UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C.  20549
                                                          

                                    FORM 10-K

     (Mark One)

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

          For the fiscal year ended July 31, 1998

                                       OR

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

          For the transition period from              to               

                          Commission file number 0-6673

                           PACIFIC SECURITY COMPANIES
              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)


                  Washington                          91-0669906
        ------------------------------       ----------------------------
        State or other jurisdiction of             (I.R.S. Employer
        incorporation of organization)            Identification No.)

              N. 10 Post Street
             525 Peyton Building
             Spokane, Washington                         99201
       -------------------------------       ----------------------------
       (Address of principal executive                (Zip code)
                   offices)

     Registrant's telephone number, 
       including area code:                         (509) 624-0183
                                        ----------------------------

     Securities registered pursuant to Section 12(b) of the Act:

                 Name of each
             Title of each class             exchange on which registered
       --------------------------------      -----------------------------
                     None                                None
     <PAGE>
     Securities registered pursuant to Section 12(g) of the Act:

                        Common stock, no par value shares
                        ---------------------------------
                                (Title of class)

     Indicate by check mark whether the registrant (1) has filed all
     reports required to be filed by Section 13 or 15(d) of the Securities
     Exchange Act of 1934 during the preceding 12 months (or for such
     shorter period that the registrant was required to file such reports),
     and (2) has been subject to such filing requirements for the past 90
     days.  Yes   X     No
                -----      -----

     Indicate by check mark if disclosure of delinquent filers pursuant to
     Item 405 of Regulation S-K is not contained herein, and will not be
     contained, to the best of registrant's knowledge, in definitive proxy
     or information statements incorporated by reference in Part III of
     this Form 10-K or any amendment to this Form 10-K.   X  
                                                        -----

     State the aggregate market value of the voting and non-voting common
     equity held by nonaffiliates computed by reference to the price at
     which the common equity was sold, or the average bid and asked price
     of such common equity, as of a specified date within the past 60 days. 
     There is no regular, established market for trading in the Company's
     common stock.  Therefore, the aggregate market value of the voting
     stock held by nonaffiliates of the registrant is not determinable.

     On July 31, 1998, the registrant had outstanding 1,172,488 shares of
     common stock, no par value ($3 stated value) and 7,000 shares of
     Redeemable Class A preferred stock, $100 par value.

     Documents incorporated by reference:  none.
     <PAGE>
                           PACIFIC SECURITY COMPANIES
                             FORM 10-K ANNUAL REPORT

                                Table of Contents
                                                          


     PART I

     Item 1.   Business
     Item 2.   Properties
     Item 3.   Legal Proceedings
     Item 4.   Submission of Matters to a Vote of Security Holders


     PART II

     Item 5.   Market for the Registrant's Common Equity and
                 Related Stockholder Matters
     Item 6.   Selected Financial Data
     Item 7.   Management's Discussion and Analysis of Financial
                 Condition and Results of Operations
     Item 7A.  Quantitative and Qualitative Disclosures About 
                 Market Risk
     Item 8.   Financial Statements and Supplementary Data
     Item 9.   Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure


     PART III

     Item 10.  Directors and Executive Officers of the Registrant
     Item 11.  Executive Compensation
     Item 12.  Security Ownership of Certain Beneficial Owners
                 and Management
     Item 13.  Certain Relationships and Related Transactions


     PART IV

     Item 14.  Exhibits, Financial Statement Schedules, and 
                 Reports on Form 8-K
     <PAGE>
     PART I


     Item 1.   Business
               --------
     (a)  Pacific Security Companies was merged into Security Savesco, Inc.
          as of May 31, 1985.  The name of Security Savesco, Inc., the
          surviving corporation, was changed to Pacific Security Companies
          as of the date of the merger.

          Prior to the merger, both corporations were engaged principally
          in real estate contract financing and owning, leasing and selling
          real properties.  The merged corporation has continued these
          activities.  Total assets of the registrant at July 31, 1998 and
          1997 were $31,038,039 and $32,294,907, respectively, and real
          estate contracts and loans represent approximately 36% and 34% of
          the respective asset totals.  The Company presently primarily
          originates contracts to facilitate the sale of real estate held
          for sale or development and originates commercial loans.  Many of
          the contracts have fixed contractual interest rates, while the
          newly originated interim and construction real estate loans have
          variable rates.  For real estate contracts purchased by the
          Company, most contracts have been purchased at a discount from
          the contract balance which increases the effective yield.  The
          total amount invested in real estate contracts and loans of
          $11,246,755 as of July 31, 1998 is $275,055 more than at the end
          of the prior year.  The percentage of contracts which were
          delinquent over 90 days was 2.2% as of July 31, 1998 and 0.4% as
          of July 31, 1997.  Management continues to emphasize enforcement
          of the Company's credit and collection policies.

          In fiscal 1998, the Company's newly formed subsidiary,
          Cornerstone Realty Advisors, Inc., began making construction and
          interim loans.  Bank lines of credit were increased to provide
          additional funds for this purpose.

          In fiscal 1997, the Company continued to emphasize the
          development of its rental properties and commenced new projects
          primarily to improve the occupancy of its commercial buildings. 
          Correspondingly, the acquisition of additional real estate
          contracts was minimal, other than for Company financed sales of
          its real estate.

          In fiscal 1996, the Company completed construction of Birdies
          Golf Center (Birdies).  The golf center features a 56-tee driving
          range, a fully lighted, contoured fairway with 5 target greens, a
          pro shop, teaching studios and an 8,000-square-foot putting
          green.  Birdies serves as a practice and teaching center for all
          levels of golfers and additionally sells golf clubs and related
          golfing supplies.  Birdies has been constructed on land held for
          development by the Company since 1990.  Cumulative costs incurred
          to construct the facility, including land costs, were
     <PAGE>
          approximately $2.3 million.  See further information on this
          business segment in Notes 5 and 6 to the consolidated financial
          statements.

          Additionally, in fiscal 1997, the Company continued developing
          certain land for residential development.  The project, known as
          Tanglewood Ranch Park Estates (The Crest) offered approximately
          21 ten-acre parcels suitable for home construction.  The Company
          began marketing these parcels in fiscal 1998 and has
          approximately 14 ten-acre parcels remaining for sale.

          Investments in rental properties totaled $13,588,145 and
          $13,487,085 as of July 31, 1998 and 1997, respectively.  The
          increase is primarily the net result of increased capitalized
          costs that more than offset depreciation and sales.  Other real
          property held for sale and development totaled $2,775,542 and
          $4,039,208 as of July 31, 1998 and 1997, respectively.  These
          properties will be liquidated and/or developed at such time as
          market conditions warrant, and in the judgment of management,
          when the Company can maximize its return.  The Company will
          continue to invest in and hold real property on a long-term
          basis.  These properties may ultimately be sold on an installment
          basis for tax purposes in order to minimize and defer related
          income taxes and to conserve funds for additional investment
          purposes.  These plans may be modified as the result of future
          changes to the Internal Revenue Code.

          With the Company's sale of certain commercial real estate and
          multi-family housing, rental income has decreased from $2,714,563
          in fiscal 1996 to $2,220,979 in fiscal 1998.  During the same
          period, interest income, including the amortization of discounts
          on real estate contracts, has declined from 26% of total income
          in fiscal 1996 to 23% of total income in fiscal 1998.  The
          Company expects to continue its emphasis on the development,
          leasing and sale of commercial real estate in fiscal 1999 along
          with the continued operation of Birdies, marketing of the
          Tanglewood (The Crest) parcels and originating construction and
          interim commercial real estate loans.  There are no contractual
          commitments other than the remaining remodeling costs associated
          with improvements for commercial buildings.  The Company's fiscal
          1999 capital expenditures may increase if demand for the rental
          of Company properties continues or if the Company decides to
          further develop any of its properties held for sale.  A
          description of the Company's significant properties is included
          in Item 2 -- Properties.

          The Company's business is concentrated in financing real estate
          contracts, originating loans collateralized by real estate,
          developing real estate for sale or lease and the operation of
          Birdies.  The Company is in competition with financial
          institutions who originate or invest in real estate
     <PAGE>
          collateralized contracts and commercial property owners located
          primarily in or near Spokane, Washington.  As of July 31, 1998,
          the Company employed approximately 33 people on a full-time
          equivalent basis, 11 of whom are in its office at N. 10 Post
          Street in Spokane, Washington.


     Item 2.   Properties
               ----------
     As of July 31, 1998, the Company owns the following properties.  Some
     of the properties are subject to real estate contracts or mortgages
     that are collateralized by the property.

     Properties Located in Spokane County, Washington:
     -------------------------------------------------
      <TABLE>
      <CAPTION>
                                                         July 31, 1998
                                                         ----------------------------------------
                                                         Rental/         Net          Mortgage
      Date                                               Development     Carrying     or Contract
      Acquired   Description of Property                 Status          Value        Obligation 
      --------   -------------------------------------   -----------     ----------   -----------
      <S>        <C>                                     <C>             <C>          <C>
      COMMERCIAL:

      1979       The Peyton Building at N. 10 Post       Substantially   $4,095,102   $   756,042
                 Street contains approximately 85,000    leased
                 square feet of rentable space. 
                 Substantial improvements have been 
                 made to the building since its 
                 acquisition.  Remodeling of this 
                 office building continues as new 
                 occupancy warrants.  The Company's 
                 offices are located in this building.

      1979       The Hutton Building at S. 10 Washing-   Substantially
                 ton contains approximately 56,000       leased          $3,677,907
                 square feet of rentable space.
                 Substantial improvements have been 
                 made to the building since its 
                 acquisition.  Remodeling of this 
                 building continues as new occupancy 
                 warrants.  The Company also acquired 
                 25,000 square feet for parking 
                 near this building.

      1984       Bank Branch Building at W. 102          Leased          $  414,035   $   599,150
                 Indiana Avenue is under a long-term 
                 lease.

      1992       The Pier One Building is a commercial   Leased          $3,307,281   $ 1,458,610
                 building.  The building has two major 
                 tenants, who occupy over 60% of the 
                 space, and several other smaller
                 tenants for the remaining space.

      1992       The Cellular One Building is a          Leased          $  751,366   $   834,132
                 commercial building constructed by 
                 the Company on the north river 
                 bank in Spokane.
      </TABLE>
      <PAGE>
      Properties Located in Spokane County, Washington, Continued:
      ------------------------------------------------------------
      <TABLE>
      <CAPTION>
                                                         July 31, 1998
                                                         ----------------------------------------
                                                         Rental/         Net          Mortgage
      Date                                               Development     Carrying     or Contract
      Acquired   Description of Property                 Status          Value        Obligation 
      --------   -------------------------------------   -----------     ----------   -----------
      <S>        <C>                                     <C>             <C>          <C>
      COMMERCIAL, CONTINUED:

      1990       The Nevada-Holland property consists    Under           $  780,629   $   850,416
                 of approximately 12 remaining acres     development
                 of raw land in a location where there 
                 has been substantial commercial and 
                 residential development.

      1995       Birdies Golf Center, constructed on     Constructed     $2,070,994
                 14 acres of the Nevada-Holland 
                 property, features  a 56-tee driving
                 and operating range, a fully con-
                 toured fairway with 5 target greens,
                 a pro shop, teaching studios and an 
                 8,000-square-foot putting green.

      1991       Tanglewood Ranch Park Estates (The      Being           $1,137,546
                 Crest) in south Spokane County was      marketed
                 acquired through a judicial fore-
                 closure.  The area consisted of 
                 approximately 300 acres of 
                 undeveloped land.  In fiscal 1998, 
                 several lots were sold, leaving 
                 approximately 14 lots available for 
                 sale.

      1990       The north river bank in Spokane         Sale pending    $  684,980
                 consists of a parcel of undeveloped 
                 commercial real estate.

      MULTI-FAMILY HOUSING:

      1969       The Broadmoor Apartments, formerly      Occupied        $  911,056
                 the Aqua View Apartments, is a 129-
                 unit apartment complex. 

      1991       The Southridge Apartments, formerly     Fully           $  432,403   $   542,424
                 the City View Apartments, is a 21-      occupied
                 unit apartment complex.

      1993       Approximately six acres in Auburn,      Being           $  167,136
                 Washington zoned for multi-family       marketed
                 housing were acquired through a 
                 foreclosure.

     </TABLE>
     <PAGE>
     Projects Located Outside Spokane County, Washington:
     ----------------------------------------------------
     Additionally, the Company has other less significant investments in
     real estate located primarily in the state of Washington.

     Item 3.   Legal Proceedings
               -----------------
     As of July 31, 1998, it is the opinion of management that there is no
     pending litigation that would have a material adverse effect on the
     financial condition or operations of the registrant.


     Item 4.   Submission of Matters to a Vote of Security Holders
               ---------------------------------------------------
     No matters were submitted to a vote of the stockholders during the
     fourth quarter of fiscal 1998.


     PART II


     Item 5.   Market for the Registrant's Common Equity and Related
               Stockholder Matters
               -----------------------------------------------------
     (a)  Principal Market.

          There is no established market for trading in the Company's
          common stock.  Periodically, the Company will purchase and retire
          its common stock, but does not solicit such transactions.

     (b)  Stock Price and Dividend Information.

          There is no market information relative to the common stock 
          price of the Company's stock as it is not actively traded.  A
          dividend of $0.075 per common share totaling $150,786, declared
          as payable to stockholders of record as of July 31, 1989, was
          paid August 15, 1989.  A dividend of $0.10 per common share or
          $200,211, declared as payable to stockholders of record as of
          July 31, 1990, was paid August 15, 1990.  No dividends were
          declared in any of the years since 1990.

     (c)  Approximate Number of Holders of Common Stock.

          Common no par value -- 1,145 record holders.

     (d)  There is only one class of common stock outstanding.  Any
          dividend which may be declared would be payable at the same rate
          on each share of common stock.  At July 31, 1998, the Company
          also has issued 7,000 shares of Redeemable Class A preferred
          stock owned by two holders.  These shares receive cumulative
          dividends of 6% when declared by the Board of Directors.  During
          the fiscal year ended July 31, 1998, a dividend totaling $42,000
     <PAGE>
          was declared and accrued on these shares.  During the fiscal
          years ended July 31, 1997 and 1996, dividends totaling $62,400
          were declared and accrued on these shares.  The dividends were
          paid on August 3, 1998, August 1, 1997 and August 2, 1996,
          respectively.  These preferred shares require redemption by the
          Company at par value plus accrued dividends in 2004; however, the
          Board has proposed a plan to remove the redemption provision for
          $500,000 face amount (5,000 shares) of the preferred stock in
          connection with the redemption of $200,000 face amount (2,000
          shares) in August 1998.

     <PAGE>
     Item 6.   Selected Financial Data
               -----------------------
     The following selected financial data have been derived from the
     Company's audited consolidated financial statements, and should be
     read in conjunction with the consolidated financial statements and
     notes thereto.

     <TABLE>
     <CAPTION>

                                                   Years Ended July 31,
                                                   -------------------------------------------------------------------
                                                   1998          1997          1996          1995          1994
                                                   -----------   -----------   -----------   -----------   -----------
      <S>                                          <C>           <C>           <C>           <C>           <C>
      STATEMENT OF OPERATIONS DATA:

      Rental income                                $ 2,220,979   $ 2,398,369   $ 2,714,563   $ 2,832,139   $ 2,653,958
      Interest income                                  903,718     1,005,072     1,138,935     1,375,420     1,476,881
      Gains on sales of real estate                    514,141     1,611,195       486,469       584,657       186,109
      Interest expense, net                          1,580,820     1,548,173     1,650,559     1,681,213     1,682,355
      Cumulative effect of change in 
        accounting principle                                --            --            --            --       (61,894)
      Net income (loss)                               (596,936)      472,000        39,266       159,310        71,558
      Income (loss) applicable to
        common stockholders                           (757,936)      357,600       (75,134)       44,910        71,558
      Income (loss) per common share - basic
        and diluted:
          Income (loss) before cumulative effect
            of change in accounting principle             (.48)          .19          (.04)          .02           .07
          Cumulative effect of change in 
            accounting principle                            --            --            --            --          (.03)
                                                   -----------   -----------   -----------   -----------   -----------
      Income (loss) per common share                      (.48)          .19          (.04)          .02           .04
                                                   ===========   ===========   ===========   ===========   ===========

      Cash dividends per common share                       --            --            --            --            --
      Weighted-average number of common 
        shares outstanding                           1,591,484     1,895,105     1,938,076     1,960,746     1,977,889

      </TABLE>
      <PAGE>
      <TABLE>
      <CAPTION>

                                                   Years Ended July 31,
                                                   -------------------------------------------------------------------
                                                   1998          1997          1996          1995          1994
                                                   -----------   -----------   -----------   -----------   -----------
      <S>                                          <C>           <C>           <C>           <C>           <C>
      BALANCE SHEET DATA (AT YEAR END):

      Contracts, mortgages and finance notes 
        receivable, net                            $11,246,755   $10,971,700   $10,492,944   $13,457,896   $14,457,958
      Total assets                                  31,038,039    32,294,907    32,840,107    35,351,486    34,842,679
      Notes and contracts payable                   12,255,178    10,028,531    11,055,919    13,107,725    13,679,068
      Debentures                                     9,839,936     9,898,351     9,718,260     9,179,484     8,567,231
      Stockholders' equity                           6,647,479     9,689,896     9,397,005     9,544,017     9,563,355

      </TABLE>

     Item 7.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations
               -----------------------------------------------------------
     GENERAL

     This discussion contains some forward-looking statements.  A forward-
     looking statement may contain words such as "will continue to be,"
     "will be," "continue to," "expect to," "anticipates that," "to be," or
     "can impact."  Management cautions that forward-looking statements are
     subject to risks and uncertainties that could cause the Company's
     actual results to differ materially from those projected in forward-
     looking statements.

     The Company engages in financing real estate collateralized contracts
     and loans, originating construction and interim loans, acquiring real
     estate that is either held for sale or developed and leased or sold
     and operating Birdies Golf Center as its primary activities.  During
     the past two years, the Company has been emphasizing the development
     and lease of its commercial office building projects as demand for the
     available space in these projects has increased.  Virtually all of the
     Company's development of these commercial office building projects has
     involved extensive remodeling efforts in connection with preparation
     of previously unoccupied space for a new tenant and structural changes
     as required by current building codes.
     <PAGE>
     The Company invests in real estate collateralized contracts and real
     property primarily within the state of Washington, with a
     concentration in Spokane County.  The Company has concentrated its
     efforts primarily on the development and sale of existing real estate
     projects to maximize the return from those investments.  The Company
     has curtailed its contract acquisitions and now primarily originates
     real estate contracts to facilitate the sale of its property held for
     sale or development and, in fiscal 1998, began originating loans
     secured by real estate, including construction and interim loans
     through its subsidiary, Cornerstone Realty Advisors, Inc.

     Birdies Golf Center (Birdies) opened to the pubic in fiscal 1996.  The
     Company has focused on a marketing campaign to increase public
     awareness and attraction to the facility.  In addition to its many
     unique amenities, Birdies has retained the services of a golf
     professional.  Birdies is expected to contribute an increasing portion
     of the Company's revenues.

     The Company finances its investments in real estate and loans and
     operates Birdies primarily through the sale of fixed rate debentures
     with terms ranging from one to ten years, real estate notes or
     mortgages, and collateralized line-of-credit arrangements with local
     banks.  The Company intends to continue using these funding sources in
     the future.

     RESULTS OF OPERATIONS

     For the years ended July 31, 1998, 1997 and 1996, the Company's net
     income (loss) was approximately $(597,000), $472,000 and $39,000,
     respectively.  Due to dividends and the accretion of the discount on
     the issuance of preferred stock, the income (loss) applicable to
     common stockholders was approximately $(758,000), $358,000 and
     $(75,000) in fiscal 1998, 1997 and 1996, respectively.

     Rental real estate activities have decreased due to sales of rental
     properties.  Total rental income has decreased from approximately
     $2,715,000 in fiscal 1996 to $2,221,000 in fiscal 1998.  Reduced
     rental income could continue as a result of sales of some rental
     properties.

     The total interest income and amortization of discounts on acquired
     real estate contracts and loans has continued to decline from
     approximately $1,265,000 and $1,031,000 in fiscal 1996 and 1997,
     respectively, to approximately $946,000 in fiscal 1998.  This decline
     corresponds directly with the decline in the Company's investment in
     real estate contracts.  The Company has curtailed its real estate
     contract acquisition activities to concentrate its efforts in
     renovating and leasing commercial office buildings and developing real
     estate.  Collections on real estate contracts have exceeded new
     acquisitions in each of the last three fiscal years.  These funds were
     used to remodel and develop existing real estate projects.  In the
     last half of fiscal 1998, the Company began originating new commercial
     real property construction and interim loans through its subsidiary,
     Cornerstone Realty Advisors, Inc.  Loan fees and net interest income
     are expected to significantly increase as the loan portfolio grows.
     <PAGE>
     Gains on the sale of real estate were approximately $514,000,
     $1,611,000 and $486,000 in fiscal 1998, 1997 and 1996, respectively. 
     The Company anticipates that it will continue to recognize gains both
     on the sale of real estate acquired through foreclosure and real
     estate acquired for resale.

     Sales of services and tangible products at Birdies were approximately
     $333,000 in fiscal 1998 compared to $294,000 in its first year of
     operations.  Overall, the golf center recorded losses from operations
     of approximately $116,000, $189,000 and $143,000 in fiscal 1998, 1997
     and 1996, respectively, primarily reflecting the initial start-up and
     staffing costs.  The Company anticipates that the margins from its
     golf center will improve through increased sales and the non-
     recurrence of start-up costs.

     The expenses associated with rental operations have decreased to
     approximately $2.0 million in fiscal 1998 from approximately $2.5
     million in fiscal 1996.  The rental activities of the Company are
     expected to continue to contribute significantly to its profitability,
     but may be affected by sales of rental properties.

     Interest expense, exclusive of interest on rental properties, net of
     amounts capitalized, was approximately $1,212,000, $1,188,000 and
     $1,216,000 in fiscal 1998, 1997 and 1996, respectively.  The decline
     in interest costs from fiscal 1996 to fiscal 1997 has been primarily
     as a result of a decrease in outstanding average borrowings during
     these periods.  In the last half of fiscal 1998, outstanding
     borrowings increased significantly due to advances drawn under the
     Company's lines of credit to fund the origination of construction and
     interim loans and in connection with notes payable issued to redeem
     common stock.  See further discussion of this common stock redemption
     in Note 14 to the consolidated financial statements..

     Salaries and commissions have fluctuated in absolute dollar amounts
     for each of the last three fiscal years.  The commencement of the
     Birdies operation in early fiscal 1996 contributed to an increase in
     the number of employees and related salaries.  In fiscal 1998,
     additional staffing for Cornerstone Realty Advisors, Inc. increased
     salaries and commissions.

     In addition to the payroll related costs associated with the increase
     in number of employees from fiscal 1996 to fiscal 1998, general and
     administrative expenses in fiscal 1998 were significantly higher than
     fiscal 1997 due to legal fees incurred of approximately $300,000
     related to a minority stockholder lawsuit.  General and administrative
     expenses increased from fiscal 1996 to fiscal 1997 also due to a
     significant increase in real estate taxes for Birdies and other
     properties.

     The Company's effective income tax rate as a percentage of loss before
     income tax benefit was 29% in fiscal 1998, compared to a provision of
     32% and 35% in fiscal 1997 and 1996, respectively.
     <PAGE>
     LIQUIDITY AND CAPITAL RESOURCES

     At July 31, 1998, the Company had total stockholders' equity of
     approximately $6,647,000 and a total liabilities to equity ratio of
     3.60 to 1, which increased from 2.27 to 1 a year before.  The increase
     in this ratio was due primarily to the purchase and retirement of the
     Company's common stock in fiscal 1998.  In fiscal 1998, the Company's
     primary sources of funds were approximately $.6 million from the sale
     of real estate, $7.2 million in real estate contract collections, $.4
     from the sale of debentures and $1.7 million from net line-of-credit
     and note borrowings.  The primary uses of funds were approximately
     $1.7 million used for the acquisition and improvements of real estate
     projects, $6.5 million used to acquire new contracts and mortgage
     notes, $1.0 in repayment of maturing debentures, $.6 million for
     purchase and retirement of common stock and preferred stock, and
     approximately $.3 million in repayment of outstanding long-term debt. 
     As a holder of monetary assets and liabilities, the Company's
     performance may be significantly affected by changes in interest
     rates.  These changes are somewhat mitigated or delayed to the extent
     that much of the Company's investment in real estate contracts and
     established real estate leases have fixed returns, as do the Company's
     debentures.  Additionally, the Company will be affected by changes in
     the real estate market in Washington.

     The Company anticipates that sales of debentures and the availability
     of funds under its $19,000,000 line-of-credit and loan arrangements,
     of which only approximately $6,644,000 was outstanding at July 31,
     1998, will be sufficient to fund its short- and intermediate-term
     needs to retire maturing debentures and mortgage obligations and
     continue development of its real estate projects as demand warrants
     and the origination of commercial real estate loans.  The Company does
     not anticipate any significant capital expenditures during fiscal
     1999, other than the completion of the remodeling of the Broadmoor
     Apartments.

     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     See Notes 1 and 6 to the consolidated financial statements for a
     discussion of new accounting standards.

     YEAR 2000 ISSUES

     Throughout the information technology industry, the use of two-digit
     fields was common practice in the design of hardware, systems
     software, proprietary applications and system interfaces.  The Year
     2000 problem is pervasive and complex.  The issue is whether computer
     systems will properly recognize date sensitive information when the
     year changes to 2000.  Systems that do not properly recognize such
     information could generate erroneous data or cause a system to fail.
     <PAGE>
     The Company recognizes the need to ensure its operations will not be
     adversely impacted by Year 2000 software failures and has assessed
     Year 2000 risks.  This assessment includes the identification of
     necessary changes to computer hardware and software applications that
     will attempt to ensure availability and integrity of the Company's
     information systems and the reliability of its financial and
     operational systems.

     The Company has reviewed its financial, information and operational
     systems in order to identify those products, services or systems that
     are not Year 2000 compliant.  As a result of this review, the Company
     has determined that it will be required to modify or replace certain
     information and operational systems so they will be Year 2000
     compliant.  These modifications and replacements are being, and will
     continue to be, made in conjunction with the Company's overall systems
     initiatives.  The total cost of these Year 2000 compliance activities
     is not anticipated to be material to the Company's financial position
     or its results of operations.

     Based on available information, the Company does not believe any
     material exposure to significant business interruption exists as a
     result of Year 2000 compliance issues.  These costs and the timing in
     which the Company plans to complete its Year 2000 modifications are
     based on management's best estimates.  However, there can be no
     assurance that the Company will timely identify and remediate all
     significant Year 2000 problems, that remedial efforts will not involve
     significant time and expense, or that such problems will not have a
     material adverse effect on the Company's business, results of
     operations or financial position.

     The Company also faces risk to the extent that its borrowers, vendors,
     service providers and others with whom the Company transacts business
     may not comply with Year 2000 requirements.  The Company will initiate
     formal communications with significant borrowers, vendors and service
     providers to determine the extent to which the Company is vulnerable
     to these third parties failure to remediate their own Year 2000
     issues.  In the event any such third parties are not Year 2000
     compliant, the Company's results of operations could be materially
     adversely affected.

     Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
               ----------------------------------------------------------
     MARKET RISK

     Market risk is the risk of loss from adverse changes in market prices
     and rates.  The Company's market risk arises principally from interest
     rate risk in its lending and borrowing activities.  Management
     actively monitors and manages its interest rate risk exposure. 
     Although the Company manages other risks, as in credit quality and
     liquidity risk, in the normal course of business, management considers
     interest rate risk to be its most significant market risk and could
     potentially have the largest material effect on the Company's
     <PAGE>
     financial condition and results of operations.  Other types of market
     risks, such as foreign currency exchange rate risk and commodity price
     risk, do not arise in the normal course of the Company's business
     activity.

     The Company's profitability is affected by fluctuations in the
     interest rates.  Management's goal is to maintain a reasonable balance
     between exposure to interest rate fluctuations and earnings.  A sudden
     and substantial increase in interest rates may adversely impact the
     Company's earnings to the extent that the interest rates on interest-
     earning assets and interest-bearing liabilities do not change at the
     same speed, to the same extent or on the same basis.
     <PAGE>
   The following table shows the Company's financial instruments that are
   sensitive to changes in interest rates, categorized by expected
   maturity, and the instruments' fair values at July 31, 1998.

   <TABLE>
   <CAPTION>
                                1999        2000        2001        2002        2003        Thereafter  Balance      Fair Value
                                ----------  ----------  ----------  ----------  ----------  ----------  ----------   ----------
   <S>                          <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>
   Interest-sensitive assets:
     Contracts, mortgages, 
       finance notes, and  
       loans receivable         $4,296,087  $1,513,128  $1,601,842  $1,651,795  $1,705,894  $  478,009  $11,246,755  $11,246,755

   Interest-sensitive 
     liabilities:
       Notes payable to banks    6,643,826                                                                6,643,826    6,643,826
       Installment contracts, 
         mortgage notes and 
         notes payable             288,525     310,441     334,175     360,479     387,424   3,930,308    5,611,352    5,611,352
       Debenture bonds           1,223,924   1,259,987     765,492     672,356     752,901   5,165,276    9,839,936    9,839,936

   Off-balance sheet items:
     Undisbursed loans 
       receivable                  837,272                                                                  837,272      837,272

   </TABLE>


     Expected maturities are contractual maturities adjusted for
     prepayments of principal.  The Company uses certain assumptions to
     estimate fair values and expected maturities.  For assets, expected
     maturities are based upon contractual maturity, projected repayments
     and prepayment of principal.
     <PAGE>
     Item 8.   Financial Statements and Supplementary Data
               -------------------------------------------

     Report of independent accountants

     Financial statements:

       Consolidated balance sheets

       Consolidated statements of operations

       Consolidated statements of stockholders' equity

       Consolidated statements of cash flows

       Notes to consolidated financial statements


     Item 9.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure
               -----------------------------------------------------------
     There were no disagreements on accounting issues or financial
     statement disclosure during the fiscal year ended July 31, 1998 or any
     interim period after July 31, 1998.
     <PAGE>
     REPORT OF INDEPENDENT ACCOUNTANTS


     September 18, 1998


     Board of Directors and Stockholders
     Pacific Security Companies and Subsidiaries
     Spokane, Washington


     In our opinion, the accompanying consolidated balance sheets and the
     related consolidated statements of operations, stockholders' equity
     and cash flows present fairly, in all material respects, the financial
     position of Pacific Security Companies and its subsidiaries (the
     Company) at July 31, 1998 and 1997, and the results of their
     operations and their cash flows for each of the three years in the
     period ended July 31, 1998, in conformity with generally accepted
     accounting principles.  These financial statements are the
     responsibility of the Company's management; our responsibility is to
     express an opinion on these financial statements based on our audits.
     We conducted our audits of these statements in accordance with
     generally accepted auditing standards which 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, assessing the accounting
     principles used and significant estimates made by management, and
     evaluating the overall financial statement presentation.  We believe
     that our audits provide a reasonable basis for the opinion expressed
     above.

     As discussed in Note 1 to the consolidated financial statements, the
     Company changed its accounting for impaired loans in fiscal 1996.

                          /s/PricewaterhouseCoopers LLP
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Consolidated Balance Sheets
     July 31, 1998 and 1997


                                                 1998          1997
                                                 -----------   -----------
                     ASSETS

     Cash and cash equivalents:
       Unrestricted                              $   318,026   $   325,058
       Restricted                                     11,289        84,684
                                                 -----------   -----------
                                                     329,315       409,742
                                                 -----------   -----------
     Receivables:
       Contracts, mortgages, finance notes 
         and loans receivable, net:
           Related parties                           427,183       728,436
           Unrelated                              10,819,572    10,243,264
                                                 -----------   -----------
                                                  11,246,755    10,971,700
       Accrued interest                              391,076        91,919
       Income taxes                                  154,857       454,621
       Other                                           2,415        30,541
                                                 -----------   -----------
                                                  11,795,103    11,548,781
                                                 -----------   -----------
     Investment in rental properties, net         13,588,145    13,487,085
                                                 -----------   -----------
     Investment in golf center, net                2,070,994     2,142,247
                                                 -----------   -----------
     Other investments:
       Property held for sale and development      2,775,542     4,039,208
       Marketable securities                          88,062        87,004
       Restricted investments                                      278,154
                                                 -----------   -----------
                                                   2,863,604     4,404,366
                                                 -----------   -----------
     Other assets:
       Vehicles and equipment, net                    35,957        25,760
       Prepaid and other, net                        296,590       221,425
       Golf center inventories                        58,331        55,501
                                                 -----------   -----------
                                                     390,878       302,686
                                                 -----------   -----------
             Total assets                        $31,038,039   $32,294,907
                                                 ===========   ===========


     The accompanying notes are an integral part of the consolidated
       financial statements.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Consolidated Balance Sheets, Continued
     July 31, 1998 and 1997



                                                 1998          1997
                                                 -----------   -----------

       LIABILITIES AND STOCKHOLDERS' EQUITY

     Liabilities:
       Notes payable to banks                    $ 6,643,826   $ 5,404,999
                                                 -----------   -----------
       Installment contracts, mortgage notes 
         and notes payable:
           Related parties                         1,028,758       191,462
           Unrelated                               4,582,594     4,432,070
                                                 -----------   -----------
                                                   5,611,352     4,623,532
                                                 -----------   -----------
       Debenture bonds                             9,839,936     9,898,351
                                                 -----------   -----------
       Accrued expenses and other liabilities:
         Related parties                             207,240       246,994
         Unrelated                                 1,011,334       733,657
                                                 -----------   -----------
                                                   1,218,574       980,651
                                                 -----------   -----------
       Deferred income taxes                         586,872     1,121,478
                                                 -----------   -----------
             Total liabilities                    23,900,560    22,029,011
                                                 -----------   -----------
     Commitments and contingencies (Notes 3, 
       4, 10 and 12)

     Redeemable Class A preferred stock, $100 
       par value; $100 redemption value; 
       authorized 20,000 shares; issued and 
       outstanding, 7,000 and 9,400 shares           700,000       940,000
     Less: Net discount on issuance of 
       preferred stock                              (210,000)     (364,000)
                                                 -----------   -----------
                                                     490,000       576,000
                                                 -----------   -----------
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Consolidated Balance Sheets, Continued
     July 31, 1998 and 1997



                                                 1998          1997
                                                 -----------   -----------

       LIABILITIES AND STOCKHOLDERS' EQUITY,
                   CONTINUED

     Stockholders' equity:
       Common stock:
         Original class, authorized 2,500,000 
           no par value shares, $3 stated 
           value; issued and outstanding,
           1,172,488 and 1,872,125 shares        $ 3,517,464   $ 5,616,375
         Class B, authorized 30,000 no par 
           value shares; no shares issued and 
           outstanding
       Additional paid-in capital                  1,776,951     1,906,642
       Retained earnings                           1,361,363     2,175,875
       Unrealized loss on marketable securi-
         ties, net of deferred income taxes           (8,299)       (8,996)
                                                 -----------   -----------
           Total stockholders' equity              6,647,479     9,689,896
                                                 -----------   -----------
           Total liabilities and stockholders' 
             equity                              $31,038,039   $32,294,907
                                                 ===========   ===========


     The accompanying notes are an integral part of the consolidated
       financial statements.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Consolidated Statements of Operations
     for the years ended July 31, 1998, 1997 and 1996

     <TABLE>
     <CAPTION>
                                                             1998         1997         1996
                                                             ----------   ----------   ----------
      <S>                                                    <C>          <C>          <C>
      Income:
        Rental                                               $2,220,979   $2,398,369   $2,714,563
        Interest                                                903,718    1,005,072    1,138,935
        Loan and service fees                                    59,579       27,775
        Amortization of discounts on real estate 
          contracts                                              41,992       25,856      126,044
        Gain on sales of real estate                            514,141    1,611,195      486,469
        Gain on sale of marketable securities                                              30,959
        Golf center sales (including lessons of $33,481, 
          $13,527 and $31,937)                                  332,815      343,528      294,276
        Other, net                                               49,412      (32,757)     153,376
                                                             ----------   ----------   ----------
                                                             4,122,636    5,379,038     4,944,622
                                                             ----------   ----------   ----------
      Expenses:
        Rental operations:
          Depreciation and amortization                         628,149      640,105      714,474
          Interest                                              369,276      360,632      434,397
          Other                                               1,038,890    1,097,046    1,311,200
                                                             ----------   ----------   ----------
                                                              2,036,315    2,097,783    2,460,071
        Interest, net of amount capitalized                   1,211,544    1,187,541    1,216,162
        Salaries and commissions                                726,970      626,675      651,416
        General and administrative                              795,619      575,463      422,455
        Depreciation and amortization                           122,221      100,875       82,797
        Cost of golf merchandise sales                           64,540       98,105       53,503
        Uncollectible accounts                                    2,199        2,788        1,412
                                                             ----------   ----------   ----------
                                                              4,959,408    4,689,230    4,887,816
                                                             ----------   ----------   ----------
      Income (loss) before income taxes                        (836,772)     689,808       56,806
      Income tax provision (benefit)                           (239,836)     217,808       17,540
                                                             ----------   ----------   ----------
      Net income (loss)                                        (596,936)     472,000       39,266

      Less: Preferred stock dividends                           (42,000)     (62,400)     (62,400)
          Accretion of discount on preferred stock             (119,000)     (52,000)     (52,000)
                                                             ----------   ----------   ----------
      Income (loss) applicable to common stockholders        $ (757,936)  $  357,600   $  (75,134)
                                                             ==========   ==========   ==========

      Income (loss) per common share - basic and diluted     $     (.48)  $      .19   $     (.04)
                                                             ==========   ==========   ==========
      Weighted average common shares outstanding - basic
        and diluted                                           1,591,484    1,895,105    1,938,076
                                                             ==========   ==========   ==========

     </TABLE>

     The accompanying notes are an integral part of the consolidated
       financial statements.
     <PAGE>
   PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
   Consolidated Statements of Stockholders' Equity
   for the years ended July 31, 1998, 1997 and 1996

   <TABLE>
   <CAPTION>
                                                                        Unrealized
                                    Additional                          Gain (Loss)
                                    Common      Paid-In     Retained    on Marketable
                                    Stock       Capital     Earnings    Securities     Total
                                    ----------  ----------  ----------  -------------  ----------
   <S>                              <C>         <C>         <C>         <C>            <C>
   Balances, July 31, 1995          $5,874,201  $1,747,028  $1,928,409   $   (5,621)   $9,544,017
     Net income                                                 39,266                     39,266
     Unrealized loss on market-
       able securities                                                       (9,905)       (9,905)
     Purchase and retirement
       of common stock (39,982 
       shares)                        (119,946)     57,973                                (61,973)
     Cash dividend declared on 
       preferred stock                                         (62,400)                   (62,400)
     Accretion of discount on 
       preferred stock                                         (52,000)                   (52,000)
                                    ----------  ----------  ----------   ----------    ----------
   Balances, July 31, 1996           5,754,255   1,805,001   1,853,275      (15,526)    9,397,005
     Net income                                                472,000                    472,000
     Unrealized gain on market-
       able securities                                                        6,530         6,530
     Purchase and retirement 
       of common stock (45,960 
       shares)                        (137,880)     66,641                                (71,239)
     Cash dividend declared on 
       preferred stock                                         (62,400)                   (62,400)
     Accretion of discount on
       preferred stock                                         (52,000)                   (52,000)
     Redemption of preferred
       stock (1,000 shares)                         35,000     (35,000)
                                    ----------  ----------  ----------   ----------    ----------
   Balances, July 31, 1997           5,616,375   1,906,642   2,175,875       (8,996)    9,689,896
     Net loss                                                 (596,936)                  (596,936)
     Unrealized gain on market-
       able securities                                                          697           697
     Purchase and retirement
       of common stock (699,637 
       shares)                      (2,098,911)    (94,691)    (56,576)                (2,250,178)
     Cash dividend declared on 
       preferred stock                                         (42,000)                   (42,000)
     Accretion of discount on 
       preferred stock                             (35,000)    (37,500)                   (72,500)
     Redemption of preferred
       stock (2,400 shares)                                    (81,500)                   (81,500)
                                    ----------  ----------  ----------   ----------    ----------
   Balances, July 31, 1998          $3,517,464  $1,776,951  $1,361,363   $   (8,299)   $6,647,479
                                    ==========  ==========  ==========   ==========    ==========
   </TABLE>

   The accompanying notes are an integral part of the consolidated
     financial statements.
   <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Consolidated Statements of Cash Flows
     for the years ended July 31, 1998, 1997 and 1996

     <TABLE>
     <CAPTION>
                                                             1998         1997         1996
                                                             ----------   ----------   ----------
      <S>                                                    <C>          <C>          <C>
      Cash flows from operating activities:
        Cash received from contracts, rentals and
          golf center sales                                  $2,690,419   $2,759,659   $3,119,937
        Interest received                                       879,135    1,003,265    1,168,493
        Cash paid to suppliers and employees                 (2,590,272)  (2,269,308)  (3,029,296)
        Interest paid, net of amounts capitalized            (1,040,047)    (995,036)  (1,141,198)
        Income taxes paid                                                   (643,000)    (112,500)
                                                             ----------   ----------   ----------
            Net cash from operating activities                  (60,765)    (144,420)       5,436
                                                             ----------   ----------   ----------
      Cash flows from investing activities:
        Proceeds from sales of real estate                      566,628    2,032,279      259,435
        Proceeds from sales of marketable securities                                       41,553
        Collections on contracts, mortgages, finance
          notes and loans receivable                          7,208,934    2,462,229    4,166,338
        Investment in contracts, mortgages, finance
          notes and loans receivable                         (6,471,596)  (1,535,634)     (51,106)
        Additions to rental properties, property
          held for sale, property under develop-
          ment, golf center, vehicles and equipment          (1,673,150)  (1,353,211)  (2,477,696)
        Change in restricted investments and
          cash equivalents                                      351,549       11,348       84,974
        Other                                                                 16,335       28,837
                                                             ----------   ----------   ----------
            Net cash from investing activities                  (17,635)   1,633,346    2,052,335
                                                             ----------   ----------   ----------
      Cash flows from financing activities:
        Net borrowings (repayments) under 
          line-of-credit agreement                            1,238,827      956,989   (2,231,388)
        Proceeds from installment contracts,
          mortgage notes and notes payable                      434,688                 1,270,858
        Payments on installment contracts,
          mortgage notes and notes payable                     (300,868)  (1,984,377)  (1,091,276)
        Proceeds from sales of debenture bonds                  340,657      447,223      863,142
        Redemption of debenture bonds                          (954,296)    (814,535)    (855,614)
        Redemption of preferred stock                          (240,000)    (100,000)
        Payment of dividends on preferred stock                 (62,400)     (62,400)     (62,400)
        Purchase and retirement of common stock                (385,240)     (71,239)     (61,973)
                                                             ----------   ----------   ----------
            Net cash from financing activities                   71,368   (1,628,339)  (2,168,651)
                                                             ----------   ----------   ----------
      Net decrease in cash and cash equivalents                  (7,032)    (139,413)    (110,880)
      Cash and cash equivalents, beginning of year              325,058      464,471      575,351
                                                             ----------   ----------   ----------
      Cash and cash equivalents, end of year                 $  318,026   $  325,058   $  464,471
                                                             ==========   ==========   ==========
     </TABLE>

     The accompanying notes are an integral part of the consolidated
       financial statements.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Consolidated Statements of Cash Flows, Continued
     for the years ended July 31, 1998, 1997 and 1996


     <TABLE>
     <CAPTION>
                                                             1998         1997         1996
                                                             ----------   ----------   ----------
      <S>                                                    <C>          <C>          <C>
      Reconciliation of net income (loss) to net cash
        from operating activities:
          Net income (loss)                                  $ (596,936)  $  472,000   $   39,266
          Adjustments to reconcile net income (loss)
            to net cash from operating activities:
              Depreciation and amortization                     750,370      740,980      797,271
              Deferred income tax provision (benefit)          (534,967)     274,374     (328,187)
              Deferred financing income realized                (41,992)     (25,856)    (126,044)
              Interest accrued on debenture bonds               555,224      547,403      531,248
              Gain on sales of marketable securities                                      (30,959)
              Gain on sales of real estate                     (514,141)  (1,611,195)    (486,469)
              Uncollectible accounts                              2,199        2,788        1,412
              Change in assets and liabilities:
                Accrued interest receivable                    (299,157)      (1,808)      18,685
                Income taxes receivable                         299,764     (699,565)     228,095
                Prepaid expenses                                 35,252       61,617       52,025
                Golf center inventories                          (2,830)      27,851      (83,352)
                Accrued expenses and other liabilities          258,323       29,047     (583,245)
                Other, net                                       28,126       37,944      (24,310)
                                                             ----------   ----------   ----------
                   Net cash from operating activities        $  (60,765)  $ (144,420)  $    5,436
                                                             ==========   ==========   ==========

      Supplemental schedule of noncash investing
        and financing activities:
          Company financed sale of property                  $  486,300   $1,379,495   $1,025,648
          Accretion of discount on preferred stock              119,000       52,000       52,000
          Stock dividend declared and unpaid                     42,000       62,400       62,400
          Deferred gain recognized on sale of property           41,516      507,703
          Related party note issued in exchange for non-
            competition agreement                               125,000
          Exchange of real estate for purchase and redemp-
            tion of common shares                             1,143,500
          Notes payable issued for purchase and redemption 
            of common shares                                    729,000

     </TABLE>

     The accompanying notes are an integral part of the consolidated
       financial statements.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements


      1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          Pacific Security Companies and subsidiaries (the Company) is
          incorporated under the laws of the state of Washington.  The
          Company is engaged in the business of owning, selling and leasing
          real properties and in financing contracts and loans,
          collateralized by real estate.  Most of the Company's real estate
          activities are concentrated within the state of Washington. 
          During the year ended July 31, 1998, the Company began
          originating commercial real estate loans.  Additionally, the
          Company completed construction and commenced operations of a golf
          center during the year ended July 31, 1996.  The golf center,
          located in Spokane, Washington, serves as a practice and teaching
          center and sells golf clubs and related golf supplies.

          A summary of the significant accounting policies followed by the
          Company is presented below:

            CONSOLIDATION
            -------------
            The consolidated financial statements include the accounts of
            the Company and its wholly owned subsidiaries, Aqua View
            Apartments, Inc. (operating as the Broadmoor Apartments) and
            Cornerstone Realty Advisors, Inc. which was formed in March
            1998.  All significant intercompany accounts and transactions
            have been eliminated.

            The Company's wholly owned subsidiary, Henry George & Sons Co.,
            Inc. (and its wholly owned subsidiary, Cooper George Company)
            (Cooper George) was dissolved during the year ended July 31,
            1996.  Upon dissolution, all assets of Cooper George were
            transferred to the Company for the redemption of the
            outstanding common stock.

            CASH AND CASH EQUIVALENTS
            -------------------------
            The Company deposits all cash and cash equivalents with high
            quality financial institutions.  At times, the deposits may
            exceed the federal insured limit.

            The Company considers highly liquid debt instruments, if any,
            purchased with a remaining maturity of three months or less to
            be cash equivalents.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
          CONTINUED:

            CONTRACTS, MORTGAGES, FINANCE NOTES AND LOANS RECEIVABLE
            --------------------------------------------------------
            Contracts, mortgages, finance notes and loans receivable are
            stated at unpaid principal balance, plus accrued interest, less
            acquisition discounts, unearned loan fees and an allowance for
            estimated uncollectible amounts, as necessary.  Management
            evaluates receivables which may not be fully collectible to
            determine if a provision for loss is necessary based on the
            present value of expected future cash flows from the
            receivables in the ordinary course of business or from amounts
            recoverable through foreclosures and the subsequent resale of
            the collateral, in accordance with Statement of Financial
            Accounting Standards (SFAS) No. 114, "Accounting by Creditors
            for Impairment of a Loan." The  adoption of this standard on
            August 1, 1995 did not have a material effect on the
            consolidated financial statements.

            Interest continues to be accrued on non-performing receivables
            until such amount is not expected to be recovered.

            DISCOUNTS ON CONTRACTS
            ----------------------
            The Company amortizes discounts on purchased contracts using
            the level-yield method over the expected term of the contracts.

            LOAN ORIGINATION FEES
            ---------------------
            Loan origination fees, net of direct origination costs, are
            deferred and recognized as interest income using the level
            interest yield method over the contractual term of each loan.

            INVESTMENT IN RENTAL PROPERTIES
            -------------------------------
            Rental properties, including land, buildings and improvements
            and furniture and equipment, are recorded at cost. 
            Expenditures for maintenance and repairs are charged to
            operations as incurred.  Renewals and betterments are
            capitalized. 

            Depreciation is provided on the straight-line method over
            estimated useful lives as summarized below:

                                                             Years
                                                             -----
              Buildings and improvements                     15-40
              Furniture and equipment                         5-10
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
          CONTINUED:

            INVESTMENT IN RENTAL PROPERTIES, CONTINUED
            ------------------------------------------
            Upon sale or retirement of depreciable properties, the related
            cost and accumulated depreciation are removed from the accounts
            and any resultant gain or loss is reflected in operations.

            INVESTMENT IN GOLF CENTER
            -------------------------
            The golf center, including land, building and improvements and
            furniture and equipment, is recorded at cost.  Depreciation is
            provided on the straight-line method over the estimated useful
            lives as summarized below:

                                                             Years
                                                             -----
              Buildings and improvements                     15-40
              Furniture and equipment                         3-10

            INTEREST CAPITALIZATION
            -----------------------
            All costs associated with self-constructed assets (including
            interest and real estate taxes) incurred during the
            construction period are capitalized.  Interest costs of
            approximately $98,000 and $205,000 were capitalized during the
            years ended July 31, 1997 and 1996, respectively.

            PROPERTY HELD FOR SALE OR DEVELOPMENT
            -------------------------------------
            The Company acquires real estate through direct acquisition and
            foreclosures and records these assets at the lower of fair
            value, less estimated costs to sell, or cost.  Losses on
            properties held for sale or development are recognized if the
            anticipated cash flows from disposition, less estimated selling
            costs, are estimated to be less than the carrying value of the
            related asset.

            The Company evaluates its real estate assets for impairment in
            value whenever events or circumstances indicate that the
            carrying value of an asset may not be recoverable.  In
            performing the review, if expected future undiscounted cash
            flows from the use of the asset or the fair value, less selling
            costs, from the disposition of the asset is less than its
            carrying value, an impairment loss is recognized.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
          CONTINUED:

            MARKETABLE SECURITIES
            ---------------------
            The Company's investments, consisting of debt and equity
            securities, are considered to be "available for sale" and,
            therefore, are carried at market value.  Realized gains and
            losses on the sale of these marketable securities are
            recognized on a specific identification basis in the
            consolidated statement of operations in the period the
            securities are sold.  Unrealized gains and losses are excluded
            from operations and reported as a separate component of
            stockholders' equity, net of related income taxes, until
            realized.

            RESTRICTED INVESTMENTS
            ----------------------
            Restricted investments in U.S. Treasury bonds are carried at
            amortized cost.  Premiums or discounts at acquisition are
            amortized using the interest method over the remaining term of
            the investment.

            INTANGIBLE ASSETS
            -----------------
            The amount paid under a covenant not-to-compete is being
            amortized on a straight-line basis over the five-year term of
            the related agreement.  Accumulated amortization at July 31,
            1998 associated with this agreement was $11,441.

            VEHICLES AND EQUIPMENT
            ----------------------
            Vehicles and equipment are stated at cost and are depreciated
            using the straight-line method over their estimated useful
            lives of 4 to 5 and 5 to 10 years, respectively.  Accumulated
            depreciation associated with vehicles and equipment was
            $198,073 and $191,547 at July 31, 1998 and 1997, respectively. 
            Upon sale or retirement, the cost and related accumulated
            depreciation are removed from the accounts and any resultant
            gain or loss is reflected in operations.

            GOLF CENTER INVENTORIES
            -----------------------
            Golf center inventories are stated at the lower of cost or
            estimated net realizable value using the first-in, first-out
            method.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
          CONTINUED:

            SALES OF REAL ESTATE
            --------------------
            Receipts on sales of real estate investments are accounted for
            as customer deposits until the principal payments received on
            the sales contracts exceed the minimum guidelines for gain
            recognition.  Losses arising from sales of real estate are
            recognized immediately upon sale.

            INCOME TAXES
            ------------
            The Company recognizes deferred tax assets and liabilities for
            the expected future income tax consequences of events that have
            been recognized in the financial statements.  Under this
            method, deferred tax liabilities and assets are determined
            based on the temporary differences between the financial
            statement carrying amounts and tax bases of assets and
            liabilities using enacted tax rates in effect in the years in
            which the temporary differences are expected to reverse.

            INCOME OR LOSS PER SHARE
            ------------------------
            Income (loss) per share - basic is computed by dividing income
            (loss) applicable to common stockholders by the weighted-
            average number of common shares outstanding during the period. 
            Income (loss) per share - diluted is computed by dividing
            income (loss) applicable to common stockholders by the
            weighted-average number of common shares outstanding increased
            by the additional common shares that would have been
            outstanding if the dilutive potential common shares had been
            issued.  The Company did not have any potentially dilutive
            common shares outstanding during the years ended July 31, 1998,
            1997 and 1996; therefore, diluted earnings per share amounts
            are identical to basic earnings per share.

            The income (loss) per share disclosures have been made in
            accordance with SFAS No. 128, "Earnings per Share," which was
            applied by the Company in fiscal 1998.  In accordance with SFAS
            No. 128, all prior income (loss) per share data has been
            restated to conform to this presentation.  Basic and diluted
            earnings per share amounts for periods prior to 1998 are
            identical in amount to primary and fully diluted earnings per
            share amounts that were previously presented.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
          CONTINUED:

            INTEREST RATE RISK
            ------------------
            The results of operations of the Company may be materially and
            adversely affected by changes in prevailing economic
            conditions, including rapid changes in interest rates.  The
            Company's financial assets (primarily contracts, mortgages,
            finance notes and loans receivable) and liabilities (primarily
            notes payable to banks, installment contracts, mortgage notes
            and notes payable and debenture bonds) are subject to interest
            rate risk.  Management is aware of the sources of interest rate
            risk and endeavors to actively monitor and manage its interest
            rate risk, although there can be no assurance regarding the
            management of interest rate risk in future periods.

            COMPREHENSIVE INCOME
            --------------------
            In June 1997, Statement of Financial Accounting Standards No.
            130 (SFAS 130), "Reporting Comprehensive Income," was issued. 
            SFAS 130 establishes standards for reporting and display of
            comprehensive income and its components (revenues, expenses,
            gains and losses) in a full set of general-purpose financial
            statements.  This Statement requires an enterprise to classify
            items of other comprehensive income by their nature in a
            financial statement and display the accumulated balance of
            other comprehensive income separately from retained earnings
            and additional paid-in capital in the equity section of a
            statement of financial position.  This Statement is effective
            for fiscal years beginning after December 15, 1997.  The
            Company does not believe that the application of this statement
            will have a material effect on the presentation of its
            financial statements.

            ESTIMATES
            ---------
            The preparation of financial statements in conformity with
            generally accepted accounting principles requires management to
            make estimates and assumptions that affect the reported amounts
            of assets and liabilities and disclosures of contingent assets
            and liabilities at the dates of the financial statements and
            the reported amounts of revenues and expenses during the
            reporting periods.  Actual results could differ from those
            estimates.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      2.  RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS:

          At July 31, 1998 and 1997, the Company holds cash and cash
          equivalents and investments which are restricted for the
          following purposes:

            <TABLE>
            <CAPTION>
                                                     1998          1997
                                                     -----------   ----------------------
                                                     Cash and      Cash and      U.S.
                                                     Cash          Cash          Treasury
                                                     Equivalents   Equivalents   Notes
                                                     -----------   -----------   --------
              <S>                                    <C>           <C>           <C>
              Tenant security deposits                $ 11,289      $ 13,250
              Mortgage reserves                                                    21,437
              Apartment complex replacement 
                 reserve required by the Depart-
                 ment of Housing and Urban Develop-
                 ment (HUD)                                           36,558     $129,330
              Apartment complex residual receipts 
                 as required by HUD                                   13,439      148,824
                                                      --------      --------     --------
                                                      $ 11,289      $ 84,684     $278,154
                                                      ========      ========     ========
            </TABLE>

          The U.S. Treasury notes held in the replacement and residual
          receipt reserves at July 31, 1997 bore interest at 5.75% to
          6.00%.  The restricted investments were liquidated upon full
          repayment of the related mortgage loan during the year ended 
          July 31, 1998.


      3.  CONTRACTS, MORTGAGES AND FINANCE NOTES AND LOANS RECEIVABLE:

          The components of contracts, mortgages, finance notes and loans
          receivable at July 31, 1998 and 1997 are as follows:

                                                  1998         1997
                                                  -----------  -----------
            Contracts, mortgages and finance 
              notes receivable                    $ 7,293,800  $11,154,805
            Originated loans receivable             4,931,340
            Undisbursed portion of loans 
              receivable                             (837,272)
            Discounts, net                           (141,113)    (183,105)
                                                  -----------  -----------
            Contracts, mortgages, finance notes 
              and loans receivable, net           $11,246,755  $10,971,700
                                                  ===========  ===========
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      3.  CONTRACTS, MORTGAGES AND FINANCE NOTES AND LOANS RECEIVABLE,
          CONTINUED:

          One contract and two individual loans included above each
          represent approximately 15%, 13% and 13%, respectively, of the
          total outstanding contracts, mortgages, finance notes and loans
          receivable at July 31, 1998.

          At July 31, 1998 and 1997, the aging of amounts due on contracts,
          mortgages, finance notes and loans receivable was as follows:

                                                  1998         1997
                                                  -----------  -----------
            Current                               $11,081,593  $11,049,018
            31 to 60 days                              53,552       46,506
            60 to 90 days                                            9,756
            Over 90 days                              252,723       49,525
                                                  -----------  -----------
                                                   11,387,868   11,154,805
            Less unearned acquisition discounts      (141,113)    (183,105)
                                                  -----------  -----------
                                                  $11,246,755  $10,971,700
                                                  ===========  ===========

          Management of the Company provides an allowance for losses based
          upon estimates of the cash flows to be collected on the
          receivable or the fair value of the underlying collateral, net of
          selling costs.  At July 31, 1998 and 1997, the fair value of the
          underlying collateral, net of selling costs, is estimated to be
          greater than the carrying value of the related receivables, and
          thus, no allowance for loss has been provided.  The receivables
          are collateralized primarily by residential and commercial real
          estate located in the Pacific Northwest.  These estimates can be
          affected by changes in the economic environment in the Pacific
          Northwest and the resultant effect on real estate values.  As a
          result of changing economic conditions, the amount of the
          allowance for loan losses could change in the near term.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      4.  INVESTMENTS IN RENTAL PROPERTIES:

          Following is a summary of investments in rental properties at
          July 31, 1998 and 1997:

                                                  1998         1997
                                                  -----------  -----------
            Land                                  $ 2,417,729  $ 2,467,862
            Buildings and improvements             16,130,418   15,780,141
            Furniture and equipment                 1,166,014      945,714
                                                  -----------  -----------
                                                   19,714,161   19,193,717
            Less accumulated depreciation          (6,126,016)  (5,706,632)
                                                  -----------  -----------
                                                  $13,588,145  $13,487,085
                                                  ===========  ===========

          The Company leases office space in certain of the above buildings
          under operating leases.  Most of the lease agreements contain
          renewal options and escalation provisions associated with
          inflation over the term of the lease.  The following is a
          schedule by years of minimum future rentals on noncancellable
          operating leases as of July 31, 1998:

            Year Ending
              July 31,
            -----------
               1999                               $ 1,384,809
               2000                                 1,006,180
               2001                                   798,971
               2002                                   614,745
               2003                                   452,390
            Thereafter                                 98,150
                                                  -----------
            Total minimum future rentals          $ 4,355,245
                                                  ===========

          These properties are primarily located in the greater Spokane,
          Washington geographical area.  Losses on investments in rental
          properties are recognized if the anticipated cash flows from
          operations or the sale of the rental property, net of selling
          costs, are estimated to be less than the carrying value of the
          related asset.  These estimates can be affected by changes in the
          economic environment of the Spokane, Washington area and the
          resultant effect on the real estate rental and property values.
          As a result of changing economic conditions, these estimates
          could change in the near term.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      4.  INVESTMENTS IN RENTAL PROPERTIES, CONTINUED:

          At July 31, 1997, the sales of certain rental property and land
          were subject to sales contracts, but had not met the criterion to
          be recorded as a sale.  Therefore, the deposit method of
          accounting for these sales was applied, resulting in the
          classification of approximately $159,000 as investments in rental
          properties at July 31, 1997.  At July 31, 1997, the Company had
          deferred gains of approximately $41,000 associated with these
          sales.  These gains were recognized during the year ended July
          31, 1998 when the criterion for a sale was met.


      5.  INVESTMENT IN GOLF CENTER:

          The Company constructed Birdies Golf Center (Birdies), which
          features a 56-tee driving range, a fully lighted, contoured
          fairway with 5 target greens, a pro shop, teaching studios and an
          8,000-square-foot putting green.

          The following is a summary of the investment in the golf center
          at July 31, 1998 and 1997:

                                                  1998         1997
                                                  -----------  -----------
            Land                                  $   350,000  $   350,000
            Building and improvements               1,696,175    1,687,503
            Furniture and equipment                   271,896      259,757
                                                  -----------  -----------
                                                    2,318,071    2,297,260
            Less accumulated depreciation            (247,077)    (155,013)
                                                  -----------  -----------
                                                  $ 2,070,994  $ 2,142,247
                                                  ===========  ===========

     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      6.  BUSINESS SEGMENT REPORTING:

          Information about the Company's separate business segments and in
          total as of and for the years ended July 31, 1998, 1997 and 1996
          is as follows:

                                                  Real Estate
                                     Birdies      Rental and
                                     Golf         Receivable
                                     Center       Operations   Total
                                     -----------  -----------  -----------
            1998:
              Revenue                $   332,815  $ 3,789,821  $ 4,122,636
              Loss from operations      (116,400)    (720,372)    (836,772)
              Identifiable assets, 
                net                    2,129,325   28,908,714   31,038,039
              Depreciation and 
                amortization              96,190      654,180      750,370
              Capital expenditures        27,873    1,645,277    1,673,150

            1997:
              Revenue                $   343,528  $ 5,035,510  $ 5,379,038
              Income (loss) from 
                operations              (189,429)     879,237      689,808
              Identifiable assets, 
                net                    2,197,928   30,096,979   32,294,907
              Depreciation and 
                amortization              82,507      658,473      740,980
              Capital expenditures       108,103    1,245,108    1,353,211

            1996:
              Revenue                $   294,276  $ 4,650,346  $ 4,944,622
              Income (loss) from 
                operations              (142,848)     199,654       56,806
              Identifiable assets, 
                net                    2,207,582   30,632,525   32,840,107
              Depreciation and 
                amortization              72,506      724,765      797,271
              Capital expenditures       854,937    1,622,759    2,477,696

          In June 1997, Statement of Financial Accounting Standards No. 131
          (SFAS 131), "Disclosures About Segments of an Enterprise and
          Related Information," was issued.  SFAS 131 establishes standards
          for the way that public business enterprises report information
          about operating segments in annual financial statements.  It also
          establishes standards for related disclosures about products and
          services, geographic areas and major customers.  This Statement
          is effective for financial statements for periods beginning after
          December 15, 1997.  The Company has not yet determined the effect
          that the application of this Statement will have on its
          consolidated financial statements.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      7.  MARKETABLE SECURITIES:

          A summary of investments in marketable securities at July 31,
          1998 and 1997 is as follows:

          <TABLE>
          <CAPTION>
                                                   1998                               1997
                                                   --------------------------------   --------------------------------
                                                                           Market/                            Market/
                                                              Unrealized   Carrying              Unrealized   Carrying
                                                   Cost       Loss         Value      Cost       Loss         Value
                                                   --------   ----------   --------   --------   ----------   --------
              <S>                                  <C>        <C>          <C>        <C>        <C>          <C>
              Marketable equity securities         $ 41,235    $(12,573)   $ 28,662   $ 41,235    $(13,631)   $ 27,604
              Debt securities                        59,400                  59,400     59,400                  59,400
                                                   --------    --------    --------   --------    --------    --------
                                                   $100,635    $(12,573)   $ 88,062   $100,635    $(13,631)   $ 87,004
                                                   ========    ========    ========   ========    ========    ========
            </TABLE>

          The debt securities matured during the year ended July 31, 1998. 
          In connection with the reorganization of the issuer, these
          securities are expected to be paid in the year ending July 31,
          1999 at the full principal amount.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      8.  NOTES PAYABLE TO BANKS:

          Notes payable to banks consisted of the following at July 31,
          1998 and 1997:

                                                    1998        1997
                                                    ----------  ----------

            U.S. Bank of Washington, short-term 
              line of credit, $8,000,000 commit-
              ment, interest at the prime rate 
              plus 0.375%, expires December 15, 
              1998, collateralized by contracts, 
              mortgages and finance notes 
              receivable                            $4,163,189  $5,404,999
            U.S. Bank of Washington, line of 
              credit, $3,000,000 commitment, 
              interest at the prime rate plus 
              0.375%, expires December 15, 1998, 
              collateralized by loans receivable     1,435,327
            Western Bank, line of credit, 
              $8,000,000 commitment, interest at
              the prime rate plus 0.50%, expires 
              December 1, 1998, collateralized 
              by contracts and loans receivable      1,045,310
                                                    ----------  ----------
                                                    $6,643,826  $5,404,999
                                                    ==========  ==========

          The prime rate referenced on the above notes was 8.50% at 
          July 31, 1998.


      9.  INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:

          Installment contracts, mortgage notes and notes payable consist
          of the following at July 31, 1998 and 1997:

                                                    1998        1997
                                                    ----------  ----------
            Installment contracts and mortgage 
              notes payable, interest at 7.0% to 
              9.0%, aggregate monthly payments, 
              including interest of $54,269, 
              mature 1999 through 2021, collatera-
              lized by various properties           $4,643,887  $4,482,251
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


      9.  INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE:

                                                    1998        1997
                                                    ----------  ----------

            Notes payable to former stockholders, 
              interest at 7.0%, aggregate monthly 
              payments, including interest of
              $5,317, mature 2003, collateralized 
              by property                           $  850,416

            Other notes payable                        117,049  $  141,281
                                                    ----------  ----------
                                                    $5,611,352  $4,623,532
                                                    ==========  ==========

          Scheduled future maturities of contracts, mortgage notes and
          notes payable are as follows:

            Year Ending
              July 31,
            -----------
               1999                               $   288,525
               2000                                   310,441
               2001                                   334,175
               2002                                   360,479
               2003                                   387,424
            Thereafter                              3,930,308
                                                  -----------
                                                  $ 5,611,352
                                                  ===========

          The following assets were pledged as collateral for contracts,
          mortgage notes and notes payable at July 31, 1998 and 1997:

                                                  1998         1997
                                                  -----------  -----------
            Contracts receivable                  $ 4,438,446  $ 3,952,479
            Rental properties                       4,905,085    8,116,950
                                                  -----------  -----------
                                                  $ 9,343,531  $12,069,429
                                                  ===========  ===========
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     10.  DEBENTURE BONDS:

          The Company has issued unsecured investment bonds to residents of
          the state of Washington under the Securities Act of Washington. 
          The proceeds have been primarily used in making funds available
          for contracts and loans and the development, improvement and
          acquisition of commercial real property.

          The outstanding bonds have original maturities ranging from one
          to ten years and the interest rates vary depending upon the
          maturity. 

          Outstanding bonds by interest rate categories were as follows at
          July 31, 1998 and 1997:

            Bond Interest Rate                    1998         1997
            ------------------                    -----------  ------------
                  5.75%                           $   141,530  $   354,502
                  6.00                                132,803
                  6.25                                 29,490      148,258
                  6.50                                535,561      577,675
                  7.00                                 65,618      517,146
                  7.25                                176,345      325,088
                  7.50                              1,669,324    1,712,455
                  7.75                                756,709      473,967
                  8.00                                788,032      722,011
                  8.25                                964,264      636,594
                  8.50                              1,416,790    1,384,274
                  8.75                                341,911      331,323
                  9.00                              1,721,023    1,644,000
                  9.25                                314,511      334,996
                  9.50                                753,906      707,069
                 10.00                                 14,531       13,164
                 10.50                                 11,403       10,280
                 11.00                                  6,185        5,549
                                                  -----------  -----------
                                                  $ 9,839,936  $ 9,898,351
                                                  ===========  ===========

          The weighted average annual interest rate on outstanding
          debentures at July 31, 1998 and 1997 was 8.19% and 8.06%,
          respectively.

     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     10.  DEBENTURE BONDS, CONTINUED:

          Estimated future contractual maturities of outstanding debenture
          bonds are as follows:

            Year Ending
              July 31,
            -----------
               1999                               $ 1,223,924
               2000                                 1,259,987
               2001                                   765,492
               2002                                   672,356
               2003                                   752,901
            Thereafter                              5,165,276
                                                  -----------
                                                  $ 9,839,936
                                                  ===========

          The Securities Act of Washington contains specific statutory and
          regulatory requirements concerning companies selling debentures
          in the state of Washington.  These regulations require
          maintenance of minimum net worth and liquidity levels, define
          debenture terms and maturity limitations, describe financial
          reporting requirements and prohibit certain activities by
          controlling persons of the issuer of debentures.  Failure to
          comply with these requirements may jeopardize a company's ability
          to issue debentures.

          In November 1996, the Company obtained its permit to offer
          debentures for sale under the Securities Act of Washington.  The
          permit is subject to the following conditions:

          (a)  Outstanding debentures, including accrued interest, may not
               exceed $10,488,910 at any time during the period.

          (b)  Normal quarterly reports will be supplemented with the
               following information:

               --  Copies of the Company's Form 10-Q.

               --  Calculations of the ratio of earnings to fixed charges.

               --  Schedules showing the real estate sold, proceeds
                   received and use of the proceeds during the quarter.

               --  Schedules showing the amounts of debentures sold to new
                   investors, old debentures retired and renewals.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     10.  DEBENTURE BONDS, CONTINUED:

               --  A discussion of the efforts which have been made during
                   the quarter to transfer a receivable from Washington
                   Capital, Inc. (WCI), a related party (see Note 14), to
                   an unaffiliated entity.

          The permit was renewed for an additional one year upon its
          expiration in November 1997.  However, the Company's continued
          ability to sell additional debentures is dependent upon its
          compliance with the preceding conditions.


     11.  INCOME TAXES:

          The components of the income tax provision (benefit) are as
          follows:

                                     1998         1997         1996
                                     -----------  -----------  -----------
            Current                  $   295,131  $   (56,566) $   345,727
            Deferred                    (534,967)     274,374     (328,187)
                                     -----------  -----------  -----------
                                     $  (239,836) $   217,808  $    17,540
                                     ===========  ===========  ===========

          The components of the net deferred tax liability at July 31, 1998
          and 1997 are as follows:

                                     Assets       Liabilities  Total
                                     -----------  -----------  -----------
            1998:
              Depreciation                        $  (324,403) $  (324,403)
              Installment gains                      (330,106)    (330,106)
              Unrealized losses
                on marketable 
                securities           $     4,274                     4,274
              Accrued expenses            46,297                    46,297
              Other, net                  17,066                    17,066
                                     -----------  -----------  -----------
                                     $    67,637  $  (654,509) $  (586,872)
                                     ===========  ===========  ===========
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     11.  INCOME TAXES, CONTINUED:

                                     Assets       Liabilities  Total
                                     -----------  -----------  -----------
            1997:
              Depreciation                        $  (318,282) $  (318,282)
              Installment gains                      (854,093)    (854,093)
              Unrealized losses 
                on marketable
                securities           $     4,635                     4,635
              Accrued expenses            35,317                    35,317
              Other, net                  10,945                    10,945
                                     -----------  -----------  -----------
                                     $    50,897  $(1,172,375) $(1,121,478)
                                     ===========  ===========  ===========

          The annual tax provision (benefit) is different from the amount
          which would be provided by applying the statutory federal income
          tax rate to the Company's pretax income (loss).  The reasons for
          the differences are:

      <TABLE>
      <CAPTION>
                                   1998        %         1997        %         1996        %
                                   ---------   -------   ---------   -------   ---------   -------
              <S>                  <C>         <C>       <C>         <C>       <C>         <C>
              Computed statutory 
                 provision 
                 (benefit)         $(284,502)  (34.0)%   $ 234,535    34.0%    $  19,314    34.0%
              Meals and enter-
                 tainment                801     0.1           861     0.1         1,280     1.3
              Change in tax 
                 estimates                                 (17,588)   (2.5)
              Nondeductible 
                 stockholder
                 legal expenses       51,000     6.1
              Effect of graduated 
                 tax rate              5,941     0.7
              Other                  (13,076)   (1.6)                             (3,054)   (5.4)
                                   ---------   -----     ---------   -----     ---------   -----
                                   $(239,836)  (28.7)%   $ 217,808    31.6%    $  17,540    35.0%
                                   =========   =====     =========   =====     =========   =====
     </TABLE>
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     12.  REDEEMABLE PREFERRED STOCK:

          In fiscal 1995, the Company issued 10,400 shares of $100 par
          value redeemable Class A preferred stock.  The Company has the
          right to redeem any shares after three years from the date of
          issuance.  During the years ended July 31, 1998 and 1997, the
          Company redeemed 2,400 and 1,000 shares, respectively, of the
          preferred stock at par.  However, all shares are required to be
          redeemed by the Company ten years after issuance at the par value
          plus accrued dividends to date of redemption.  Due to the
          mandatory ten-year redemption, the discount on the issuance of
          the preferred stock is being accreted using the interest method
          over the redemption period.  This accretion is recorded as an
          increase in the carrying value of the preferred stock and as a
          charge against retained earnings.  The accretion of this discount
          was $37,500 in the year ended July 31, 1998 and $52,000 in each
          of the years ended July 31, 1997 and 1996.  The accretion of the
          discount on the shares redeemed during the years ended July 31,
          1998 and 1997 was $81,500 and $35,000, respectively.

          Each share of Class A Preferred Stock is entitled to one vote on
          each matter voted on at a stockholders' meeting.  The preferred
          stockholders have liquidation rights equal to the par value plus
          accumulated and unpaid dividends.  The liquidation preference of
          the preferred stock was $742,000 and $996,400 at July 31, 1998
          and 1997, respectively.

          The 6% annual dividends on the Class A preferred stock are
          cumulative.  Dividends of $42,000, $62,400 and $62,400 were
          declared on the preferred stock during the years ended July 31,
          1998, 1997 and 1996, respectively, and were paid subsequent to
          each respective year end.


          At July 31, 1998, preferred stock with a face value of $400,000
          has been pledged as collateral for a contract receivable from WCI
          (see Note 14).  In August 1998, $200,000 (2,000 shares) of
          preferred stock  was redeemed at par value and the contract
          receivable from WCI was satisfied in full.  In connection with
          this redemption, the Board of Directors of the Company has
          proposed a plan to remove the redemption provision on the
          remaining 5,000 shares of outstanding preferred stock.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     13.  COMMON STOCK:

          The Board of Directors of the Company proposed the creation of a
          second class of common stock, Class B common stock.  This
          proposed action was ratified by the stockholders of the Company
          on December 12, 1995, at which time an amendment to the Articles
          of Incorporation was approved.  This class has authorized 30,000,
          no par value shares and entitles the holder to 50 votes on each
          matter in all proceedings in which actions are taken by the
          stockholders, including the election of directors.  Otherwise,
          the common stock is identical to the original class in all
          respects and for all purposes.


     14.  RELATED-PARTY TRANSACTIONS:

            LITIGATION SETTLEMENT
            ---------------------
            On January 5, 1998, in connection with pending litigation
            between the Company and all of the Company's officers and
            directors and certain minority stockholders of the Company
            ("the Minority Stockholders"), who are children of Wayne E.
            Guthrie, the Company's Chief Executive Officer and largest
            individual Company common stockholder, the Company agreed to
            settle all claims of the Minority Stockholders and redeem all
            Company common shares held by the Minority Stockholders by
            paying approximately $317,000 in cash, distributing Company
            real property with an estimated fair value of $643,500 and the
            issuance of notes payable, bearing interest at 7% per annum,
            aggregating approximately $729,000.  The Company acquired
            408,419 of its common shares pursuant to this agreement, which
            were retired.  In addition, the Company obtained a covenant
            not-to-compete for five years from one of the Minority
            Stockholders in return for the issuance of a $125,000 note
            payable bearing interest at 7% per annum.  Concurrently,
            certain Company officers and directors issued notes payable
            aggregating approximately $236,000 to one of the Minority
            Stockholders.  In connection with the settlement, the Company
            also agreed to reimburse the Minority Stockholders for legal
            costs aggregating $150,000.  Total expenses incurred by the
            Company during the year ended July 31, 1998 related to this
            settlement were approximately $300,000.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     14.  RELATED-PARTY TRANSACTIONS, CONTINUED:

            YELLOWFRONT BUILDING
            --------------------
            On July 31, 1998, the Company transferred its ownership of the
            Yellowfront Building, a commercial property located in Coeur
            d'Alene, Idaho, to a family trust formed by Wayne E. Guthrie in
            exchange for 200,000 shares of Class A common stock.  The
            transfer was recorded at the fair value of the property and
            resulted in a net gain to the Company of approximately
            $420,000.

            CONTRACTS AND NOTES RECEIVABLE
            ------------------------------
            Certain former stockholders are indebted to the Company on
            contracts or notes with the following terms:

                                                       1998       1997
                                                       --------   --------
              Note secured by real estate or common 
                stock, bearing interest at 12.5% 
                (prime plus 4%)                        $227,183   $250,343
              Notes secured by real estate and common 
                stock; interest at 8.5% to 13.75%                   27,985
                                                       --------   --------
                                                       $227,183   $278,328
                                                       ========   ========

            HERITAGE VILLAGE APARTMENT COMPLEX
            ----------------------------------
            On February 1, 1974, Wayne E. Guthrie and his wife, Constance
            Guthrie, purchased the Heritage Village apartment complex
            located in King County, Washington for $2,100,000 from Pacific
            National Capital Company (which subsequently merged into
            Pacific Security Companies).  The purchase was partially
            seller-financed by a real estate contract bearing interest at
            8% in an original amount of $2,060,000.  This contract was
            assigned to WCI in 1990 (see below).  The balance owed on this
            contract was $200,000 and $450,109 on July 31, 1998 and 1997,
            respectively.  The taxable gain on this sale was $932,348.  The
            balance owed was paid in full in August 1998.

            On August 1, 1976, Wayne E. Guthrie and Constance Guthrie sold
            the Heritage Village apartment complex for $2,650,000 to
            Security Savesco, Inc., which subsequently merged with Pacific
            Security Companies in 1985 and had its name changed to Pacific
            Security Companies.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     14.  RELATED-PARTY TRANSACTIONS, CONTINUED:

            HERITAGE VILLAGE APARTMENT COMPLEX, CONTINUED
            ---------------------------------------------
            On November 29, 1979, Security Savesco, Inc. sold the Heritage
            Village apartment complex for $6,000,000 to a non-related
            party.  The sale was partially seller-financed by a real estate
            contract bearing interest at 9% in an original amount of
            $5,200,000.  The balance owed on this contract was paid in full
            during the year ended July 31, 1998.

            WASHINGTON CAPITAL, INC. (WCI)
            ------------------------------
            In July 1990, certain contracts receivable from Company
            officers, directors and stockholders were assigned by the
            Company to WCI, a corporation whose sole stockholder was 
            Wayne E. Guthrie.  In December 1991, Mr. Guthrie transferred
            his ownership interest in WCI to his brother, who is now the
            sole stockholder of WCI.

            The assignment of the contracts receivable from officers/
            directors/stockholders of the Company was made at no gain or
            loss as WCI executed installment notes payable to the Company
            for the same principal amounts and interest rates as the
            contracts assigned to WCI.  At July 31, 1998 and 1997, the only
            significant assets and liabilities of WCI were the contracts
            receivable and the installment contract payable to the Company.

            In July 1994, Wayne E. Guthrie and/or WCI pledged $800,000 face
            value of the Company's Class A Preferred Stock (see Note 12) to
            guarantee performance and full payment of any account that he
            or WCI may owe to the Company.  As a result of the redemption
            of preferred shares during the years ended July 31, 1998 and
            1997, the pledge was adjusted to $400,000 face value of the
            Company's Class A Preferred Stock.

            The contract receivable by the Company from WCI had balances
            outstanding of $200,000 and $450,109 at July 31, 1998 and 1997,
            respectively.  This contract was repayable in $15,000 monthly
            installments and bore interest at 8% per annum.  The contract
            was satisfied in full subsequent to July 31, 1998 in connection
            with the redemption of preferred shares (see Note 12).
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     14.  RELATED-PARTY TRANSACTIONS, CONTINUED:

            WASHINGTON CAPITAL, INC. (WCI), CONTINUED
            -----------------------------------------
            The Securities Act of Washington prohibits a debenture
            company's officers, directors or controlling persons from
            directly or indirectly borrowing funds from a debenture company
            or from indirectly or directly owning real property upon which
            the debenture company holds a mortgage, deed of trust or
            property contract.  The Securities Division takes the position
            that the holding of these receivables, whether by the Company
            or WCI, violates this provision of the Securities Act.

            INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE
            -------------------------------------------------------
            At July 31, 1998 and 1997, the following related-party notes
            payable were outstanding:

      <TABLE>
      <CAPTION>
                                                                       Interest   Monthly
                                             1998         1997         Rate       Payment
                                             ----------   ----------   --------   -------
                 <S>                         <C>          <C>          <C>        <C>
                 John Guthrie                $  496,618                  7.00%     $2,917
                 Linda Welden                   176,899                  7.00%      1,200
                 Robert Guthrie                 176,899                  7.00%      1,200
                 Wayne E. Guthrie               176,658   $  188,109     6.75%      2,000
                 John Guthrie                     1,684        3,353     9.00%        219
                                             ----------   ----------
                                             $1,028,758   $  191,462
                                             ==========   ==========
      </TABLE>

            The scheduled future maturities of these notes are as follows:

              Year Ending
                July 31,
              -----------
                 1999                             $    22,412
                 2000                                  32,394
                 2001                                 355,662
                 2002                                  35,642
                 2003                                 477,170
              Thereafter                              105,478
                                                  -----------
                                                  $ 1,028,758
                                                  ===========
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     14.  RELATED-PARTY TRANSACTIONS, CONTINUED:

            DEBENTURE BONDS
            ---------------
            Included in debenture bonds at July 31, 1998 and 1997 is
            approximately $135,000 and $199,000, respectively, that is
            payable to related parties.  These bonds bear interest at the
            prevailing market rate on the date of purchase.

            ACCRUED EXPENSES AND OTHER LIABILITIES
            --------------------------------------
            At July 31, 1998 and 1997, the following demand notes were
            payable to related parties:

                                    1998                1997
                                    ------------------  ------------------
                                              Interest            Interest
                                    Amount    Rate      Amount    Rate
                                    --------  --------  --------  --------
              Wayne E. Guthrie      $ 82,990    7.50%   $138,546    8.25%
              Constance Guthrie       99,996    7.50      97,288    8.25
              Other stockholders      24,254    7.50      11,160    8.25
                                    --------            --------
                                    $207,240            $246,994
                                    ========            ========

            INTEREST INCOME AND EXPENSE
            ---------------------------
            The approximate amount of related-party interest income and
            expense included in the accompanying consolidated statements of
            operations during the years ended July 31, 1998, 1997 and 1996
            is as follows:

                                                 1998     1997     1996
                                                 -------  -------  -------
              Interest income                    $53,000  $68,000  $90,000
              Interest expense                    64,000   36,000   35,000

            SALE OF REAL ESTATE
            ------------------- 
            On December 1, 1979, Pacific Security Companies sold land and a
            mini-warehouse business to Security Savesco, Inc., an equity
            method investee.  Security Savesco, Inc. merged with Pacific
            Security Companies in 1985 and had its name changed to Pacific
            Security Companies.  The gain on the sale of the property was
            $727,703.  The gain, net of $220,000 of income taxes, was
            deferred for financial statement purposes until the property
            was sold to an unrelated entity.  During the year ended July
            31, 1997, the property was sold and the net deferred gain of
            $507,703 was recognized in the statement of operations.
     <PAGE>
     PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
     Notes to Consolidated Financial Statements, Continued


     15.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

          The following methods and assumptions were used to estimate the
          value of each class of financial instrument for which it is
          practicable to estimate that value.  Potential income tax
          ramifications related to the realization of unrealized gains and
          losses that would be incurred in an actual sale and/or settlement
          have not been taken into consideration.

            CASH AND CASH EQUIVALENTS - Due to the nature of these
            financial instruments, carrying value approximates fair value.

            DEBENTURE BONDS, CONTRACTS RECEIVABLE AND INSTALLMENT CONTRACTS
            PAYABLE - Fair values are determined using future cash flows
            discounted at a rate of interest currently offered for debt or
            receivables with similar remaining maturities and credit risks. 
            At July 31, 1998 and 1997, the carrying values of these
            financial instruments approximated their fair values.

            NOTES PAYABLE TO BANKS - Fair value approximates the carrying
            value because the notes bear variable interest rates.

            MARKETABLE SECURITIES AND RESTRICTED INVESTMENTS - Fair value
            approximates the carrying value based on quoted market prices.

            LIMITATIONS - The fair value estimates are made at a discrete
            point in time based on relevant market information and
            information about the financial instruments.  Because no market
            exists for many of these financial instruments, fair value
            estimates are based on judgments regarding current economic
            conditions and other factors.  These estimates are subjective
            in nature and involve uncertainties and matters of significant
            judgment and, therefore, cannot be determined with precision. 
            Changes in assumptions could significantly affect the
            estimates.  Accordingly, the estimates presented herein are not
            necessarily indicative of what the Company could realize in a
            current market exchange.
     <PAGE>
     PART III


     Item 10.  Directors and Executive Officers of the Registrant
               --------------------------------------------------

     IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

     The following information as of July 31, 1998 is provided with respect
     to each director and executive officer of the Company:

     <TABLE>
     <CAPTION>
                                    Year First    Term as
                                    Elected as    Director
      Name                    Age   Director      Expires in   Position (date elected to position)
      ---------------------   ---   ----------    ----------   --------------------------------------------
      <S>                     <C>   <C>           <C>          <C>
      Wayne E. Guthrie        78    1970          1999         Chairman of the Board and Chief Executive
                                                               Officer (January 17, 1970); Director

      Kevin M. Guthrie        43    1980          2001         Vice President (May 2, 1985); Director

      David L. Guthrie        34    1987          2001         Vice President (September 1, 1989); Director

      Donald J. Migliuri      51    1992          1998         Secretary/Treasurer (May 29, 1990); Director

      Raymond J. Fisher       75    1970          1999         Director

      Constance M. Guthrie    64    1981          1999         Director

      Robert N. Codd          68    1994          2001         Director

      Julian Guthrie          33    1998          2001         Director

      </TABLE>

     FAMILY RELATIONSHIPS

     Kevin M. Guthrie, David L. Guthrie and Julian Guthrie are the children
     of Wayne E. Guthrie.  Constance M. Guthrie is the wife of Wayne E.
     Guthrie.
     <PAGE>
     BUSINESS EXPERIENCE

     Wayne E. Guthrie, Chairman of the Board of Pacific Security Companies. 
     Mr. Guthrie is also Chairman of the Board of Aqua View Apartments,
     Inc., a Washington corporation and subsidiary of the registrant.  Mr.
     Guthrie has over 50 years of experience in areas of construction,
     financing of real estate and personal property, and real estate
     investments.

     Kevin M. Guthrie, Vice President of Pacific Security Companies since
     1985.  Mr. Guthrie has served as property manager for the Company
     since 1976.  Mr. Guthrie is also an officer and director of Aqua View
     Apartments, Inc.

     David L. Guthrie, Vice President of Pacific Security Companies since
     1989.  Mr. Guthrie was formerly a financial consultant with Merrill
     Lynch in Spokane, Washington.  Mr. Guthrie is also an officer and
     director of Aqua View Apartments, Inc.  Mr. Guthrie is a NASD licensed
     securities sales person (registered representative) and broker-dealer
     (general securities principal).  He is a licensed real estate broker
     in the state of Washington and has obtained the CCIM designation
     (certified commercial investment member) awarded by the commercial
     real estate investment institute.

     Donald J. Migliuri, Treasurer of Pacific Security Companies since 1990
     and Secretary since 1991.  Mr. Migliuri is a Certified Public
     Accountant and has served as an accounting officer with various
     diversified financial services companies for over 18 years.  He also
     is a certified management accountant (CMA) and has a Masters degree in
     Business Administration.

     Constance M. Guthrie.  Mrs. Guthrie is a housewife and has not been
     employed outside the home during the past nine years.

     Raymond J. Fisher.  Mr. Fisher, now retired, was Secretary of Pacific
     Security Companies.  He was a Certified Public Accountant and was
     employed by the Company and its predecessor companies for 41 years.

     Robert N. Codd.  Mr. Codd is employed by Pacific Security Companies in
     its leasing and real estate activities.  He was employed by the
     Company from 1970 to 1979 and was rehired in November 1992.  Prior to
     being rehired, he was a commercial realtor and property manager.

     Julian Guthrie.  Ms. Guthrie is a reporter for the San Francisco
     Examiner.  She covered general news for the paper for two years and
     last year was named education reporter, responsible for covering all
     education issues in the Bay Area.  Before that, she was senior editor
     of a lifestyle managzine in San Francisco and also worked as a
     freelance writer for the Examiner, covering breaking business,
     political and lifestyle stories.  She currently lives in San
     Francisco.
     <PAGE>
     Item 11.  Executive Compensation
               ----------------------

     REMUNERATION OF DIRECTORS AND OFFICERS

     The following table lists, on an accrual basis, for each of the three
     years ended July 31, 1998, the remuneration paid by the Company to any
     officers or directors in excess of $100,000 and to all officers and
     directors as a group who were officers or directors of the Company at
     any time during the year ended July 31, 1998:

     <TABLE>
     <CAPTION>

                                                                   Annual Compensation*
      Name of Individual                                           --------------------
      or Number of                                       Fiscal
      Persons in Group    Capacities in Which Served     Year      Salary      Bonus
      ------------------  ----------------------------   ------    --------    --------
      <S>                 <C>                            <C>       <C>         <C>
      David L. Guthrie    Vice President and Director    1998      $ 98,580    $ 10,000

      Kevin M. Guthrie    Vice President and Director    1998      $ 98,862    $ 10,000

      Officers and                                       1998      $382,223    $ 25,000
      Directors 
      as a group (5)

      </TABLE>

     The Company has no qualified or nonqualified stock option plans as of
     July 31, 1998.

     *Annual compensation did not exceed $100,000 in 1996 and 1997.


     Item 12.  Security Ownership of Certain Beneficial Owners and
               Management
               ---------------------------------------------------

     (a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

          Set forth below is certain information concerning parties,
          excluding management, who are known by the Company to directly
          own more than 5% of any class of the Company's voting shares on
          July 31, 1998:  none.

     <PAGE>
     (b)  SECURITY OWNERSHIP OF MANAGEMENT
          The following table sets forth as of July 31, 1998 information
          concerning the direct ownership of each class of equity
          securities by all directors and all directors and officers of the
          Company as a group:

     <TABLE>
     <CAPTION>
                                                                     Amount and
                                                                     Nature of
              Title                                                  Beneficial   Percent
              of Class       Name of Beneficial Owner                Ownership    of Class
              ------------   -------------------------------------   ----------   --------
              <S>            <C>                                     <C>          <C>
              Common stock   Wayne E. Guthrie                         182,870      15.60%
              Common stock   Constance Guthrie                        105,043       8.96
              Common stock   Kevin Guthrie                            222,718      18.99*
              Common stock   David Guthrie                            222,718      18.99*
              Common stock   Julian Guthrie                           196,838      16.79
                                                                      -------     ------
              Common stock   All directors and officers as a group    930,187      79.33%
                                                                      =======     ======
              Preferred 
                stock        Wayne E. Guthrie                           4,000      57.10
              Preferred 
                stock        Wayne E. or Constance Guthrie              2,000      28.60
              Preferred 
                stock        Constance Guthrie                          1,000      14.30
                                                                      -------     ------
              Preferred 
                stock        All directors and officers as a group      7,000     100.00%
                                                                      =======     ======
      </TABLE>

      * Additionally, these parties exercise voting rights over an
       additional 1.31% of this class through the holdings of their minor
       children.


     Item 13.  Certain Relationships and Related Transactions
               ----------------------------------------------
     Transactions with Company officers, directors and stockholders and
     other related parties are summarized in Notes 12 and 14 to the
     consolidated financial statements included herein.
     <PAGE>
     PART IV


     Item 14.  Exhibits, Financial Statement Schedules and Reports on 
               Form 8-K
               ------------------------------------------------------

     (a)  1.  Financial Statements - See index under Item 8

     (a)  2.  Financial Statement Schedules:
              Report of independent accountants

              Schedule III - Real estate and accumulated depreciation
              Schedule IV - Mortgage loans on real estate

              All other schedules are omitted because they are not
              applicable, or not required, or because the required
              information is included in the financial statements or notes
              thereto.

     (a)  3.  Exhibits:

              Exhibit 27 - Financial Data Schedule

     (b)      Reports on Form 8-K during the last quarter:
              None
     <PAGE>
     REPORT OF INDEPENDENT ACCOUNTANTS ON 
     FINANCIAL STATEMENT SCHEDULES


     September 18, 1998


     Board of Directors and Stockholders
     Pacific Security Companies and Subsidiaries
     Spokane, Washington


     Our report on the consolidated financial statements of Pacific
     Security Companies and subsidiaries is included on page 13 of this
     Form 10-K.  In connection with our audits of such consolidated
     financial statements, we have also audited the related financial
     statement schedules listed under Item 14 of this Form 10-K.

     In our opinion, the financial statement schedules referred to above,
     when considered in relation to the basic financial statements taken as
     a whole, present fairly, in all material respects, the information
     required to be included therein.

                          /s/PricewaterhouseCoopers LLP
     <PAGE>
  PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
  Schedule III

  Real Estate and Accumulated Depreciation
  July 31, 1998

  <TABLE>
  <CAPTION>
                                                                                                                   Life on Which
                                                                                                                   Depreciation
                                                       Cost                                                        in Latest
                                                       Capitalized     Amount at                                   Income
                                                       Subsequent      Which Carried       Accumulated   Date      Statement
  Description               Encumbrance  Initial Cost  to Acquisition  at Close of Period  Depreciation  Acquired  isComputed
  ------------------------  -----------  ------------  --------------  ------------------  ------------  --------  -------------
  <S>                       <C>          <C>           <C>             <C>                 <C>           <C>       <C>
  Residential and commer-
   cial properties:
    Rental buildings and 
     improvements:
      SPOKANE, WASHINGTON
        N. 10 Post Street 
         (Peyton Bldg.)     $   756,042  $ 2,209,343    $ 3,342,008       $ 5,551,351      $ 1,598,798   1979       25-40 years
        S. 10 Washington 
         (Hutton Bldg.)                    1,498,769      3,754,253         5,253,022        1,723,895   1979       25-40 years
        Broadmoor Apart-
         ments                             1,385,074        656,761         2,041,835        1,130,779   1969          40 years
        W. 102 Indiana          599,150      663,031                          663,031          248,996   1984          30 years
        South Ridge 
         Apartments             542,424      440,028         75,276           515,304          116,422   1991          25 years
        Pier One Building     1,458,610    1,194,017      2,771,167         3,965,184          673,195   1992       25-40 years
        Cellular One 
         Building               834,132      950,373         (2,811)          947,562          196,197   1992          25 years
        Birdies Golf 
         Center                            1,972,752         73,423         2,046,175          153,730   1995       15-40 years
      Furniture related
       to above                              540,237        508,531         1,048,768          531,081   Various    Various
                            -----------  -----------    -----------       -----------       ----------
                            $ 4,190,358  $10,853,624    $11,178,608       $22,032,232       $6,373,093
                            ===========  ===========    ===========       ===========       ==========

  </TABLE>
  <PAGE>
    PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
    Schedule III, CONTINUED


     Real Estate and Accumulated Depreciation
     July 31, 1998


     Real estate:
       Balance at beginning of period                          $21,038,629
       Additions during period:
         Purchases and capitalized costs                           932,815
         Sales recognized under deposit method                     340,511
       Deductions during period:
         Cost of real estate sold                                 (281,723)
                                                               -----------
       Balance at close of period                              $22,032,232
                                                               ===========

     Accumulated depreciation:
       Balance at beginning of period                          $ 5,861,645
       Depreciation for the year                                   718,277
       Charges to accumulated depreciation related to
         real estate investments sold, net of other
         adjustments                                              (206,829)
                                                               -----------
     Balance at close of period                                $ 6,373,093
                                                               ===========
     <PAGE>
  PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
  SCHEDULE IV

  Mortgage Loans on Real Estate
  July 31, 1998

  <TABLE>
  <CAPTION>
                                                                                                                   Principal
                                                                                                                   Amount of
                                                                                                                   Loans Subject
                                                                                         Face         Carrying     to Delinquent
                               Interest    Maturity  Periodic                            Amount of    Amount of    Principal
  Description                  Rate        Date      Payment Terms          Prior Liens  Mortgages    Mortgages    or Interest
  ---------------------------  ----------  --------  ---------------------  -----------  -----------  -----------  -------------
  <S>                          <C>         <C>       <C>                    <C>          <C>          <C>          <C>
  Real estate contract on 
   apartment complex 
   (Evergreen Town House)      9%          2023      $16,973 per month, 
                                                     including interest                  $ 1,682,209  $ 1,682,209

  Loan (WAM)                   Prime + 3%  1999      Interest only monthly                 1,435,328    1,435,328

  Loan (Bengreen)              Prime + 3%  1999      Interest only monthly                 1,426,098    1,426,098

  Loan (Decaro)                Prime + 4%  1998      Interest only monthly                 1,042,198    1,042,198

  Real estate contract on 
   apartment building (East 
   Valley Terrace)             9.50%       2002      $8,492 per month, 
                                                     including interest                      957,828      957,828

  Finance note                 11.50%      2002      $5,900 per month, 
                                                     including interest                      496,220      496,220

  Real estate contract on 
   Walker-McGough Building     8.50%       2016      $3,600 per month, 
                                                     including interest                      389,958      389,958
  Other mortgage contracts 
   and notes receivable, 
   none of which individu-
   ally exceed 3% of the 
   total carrying value of 
   mortgages                   Various     Various   Various                               3,958,029    3,816,916
                                                                                         -----------  -----------
                                                                                         $11,387,868  $11,246,755
                                                                                         ===========  ===========
  </TABLE>
  <PAGE>
  PACIFIC SECURITY COMPANIES AND SUBSIDIARIES
  SCHEDULE IV, CONTINUED

  Mortgage Loans on Real Estate
  July 31, 1998

  <TABLE>
  <CAPTION>                                                                                                        Principal
                                                                                                                   Amount of
                                                                                                                   Loans Subject
                                                                                         Face         Carrying     to Delinquent
                               Interest    Maturity  Periodic                            Amount of    Amount of    Principal
  Description                  Rate        Date      Payment Terms          Prior Liens  Mortgages    Mortgages    or Interest
  ---------------------------  ----------  --------  ---------------------  -----------  -----------  -----------  -------------
  <S>                          <C>         <C>       <C>                    <C>          <C>          <C>          <C>
  Balance at beginning of 
   period                                                                                             $10,971,700

  Additions during period:
   Mortgage loans originated 
   and purchased                                                                         $ 7,444,196
  Contract discounts realized                                                                 41,992
                                                                                         -----------
                                                                                                        7,486,188
  Deductions during period:
   Collections of principal 
    and contract payoffs                                                                   7,208,934
   Uncollectible accounts                                                                      2,199    7,211,133
                                                                                         -----------  -----------

  Balance at end of period                                                                            $11,246,755
                                                                                                      ===========
  </TABLE>
  <PAGE>
     SIGNATURES

     Pursuant to the requirements of Sections 13 or 15(d) of the Securities
     Exchange Act of 1934, Pacific Security Companies has duly caused this
     report to be signed on its behalf by the undersigned, thereunto duly
     authorized.

                                        PACIFIC SECURITY COMPANIES
                                        (Registrant)

     Dated: October 27, 1998            By: /s/ Wayne E. Guthrie
            -----------------------         -----------------------------
                                            Wayne E. Guthrie
                                            Chief Executive Officer
     <PAGE>
     Pursuant to the requirements of the Securities Exchange Act of 1934,
     this report has been signed below by the following persons, which
     include the Chief Executive Officer, the Chief Financial Officer, and
     the Board of Directors, on behalf of the Registrant and in the
     capacities and on the dates indicated:

     Signature                Capacity                 Date
     -----------------------  -----------------------  ----------------

     /s/Wayne E. Guthrie      Chief Executive Officer  October 27, 1998
     -----------------------  and Director             ----------------
     Wayne E. Guthrie


     /s/Donald J. Migliuri    Secretary-Treasurer      October 27, 1998
     -----------------------  Chief Financial Officer  ----------------
     Donald J. Migliuri


     /s/Kevin M. Guthrie      Vice-President and       October 27, 1998
     -----------------------  Director                 ----------------
     Kevin M. Guthrie


     /s/David L. Guthrie      Vice-President and       October 27, 1998
     -----------------------  Director                 ----------------
     David L. Guthrie


     /s/Constance M. Guthrie  Director                 October 27, 1998
     -----------------------                           ----------------
     Constance M. Guthrie


     /s/Raymond J. Fisher     Director                 October 27, 1998
     -----------------------                           ----------------
     Raymond J. Fisher


     /s/Robert N. Codd        Director                 October 27, 1998
     -----------------------                           ----------------
     Robert N. Codd

     /s/Julian Guthrie        Director                 October 27, 1998
     -----------------------                           ----------------
     Julian Guthrie

<PAGE>