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, 2002

                                       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 FINANCIAL, INC.
                        --------------------------------
             (Exact name of registrant as specified in its charter)

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

            10 North Post Street
             325 Peyton Building
             Spokane, Washington                                      99201
             -------------------                                      -----
  (Address of principal executive offices)                          (Zip code)

  Registrant's telephone number, including
                 area code:                                     (509) 444-7700
                                                                --------------

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

                                                            Name of each
                                                          exchange on which
    Title of each class                                      registered
    -------------------                                   -----------------
          None                                                  None


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

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


<PAGE>


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 the Form 10-K or any amendment to this
Form 10-K. [X]

State the aggregate market value of the voting and nonvoting 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, 2002, the registrant had outstanding 1,084,289 shares of common
stock, no par value ($3 stated value) and 3,000 shares of Class A preferred
stock, $100 par value.

Documents incorporated by reference:  none.



<PAGE>

                        PACIFIC SECURITY FINANCIAL, INC.
                             FORM 10-K ANNUAL REPORT

                                Table of Contents

<TABLE>
<CAPTION>


<S>                                                                                                               <C>
Part I

      Item 1.  Business                                                                                           1

      Item 2.  Properties                                                                                         2

      Item 3.  Legal proceedings                                                                                  5

      Item 4.  Submission of matters to a vote of security holders                                                6


Part II

      Item 5.  Market for the registrant's common equity and related stockholder matters                          7

      Item 6.  Selected Financial Data                                                                            8

      Item 7.  Management's discussion and analysis of financial condition and results of operations              9

      Item 7A.  Quantitative and qualitative disclosures about market risk                                       13

      Item 8.  Financial statements and supplemental data                                                        15

      Item 9.  Changes in and disagreements with accountants on accounting and financial disclosure              46


Part III

      Item 10.  Directors and executive officers of the registrant                                               47

      Item 11.  Executive compensation                                                                           49

      Item 12.  Security ownership of certain beneficial owners and management                                   50

      Item 13.  Certain relationships and related transactions                                                   50


Part IV

      Item 14.  Exhibits, financial statement schedules, and reports on Form 8-K                                 51
</TABLE>


<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                          PART I
--------------------------------------------------------------------------------

ITEM 1.  BUSINESS

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 (the Company) as of the date of the merger.
Pacific Security Companies changed its name to Pacific Security Financial, Inc.
in 1999.

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 Company at July
31, 2002 and 2001, were $44,451,625 and $48,754,659, respectively, and real
estate contracts and loans represent approximately 57.0% and 53.0% of the
respective asset totals. The Company primarily originates commercial loans. The
Company also originates contracts to facilitate the sale of real estate held for
sale or development. Some of the Company's contracts have fixed contractual
interest rates while commercial (interim and construction) loans generally have
variable rates. The total amount invested in real estate contracts and loans of
$25,451,896 as of July 31, 2002, is $315,220 less than at the end of the prior
year. The percentage of contracts which were delinquent over 90 days was 5.9% as
of July 31, 2002, and 9.6% as of July 31, 2001. 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 short-term construction and interim loans
(generally one to two years including extensions). Bank lines of credit were
increased to provide additional funds for this purpose. The permanent financing
for these short-term loans is obtained from the secondary market and includes
such sources as banks, savings and loan institutions, life insurance companies,
credit unions, and conduits.

The Company has continued to emphasize the development of its rental properties
and commenced new projects primarily to improve the occupancy of its commercial
buildings. The Company developed 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 two parcels remaining for
sale at July 31, 2002.

In fiscal 1996, the Company completed construction of Birdies Golf Center
(Birdies) and discontinued this operation in fiscal 1999.


                                                                               1
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                          PART I
--------------------------------------------------------------------------------

ITEM 1.  BUSINESS (CONTINUED)

Investment in rental properties totaled $12,811,852 and $17,990,836 as of July
31, 2002 and 2001, respectively. Other real property held for sale and
development totaled $4,399,921 and $3,635,184 as of July 31, 2002 and 2001,
respectively. In fiscal 2001, the Company began construction of a commercial
building containing approximately 13,000 square feet of rentable space, in the
Cornerstone Office Park. Leasing efforts have begun but no leases have been
obtained as of July 31, 2002. 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 has no
commitments for additional construction on these properties at this time. The
Company will continue to invest in and hold real property on a long-term basis.
These properties may ultimately be sold or exchanged for tax purposes in order
to minimize and defer the 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, rental income has
decreased from $2,285,947 in fiscal 2000 to $1,533,476 in fiscal 2002. During
the same period, interest income, including the amortization of discounts on
real estate contracts, has decreased from 47% of total income in fiscal 2000 to
46% of total income in fiscal 2002. The Company expects to continue originating
construction and interim commercial real estate loans and the development,
leasing, and sale of commercial real estate in fiscal 2002. There are no
contractual commitments other than the remaining remodeling costs associated
with improvement for commercial buildings. The Company's fiscal 2002 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 originating loans collateralized by
real estate, financing real estate contracts, developing real estate for sale or
lease, and the operation of rental properties. The Company is in competition
with financial institutions who originate or invest in real estate
collateralized contracts and commercial property owners located primarily in or
near Spokane, Washington.

As of July 31, 2002, the Company employed approximately 12 people on a full-time
equivalent in its office at 10 North Post Street, Spokane, Washington.


ITEM 2.  PROPERTIES

As of July 31, 2002, the Company owns the following properties. Some of the
properties are subject to real estate contracts or mortgages that are
collateralized by the property.


                                                                               2
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                          PART I
--------------------------------------------------------------------------------

ITEM 2.  PROPERTIES (CONTINUED)

Properties located in Spokane County, Washington, unless otherwise noted:
<TABLE>
<CAPTION>

                                                                                    July 31, 2002
                                                                   -----------------------------------------------
                                                                      Rental/            Net          Mortgage or
     Date                                                           Development       Carrying          Contract
   Acquired                 Description of Property                   Status            Value          Obligation
   --------                 -----------------------                   ------            -----          ----------
<S>              <C>                                            <C>                  <C>               <C>
COMMERCIAL:

     1979        The Peyton Building at 10 North Post Street     Substantially       $4,814,258      $  2,812,500
                 contains approximately 85,000 square feet of    leased
                 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.

     1992        The Pier 1 Building is a commercial             Leased               2,857,084      1,097,084(2)
                 building.  The building has one major tenant,
                 who occupies over 35% of the space, and
                 several other smaller tenants for the
                 remaining space.

     1995        Cornerstone Office Building is the remodeled    Leased               1,458,707         1,466,962
                 Birdies Golf Center, constructed on two acres
                 of the Cornerstone Office Park property.  It
                 has approximately 8,300 square feet of
                 rentable space occupied by two tenants.

     2000        Apex Physical Therapy is a commercial           Leased; sold in        560,302           516,983
                 building constructed by the Company in the      October 2002
                 Cornerstone Office Park.
</TABLE>



                                                                               3
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                          PART I
--------------------------------------------------------------------------------


ITEM 2.  PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>

                                                                            July 31, 2002
                                                           -----------------------------------------------
                                                              Rental/               Net          Mortgage or
     Date                                                   Development          Carrying          Contract
   Acquired                 Description of Property           Status               Value          Obligation
   --------                 -----------------------           ------               -----          ----------
<S>              <C>                                          <C>                <C>             <C>
COMMERCIAL (CONTINUED):

     2000        Boise, Idaho: Calderwood - Overland          Leased             $1,630,707      $1,819,589(1)
                 Building-commercial building with
                 approximately 10,896 square feet of
                 rentable space.

     2000        Boise, Idaho: Calderwood - Ardene            Leased              1,223,401                (1)
                 Building-commercial building with
                 approximately 8,292 square feet of
                 rentable space.

LAND:

     1990        Cornerstone Office Park and property         Under development;  1,761,326                -
                 consists of approximately 10 remaining       approximately 5
                 acres of land in a location where there      acres sold in
                 has been substantial commercial and          September 2002
                 residential development and construction
                 of office buildings.

     1991        Tanglewood Ranch Park Estates (The Crest)    Being marketed        120,220                -
                 in south Spokane County was acquired
                 through a judicial foreclosure.  The area
                 consisted of approximately 300 acres of
                 undeveloped land.  In fiscal 2002, six
                 lots were sold, leaving two lots available
                 for sale.
</TABLE>


                                                                               4
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                          PART I
--------------------------------------------------------------------------------


ITEM 2.  PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>

                                                                                    July 31, 2002
                                                                   -----------------------------------------------
                                                                      Rental/               Net          Mortgage or
     Date                                                           Development          Carrying          Contract
   Acquired                 Description of Property                   Status               Value          Obligation
   --------                 -----------------------                   ------               -----          ----------

<S>              <C>                                            <C>                      <C>               <C>
     1993        Approximately six acres in Auburn,              Being marketed           $177,092            $  -
                 Washington, zoned for single-family
                 housing were acquired through a
                 foreclosure.

     2000        Calderwood lots (2), Boise, Idaho.              Under development         126,026               -  (1)

     2000        Parkview Real Estate, Twin Falls, Idaho,        Being marketed            907,110               -
                 acquired through a foreclosure.  51 lots and
                 acreage; nine lots were sold, leaving 42 lots
                 available for sale.

     2002        Calderwood Lot 5; 112,983 square feet of        Sold in August            565,000               -
                 vacant commercial land in Boise, Idaho.         2002 for $565,000

     2002        32,856 square feet of vacant commercial land    Being marketed            226,000               -
                 in Boise, Idaho; Calderwood Lots 3, 4, and 6.

     2002        Three residential condominiums, Boise, Idaho.   Being marketed            517,146           307,685
                                                                 and one sold in
                                                                 September 2002
</TABLE>

(1)      Total obligation of $1,819,589 is secured by two commercial buildings
         and land as noted above.

(2)      Additional obligation of $3,088,586 is secured by contract sale of
         Broadmoor Apartments and Pier 1 Building.

ITEM 3.  LEGAL PROCEEDINGS

As of July 31, 2002, 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.


                                                                               5
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                          PART I
--------------------------------------------------------------------------------

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

A director, Donald J. Migliuri, was re-elected to the Board of Directors and
Moss Adams LLP was approved as the Company's outside independent auditor by a
vote of the stockholders during the fourth quarter of fiscal 2002.


                                                                               6
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

(a)      Principle 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. No common stock
         dividends have been declared since 1990.

(c)      Approximate number of holders of common stock.

         Common no par value - 1,003 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, 2002, the Company also has issued 3,000
         shares of 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, 2002, dividends
         totaling $18,000 were declared and accrued on these shares and paid
         August 2, 2002. Dividends of $18,000 were paid August 3, 2001, 2000,
         and 1999.


                                                                               7
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial data has 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>

                                                                       Year Ended July 31,
                                         --------------------------------------------------------------------------
                                             2002            2001             2000          1999          1998
                                         ------------    ------------    ------------   ------------   ------------
<S>                                      <C>             <C>             <C>            <C>            <C>
Statement of Operations Data:

   Rental income                         $  1,533,476    $  2,689,799    $  2,285,947   $  2,268,810   $  2,220,979
   Interest income, including loan
      fees                                  3,101,696       3,981,137       2,885,338      2,183,276        963,297
   Gain (loss) on sale of real estate       2,022,192         (24,525)      1,038,694      1,128,628        514,141
   Interest expense, net                    2,429,258       3,148,162       2,364,846      2,208,858      1,580,820
   Income (loss) from continuing
      operations before income taxes         (266,951)        100,888         845,791        853,559       (720,371)
   Net income (loss)                         (176,188)         78,780         561,491        285,342       (596,936)
   Income (loss) applicable to
      common stockholders                    (212,188)         78,780         543,491         57,342       (757,936)
   Income (loss) per common share -
      basic and diluted                         (0.19)           0.07            0.48           0.05          (0.48)
                                         ============    ============    ============   ============   ============

   Cash dividends per common share                 --              --              --             --             --
   Weighted-average number of
      common shares outstanding             1,099,105       1,128,469       1,139,232      1,161,677      1,591,484

Balance Sheet Data (at year end):

   Contracts, mortgages, finance
      notes, and loans receivable, net   $ 25,451,896    $ 25,767,116    $ 19,713,117   $ 17,923,329   $ 11,149,009
   Total assets                            44,451,625      48,754,659      40,416,395     35,946,222     30,940,293
   Notes and contracts payable             25,103,907      29,544,197      21,234,496     17,421,385     12,255,178
   Debentures                               9,996,954      10,166,644       9,867,649      9,643,548      9,839,936
   Stockholders' equity                     7,212,596       7,503,072       7,500,785      6,980,693      6,647,479
   Book value per common share                   6.38            6.49            6.32           5.80           5.67
                                         ============    ============    ============   ============   ============

   Shares used to calculate book
      value per common share                1,084,289       1,110,385       1,138,796      1,152,533      1,172,488

</TABLE>

                                                                               8
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

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 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 rental properties
as its primary activities. In fiscal 1999, the Company expanded its lending
activities associated with interim construction loans. During the past two
years, the Company has also focused on the development and leasing of its rental
properties as demand for the available space in these projects has increased.
Much of the Company's development of the 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. The Company also constructed a new building in the
Cornerstone Office Park in fiscal year 2000. This building is fully leased to a
tenant who did not exercise an option to buy the building. The Company began
construction of an additional building in the Cornerstone Office Park in fiscal
2001 which has not yet been leased.

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 on the development and sale of
existing real estate projects to maximize the return from those investments. The
Company originates real estate contracts to facilitate the sale of its property
held for sale or development and, in fiscal year 1998, began originating loans
secured by real estate, including construction and interim loans through its
subsidiary, Cornerstone Realty Advisors, Inc. These loans have involved
properties located in the western United States.

The Company finances its investments in real estate and loans primarily through
collateralized line of credit arrangements with local banks, real estate notes,
or mortgages, and the sale of fixed rate debentures with terms ranging from one
to ten years. The Company may not be able to continue using these funding
sources in the future.


                                                                               9
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS:
For the years ended July 31, 2002, 2001, and 2000, the Company's net income
(loss) was approximately $(176,000), $79,000, and $561,000, respectively. Due to
dividends on the preferred stock, the income (loss) applicable to common
stockholders was approximately $(212,000), $79,000, and $543,000 in fiscal 2002,
2001, and 2000, respectively.

Rental real estate revenues have decreased primarily because of sales of rental
properties. Total rental income has decreased from approximately $2,286,000 in
fiscal 2000 to $1,533,000 in fiscal 2002.

The total interest income, including loan fees and amortization of discounts on
acquired real estate contracts and loans, has decreased from approximately
$3,993,000 and $2,958,000 in fiscal 2001 and 2000, respectively, to
approximately $3,102,000 in fiscal 2002. This decrease corresponds directly with
the decrease in the Company's origination of construction and interim commercial
loans. In the last half of fiscal 2002, the Company discontinued originating new
commercial real property construction and interim loans through its subsidiary,
Cornerstone Realty Advisors, Inc. Loan fees of $741,000 have declined as the new
loan portfolio has declined in fiscal 2002. Loan fees were $1,053,000 and
$600,000 in fiscal 2001 and 2000, respectively. Net interest income without loan
fees was approximately $356,000 in fiscal year 2002 compared with $352,000 and
$347,000 in fiscal 2001 and 2000, respectively.

The Company had a gain of approximately $2,022,000 from real estate sales in
fiscal 2002 compared with a loss of approximately $25,000 in fiscal 2001 and a
gain of $1,039,000 in fiscal 2000.

The Company anticipates that it will continue to recognize gains and losses both
on the sale of real estate acquired through foreclosure and real estate acquired
for resale.

The expenses associated with rental operations have decreased to approximately
$1,703,000 in fiscal 2002 from approximately $2,396,000 in fiscal 2001 and
$1,996,000 in fiscal 2000. The rental activities of the Company are expected to
continue to contribute to its operations, but sales of rental properties have
more than offset rental increases from newly-acquired or newly-constructed
properties.

Interest expense, exclusive of interest on rental properties, net of amounts
capitalized, was approximately $2,005,000, $2,588,000, and $2,011,000 in fiscal
2002, 2001, and 2000, respectively. In fiscal 2000 and through the first half of
fiscal 2002, outstanding borrowings increased significantly due to advances
drawn under the Company's lines of credit to fund the origination of
construction and interim loans. Decreased borrowings and lower interest rates
resulted in the decrease in interest expense in fiscal 2002.

Salaries and commissions have increased for the last three fiscal years
approximately to $1,121,000 in fiscal 2002, $901,000 in fiscal 2001 and $890,000
in fiscal 2000.


                                                                              10
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED):
General and administrative expenses in fiscal 2002 were approximately $667,000
compared with $589,000 in fiscal 2001 and $452,000 in fiscal 2000 primarily due
to the growth of the Company's commercial lending activities.

The Company's effective income tax rate as a percentage of income (loss) from
continuing operations before income taxes was 34% in fiscal 2002, compared to a
provision of 22% and 34% in 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES:
At July 31, 2002, the Company had total stockholders' equity of approximately
$7,213,000 and a total liabilities to equity ratio of 5.16 to 1, which decreased
from 5.5 to 1 the year before. The decrease in this ratio was primarily due to
the decrease in bank borrowings to fund new interim and construction loans in
fiscal 2002. In fiscal 2002, the Company's primary sources of funds were
approximately $15,894,000 in real estate contract collections, $1,762,000 from
real estate sales, and $202,000 from net note borrowings. The primary uses of
funds were approximately $1,195,000 used for acquisition and improvement of real
estate projects, $11,670,000 used to originate new loans and acquire new
contracts, $712,000 net in repayment of maturing debentures, and approximately
$4,648,000 in net repayment of bank line borrowings. As a shareholder of
monetary assets and liabilities, the Company's performance may be significantly
affected by changes in interest rates. These changes are somewhat delayed to the
extent that a portion of the Company's investment in real estate contracts and
established real estate leases have fixed returns, as do the Company's
debentures. The interim and construction loans originated by the Company have
variable interest rates and are primarily funded by variable interest rate loans
so that the spread between the loans receivable interest rate and debt interest
rate is maintained regardless of whether rates are increasing or decreasing. The
Company will be affected by changes in the real estate market in Washington and
other western states where it originates loans.

The Company's sources of liquidity historically have included the issuance of
debentures under the auspices of the Washington State Securities Division of the
Department of Financial Institutions and borrowings from various bank lenders.
These sources of liquidity are limited either by the Washington State Securities
Division who has capped the amount of debentures the Company may sell or by the
individual banks through restrictive covenants included in the lines of credit
loan agreements.

An additional source of liquidity is the issuance of participation interests in
certain loans originated by the Company. The total of these non-recourse
participations was $3,495,000 at July 31, 2002, and $6,686,000 at July 31, 2001.


                                                                              11
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
At July 31, 2002, the Company's lines of credit and other banking agreements
totaled approximately $19,813,000 of which $16,439,000 was outstanding. The
remaining unused portions of the lines of credit may not be fully available to
the Company to meet operational needs because of violations of covenants at two
of the Company's banks. Due to the restrictive banking agreements, the Company
has essentially stopped making new loans and has concentrated on collection
efforts to pay down outstanding debt. These collection efforts include
foreclosure proceedings on several loans. The Company anticipates that cash
flows from operations along with real estate and receivable sales will be
sufficient to provide for the retirement of maturing debentures and mortgage
obligations.

The Company's management is continuously evaluating loans for collectibility.
Additional provisions for loan losses may be required as the Company analyzes
each loan during its efforts to reduce outstanding loans receivable. Litigation
may be required in the course of collection. In addition, the Company's position
relative to bankruptcy filings by three borrowers must be assessed.

The provision for loan losses increased to approximately $1,408,000 in fiscal
2002 compared with approximately $70,000 in fiscal 2001 and $120,000 in fiscal
2001 as the slowing economy resulted in some loan defaults and foreclosures.
Write offs increased to approximately $941,000 in fiscal 2002 compared with
approximately $70,000 in fiscal 2001 and approximately $5,000 in fiscal 2000.

A provision for loan loss of $280,000 was made on a Bellevue, Washington, loan
of approximately $700,000. The Bellevue loan borrower filed for bankruptcy
protection on June 6, 2002. The Company is currently assessing its potential for
recovery.

The borrower on a Park City, Utah, loan filed for bankruptcy protection on May
1, 2002. The Company's principal portion of this loan totaled $1,250,000 and is
expected to be recovered.

Several properties securing commercial loans to a single borrower or entities
controlled by that borrower in Boise, Idaho, were in the process of foreclosure
on April 30, 2002. Subsequent to that date, the Company obtained title to
properties collateralizing or cross-collateralizing the loans. Management has
written off approximately $865,000 against five loans totaling approximately
$2,597,000 in principal balances. Sales of properties have commenced including
one lot for $565,000 that closed in August 2002, subsequent to the fiscal year
end on July 31, 2002.

Two of the Company's executives made a loan secured by a second mortgage in
2001, behind the first position mortgage of the Company, and ahead of a
cross-collateralized third position mortgage held by the Company. The second
mortgage was paid off in May 2002, putting the Company in a first and second
position. The Company is currently in foreclosure proceedings on its loans. A
provision for loan loss of $235,855 was made on these Eagle, Idaho, loans
totaling approximately $2,366,000.


                                                                              12
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                         PART II
--------------------------------------------------------------------------------

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
A provision for loan loss of $70,000 was made on a Kirkland, Washington, loan of
approximately $140,000. The borrower was forced into involuntary bankruptcy by
unsecured creditors.

As a result of a slowdown in economic activity since September 11, 2001, the
Company anticipates sales of its real estate, including foreclosed properties,
may involve delays and possible losses.

The $700,000 sale of an office building in February 2002 to the Company's
president resulted in a reduction of approximately $697,000 in related debt and
a loss on sale of real estate of approximately $61,000. It was management's
opinion that the purchase price represented fair market value. Legal counsel was
advised prior to the transaction and a favorable opinion was obtained.

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 a significant market risk and could
potentially have a material effect on the Company's 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 can be affected by fluctuations in 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. In
addition, real estate lending may slow in a rising interest rate environment.

The Company mitigates interest rate risk on the interim and construction loans
it originates by having variable interest rates on these loans tied to the
variable interest rates on its borrowings to fund the loans. These loans are
short-term loans (generally one to two years, including extensions). Permanent
financing for these loans is obtained from the secondary market and includes
such sources as banks, savings and loan institutions, life insurance companies,
credit unions, and conduits.

                                                                              13
<PAGE>


PACIFIC SECURITY FINANCIAL, INC.
PART II
--------------------------------------------------------------------------------

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)

The following table shows the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and the
instruments' estimated fair values at July 31, 2002.
<TABLE>
<CAPTION>

                                       2003        2004        2005        2006         2007    Thereafter    Balance   Fair Value
                                     ---------   ---------   ---------   ---------     -------     -------   ---------   ---------
<S>                                <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Interest-sensitive assets:
   Contracts, mortgages, finance
      notes, and loans receivable  $17,671,260 $   440,478 $   152,062 $   163,888 $   943,280 $ 6,747,944 $26,118,912 $26,118,912

Interest-sensitive liabilities:
   Notes payable to banks           16,438,964          --          --          --          --          --  16,438,964  16,438,964
   Installment contracts, mortgage
      notes, and notes payable       3,554,486     255,373     248,425     260,121   3,058,557   1,287,981   8,664,943   8,664,943
   Debenture bonds                   1,641,076   2,751,185   2,592,529   1,699,554     861,099     451,511   9,996,954   9,996,954

Off-balance sheet items:
   Undisbursed loans receivable      1,825,566          --          --          --          --          --          --          --
</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.


                                                                              14
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


INDEPENDENT AUDITOR'S REPORT


Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington


We have audited the accompanying consolidated balance sheets of Pacific Security
Financial, Inc. and subsidiaries as of July 31, 2002 and 2001, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Security
Financial, Inc. and subsidiaries as of July 31, 2002 and 2001, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.


/s/ MOSS ADAMS LLP


Spokane, Washington
August 30, 2002


                                                                              15
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington


In our opinion, the accompanying consolidated statement of operations,
comprehensive income, shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Pacific Security Financial,
Inc. (formerly Pacific Security Companies) and its subsidiaries (the Company) at
July 31, 2000, and the results of their operations and cash flows for the period
ended July 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, 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
audit provides a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP



September 19, 2000
San Francisco, California


                                                                              16
<PAGE>


                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                                      CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                     ASSETS

                                                                                 July 31,
                                                                        --------------------------
                                                                            2002           2001
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
ASSETS
   Cash and cash equivalents
      Unrestricted                                                      $   367,469    $   619,642
      Restricted                                                                 --         19,480
                                                                        -----------    -----------

                                                                            367,469        639,122
                                                                        -----------    -----------

   Receivables
      Contracts, mortgages, finance notes, and loans receivable, net
         Related parties                                                    166,182        186,846
         Unrelated                                                       25,285,714     25,580,270
                                                                        -----------    -----------

                                                                         25,451,896     25,767,116
      Accrued interest                                                      208,612        282,616
      Other                                                                 251,639        121,319
                                                                        -----------    -----------

                                                                         25,912,147     26,171,051
                                                                        -----------    -----------

   Investment in rental properties, net                                  12,811,852     17,990,836
                                                                        -----------    -----------

   Other investments
      Property held for sale and development                              4,399,921      3,635,184
                                                                        -----------    -----------


   Other assets
      Vehicles and equipment, net                                            78,553         62,732
      Prepaid and other, net                                                234,410        251,053
      Federal income tax refund receivable                                  647,273          4,681
                                                                        -----------    -----------


                                                                            960,236        318,466
                                                                        -----------    -----------

         TOTAL ASSETS                                                   $44,451,625    $48,754,659
                                                                        ===========    ===========
</TABLE>


                                                                              17
<PAGE>


                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                                      CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                              July 31,
                                                                     --------------------------
                                                                         2002          2001
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
LIABILITIES
   Notes payable to banks                                            $16,438,964    $23,487,255
   Installment contracts, mortgage notes, and notes payable
      Related parties                                                     28,158         85,898
      Unrelated                                                        8,636,785      5,971,044
   Debenture bonds                                                     9,996,954     10,166,644
   Accrued expenses and other liabilities
      Related parties                                                    144,928        153,078
      Unrelated                                                          896,541        782,798
   Deferred income taxes                                               1,096,699        604,870
                                                                     -----------    -----------

                                                                      37,239,029     41,251,587
                                                                     -----------    -----------

COMMITMENTS AND CONTINGENCIES (Note 2)

STOCKHOLDERS' EQUITY
   Preferred stock
      Class A preferred stock, $100 par value, authorized 20,000
         shares; issued and outstanding 3,000 shares                     300,000        300,000
      Preferred stock, authorized 10,000,000 no par value shares;
         no shares issued and outstanding                                     --             --
   Common stock
      Original class, authorized 2,500,000 no par value shares;
         $3 stated value; issued and outstanding, 1,084,289 and
         1,110,385 shares                                              3,252,866      3,331,154
      Class B, authorized 30,000 no par value shares; no shares
         issued and outstanding                                               --             --
   Additional paid-in capital                                          1,830,941      1,830,941
   Retained earnings                                                   1,828,789      2,040,977
                                                                     -----------    -----------

         Total stockholders' equity                                    7,212,596      7,503,072
                                                                     -----------    -----------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $44,451,625    $48,754,659
                                                                     ===========    ===========
</TABLE>

See accompanying notes.

                                                                              18
<PAGE>



                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                            Year Ended July 31,
                                                 -------------------------------------------
                                                     2002           2001            2000
                                                 -----------     -----------     -----------
<S>                                              <C>             <C>             <C>
Income
   Rental                                        $ 1,533,476     $ 2,689,799     $ 2,285,947
   Interest, including loan fees of $740,556,
      $1,052,937, and $599,878                     3,101,696       3,981,137       2,885,338
   Amortization of discounts on real estate
      contracts                                           --          11,971          72,777
   Gain (loss) on sale of real estate              2,022,192         (24,525)      1,038,694
   Other, net                                         27,097          31,126          71,453
                                                 -----------     -----------     -----------

                                                   6,684,461       6,689,508       6,354,209
                                                 -----------     -----------     -----------

Expense
   Rental operations
      Depreciation and amortization                  538,096         783,704         698,769
      Interest                                       424,116         559,701         353,852
      Other                                          741,109       1,053,072         943,149
                                                 -----------     -----------     -----------

                                                   1,703,321       2,396,477       1,995,770
   Interest, net of amount capitalized             2,005,142       2,588,461       2,010,994
   Salaries and commissions                        1,120,787         901,220         889,720
   General and administrative                        666,555         589,184         451,941
   Depreciation and amortization                      47,895          43,278          39,968
   Provision for loan loss                         1,407,712          70,000         120,025
                                                 -----------     -----------     -----------

                                                   6,951,412       6,588,620       5,508,418
                                                 -----------     -----------     -----------

         Income (loss) from operations
            before income taxes                     (266,951)        100,888         845,791

Income tax provision (benefit)                       (90,763)         22,108         284,300
                                                 -----------     -----------     -----------

         Net income (loss)                          (176,188)         78,780         561,491
                                                 -----------     -----------     -----------
</TABLE>

See accompanying notes.

                                                                              19
<PAGE>

                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                           Year Ended July 31,
                                               ------------------------------------------
                                                   2002            2001          2000
                                               -----------     -----------    -----------

<S>                                            <C>             <C>            <C>
         Net income (loss)                     $  (176,188)    $    78,780    $   561,491

Less preferred stock dividends                     (36,000)             --        (18,000)
                                               -----------     -----------    -----------

         INCOME (LOSS) APPLICABLE TO
            COMMON STOCKHOLDERS                $  (212,188)    $    78,780    $   543,491
                                               ===========     ===========    ===========


Income (loss) from operations applicable to
   common stockholders                         $  (212,188)    $    78,780    $   543,491
                                               ===========     ===========    ===========

Income (loss) per common share - basic and
   diluted                                     $     (0.19)    $      0.07    $      0.48
                                               ===========     ===========    ===========

Weighted-average common shares
   outstanding basic and diluted                 1,099,105       1,128,469      1,139,232
                                               ===========     ===========    ===========
</TABLE>

See accompanying notes.


                                                                              20
<PAGE>


                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                        Year Ended July 31,
                                                ------------------------------------
                                                  2002          2001          2000
                                                ---------     ---------    ---------
<S>                                             <C>           <C>          <C>
Net income (loss)                               $(176,188)    $  78,780    $ 561,491

Changes in unrealized gains (losses) on
   marketable securities                               --            --         (579)
                                                ---------     ---------    ---------


         Other comprehensive income (loss)
            before income taxes                  (176,188)       78,780      560,912

Less deferred income tax provision (benefit)           --            --         (197)
                                                ---------     ---------    ---------

         COMPREHENSIVE INCOME (LOSS)            $(176,188)    $  78,780    $ 561,109
                                                =========     =========    =========
</TABLE>



See accompanying notes.


                                                                              21
<PAGE>

                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                      Number of
                                        Shares                                 Additional                 Accumulated
                                      -----------    Preferred     Common       Paid-In       Retained   Comprehensive
                                        Common         Stock        Stock       Capital       Earnings   Income (Loss)    Total
                                      -----------   -----------  -----------   -----------  -----------  -------------  -----------
<S>                                     <C>         <C>          <C>           <C>          <C>           <C>           <C>
Balance, July 31, 1999                  1,152,533   $   300,000  $ 3,457,597   $ 1,804,009  $ 1,418,705   $       382   $ 6,980,693
   Net income                                  --            --           --            --      561,491            --       561,491
   Unrealized gain on marketable
      securities                               --            --           --            --           --          (382)         (382)
   Purchase and retirement of
      common stock                        (13,737)           --      (41,211)       18,194           --            --       (23,017)
   Cash dividend declared on
      preferred stock (3,000 shares)           --            --           --            --      (18,000)           --       (18,000)
                                      -----------   -----------  -----------   -----------  -----------   -----------   -----------

Balance, July 31, 2000                  1,138,796       300,000    3,416,386     1,822,203    1,962,196            --     7,500,785
   Net income                                  --            --           --            --       78,781            --        78,781
   Purchase and retirement of
      common stock                        (28,411)           --      (85,232)        8,738           --            --       (76,494)
                                      -----------   -----------  -----------   -----------  -----------   -----------   -----------

Balance, July 31, 2001                  1,110,385       300,000    3,331,154     1,830,941    2,040,977            --     7,503,072
   Net loss                                    --            --           --            --     (176,188)     (176,188)
   Purchase and retirement of
      common stock                        (26,096)           --      (78,288)           --           --            --       (78,288)
   Cash dividend declared on
      preferred stock (3,000 shares)           --            --           --            --      (36,000)           --       (36,000)
                                      -----------   -----------  -----------   -----------  -----------   -----------   -----------

Balance, July 31, 2002                  1,084,289   $   300,000  $ 3,252,866   $ 1,830,941  $ 1,828,789   $        --   $ 7,212,596
                                      ===========   ===========  ===========   ===========  ===========   ===========   ===========
</TABLE>


See accompanying notes.


                                                                              22
<PAGE>


                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              Year Ended July 31,
                                                  ----------------------------------------------
                                                      2002             2001            2000
                                                  ------------     ------------     ------------
<S>                                               <C>              <C>              <C>
CASH FLOWS FROM OPERATING
   ACTIVITIES
   Cash received from rentals and other           $  1,333,773     $  2,658,100     $  2,275,926
   Interest received                                 3,175,700        3,948,546        2,733,632
   Cash paid to suppliers and employees             (2,273,802)      (2,585,089)      (2,366,855)
   Interest paid, net of amounts capitalized        (1,964,830)      (2,572,067)      (1,759,175)
   Income taxes refunded (paid)                        (60,000)        (310,000)        (167,820)
                                                  ------------     ------------     ------------

         Net cash provided by operating
            activities                                 210,841        1,139,490          715,708
                                                  ------------     ------------     ------------

CASH FLOWS FROM INVESTING
   ACTIVITIES
   Proceeds from sales of real estate                1,762,137           75,530        1,999,051
   Proceeds from sales and maturities of
      marketable securities                                 --           41,724          252,093
   Purchase of marketable securities                        --               --          (50,000)
   Collections on contracts, mortgages,
      finance notes, and loans receivable           15,893,636       16,020,406       17,546,549
   Origination of loans receivable and
      investment in contracts, mortgages, and
      finance notes                                (11,669,791)     (23,014,235)     (19,415,924)
   Additions to rental properties, property
      held for sale and development, vehicles,
      and equipment                                 (1,195,241)      (2,068,405)      (4,574,922)
   Change in restricted investments                         --              345           (3,504)
                                                  ------------     ------------     ------------

         Net cash provided (used) by investing
            activities                               4,790,741       (8,944,635)      (4,246,657)
                                                  ------------     ------------     ------------
</TABLE>


See accompanying notes.


                                                                              23
<PAGE>


                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                             Year Ended July 31,
                                                  -------------------------------------------
                                                      2002           2001            2000
                                                  -----------     -----------     -----------
<S>                                               <C>             <C>             <C>
CASH FLOWS FROM FINANCING
   ACTIVITIES
   Net borrowings under line of credit
      agreements                                  $(4,647,717)    $ 7,772,198     $ 1,789,652
   Proceeds from installment contracts,
      mortgage notes, and notes payable             2,143,925       1,544,301       3,072,710
   Payments on installment contracts,
      mortgage notes, and notes payable            (1,941,432)     (1,006,798)     (1,049,251)
   Proceeds from sales of debenture bonds              31,009         237,319         361,266
   Redemption of debenture bonds                     (743,252)       (469,947)       (672,675)
   Payment of dividends on preferred stock            (18,000)        (18,000)        (18,000)
   Purchase and retirements of common
      stock                                           (78,288)        (76,494)        (23,017)
                                                  -----------     -----------     -----------

         Net cash provided (used) by financing
            activities                             (5,253,755)      7,982,579       3,460,685
                                                  -----------     -----------     -----------

         NET CHANGE IN CASH
            AND CASH EQUIVALENTS                     (252,173)        177,434         (70,264)

Cash and cash equivalents, beginning of year          619,642         442,208         512,472
                                                  -----------     -----------     -----------

Cash and cash equivalents, end of year            $   367,469     $   619,642     $   442,208
                                                  ===========     ===========     ===========
</TABLE>


See accompanying notes.


                                                                              24
<PAGE>


                               PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Year Ended July 31,
                                                       -------------------------------------------
                                                           2002            2001            2000
                                                       -----------     -----------     -----------
<S>                                                    <C>             <C>             <C>
RECONCILIATION OF NET INCOME
   TO NET CASH FROM OPERATING
   ACTIVITIES
   Net income (loss)                                   $  (176,188)    $    78,780     $   561,491
   Adjustments to reconcile net income to
      net cash provided by operating activities:
      Depreciation and amortization                        585,991         826,982         738,737
      Deferred income tax provision (benefit)              491,829         (41,700)        (65,900)
      Deferred financing income realized                        --         (11,971)        (72,777)
      Interest accrued on debenture bonds                  542,552         531,623         535,510
      Gain on sales of marketable securities                    --              --          (1,834)
      (Gain) loss on sales of real estate               (2,022,192)         24,525      (1,038,694)
      Provision for loan loss                            1,477,712          70,000         120,025
      Change in assets and liabilities:
         Accrued interest receivable                        74,004         (32,591)       (151,706)
         Income taxes                                           --        (246,192)        182,380
         Prepaid expenses                                   (8,358)        (30,900)        (22,741)
         Income tax refund receivable                     (642,592)             --              --
         Accrued expense and other liabilities             106,526          28,493        (203,808)
         Other, net                                       (218,443)        (57,559)        135,025
                                                       -----------     -----------     -----------

         NET CASH PROVIDED BY
            OPERATING ACTIVITIES                       $   210,841     $ 1,139,490     $   715,708
                                                       ===========     ===========     ===========

SUPPLEMENTAL SCHEDULE OF
   NONCASH INVESTING AND
   FINANCING ACTIVITIES
   Company financed sale of property                   $ 6,742,480     $    50,000     $   129,750
                                                       ===========     ===========     ===========

   Stock dividend declared and unpaid                  $    18,000     $        --     $    18,000
                                                       ===========     ===========     ===========

   Property held for sale and development acquired
      in satisfaction for defaulted loan receivable    $ 1,509,200     $ 1,065,804     $        --
                                                       ===========     ===========     ===========


   Impairment of real estate owned against
      provision for loan loss                          $    60,000     $    70,000     $        --
                                                       ===========     ===========     ===========
</TABLE>


See accompanying notes.


                                                                              25
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Pacific Security Financial, Inc. (formerly 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. The Company's commercial real estate loans are
originated on properties located in the western United States.

FINANCIAL CONDITION OF LIQUIDITY:
As a result of the weakening national economy, the Company experienced
increasing levels of delinquent loans arising from its lending to borrowers
primarily engaged in construction and real estate development around the western
United States. This has resulted in a reduction in the Company's earning assets,
which may materially impact the Company's profitability. This has also resulted
in one of the Company's lenders limiting further borrowing to a portion of the
line that is secured with an assignment of the beneficial interest in various
receivables. This same lender also reduced its total commitment to the Company
from $6.0 million to $4.75 million.

Another financial institution the Company has relied upon as a source of funding
for its commercial real estate loans has, subsequent to fiscal year end,
indicated they are terminating (nationally) from all or nearly all, commercial
warehouse lines of credit. This financial institution has presently agreed to
work with the Company to allow all current loan commitments to pay off as they
mature, which is anticipated to occur by March 31, 2003. Therefore, the Company
does not have access to an $11.0 million line of credit provided by this
institution going forward. Management does not currently believe that this line
of credit can be replaced by another lender. This event will materially impact
the Company's liquidity and profitability. Additionally, the Washington State
Securities Division has not yet approved the Company's application to issue
additional debentures under the Washington State Debenture Act. Approval is
unlikely without significant conditions, which may materially adversely impact
the Company's liquidity and profitability. The state of Washington has mandated
as a condition for issuance of a previous permit that the Company reduce total
debentures outstanding to $9.5 million by March 2003. The requirement to do so
will materially impact the Company's liquidity.

The result of these actions has impacted the Company's ability to meet long-term
debt retirement projections. The financial institutions from which the Company
borrows have agreed to allow existing debt to be repaid through the orderly
repayment of loans owed to the Company by borrowers. Without additional sources
of liquidity with which originate further loans the liquidity needed to retire
the debentures is a significant problem. Therefore, the Company has begun to
consider strategies for reorganizing or liquidating the Company over the next
year. In either case, implementation of the different alternatives will result
in the orderly sale of some or all of the Company's assets.




                                                                              26
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FINANCIAL CONDITION OF LIQUIDITY (CONTINUED):
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, Pacific Realty Management and Cornerstone Realty
Advisors, Inc., which were formed in fiscal years 2000 and 1998, respectively.
All significant intercompany accounts and transactions have been eliminated.
Cornerstone Realty Advisors, Inc. was dissolved as of March 31, 2002, with
commercial lending activities folded back into the parent company.

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.

CONTRACTS, MORTGAGES, FINANCE NOTES, AND LOANS RECEIVABLE: The Company's
contracts, finance notes, and loans receivable consist primarily of short-term
construction and real estate development loans. Contracts, mortgages, finance
notes, and loans receivable are stated at the 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.

Contracts, mortgages, finance notes, and loans receivable are placed on
nonaccrual status when collection of principal or interest is considered
doubtful. Interest income previously accrued on these loans, but not yet
received, is reversed in the current period to the extent that it is considered
uncollectible. Interest subsequently recovered is credited to income in the
period collected.



                                                                              27
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is based on management's evaluation of each
specific loan. A loan is considered impaired when, based on current information
such as adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, current economic conditions, and
independent appraisals, it is probable that the Company will be unable to
collect, on a timely basis, all principal and interest according to the
contractual terms of the loan's original agreement. The amount of the impairment
is measured using cash flows discounted at the loan's effective interest rate,
except when it is determined that the sole source of repayment for the loan is
the operation or liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling costs, is used
in place of discounted cash flows. Generally, when a loan is deemed impaired,
current period interest previously accrued but not collected is reversed against
current period interest income. Income on such impaired loans is then recognized
only to the extent that cash in excess of any amounts charged off to the
allowance for loan losses is received and where the future collection of
principal is probable. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be fully collectible
as to both principal and interest.

Contracts, mortgages, finance notes, and loans receivable are charged off when
management believes there has been permanent impairment of their carrying
values.

DISCOUNTS ON CONTRACTS:
The Company amortizes discounts on purchased contracts using the effective 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 effective 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.

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

Building and improvements                                           15-40 years
Furniture and equipment                                              5-10 years

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.



                                                                              28
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTEREST CAPITALIZATION:
All costs associated with self-constructed assets, including interest, incurred
during the construction period, are capitalized. Interest costs of approximately
$46,000 and $43,000 were capitalized during the years ended July 31, 2002 and
2001, 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.

INTANGIBLE ASSETS:
The $125,000 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. This asset
is located in other assets on the consolidated balance sheet. Accumulated
amortization associated with this agreement was $111,441 and $86,441 at July 31,
2002 and 2001, respectively.

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 $259,714 and $241,789 at July 31, 2002 and 2001, 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.

SALES OF REAL ESTATE:
Profit on sale of real estate is recognized when the buyers' initial and
continuing investment is adequate to demonstrate (1) a commitment to fulfill the
terms of the transaction, (2) that collectibility of the remaining sales price
due is reasonably assured, and (3) the Company maintains no continuing
involvement or obligation in relation to the property sold and has transferred
all the risk and rewards of ownership to the buyer.

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.

                                                                              29
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECOGNITION OF RENTAL INCOME:
Rental income on cancelable operating leases is recognized as it becomes
receivable in accordance with the provisions of the lease. Rental income on
noncancelable operating leases which contain fixed escalation clauses is
recognized on the straight-line method over the term of the lease. The
difference between income earned and lease payments received from the tenants is
included in the other assets on the consolidated balance sheet.

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.

The Company allocates income taxes between continuing and discontinued
operations in proportion to their individual effects on the consolidated income
tax provision (benefit) at the Company's effective tax rate for the respective
period.

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, 2002, 2001, and 2000; therefore,
diluted earnings per share amounts are identical to basic earnings per share.

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, 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.

OFF-BALANCE-SHEET INSTRUMENTS:
The Company has outstanding commitments to extend credit to commercial
borrowers. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.

                                                                              30
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OFF-BALANCE-SHEET INSTRUMENTS (CONTINUED):
The Company has also entered into participation agreements with other lenders to
reduce its credit risk on certain commercial loans. The use of participations
enables the Company to diversify its portfolio among its borrowers and lenders
and mitigate significant geographical and credit concentration.

COMPREHENSIVE INCOME:
Statement of Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income
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 the Company 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 the consolidated balance sheet.

RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, Financial Accounting Standards Board (FASB) approved for issuance
SFAS No. 141, Business Combinations. This standard eliminates the pooling method
of accounting for business combinations initiated after June 30, 2001. In
addition, SFAS No. 141 addresses the accounting for intangible assets and
goodwill acquired in a business combination. This portion of SFAS No. 141 is
effective for business combinations completed after June 30, 2001. The Company's
adoption of SFAS No. 141 did not have a material effect on the Company's
financial position or results of operations.

In June 2001, FASB approved for issuance SFAS No. 142, Goodwill and Intangible
Assets, which revises the accounting for purchased goodwill and intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually and also
in the event of an impairment indicator. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. The Company's adoption of SFAS No. 142
will not have a material impact on the Company's financial position or results
of operations.

In June 2001, FASB approved for issuance SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses the accounting for legal obligations
associated with the retirement of tangible long-lived assets. Under SFAS No.
143, the fair value of a liability for an asset retirement obligation shall be
recognized in the period in which the obligation is incurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company's adoption of SFAS No. 143 will not have a material
impact on the Company's financial position or results of operations.

                                                                              31
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In August 2001, FASB approved for issuance SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. SFAS No. 144 was issued to resolve
implementation issues that had been created under SFAS No. 121. Under SFAS No.
144, one accounting model is required to be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
certain additional disclosures are required. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 31, 2001.
The Company's adoption of SFAS No. 143 will not have a material impact on the
Company's financial position or results of operations.

On April 30, 2002, FASB issued SFAS No. 145, Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS
No. 145 updates, clarifies, and simplifies existing accounting pronouncements,
by rescinding SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion 30 will now be used to classify those
gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Finally, SFAS No. 145 also makes technical corrections to existing
pronouncements. The Company's adoption of SFAS No. 143 did not have a material
impact on the Company's financial position or results of operations.

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company has elected to
early adopt SFAS No. 146. The effect of adoption of this Statement is included
in these statements.

ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 expense during
the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures, or in
satisfaction of loans.


                                                                              32
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ESTIMATES (CONTINUED):
Management believes that the allowance for loan losses is adequate. While
management uses currently available information to recognize losses on loans and
real estate held for investment, future additions to the allowance may be
necessary based on changes in economic conditions.

RECLASSIFICATIONS:
Certain amounts in the 2001 and 2000 financial statements have been reclassified
to conform with the current year's presentation. These reclassifications had no
effect on retained earnings or net income (loss) as previously reported.

NOTE 2 - CONTRACTS, MORTGAGES, FINANCE NOTES, AND LOANS RECEIVABLE

The components of contracts, mortgages, finance notes, and loans receivable at
July 31, 2002 and 2001, are as follows:

                                                         2002           2001
                                                    ------------   ------------

Contracts, mortgages, and finance notes receivable  $  9,121,087   $  3,513,550
Originated loans receivable                           18,823,391     30,332,016
Undisbursed portion of loans receivable               (1,825,566)    (7,710,636)
                                                    ------------   ------------

                                                      26,118,912     26,134,930
Unearned loan fees, net                                  (81,161)      (248,354)
Allowance for loan losses                               (585,855)      (119,460)
                                                    ------------   ------------
         CONTRACTS, MORTGAGES, FINANCE NOTES,
            AND LOANS RECEIVABLE, NET               $ 25,451,896   $ 25,767,116
                                                    ============   ============


At July 31, 2002, three individual receivable balances represented approximately
15%, 11%, and 12% of the gross outstanding receivable. There were no significant
concentrations of contracts, mortgages, finance notes, and loans receivable at
July 31, 2001. Additionally, aggregate amounts receivable from two separate
borrowers represented approximately 9% and 8% of the gross outstanding
receivable at July 31, 2002.

Outstanding commitments to extend credit to borrowers is $1,825,566 at July 31,
2002. The Company does not have any other commitments to extend credit.

                                                                              33
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2 - CONTRACTS, MORTGAGES, FINANCE NOTES, AND LOANS RECEIVABLE (CONTINUED)

At July 31, 2002 and 2001, the aging of the gross amounts due on contracts,
mortgages, finance notes, and loans receivable was as follows:

                                                   2002                  2001
                                               -----------           -----------

Current                                        $20,429,239           $22,632,320
31 to 60 days                                    2,864,281               998,630
61 to 90 days                                    1,290,000                    --
Over 90 days                                     1,535,392             2,503,980
                                               -----------           -----------
                                               $26,118,912           $26,134,930
                                               ===========           ===========

The Company had $1,535,392 and $2,303,000 in loans that were in nonaccrual
status at July 31, 2002 and 2001, respectively. The total allowance for losses
related to these loans was $-0- and $100,000 at July 31, 2002 and 2001,
respectively. Additional gross interest income of $71,995 and $44,643 would have
been recorded during the years ended July 31, 2002 and 2001, respectively, if
the nonaccrual loans had been current in accordance with their original
contractual terms. Interest income of $31,463 and $68,270 was recorded during
the years ended July 31, 2002 and 2001, respectively, in connection with such
loans as the first 90 days of interest on these loans was expected to be
recovered.

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. An allowance of $585,855 and
$119,460 was provided at July 31, 2002 and 2001, respectively. The receivables
are collateralized primarily by residential and commercial real estate located
in the western United States. These estimates can be affected by changes in the
economic environment in the western United States 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.

ALLOWANCE FOR LOAN LOSSES:
                                                  Year Ended July 31,
                                    -------------------------------------------
                                        2002            2001            2000
                                    -----------     -----------     -----------

Beginning balance                   $   119,460     $   119,460     $     4,908
   Provision for loan loss            1,407,712          70,000         120,025
   Write offs                          (941,317)        (70,000)         (5,473)
                                    -----------     -----------     -----------
         ENDING BALANCE             $   585,855     $   119,460     $   119,460
                                    ===========     ===========     ===========

Write offs include $60,000 in fiscal 2002 and $70,000 in fiscal 2001 for
impairment of real estate owned against the provision for loan loss.


                                                                              34
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3 - INVESTMENTS IN RENTAL PROPERTIES

Following is a summary of investments in rental properties at July 31, 2002 and
2001:

                                                   2002                2001
                                               ------------        ------------

Land                                           $  2,071,033        $  3,047,577
Buildings and improvements                       14,234,991          21,260,531
Furniture and equipment                             641,457           1,531,048
                                               ------------        ------------

                                                 16,947,481          25,839,156
Less accumulated depreciation                    (4,135,629)         (7,848,320)
                                               ------------        ------------
                                               $ 12,811,852        $ 17,990,836
                                               ============        ============

Depreciation expense was $538,096, $783,704, and $698,769 for the years ended
July 31, 2002, 2001, and 2000, respectively.

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 noncancelable
operating leases as of July 31, 2002:

Year Ending July 31,
   2003                                                             $ 1,075,079
   2004                                                                 762,583
   2005                                                                 731,903
   2006                                                                 392,106
   2007                                                                 306,237
   Thereafter                                                           507,393
                                                                    -----------
                                                                    $ 3,775,301
                                                                    ===========

These properties are primarily located in the greater Spokane, Washington,
geographical area. Losses on investments in rental properties are recognized if
the anticipated undiscounted 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.

                                                                              35
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4 - BUSINESS SEGMENT REPORTING

Information about the Company's separate continuing business segments and in
total as of and for the years ended July 31, 2002, 2001, and 2000, is as
follows:
                                                      Real Estate,
                                      Commercial      Rental, and
                                       Lending        Receivables
                                      Operations      Operations       Total
                                      ----------      ----------     ----------
2002
   Revenue                          $  2,507,279    $  4,177,182   $  6,684,461
   Income from continuing operations    (485,102)        218,151       (266,951)
   Identifiable assets, net           19,052,050      25,399,575     44,451,625
   Depreciation and amortization           4,969         581,022        585,991
   Capital expenditures                   40,414       1,154,827      1,195,241

2001
   Revenue                             3,582,771       3,106,737      6,689,508
   Income from continuing operations   1,088,890        (988,002)       100,888
   Identifiable assets, net           22,792,656      25,962,003     48,754,659
   Depreciation and amortization           3,709         823,273        826,982
   Capital expenditures                   20,449       2,047,956      2,068,405

2000
   Revenue                             2,391,600       3,962,609      6,354,209
   Income from continuing operations     703,362         142,429        845,791
   Identifiable assets, net           16,006,450      24,409,945     40,416,395
   Depreciation and amortization           1,485         737,252        738,737
   Capital expenditures                      539       4,574,383      4,574,922

The Company has determined that its reportable business segments are those that
are based on its method of disaggregated internal reporting. The Company's
reportable business segments are its commercial loan origination business and
its rental and receivable operations. Its commercial loan origination business,
operated as Cornerstone Realty Advisors, Inc. from 1998 to March 31, 2002,
originates commercial construction loans throughout the western United States.
The rental and receivable operations represent the selling and leasing of real
properties and the financing of contracts and loans collateralized by real
estate.

NOTE 5 - MARKETABLE SECURITIES

The Company had no investments in marketable securities at July 31, 2002.
Investments in marketable securities at July 31, 2000, consisted of debt
securities of $41,724, which matured in 1998, but were not fully paid by the
issuer until 2001 due to the issuer's reorganization. No gain or loss was
recognized on this security.



                                                                              36
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5 - MARKETABLE SECURITIES (CONTINUED)

Proceeds from the sale of the marketable securities during the year ended July
31, 2000, was $252,093, resulting in a gross realized gain of $1,834.

NOTE 6 - NOTES PAYABLE TO BANKS (LINES OF CREDIT)

Notes payable to banks consisted of the following at July 31, 2002 and 2001:
<TABLE>
<CAPTION>

                                                                                           2002                 2001
                                                                                       ------------         ------------
<S>                                                                                    <C>                  <C>
U.S. Bank of Washington, short-term line of credit, $11,000,000
commitment, interest at the prime rate plus 0.25%, expires
December 15, 2002, guaranteed by Wayne Guthrie, collateralized
by loans receivable.                                                                   $  8,899,046         $ 13,049,040

Washington Mutual Bank (Western Bank), line of credit, $6,000,000 commitment,
interest at prime rate plus 0.25%, expires December 15, 2002, collateralized by
contracts and loans receivable and guaranteed by Wayne and David Guthrie
(stockholders of the Company).                                                            4,727,418            3,132,696

Sterling Savings Bank, line of credit, $2,482,500 commitment, interest at the
Bank of America Reference Rate (BARR) plus 0.25%, expires October 15, 2001,
collateralized by real property and assignment of rents, guaranteed by
Wayne and David Guthrie.                                                                         --            2,482,500

Sterling Savings Bank, line of credit, $3,137,500 commitment, interest at BARR
plus 0.25%, collateralized by real property and assignment of rents, guaranteed
by Wayne and David Guthrie. This became a term loan in 2001 (see Note 8) with a
July 31, 2002, balance of $3,088,586.                                                            --            2,400,575

Sterling Savings Bank, line of credit, $2,812,500 commitment, interest at BARR
plus 0.25%, expires December 1, 2002, collateralized by real property and
assignment of rents, guaranteed by Wayne and David Guthrie.                               2,812,500            2,422,444
                                                                                       ------------         ------------
                                                                                       $ 16,438,964         $ 23,487,255
                                                                                       ============         ============
</TABLE>

The prime rate and the BARR referenced on the above notes were 4.75% and 6.75%
on July 31, 2002 and 2001, respectively.


                                                                              37
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6 - NOTES PAYABLE TO BANKS (LINES OF CREDIT) (CONTINUED)

The above line of credit agreements contain restrictive covenants requiring the
maintenance of minimum tangible net worth, certain debt service coverage, and
debt to worth ratios. At July 31, 2002, the Company was not in compliance with
two of its three bank lines of credit. One was a violation for a debt-to-equity
covenant by exceeding a 5:1 ratio. The other was a violation of not achieving
the 1.1:1 required minimum for a debt service coverage ratio. The Company is
working with the banks to have the covenants modified or forbearance given.

The following assets were pledged as collateral on these notes payable at July
31, 2002 and 2001:

                                                     2002                2001
                                                 -----------         -----------

Contracts receivable                             $ 5,122,703         $   953,387
Loans receivable                                  11,143,440          15,594,038
Rental properties                                  4,814,258           7,305,520
                                                 -----------         -----------

                                                 $21,080,401         $23,852,945
                                                 ===========         ===========

NOTE 7 - INSTALLMENT CONTRACTS, MORTGAGE NOTES, AND NOTES PAYABLE

Installments contracts, mortgage notes, and notes payable consist of the
following at July 31, 2002 and 2001:

                                                           2002          2001
                                                       -----------   -----------

Installment contracts and mortgage notes payable,
    interest at 6.5% to 9.25%, aggregate monthly
    payment of $30,592, mature 2002 through 2018,
    collateralized by various properties               $ 8,664,943   $ 6,056,942
                                                       ===========   ===========

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

Year Ending July 31,
   2003                                                             $ 3,554,486
   2004                                                                 255,373
   2005                                                                 248,425
   2006                                                                 260,121
   2007                                                               3,058,557
   Thereafter                                                         1,287,981
                                                                    -----------

                                                                    $ 8,664,943
                                                                    ===========


                                                                              38
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8 - DEBENTURE BONDS

The Company has issued unsecured investment bonds (debentures) 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 debentures have original maturities ranging from one to ten
years, and the interest rates vary depending upon the maturity.

Outstanding debentures by interest rate categories were as follows at July 31,
2002 and 2001:

Debenture Interest Rate                            200                   2001
-----------------------                        -----------           -----------

 5.00%                                         $   136,008           $        --
 5.25%                                              34,561                    --
 5.75%                                              49,736                    --
 6.00%                                             257,566                    --
 6.50%                                             138,652                    --
 6.75%                                              84,153                33,134
 7.00%                                             128,938               159,824
 7.25%                                             209,598               200,460
 7.50%                                             176,822               672,986
 7.68%                                                  --                16,865
 7.75%                                           1,176,651             1,257,030
 8.00%                                             287,808               806,052
 8.25%                                           1,380,740             1,306,125
 8.50%                                           2,134,065             2,061,824
 8.75%                                             364,362               363,662
 9.00%                                           2,045,523             1,984,880
 9.25%                                             438,738               403,287
 9.50%                                             923,363               865,401
10.00%                                              21,577                19,548
10.50%                                               8,093                15,566
                                               -----------           -----------
                                               $ 9,996,954           $10,166,644
                                               ===========           ===========

The weighted-average annual interest rate on outstanding debentures at July 31,
2002 and 2001, was 8.36% and 8.44%, respectively.

                                                                              39
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8 - DEBENTURE BONDS (CONTINUED)

Estimated future contractual maturities of outstanding debentures are as
follows:

Year Ending July 31,
   2003                                                             $ 1,641,076
   2004                                                               2,751,185
   2005                                                               2,592,529
   2006                                                               1,699,554
   2007                                                                 861,099
   Thereafter                                                           451,511
                                                                    ----------
                                                                    $ 9,996,954
                                                                    ===========

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 limitation, 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.

NOTE 9 - INCOME TAXES

The components of income tax expense consists of the following for the years
ended July 31:

                                             2002          2001          2000
                                          ---------     ---------     ---------

Current tax (benefit) expense             $(582,592)    $  63,808     $ 350,200
Deferred tax (benefit) expense              491,829       (41,700)      (65,900)
                                          ---------     ---------     ---------

                                          $ (90,763)    $  22,108     $ 284,300
                                          =========     =========     =========


                                                                              40
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 9 - INCOME TAXES (CONTINUED)

The net deferred tax liabilities consist of the following components at July 31:

                                                2002        2001          2000
                                            ----------   ----------   ----------

Deferred tax assets
   Provision for loan loss                  $  197,522   $   38,948   $   38,948
   Accrued expenses                             24,714       71,586       82,544
   Prepaid rents                                35,208       46,573           --
   Other                                        25,972       32,778       17,576
                                            ----------   ----------   ----------
         Total deferred tax assets             283,416      189,885      139,068
                                            ----------   ----------   ----------

Deferred tax liabilities
   Depreciation                                617,986      604,562      551,620
   Installment gains                           755,026      190,193      234,018
   Other                                         7,103           --           --
                                            ----------   ----------   ----------
         Total deferred tax liabilities      1,380,115      794,755      785,638
                                            ----------   ----------   ----------

         NET DEFERRED TAX LIABILITIES       $1,096,699   $  604,870   $  646,570
                                            ==========   ==========   ==========

The effective tax rate differs from the statutory federal rate for the years
presented as follows:

                                                 2002        2001        2000
                                              ---------   ---------   ---------

Federal income tax expense at statutory rates $ (90,763)  $  34,302   $ 287,569
Income tax expense                                   --          --       4,113
Effect of permanent differences                   7,403      11,763          --
Effect of graduated tax rate                      3,403      (4,673)         --
Other                                           (10,806)    (19,284)     (7,382)
                                              ---------   ---------   ---------
                                              $ (90,763)  $  22,108   $ 284,300
                                              =========   =========   =========


                                                                              41
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10 - EMPLOYEE BENEFIT PLAN

The Company provides a retirement savings plan (the Plan), authorized under
Section 401(k) of the Tax Reform Act of 1986, as amended. Under the terms of the
Plan, employees are eligible to contribute up to 18% of their compensation,
subject to annual limitations, to the Plan. The Company may contribute 3% of
gross salary for all eligible employees. Contributions are made directly to a
qualified individual retirement account or annuity in the employee's name. The
Company is required to make nondiscriminatory contributions for each employee
who (1) has reached the age of 21; (2) has performed services for the Company
during the last year of service in which he or she has completed 1,000 hours of
service; (3) is not covered by a collective bargaining agreement; and (4) is not
a nonresident alien. The Company's contribution to the Plan was approximately
$34,000 and $25,000 during the year ended July 31, 2002 and 2001, respectively.

NOTE 11 - PREFERRED STOCK

On February 18, 1999, at the Annual Meeting of the Stockholders, a motion was
passed to amend the Company's articles of incorporation to eliminate the
mandatory redemption provisions of the Class A Preferred stock. Accordingly, the
remaining 3,000 outstanding shares of preferred stock, with a face amount of
$300,000, were reclassified to stockholders' equity. In addition, 10 million no
par value shares of preferred stock were authorized, but none were issued.

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 Class A preferred stock was $318,000 on July 31,
2002, 2001, and 2000.

There were no changes to the 3,000 outstanding shares of preferred stock during
the years ending July 31, 2002, 2001, and 2000.

The 6% annual dividends on the Class A preferred stock are cumulative. Dividends
of $18,000 were declared on the preferred stock during July 2002, which were
accrued as of July 31, 2002, and reflected in the consolidated statement of
stockholders' equity for the year ending July 31, 2002, and paid August 2, 2002.
No dividends were declared during the year ended July 31, 2001; however,
dividends of $18,000 were declared and paid during August 2001 and are reflected
in the consolidated statement of stockholders' equity for the year ending July
31, 2002. Dividends of $18,000 were declared on the preferred stock during the
year ended July 31, 2000, and were paid during August 2000.

NOTE 12 - COMMON STOCK

The Company has authorized a second class of common stock, Class B. 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.


                                                                              42
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13 - RELATED PARTY TRANSACTIONS

NOTE RECEIVABLE:
A certain former stockholder is indebted to the Company by a note secured by
real estate bearing interest at 8.75% (prime plus 4.00% adjusted annually) in
the outstanding amounts (including interest) of $167,098 and $188,254 at July
31, 2002 and 2001, respectively.

INSTALLMENT CONTRACTS, MORTGAGE NOTES, AND NOTES PAYABLE: At July 31, 2002 and
2001, the Company had a related party payable of $28,158 and $85,898,
respectively. The payable has a monthly payment of $4,789, bears interest at
7.00%, and matures in 2003.

DEBENTURE BONDS:
Included in debenture bonds at July 31, 2002 and 2001, is approximately $142,000
and $146,000, respectively, that is payable to related parties. These debentures
bear interest at the prevailing market rate on the date of issuance.

ACCRUED EXPENSES AND OTHER LIABILITIES:
At July 31, 2002 and 2001, the following demand notes were payable to related
parties:

                                            2002                  2001
                                    -------------------  ----------------------
                                                Interest               Interest
                                     Amount       Rate      Amount       Rate
                                    --------    -------    --------    --------

Wayne E. Guthrie                    $ 80,093     7.50%     $ 99,249     7.50%
Constance Guthrie                     62,860     7.50%       32,329     7.50%
Other stockholders and employees       1,975     7.50%       21,500     7.50%
                                    --------               --------

                                    $144,928               $153,078
                                    ========               ========


                                                                              43
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)

INTEREST INCOME AND EXPENSE:
The approximate amount of related party interest income and expense included in
the accompanying consolidated statement of operations during the years ended
July 31, 2002, 2001, and 2000, is as follows:

                                           2002            2001            2000
                                          ------          ------          ------

Interest income                          $18,000         $24,000         $27,000
Interest expense                          14,000          22,000          32,000

PARTICIPATIONS:
The president of Cornerstone Realty Advisors, Inc., a wholly-owned subsidiary of
the Company that was folded into the parent company in 2002, has directly
invested in certain loans through participation agreements. The total of such
participations was $150,000 and $250,000 at July 31, 2002 and 2001,
respectively.

NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the value of each
class of financial instruments 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 sales 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, 2002 and 2001, 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.

OFF-BALANCE-SHEET INSTRUMENTS:
Commitments made to extend credit bear variable interest rates and are made
contingent to the borrower's compliance with the existing loan agreement and,
therefore, fair value approximates the commitment amount.


                                                                              44
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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.

NOTE 15 - SUBSEQUENT EVENT

Subsequent to July 31, 2002, the Company entered into an earnest money agreement
to sell commercial real estate located in Boise, Idaho, with terms of the
agreement subject to due-diligence by the purchaser. The agreement may be
terminated by the purchaser upon completion of the due-diligence. Therefore, the
sale is determined to be reasonably possible, but not probable of consummation.
The Company estimates a loss of approximately $240,000 if the sale is completed.


                                                                              45
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                        PART II
--------------------------------------------------------------------------------

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.


                                                                              46
<PAGE>


                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                        PART III
--------------------------------------------------------------------------------


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
The following information as of July 31, 2002, is provided with respect to each
director and executive officer of the Company:
<TABLE>
<CAPTION>

                                        Year First
                                        Elected as     Expiration
      Name                      Age      Director       of Term        Position and Date Elected
------------------              ---     ----------     ----------    -----------------------------------------
<S>                              <C>       <C>            <C>                                               <C>
Wayne E. Guthrie                 82        1970           2003       Chairman of the Board (Emeritus, March 7,
                                                                         2002); Director

David L. Guthrie                 38        1987           2004       Chairman of the Board (March 7, 2002)
                                                                         President (February 18, 1999); Director

Kevin M. Guthrie                 47        1980           2004       Vice President (May 2, 1985); Director

Donald J. Migliuri               55        1992           2005       Secretary/Treasurer (May 29, 1990); Director

Constance M. Guthrie             67        1981           2003       Director

Robert N. Codd                   72        1994           2004       Director

Julian Guthrie                   37        1998           2004       Director
</TABLE>

FAMILY RELATIONSHIP:
Kevin M. Guthrie, David L. Guthrie, and Julian Guthrie are the children of Wayne
E. Guthrie and Constance Guthrie. Constance M. Guthrie is the wife of Wayne E.
Guthrie.

BUSINESS EXPERIENCE:
Wayne E. Guthrie is Chairman of the Board Emeritus of Pacific Security
Financial, Inc., a Washington corporation and subsidiary of the registrant. Mr.
Guthrie has over 50 years experience in areas of construction, financing of real
estate and personal property, and real estate investments.

David L. Guthrie became Chairman of the Board in 2002 and has been president of
Pacific Security Financial, Inc. since 1999 and vice president since 1989. Mr.
Guthrie was formerly a financial consultant with Merrill Lynch in Spokane,
Washington. 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.

                                                                              47
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                        PART III
--------------------------------------------------------------------------------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

BUSINESS EXPERIENCE (CONTINUED):
Kevin M. Guthrie has been vice president of Pacific Security Financial, Inc.
since 1985. Mr. Guthrie has served as property manager for the Company since
1976. Subsequent of July 31, 2002, Mr. Guthrie resigned as an officer and
terminated employment with the Company on October 15, 2002, to work for a
Spokane property management firm that will manage the Company's rental
properties located in Spokane.

Donald J. Migliuri has been treasurer of Pacific Security Financial, Inc. since
1990 and secretary since 1991. Mr. Migliuri was a Certified Public Accountant
and has served as an accounting officer with various diversified financial
services companies for over 20 years. He also is a certified management
accountant (CMA) and has a masters degree in business administration.

Constance M. Guthrie has not been employed outside the home during the past ten
years.

Robert N. Codd retired August 1, 2002, after being employed by Pacific Security
Financial, Inc. 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 is a reporter for the San Francisco Chronicle. She covered
general news for the paper for two years and in 1998 was named education
reporter, responsible for covering all education issues in the Bay Area. Before
that, she was senior editor of a lifestyle magazine in San Francisco and also
worked as a freelance writer for the Chronicle, covering breaking business,
political, and lifestyle stories. She currently lives in San Francisco.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934:

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent (10%) of a registered class of the Company's equity securities
(Reporting Persons), to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Officers, directors, and greater than
ten percent (10%) beneficial owners are required by Securities and Exchange
Commission regulation to furnish the Company with copies of all Section 16(a)
forms filed by them.

Based solely on its review of copies of such forms furnished to the Company, the
Company believes that during the fiscal year ended July 31, 2002, all Section
16(a) filing requirements applicable to Reporting Persons were complied with,
except that David L. Guthrie has one delinquent Form 4 filing and Kevin M.
Guthrie had two delinquent Form 4 filings.

                                                                              48
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                        PART III
--------------------------------------------------------------------------------

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, 2002, 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, 2002:
<TABLE>
<CAPTION>

   Name of Individual or                                                               Annual
   Number of Person in               Capacities in                 Fiscal            Compensation
         Group                        Which Served                  Year          Salary          Bonus
-------------------------        -------------------------------   -------       --------        -------
<S>                              <C>                                <C>          <C>             <C>
David L. Guthrie                 President and Director             2002         $130,850        $93,000
                                 President and Director             2001          110,340            -
                                 President and Director             2000          105,086         50,500

Kevin M. Guthrie                 Vice President and Director        2002          114,707         82,000
                                 Vice President and Director        2001          110,863            -
                                 Vice President and Director        2000          105,515         50,500

Donald J. Migliuri               Secretary/Treasurer and Director   2002           83,700         22,050

Officers and Directors as a
   group (5)                                                        2002          610,925            -
</TABLE>

The Company has no qualified or nonqualified stock option plan as of July 31,
2002.



                                                                              49
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                        PART III
--------------------------------------------------------------------------------

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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 five percent of any class
of the Company's voting shares on July 31, 2002: none.

SECURITY OWNERSHIP OF MANAGEMENT:
The following table sets forth as of July 31, 2002, 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 of
                                                                      Shares and
                                                                      Nature of
                                                                      Beneficial           Percent of
Tital of Class        Name of Beneficial Owner                        Ownership              Class
--------------        ------------------------------------            ---------            ---------
<S>                   <C>                                             <C>                    <C>
Common stock          Wayne E. Guthrie                                142,541.5              13.14%
Common stock          Constance Guthrie                               142,541.5              13.14%
Common stock          Kevin Guthrie                                   222,718.0              20.54%
Common stock          David Guthrie                                   222,718.0              20.54%
Common stock          Julian Guthrie                                  196,838.4              18.16%
                                                                      ---------             ------

Common stock          All directors and officers as a group           927,357.4              85.52%
                                                                      =========             ======

Preferred stock       Wayne E. or Constance Guthrie                       2,000              66.70%
Preferred stock       Constance Guthrie                                   1,000              33.30%
                                                                      ---------             ------

Preferred stock       All directors and officers as a group               3,000             100.00%
                                                                      =========             ======
</TABLE>

ITEM 13.  CERTAIN RELATIONSHIP 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.



                                                                              50
<PAGE>


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K



INDEPENDENT ACCOUNTANT'S REPORT ON
FINANCIAL STATEMENT SCHEDULES



To the Board of Directors and Stockholders
Pacific Security Financial, Inc. and Subsidiaries
Spokane, Washington


Our audits of the consolidated financial statements referred to in our report
dated August 30, 2002, of Pacific Security Financial, Inc. (formerly Pacific
Security Companies) and its subsidiaries, which report and consolidated
financial statements are included herein in this Annual Report on Form 10-K,
also included an audit of the financial statement schedules listed in Item 14 of
this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.



/s/ MOSS ADAMS LLP

Spokane, Washington
August 30, 2002


                                                                              51
<PAGE>

PACIFIC SECURITY FINANCIAL, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>

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

                                                             July 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Life on
                                                                                                                           Which
                                                                                        Amount at                       Depreciation
                                                                                          Which                          in Latest
                                                                            Capitalized  Carried                          Income
                                                                            Subsequent      at                           Statement
                                                                 Initial        to       Close of  Accumulated    Date       is
                 Description                       Encumbrance     Cost     Acquisition   Period   Depreciation  Acquired  Computed
-----------------------------------------------    -----------  ----------- ----------- ----------- -----------  -------- ----------
<S>                                                <C>          <C>         <C>         <C>         <C>            <C>   <C>
Residential and commercial properties:
   Rental buildings and improvements:
      Spokane, Washington
         10 North Post Street (Peyton Bldg.)       $ 2,812,500  $ 2,209,343 $ 4,877,907 $ 7,087,250 $ 2,272,992    1979  25-40 years
         Pier 1 Building/Contract Sale
            Broadmoor Apartments               (2)   3,088,586            -           -           -           -
         Pier 1 Building                             1,097,084    1,194,017   2,852,625   4,046,642   1,189,558    1992  25-40 years
         Cornerstone Office Building                 1,466,962    1,558,552      44,282   1,602,834     144,127    1999  25-40 years
         Apex Physical Therapy                         516,983      561,594      34,611     596,205      35,903    1999  25-40 years
      Boise, Idaho
         Calderwood-Overland Building          (1)   1,819,589    1,600,000      96,756   1,696,756      66,049    2000  25-40 years
         Calderwood-Ardene Building            (1)           -    1,200,000      76,337   1,276,337      52,936    2000  25-40 years
      Furniture and equipment related to above               -      549,276      92,181     641,457     374,064  Various     Various
                                                   -----------  ----------- ----------- ----------- -----------

                                                   $10,801,704  $ 8,872,782 $ 8,074,699 $16,947,481 $ 4,135,629
                                                   ===========  =========== =========== =========== ===========
</TABLE>

(1)      Total obligation of $1,819,589 is secured by two Calderwood properties
         as noted above.

(2)      Total obligation of $3,088,586 is secured by contract sale of Broadmoor
         Apartments and Pier 1 Building.


                                                                              52
<PAGE>


                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                    SCHEDULE III
                                        REAL ESTATE AND ACCUMULATED DEPRECIATION
--------------------------------------------------------------------------------

Real estate:
   Balance at beginning of period                                  $ 25,839,156

   Additions during period:
      Purchases and capitalized costs, net                              951,139
   Deductions during period:
      Cost of real estate sold                                       (9,842,814)
                                                                   ------------

         BALANCE AT CLOSE OF PERIOD                                $ 16,947,481
                                                                   ============

Accumulated depreciation:
   Balance at beginning of period                                  $  7,848,320
   Depreciation for the year                                            543,066
   Charges to accumulated depreciation related to
      real estate investments sold,
      net of other adjustments                                       (4,255,757)
                                                                   ------------

         BALANCE AT CLOSE OF PERIOD                                $  4,135,629
                                                                   ============


                                                                              53
<PAGE>


PACIFIC SECURITY FINANCIAL, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>




                                                                                                             Prior
           Description                               Interest Rate      Date       Periodic Payment Terms    Liens
-----------------------------------------------      --------------  ---------   --------------------------  -----

<S>                                                  <C>                 <C>        <C>
Loan (#2036 Riverwalk)                               Prime + 3.50%       2002       Interest only monthly
Real estate contract (Selkirk)                               8.25%       2031        $24,047.67 monthly
Real estate contract (Butler)                        Prime + 1.00%
                                                      floor of 6.5%      2011       Interest only monthly
Loan (#2014 GLMD Properties)                         Prime + 3.50%       2001       Interest only monthly
Loan (#2031 Skyview Bus. Park)                       Prime + 3.25%       2001       Interest only monthly
Loan (#2034 Cimarron O'Bannon)                       Prime + 3.50%       2001       Interest only monthly
Loan (#2032 Bear Hollow Village)                     Prime + 3.75%       2001       Interest only monthly
Loan (#2027 Coulter)                                 Prime + 4.00%       2001       Interest only monthly
Loan (#1990 Rock Ridge Properties)                   Prime + 4.25%       2000       Interest only monthly
Real estate contract on apartment                                                     $8,164 per month,
   building (East Valley Terrace)                    Prime + 2.00%       2006        including interest
Other mortgage contracts and notes receivable,
   none of which individually exceed 3% of the
   total carrying value of mortgages                       Various     Various             Various





Balance at beginning of period
   Additions during period:
      Mortgage loans originated and purchased

   Deductions during period:
      Collections of principal and contract payoffs
      Other



         BALANCE AT END OF PERIOD

[RESTUBBED]
<CAPTION>
                                                                                    Principal
                                                                                    Amount of
                                                                                   Loans Subject
                                                                      Carrying     to Delinquent
                                                      Face Amount     Amount of    Principal of
           Description                                of Mortgages    Mortgages      Interest
-----------------------------------------------       ------------    -----------   ------------

<S>                                                    <C>            <C>           <C>
Loan (#2036 Riverwalk)                                 $ 3,900,013    $ 3,900,013
Real estate contract (Selkirk)                           3,190,603      3,190,603
Real estate contract (Butler)
                                                         2,972,081      2,972,081
Loan (#2014 GLMD Properties)                             2,118,054      2,118,054
Loan (#2031 Skyview Bus. Park)                           1,984,500      1,984,500
Loan (#2034 Cimarron O'Bannon)                           1,790,873      1,790,873
Loan (#2032 Bear Hollow Village)                         1,250,000      1,250,000   $ 1,250,000
Loan (#2027 Coulter)                                     1,150,000      1,150,000     1,150,000
Loan (#1990 Rock Ridge Properties)                       1,107,221      1,107,221
Real estate contract on apartment
   building (East Valley Terrace)                          908,106        908,106
Other mortgage contracts and notes receivable,
   none of which individually exceed 3% of the
   total carrying value of mortgages                     5,747,461      5,080,445     3,289,673
                                                       -----------    -----------   -----------

                                                       $26,118,912    $25,451,896   $ 5,689,673
                                                       ===========    ===========   ===========

Balance at beginning of period
   Additions during period:                                           $25,697,116
      Mortgage loans originated and purchased
                                                                       19,314,151
   Deductions during period:
      Collections of principal and contract payoffs    $15,893,636
      Other                                              3,665,735
                                                       ------------
                                                                       19,559,371
                                                                      ------------

         BALANCE AT END OF PERIOD                                     $25,451,896
                                                                     ============
</TABLE>



                                                                              54
<PAGE>


                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                  CERTIFICATIONS
--------------------------------------------------------------------------------

I, David L. Guthrie, certify that:

1.     I have reviewed this annual report on Form 10K of Pacific Security
       Financial, Inc. (the Company);

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

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

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

       (a)    designed such disclosure controls and procedures to ensure that
              material information relating to the registrant, including its
              consolidated subsidiaries, is made known to us by others within
              those entities, particularly during the period in which this
              annual report is being prepared;

       (b)    evaluated the effectiveness of the registrant's disclosure
              controls and procedures as of a date within 90 days prior to the
              filing date of this annual report (the Evaluation Date); and

       (c)    presented in this annual report our conclusions about the
              effectiveness of the disclosure controls and procedures based on
              our evaluation as of the Evaluation Date;

5.     The registrant's other certifying officer and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the
       registrant's Board of Directors:

       (a)    all significant deficiencies in the design or operation of
              internal controls which could adversely affect the registrant's
              ability to record, process, summarize, and report financial data
              and have identified for the registrant's auditors any material
              weaknesses in internal controls; and

       (b)    any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal controls; and



                                                                              55
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                  CERTIFICATIONS
--------------------------------------------------------------------------------

6.     The registrant's other certifying officer and I have indicated in this
       annual report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and
       material weaknesses.


Dated: October 28, 2002



/s/ David L. Guthrie
----------------------------------
David L. Guthrie, President




                                                                              56
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                  CERTIFICATIONS
--------------------------------------------------------------------------------

I, Donald J. Migliuri, certify that:

1.     I have reviewed this annual report on Form 10K of Pacific Security
       Financial, Inc. (the Company);

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

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

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

       (a)    designed such disclosure controls and procedures to ensure that
              material information relating to the registrant, including its
              consolidated subsidiaries, is made known to us by others within
              those entities, particularly during the period in which this
              annual report is being prepared;

       (b)    evaluated the effectiveness of the registrant's disclosure
              controls and procedures as of a date within 90 days prior to the
              filing date of this annual report (the Evaluation Date); and

       (c)    presented in this annual report our conclusions about the
              effectiveness of the disclosure controls and procedures based on
              our evaluation as of the Evaluation Date;

5.     The registrant's other certifying officer and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the
       registrant's Board of Directors:

(a)    all significant deficiencies in the design or operation of internal
       controls which could adversely affect the registrant's ability to record,
       process, summarize, and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and

(b)    any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and


                                                                              57
<PAGE>
                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                  CERTIFICATIONS
--------------------------------------------------------------------------------


6.     The registrant's other certifying officer and I have indicated in this
       annual report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and
       material weaknesses.


Dated: October 28, 2002



/s/ Donald J. Migliuri
-----------------------------------
Donald J. Migliuri, Treasurer


                                                                              58
<PAGE>

                                                PACIFIC SECURITY FINANCIAL, INC.
                                                                      SIGNATURES
--------------------------------------------------------------------------------

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

                                               PACIFIC SECURITY FINANCIAL, INC.
                                               (Registrant)

Dated:  October 28, 2002                       By: /s/ David L. Guthrie
                                                   ----------------------------
                                                   David L. Guthrie
                                                   Chief Executive Officer

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:
<TABLE>
<CAPTION>

           Signature                                    Capacity                                Date
---------------------------------------  --------------------------------------------    -----------------
<S>                                      <C>                                             <C>
                                         Chief Executive Officer and
/s/ David L. Guthrie                     Director, Chairman of the Board of
---------------------------------------  Directors                                       October 28, 2002
David L. Guthrie

/s/ Donald J. Migliuri                   Secretary-Treasurer
---------------------------------------  Chief Financial Officer and Director            October 28, 2002
Donald J. Migliuri

                                         Chairman of the Board of Directors,
---------------------------------------  Emeritus, and Director
Wayne E. Guthrie

/s/ Kevin M. Guthrie                     Director
---------------------------------------                                                  October 28, 2002
Kevin M. Guthrie

/s/ Constance M. Guthrie                 Director
---------------------------------------                                                  October 28, 2002
Constance M. Guthrie

/s/ Robert N. Codd                       Director
---------------------------------------                                                  October 28, 2002
Robert N. Codd

/s/ Julian Guthrie                       Director
---------------------------------------                                                  October 28, 2002
Julian Guthrie
</TABLE>



                                                                              59