, end of year                   1,529,852      $ 1.460          487,772     $ 0.101
                                                    =========                      ========
         Exercisable, end of year                     718,689      $ 0.465          212,470
                                                    =========                      ========
         Weighted average fair value of
         options granted                              $ 3.07                        $ 0.07
</TABLE>

For various price ranges, weighted average characteristics of outstanding stock
options at December 31, 2001 were as follows:

<TABLE>
<CAPTION>
                                                Outstanding Options                  Exercisable Options
                                        -------------------------------------------------------------------
                                                     Weighted-       Weighted-                    Weighted-
                                                      Average        Average                       Average
                                                      Remaining      Exercise                     Exercise
         Range of Exercise Prices        Shares      Life (years)      Price           Shares       Price
         ------------------------       -------      ------------    ---------        -------     ---------
         <S>                            <C>          <C>             <C>              <C>         <C>
             $0.050 - $0.150            451,772         7.76          $ 0.08          325,778      $ 0.07
             $0.300 - $0.425            674,800         9.29            0.37          322,360        0.36
             $2.500 - $3.500            196,180         9.59            2.54           64,956        2.61
             $4.000 - $6.500             94,500         9.95            4.32            5,595        4.45
             $7.150 - $9.900            112,600         6.21            9.23               --          --
</TABLE>

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, 2001, the Company recorded aggregate
deferred compensation of $3,030,608 related to the issuance of stock options,
with related amortization of $1,417,934 during 2001.


                                      37

<PAGE>

8.       Stockholders' Equity (continued)

Had compensation cost to employees been determined based on the fair value at
the grant dates for awards in 2001 and 2000 consistent with the provisions of
SFAS No. 123, the Company's net loss would have been the pro forma amounts
indicated below:

<TABLE>
         <S>                                                       <C>                   <C>
         Net loss available for common stockholders

              As reported                                          $ (7,090,995)         $ (1,719,056)
                                                                   ============          ============
              Pro forma                                            $ (7,594,917)         $ (1,724,383)
                                                                   ============          ============

         Pro forma basic and diluted loss per common share
              As reported                                          $      (0.73)         $      (0.19)
                                                                   ============          ============
              Pro forma                                            $      (0.78)         $      (0.19)
                                                                   ============          ============

         Pro forma weighted average shares outstanding                9,725,287             9,244,248
</TABLE>

The fair value of options granted during the years ending 2001 and 2000 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%.

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.

9.       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. 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 $170,356 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 has
expensed $148,363 of the aggregate cost of the research project for the year
ending December 31, 2001.

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.


                                      38

<PAGE>

9.       License and Research Agreements (continued)

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.

10.      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.

11.      Purchase Commitments

In connection with the manufacturing of the Company's first product the Company
has purchase commitments from suppliers of approximately $3,200,000. These
commitments are for the purchases of raw materials over the next 24 months.


                                      39

<PAGE>

12.      Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                                                                             Cumulative
                                                                                                                 from
                                                                                                            August 3, 1998
                                                                                                            (inception) to
                                                                          Year ended December 31             December 31,
                                                                        2001                 2000                2001
                                                                     -----------         -----------        --------------
<S>                                                                  <C>                 <C>                <C>
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
                                                                     ===========         ===========         ===========
</TABLE>


                                      40

<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable

                                    PART III

ITEM 9.  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH
         SECTION 16(A) OF THE EXCHANGE ACT.

         The required information with respect to the identification of
directors and executive officers is contained herein under Item 1 - Business
under the caption "Directors and Executive Officers".

         Section 16(a) of the Exchange Act requires the Company's directors,
officers and persons beneficially owning more than 10% of the Company's
outstanding Common Stock to file periodic reports of stock ownership and stock
transactions with the Commission. Based solely on a review of copies of these
reports furnished to the Company, the Company believes all of these reports
were filled in a timely manner except that David Mills failed to timely file a
Form 3 upon becoming an officer of the Company in December 2001.

ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth certain information regarding
compensation paid by the Company for the fiscal year ended December 31, 2001 to
the Company's Chief Executive Officer (the "Named Officer").

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                            Long-Term
                                                                                          Compensation          All Other
                                          Annual Compensation                                Awards          Compensation($)
-----------------------------------------------------------------------------------------------------------------------------
                                                                          Other Annual
  Name and Principal                                                      Compensation   Shares Underlying
       Position                  Year(1)       Salary($)       Bonus($)         $           Options(#)
-----------------------------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>             <C>         <C>           <C>                 <C>
Floyd H. Chilton, III             2001         $ 180,000        $   --        $   --          118,000           $ 570(2)
   President, Chief
   Executive Officer
   and Chief Scientific
   Officer
</TABLE>

(1)      Prior to 2001, the Company was not a reporting company pursuant to
         Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
         amended.

(2)      Consists of life insurance premiums paid by the Company.


                                      41
<PAGE>

OPTION GRANTS

         The following table sets forth information regarding grants of stock
options to the Named Officer pursuant to the Company's stock incentive plans
during fiscal 2001.

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                      Number of Securities      % of Total Options
                       Underlying Options      Granted to Employees       Exercise Price Per
        Name               Granted(#)             in Fiscal Year              Share($/Sh)             Expiration Date
---------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                      <C>                        <C>                         <C>
Floyd H. Chilton            30,000(1)                  2.6%                     $0.425                   04/09/11
                             3,000(2)                  0.3%                     $2.75                    08/18/06
                            85,000(3)                  7.4%                     $9.90                    12/27/06
</TABLE>

(1)      This nonqualified option has a term of 10 years and vests in thirty
         six equal monthly installments beginning May 10, 2001.

(2)      This incentive option has a term of five years and vests in nine equal
         quarterly installments beginning August 9, 2001.

(3)      This incentive option has a term of five years. The option to purchase
         14,170 shares vests on June 28, 2002, and the remainder of the option
         vests in 10 equal quarterly installments beginning on September 28,
         2002.

The following table sets forth information with respect to (i) shares acquired
upon exercise by the Named Officer in 2001 and (ii) unexercised stock options
granted under the Company's stock incentive plans as of the end of fiscal 2001.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values

<TABLE>
<CAPTION>
                                                             Number of Securities Underlying          Value of Unexercised
                                                               Unexercised Options Held at          In-the-Money Options at
                                                                   December 31, 2001(#)             December 31, 2001($)(2)
                           Shares Acquired       Value       ----------------------------------------------------------------------
        Name               on Exercise(#)    Realized($)(1)    Exercisable      Unexercisable    Exercisable    Unexercisable
-----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>               <C>             <C>                <C>              <C>            <C>
Floyd H. Chilton, III          None               $0.00           7,336             110,664         $63,187         $221,063
</TABLE>

(1)      Calculated by determining the difference between the market value per
         share on the date of exercise and the exercise price for the
         respective options.

(2)      Calculated by determining the difference between the market value of
         $9.25 per share for the Common Stock underlying the options at
         December 31, 2001 and the exercise prices of the Named Officer's
         options.


                                      42

<PAGE>

                             DIRECTOR COMPENSATION

         The Company's Bylaws provide that the Board of Directors may by
resolution from time to time fix the compensation of directors. In March 2001,
Messrs. Costa, Johnston and Undem each received a nonqualified option to
purchase 30,000 shares of Common Stock at a per share exercise price equal to
the fair market value on the date of grant as determined by the Board of
Directors. Ms. Urquhart received the same option in May 2001. All of such
options vest quarterly over 36 months. In August 2001, each director also
received a nonqualified option to purchase 6,000 shares at a per share exercise
price equal to the fair market value on the date of grant as determined by the
Board of Directors. These options vest monthly over 24 months. In addition,
each director who is not also an employee of the Company is entitled to
reimbursement from the Company for his or her reasonable expenses incurred in
attending meetings of the Board of Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of March 31, 2002 by (i)
each person known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each director of the Company, (iii) each director nominee, (iv) the
Named Officer and (v) all executive officers and directors as a group.


                                      43

<PAGE>

<TABLE>
<CAPTION>
                                                                              COMMON STOCK
                                                               --------------------------------------------
                                                                AMOUNT AND NATURE OF
           NAME AND ADDRESS                                    BENEFICIAL OWNERSHIP(1)     PERCENT OF CLASS
           ----------------                                    -----------------------     ----------------
<S>                                                            <C>                         <C>
Centennial Venture Partners, LLC                                         1,554,346               14.7%
920 Main Campus Drive, Suite 400
Raleigh, NC 27606

Wake Forest University                                                   1,125,000               10.7%
Wake Forest School of Medicine
Medical Center Boulevard
Winston-Salem, NC 27517

Academy Venture Fund, LLC                                                  916,748                8.7%
11540 North Community House Road, Suite 150
Charlotte, NC 28227

Quintiles Transnational Corp.                                            2,088,773(2)            16.5%
4709 Creekstone Drive, Suite 200
Durham, NC 27703

Dr. Floyd H. Chilton, III                                                1,963,004(3)            18.6%
c/o Pilot Therapeutics Holdings, Inc.
101 North Chestnut Street
Winston-Salem, NC 27101

Glenn J. Kline                                                           2,471,094(4)            23.4%
c/o Centennial Venture Partners, LLC
920 Main Campus Drive, Suite 400
Raleigh, NC 27606

James W. Johnston                                                          105,220(5)             1.0%
c/o Stonemarker Enterprises, Inc.
380 Knollwood Street, Suite 570
Winston-Salem, NC 27103

Santo J. Costa                                                              40,064(6)             [*]
108 Martinique Place
Cary, NC 27511

Bradley J. Undem                                                            46,260(7)             [*]
c/o Johns Hopkins University School of Medicine
Bayview Medical Center
Department of Medicine JHAAC 3A.44
3400 North Charles Street
Baltimore, MD 21218

Margaret Urquhart                                                           23,782(8)             [*]
c/o Pilot Therapeutics Holdings, Inc.
101 North Chestnut Street
Winston-Salem, NC 27101

All directors and executive officers as a group                          4,855,975(9)            44.5%
(10 persons)
</TABLE>


                                      44

<PAGE>

*        Less than 1%.

(1)      Beneficial ownership is determined in accordance with the rules of the
         Commission and is based upon filings made by such persons with the
         Commission and upon information provided to the Company. In computing
         the number of shares beneficially owned by a person and the percentage
         ownership of that person, shares of Common Stock subject to options or
         warrants held by that person that are currently exercisable or
         exercisable within 60 days of the record date are deemed outstanding.
         These shares, however, are not deemed outstanding for the purposes of
         computing the percentage ownership of any other person. Except as
         indicated in the footnotes to this table and as provided pursuant to
         applicable community property laws, the stockholders named in the
         table have sole voting and investment power with respect to the shares
         set forth opposite each stockholder's name.

(2)      Based on a Schedule 13G filed jointly by Quintiles Transnational Corp.
         ("Quintiles") and PharmaBio Development Inc. ("PharmaBio") on December
         21, 2001. Pursuant to an Agreement between PharmaBio, a subsidiary of
         Quintiles, and Pilot Therapeutics, Inc. ("PTI"), a subsidiary of
         Pilot, PharmaBio has made loans to PTI in the aggregate amount of
         $4,000,000. Such amount is convertible by PharmaBio into Pilot's
         Common Stock based on the "conversion price" as defined in such
         agreement, which is subject to adjustment in accordance with such
         agreement. Based on an assumed conversion price of $1.915 per share
         and the current outstanding loan amount of $4,000,000, PharmaBio has
         the right to acquire 2,088,773 shares of Pilot's Common Stock. See
         "Certain Transactions," below.

(3)      Includes 1,527,500 shares that Dr. Chilton owns directly, 422,500
         shares that Dr. Chilton may be deemed to indirectly beneficially own
         as a result of family holdings and 13,004 shares that Dr. Chilton has
         the right to acquire within 60 days pursuant to the exercise of
         certain options.

(4)      The reporting person is the Senior Managing Director of Centennial
         Venture Partners, LLC and Academy Venture Fund, LLC which own the
         reported securities. The reporting person disclaims beneficial
         ownership of the reported securities except to the extent of his
         pecuniary interest therein.

(5)      Includes 67,292 shares that Mr. Johnston owns directly and 37,928
         shares that may be acquired pursuant to options exercisable within 60
         days.

(6)      Represents shares that may be acquired pursuant to options exercisable
         within 60 days.

(7)      Represents shares that may be acquired pursuant to options exercisable
         within 60 days.

(8)      Includes 12,500 shares that Ms. Urquhart owns directly and 11,282
         shares that may be acquired pursuant to options exercisable within 60
         days.

(9)      Incudes an aggregate of 206,551 shares that may be acquired pursuant
         to options exercisable within 60 days and that are held by executive
         officers of the Company who are not also directors.


                                      45

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with 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. 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 pay Wake Forest a minimum of $50,000 per year for
research 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 was extended from March 2001 to October 2001, with a final report
due no later than November 7, 2001. In exchange for research assistance, Pilot
is to pay fees to Wake Forest in the aggregate of $170,356 over the specified
term of the agreement. Certain research milestones, the initiation of the
project and the presentation of the final report trigger the cash payments to
be made by Pilot. During 2001, the Company paid an aggregate of 43,000 to Wake
Forest under the terms of the research sub-agreement.

Transactions with Affiliates of Quintiles Transnational Corporation

         On June 22, 2001, Pilot entered into an Investment and Royalty
Agreement and 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
("Quintiles"), which is the beneficial owner of approximately 16.5% of the
Company's common stock. Santo J. Costa, a Director of the Company, is the
former President and Vice Chairman of Quintiles, and is currently a consultant
to Quintiles.

         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.

         Under the Loan Agreement, Pilot has a $6,000,000 line of credit (the
"Loan"). The Loan is available to Pilot for general working capital purposes
with $4,000,000 outstanding at December 31, 2001. Under the Loan Agreement, the
final $2,000,000 would have been available had the Company consummated of a
defined equity sale by December 31, 2001, which the Company did not complete.
Since a defined equity sale was not consummated by December 31, 2001, the final
$2,000,000 will not become available. 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


                                      46

<PAGE>

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, which ranges from $1.915 to $2.50 per share. Additionally, on or
before the maturity date, 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.

Financing Transactions with Centennial Venture Fund, LLC and Academy Venture
Fund, LLC

         On December 11, 1998, Centennial Venture Fund, LLC, a limited
liability company managed by an entity of which Glenn J. Kline, Chairman of the
Company's Board of Directors, is Managing Partner ("Centennial"), purchased
500,000 shares of Pilot's Series A Preferred Stock for an aggregate purchase
price of $500,000 in Pilot. In connection with the purchase, Pilot issued to
Centennial a warrant to purchase 250,000 shares of its Common Stock. On
November 1, 1999, Centennial made a bridge loan to Pilot in the amount of
$250,000, in exchange for a convertible promissory note. Effective June 6,
2000, in accordance with the terms of the convertible note, the accrued
interest was capitalized and such note was exchanged for a new convertible
promissory note in the amount of $263,875 and a warrant to purchase 65,969
shares of Pilot's Common Stock.

         On February 21, 2000, Academy Venture Fund, LLC, a limited liability
company managed by an entity of which Mr. Kline is Managing Partner
("Academy"), acquired 100,000 shares of Pilot's Series A Preferred Stock, as
well as the related warrant to purchase 25,000 shares of Pilot's Common Stock,
from the original purchaser for an aggregate purchase price of $100,000. On
March 6, 2000, Academy made a bridge loan to Pilot in the amount of $250,000 in
exchange for a convertible promissory note and a warrant to purchase 62,500
shares of Pilot's Common Stock. On November 27, 2000, Academy made an
additional bridge loan to Pilot in the amount of $500,000 in exchange for a
convertible promissory note.

         On February 28, 2001, Academy purchased 130,548 shares of Pilot's
Series B Preferred Stock for an aggregate purchase price of $500,000. In
addition, on February 28, 2001, Centennial's convertible promissory note in the
original principal amount of $263,875 was converted into 73,143 shares of
Pilot's Series B Preferred Stock, and Academy's convertible promissory notes in
the original principal amounts of $250,000 and $500,000 were converted into an
aggregate of 204,007 shares of Pilot's Series B Preferred Stock.

         On August 24, 2001, all of Pilot's Series A and Series B Common Stock
converted into shares of Pilot's Common Stock, and each share of Pilot's Common
Stock was exchanged for two shares of Common Stock of ILRG in the
recapitalization transaction described herein in Item 1-Business in the section
captioned "Corporate History" (the "Recapitalization"). Subsequent to the
Recapitalization, effective November 30, 2001, ILRG reincorporated in Delaware
in a transaction in which ILRG merged with and into the Company, and each share
of ILRG's Common Stock was converted into one share of the Company's Common
Stock.

         On April 4, 2002, Academy purchased 25,000 shares of the Company's
Common Stock in a private transaction for an aggregate purchase price of
$100,000. In addition, Academy has proposed to invest an additional $475,000 in
the Company as part of the additional financing the Company is currently
seeking.


                                      47

<PAGE>

Additional Director and Officer Financing Transactions

         On April 28, 2000, James W. Johnston, a Director of the Company, made
a bridge loan to Pilot in the amount of $100,000, in exchange for a convertible
promissory note and a warrant for 25,000 shares of Pilot's Common Stock. On
February 28, 2001, this promissory note was converted into 27,953 shares of
Pilot's Series B Preferred Stock, which shares were later converted into shares
of Common Stock of ILRG in the Recapitalization.

         On April 28, 2000, Sara Brooks Strassle, then the Chief Executive
Officer and a Director of Pilot, made a bridge loan to Pilot in the amount of
$50,000, in exchange for a convertible promissory note and a warrant for 12,500
shares of Pilot's Common Stock. On February 28, 2001, this promissory note was
converted into 13,977 shares of Pilot's Series B Preferred Stock, which shares
were later converted into shares of Common Stock of ILRG in the
Recapitalization.

         On November 27, 2000, Russell Armistead, then the interim Chief
Financial Officer and a Director of Pilot, made a bridge loan to the Company in
the amount of $25,000, in exchange for a convertible promissory note. On
February 28, 2001, this promissory note was converted into 6,666 shares of
Pilot's Series B Preferred Stock, which shares were later converted into shares
of Common Stock of ILRG in the Recapitalization.

         In addition, on January 9, 2002, the Company issued 479,500 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 $4.00 per share, for aggregate gross
proceeds of $1,918,000. Margaret Urquhart, a Director of the Company, purchased
12,500 shares of the Company's Common Stock in the private placement for an
aggregate purchase price of $50,000.


                                      48

<PAGE>

                                    PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 Accountants
                           Consolidated Balance Sheets
                           Consolidated Statements of Operations
                           Consolidated Statements of Changes in Stockholders'
                                Equity
                           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 the following reports on Form 8-K during the fourth
         quarter of the year ended December 31, 2001.

         1.       A Current Report on Form 8-K/A, filed on October 3, 2001, to
                  report change in registrant's certifying accountants.

         2.       A Current Report on Form 8-K/A, filed on December 14, 2001,
                  to report, pursuant to Item 5, registrant's reincorporation
                  in Delaware.

         3.       A Current Report on Form 8-K/A, filed on December 21, 2001,
                  to report, pursuant to Item 5, amendment of Loan Agreement
                  with PharmaBio Development, Inc.


                                      49

<PAGE>

                                   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 III
                                          --------------------------------------
                                          President and Chief Executive Officer

Date: April 15, 2002

         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.

<TABLE>
<CAPTION>
Signature                                    Title                                                Date
<S>                                          <C>                                                  <C>

/s/ Glenn Kline                              Chairman of the Board of Directors                   April 15, 2002
--------------------------------


/s/ Floyd H. Chilton III                     President, Chief Executive Officer,                  April 15, 2002
--------------------------------             Chief Scientific Officer and Director
Floyd H. Chilton III                         (Principal Executive Officer)


/s/ David J. Mills                           Treasurer and Secretary                              April 15, 2002
--------------------------------             (Principal Financial Officer and
David J. Mills                               Principal Accounting Officer)


/s/ Santo J. Costa                           Director                                             April 15, 2002
--------------------------------
Santo J. Costa


/s/ James W. Johnston                        Director                                             April 15, 2002
--------------------------------
James W. Johnston


/s/ Bradley J. Undem                         Director                                             April 15, 2002
--------------------------------
Bradley J. Undem


/s/ Margaret M. Urquhart                     Director                                             April 15, 2002
--------------------------------
Margaret M. Urquhart
</TABLE>


                                      50

<PAGE>

                                    EXHIBITS

<TABLE>
<CAPTION>
      Exhibit No.                   Description of Exhibit
      <S>                           <C>
         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.

         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.

         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.

         10.2                       Interallied Group, Inc. 2001 Stock Incentive Plan, incorporated by reference to
                                    Exhibit 10.2 to the Company's Form 10-QSB filed November 14, 2001.

         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.
</TABLE>


                                            51
<PAGE>

<TABLE>
         <S>                        <C>
         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                       Letter  agreement  dated June 2, 1999  between  the  Company  and Beth
                                    Fordham-Meier (filed herewith).

         21                         Subsidiaries of the Registrant

         23                         Consent of Ernst & Young LLP
</TABLE>


                                            52