SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Rule 13e-3 Transaction Statement
(Under Section 13(e) of the Securities Exchange Act of 1934)

Pacific Security Financial, Inc.
(Name of the Issuer)

Pacific Security Financial, Inc.
(Name of Person(s) Filing Statement)

Common Stock
(Title of Class of Securities)

None
(CUSIP Number of Class of Securities)

Gregory B. Lipsker
Workland & Witherspoon, PLLC
601 W. Main Street, Ste. 714
Spokane, WA 99201
(509) 455-9077
(Name, Address and Telephone Numbers of Person Authorized to Receive Notices and
Communications on Behalf of Persons Filing Statement)

This statement is filed in connection with (check the appropriate box):

a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A ( 240.14a-1 through 240.14b-2), Regulation 14C (
2240.14c-1 through 240.14c-101) or Rule 13e-3(c) ( 240.13e-3(c)) under the
Securities Exchange Act of 1934 ("the Act").
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [ ] A tender offer.
d. [ ] None of the above.

Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [X]

Check the following box if the filing is a final amendment reporting the
results of the transaction: [ ]

Calculation of Filing Fee

Transaction valuation - Set forth the amount of which the filing fee is
calculated and state how it was determined.

The filing fee was calculated by taking the value of the fractional share
interests to be purchased by the Company ($564,291.00) and multiplying by 1/50th
of one percent (.0002).

Amount of filing fee: $112.86

[ ] Check the box if any part of the fee is offset as provided by
240.0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

Amount Previously Paid:
Form or Registration No.:
Filing Party:
Date Filed:

SUMMARY TERM SHEET

ITEM 1. SUMMARY TERM SHEET.

- - A Special Meeting of Shareholders has been called to consider and vote
upon the adoption of an amendment to the Company's Articles of Incorporation
providing for a reverse split of common stock on a 1-for-2200 basis so that
common shareholders will receive one share of common stock for each two thousand
two hundred shares of common stock held before the reverse split.

- - In lieu of the issuance of any resulting fractional shares of the post-
reverse split Common Stock, we will purchase of all fractional shares for cash
based on a pre-reverse split price of $3.00 per share.

- - Management of the Company is the record and beneficial owner, or has
voting authority for 927,357 shares (approximately 81.44 %) of the outstanding
common stock and 3,000 shares (100%) of the outstanding preferred stock of the
Company. It is management's intention to vote all of its shares in favor of
each matter to be considered by the Shareholders, thereby assuring approval.

- - If the reverse split is effected, the officers, directors and certain
family members will own 100% of the outstanding common stock. Such individuals
now own approximately 81.4 % of the outstanding common stock.

- - There are dissenters' rights applicable with respect to the matters to be
considered by the Shareholders.

ITEM 2. SUBJECT COMPANY INFORMATION.

(a) Name and address.
Pacific Security Financial, Inc.
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

(b) Securities.

As of July 31, 2001 we had 1,110,385 shares of common stock, no par
value, outstanding and 3,000 shares of Class A preferred stock, $100 par value,
outstanding.

There is no established market for trading in the Company's common stock.
Periodically we will purchase and retire our common stock, but we do not solicit
such purchases.

There is no market information relative to the common stock price of our
stock as it is not actively traded.

(d) Dividends.

No dividends have been declared since 1990.

(e) Prior public offerings.

We have made no underwritten public offering of the common stock for cash during
the past three years that was registered under the Securities Act of 1933 or
exempt from registration under Regulation A.

(f) Prior stock purchases

During the past two years we have purchased shares from shareholders wishing to
liquidate their holdings in the Company. The following table shows for each
quarter during that period the amount of shares purchased, the range of prices
paid and the average purchase price.

FISCAL YEAR END 7/31/00 NO. OF SHARES PRICE RANGE AVERAGE PRICE PAID
- -------------------------- --------------- ------------- ------------------
First Quarter 547.80 1.55 1.55
Second Quarter 12,000.00 1.55 1.55
Third Quarter 434.00 3.00 3.00
Fourth Quarter 755.20 3.00 3.00

FISCAL YEAR END 7/30/01
First Quarter 833.30 3.00 3.00
Second Quarter 11,859.30 2.25-3.00 2.26
Third Quarter 3,372.50 3.00 3.00
Fourth Quarter 12,345.40 3.00 3.00

ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON.

(a) Name and address

This filing is being made by:

Pacific Security Financial, Inc.
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

Executive Officers and Directors:

Wayne E. Guthrie, Chairman of the Board; Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

David L. Guthrie, President; Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

Kevin M. Guthrie, Vice President; Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

Donald J. Migliuri, Secretary/Treasurer; Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

<page>
Constance M. Guthrie, Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

Robert N. Codd, Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

Julian Guthrie, Director
N. 10 Post Street
325 Peyton Building
Spokane, WA 99201
(509) 444-7700

(b) Business and background of entities

n/a

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

David L. Guthrie has been the 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 also an
officer and director of Cornerstone Realty Advisors, Inc. Mr. Guthrie is a NASD
licensed securities sales person (registered representative) and broker-dealer
(general securities principal). He is a licensed real estate broker in the state
of Washington and has obtained the CCIM designation (certified commercial
investment member) awarded by the commercial real estate investment institute.

Kevin M. Guthrie has been the vice president of Pacific Security Financial, Inc.
since 1985. Mr. Guthrie has served as property manager for the Company since
1976. Mr. Guthrie is also an officer and director of Pacific Realty Management.

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

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

Robert N. Codd is 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 Examiner. 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 Examiner, covering breaking business, political and
lifestyle stories. She currently lives in San Francisco.

No person listed above has been convicted in a criminal proceeding during the
past five years (excluding traffic violations or similar misdemeanors).

No person listed above has been a party to any judicial or administrative
proceeding during the past five years (except for matters that were dismissed
without sanction or settlement) that resulted in a judgment, decree or final
order enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws.

ITEM 4. TERMS OF THE TRANSACTION.

(a) Material terms.

At a Special Meeting, the stockholders will be asked to consider and vote
upon a proposal to approve an amendment to Article 4 of the Company's Articles
of Incorporation which would effect a 1- for - 2200 reverse split of the common
stock of the Company by reducing the number of authorized shares of common stock
from 2,500,000 shares to 1,136 shares. The Company will make a cash payment of
$3.00 per share of currently outstanding Common Stock in lieu of the issuance
of any resulting fractional shares of the post- reverse split Common Stock.
There are dissenters' rights applicable with respect to the matters to be
considered by the Shareholders.

If the reverse split is effected, the officers, directors and certain
family members will own 100% of the outstanding common stock. Such individuals
now own approximately 81.4 % of the outstanding common stock.

Other than as disclosed herein, neither the Company nor the management has
any current plans or proposals to effect any extraordinary corporate
transactions such as mergers, reorganizations or liquidation; to sell or
transfer any material amount of its assets; to change its board of directors or
management; to materially change its dividend policy of indebtedness or
capitalization or otherwise to effect any material change in its corporate
structure or business.

Federal Income Tax Consequences

THE FOLLOWING DISCUSSION SUMMARIZING CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS BASED ON CURRENT LAW AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX EFFECTS OF THE REVERSE STOCK SPLIT IN LIGHT OF
THEIR INDIVIDUAL CIRCUMSTANCES.

The receipt of Post-Reverse Split Common Stock in exchange for Common Stock will
not result in the recognition of gain or loss to a stockholder, and the adjusted
tax basis of a stockholder in the Post-Reverse Split Common Stock will be the
same as the stockholder's adjusted tax basis in the exchanged Common Stock.

The receipt of cash by a stockholder pursuant to the Reverse Stock Split,
however, will be a taxable transaction for federal income tax purposes. A
stockholder owning fewer than 2,200 shares will receive only cash in the
transaction and generally will recognize gain or loss equal to the difference
between the cash received and the stockholder's adjusted tax basis in the
surrendered Common Stock. The gain or loss recognized generally will be capital
gain or loss if the Common Stock is held as a capital asset. Any such capital
gain or loss will be long-term capital gain or loss if the stockholder's holding
period for the Common Stock exceeds one year as of the effective date of the
Amendment.

A stockholder who owns 2,200 or more shares of Common Stock and does not
hold a number of shares of Common Stock that is evenly divisible by 2,200 will
receive both shares of Post-Reverse Split Common Stock and cash in lieu of
fractional shares of Post-Reverse Split Common Stock. The federal income tax
treatment of the cash received will be as described above, unless the Reverse
Stock Split has the "effect of the distribution of a dividend." If the Reverse
Stock Split has the effect of the distribution of a dividend, the cash received
in lieu of fractional shares of Post-Reverse Split Common Stock will be treated
as a dividend to the extent of the stockholder's ratable share of the Company's
undistributed earnings and profits, and the balance of the cash will be treated
as received in exchange for property. Taxable gain or loss will be realized on
this exchange of property equal to the difference between the portion of the
cash not treated as a dividend and the stockholder's adjusted tax basis in the
Common Stock exchanged for cash. The rules for characterization of any such
gain or loss for federal income tax purposes are as described above.

The federal income tax rules that determine whether the cash received will
have the "effect of the distribution of a dividend" are beyond the scope of this
discussion and should be discussed with a personal tax adviser.

Special taxation and withholding rules may apply to any stockholder that is
a nonresident alien or a foreign corporation. Those rules are beyond the scope
of this discussion and should be discussed with a personal tax advisor.
Stockholders will be required to provide their social security or other taxpayer
identification numbers (or, in some instances, certain other information) to the
Company in connection with the Reverse Stock Split to avoid backup withholding
requirements that might otherwise apply. See "Exchange of Certificates and
Payment for Fractional Shares." The letter of transmittal will require each
stockholder to deliver such information when the Common Stock certificates are
surrendered following the effective date of the Amendment. Failure to provide
such information may result in backup withholding.

THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY
AND DOES NOT REFER TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY SPECIFIC
STOCKHOLDER. STOCKHOLDERS, PARTICULARLY THOSE WHO HAVE ACQUIRED SHARES OF
COMMON STOCK IN COMPENSATION-RELATED TRANSACTIONS, ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS FOR MORE SPECIFIC AND DEFINITIVE ADVICE AS TO THE FEDERAL
INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTION, AS WELL AS ADVICE AS TO THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

Surrender of Certificates for Cash

As promptly as possible after the effective date of the reverse split a
transmittal letter with instructions for submission of stock certificates will
be mailed to all shareholders of record as of the effective date of the reverse
split. Shareholders are requested not to submit their stock certificates until
such instructions and transmittal letter are received. The transmittal letter
will direct shareholders as to how to tender their certificates so as to receive
their cash payment.

(b) Purchases

n/a

There are no terms or arrangements that treat any common shareholder differently
from other common shareholders. All our common shareholders will be treated
equally.

(d) Appraisal rights.

Pursuant to the Revised Code of Washington 23B.13.010, any shareholder of a
corporation shall have the right to dissent from and to obtain payment of the
fair value of the shareholder's shares in the event the consummation of an
amendment to the articles of incorporation that materially reduces the number of
shares owned by to a fraction of a share if the fractional share so created is
to be acquired for cash. The proposed amendment to our Articles of
Incorporation, reverse split of our common shares and subsequent purchase of the
resulting fractional shares meets this criteria for the right of our
shareholders to dissent and obtain payment for their shares. Shareholders who
wish to dissent and demand payment for their shares must refrain from voting
their shares in favor of the proposed reverse split.

A copy of RCW 23B.010-.310 setting forth the right and procedure for
shareholders to dissent is annexed to this Rule 13e-3 Transaction Statement as
Exhibit f.

(e) Provisions for unaffiliated security holders.

We have made no provision in connection with this transaction to grant
unaffiliated security holders access to our corporate files or to obtain counsel
or appraisal service at our expense.

(f) Eligibility for listing or trading.

Not applicable

ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.

(a) Transactions.

NOTE RECEIVABLE

A certain former stockholder is indebted to the Company by a note secured by
real estate bearing interest at 12.5% (prime plus 4% adjusted annually) in the
outstanding amounts (including interest) of $188,254 and $203,550 at July 31,
2001 and 2000, respectively.

INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE

At July 31, 2001 and 2000, the following related-party notes payable were
outstanding:
2001 2000 INTEREST RATE MONTHLY
PAYMENT
----------- ----------- ------------- -----------
Wayne E. Guthrie $ 85,898 $ 135,457 7.00% $ 4,789
Wayne/Constance
Guthrie - 16,829 6.75% $ 2,000
----------- ----------- ------------- -----------
$ 85,898 $ 152,286
=========== ===========

The scheduled future maturities of these notes are as follows:

Year Ending
July 31
2002 $ 53,142
2003 $ 32,756
---------
$ 85,898
=========

DEBENTURE BONDS

Included in debenture bonds at July 31, 2001 and 2000, is approximately $146,000
and $163,000, respectively, that is payable to related parties. These bonds
bear interest at the prevailing market rate on the date of issuance.

ACCRUED EXPENSES AND OTHER LIABILITIES

At July 31, 2001 and 2000, the following demand notes were payable to related
parties:

2001 2000
---------------------- -----------------------
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ----------
Wayne E. Guthrie $ 99,249 7.5% $ 73,579 8.50%
Constance Guthrie 32,329 7.5% - -
Other stockholders 21,500 7.5% 32,518 8.50%
---------- ---------- ---------- ----------
$ 153,078 $ 106,097
========== ==========

INTEREST INCOME AND EXPENSE

The approximate amount of related-party interest income and expense
included in the consolidated statements of operations during the years ended
July 31, 2001, 2000 and 1999 is as follows:

2001 2000 1999
---------- ---------- ----------
Interest income $ 24,000 $ 27,000 $ 36.000
Interest expense 22,000 32,000 53,000

PARTICIPATIONS

The president of Cornerstone Realty Advisors, Inc., a subsidiary of the
Company, has directly invested in certain loans through participation
agreements. The total amount of such participation was $250,000 and $100,000
at July 31, 2001 and 2000, respectively.

In addition certain stockholders also directly invested in certain loans
through participation agreements. The total of such participation was$-0- and
$100,000 at July 31, 2001 and 2000, respectively.

(b) Significant corporate events.

There have been no negotiations, transactions or material contacts during the
past two years between the Company and any person listed in Item 3 above
concerning any merger, consolidation, acquisition or tender offer for or other
acquisition of any class of the Company's securities, election of directors; or
sale or other transfer of a material amount of the Company's assets.

There have been no negotiations or material contacts concerning the matters
referred to in paragraph (b) above during the past 2 years between any
affiliates of the Company; or between the Company and any of its affiliates and
any person not affiliated with the Company who would have a direct interest in
such matters.

(d) Conflicts of interest.

Management of the Company together with certain family members owns
approximately 81.44% of the outstanding common stock of the Company. Management
intends to vote its shares of stock in favor of the proposed reverse split of
common stock thereby assuring the approval of the reverse split. After
completion of the reverse split the Company will be 100% owned by management and
certain family members.

(e) Agreements involving the subject company's securities.

There are no agreements, arrangements or understandings, whether or not
legally enforceable, between the Company (and any person listed in Item 3
above), and any other person with respect to the securities of the Company.

ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.

(a) Purpose.

The purpose of the amendment to reverse split our common stock is to
acquire the entire equity interest of the Company not now owned by the
directors, executive officers and other affiliates of the Company and thereby to
take the company private. We are proposing this transaction in order to take the
company private and thereby become eligible to terminate our reporting
obligations under Section 15(d) of the Securities Exchange Act of 1934, as
amended, (the "Act"). Because we are subject to the Act we are required to incur
considerable annual legal and accounting expenses to comply with the Act's
reporting requirements including preparation of annual reports of Form 10K,
Quarterly reports on Form 10Q and compliance with the Proxy Rules. These
expenses are in excess of $30,000 per year. The purpose of the Act is to provide
current public information to the marketplace for companies whose shares are
publicly traded. There has been no public market for our common stock for over
twenty years. Our management is the record and beneficial owner, or has voting
authority for 927,357.4 shares approximately 81.44% of the outstanding common
stock and 3,000 shares (100%) of our outstanding preferred stock. The balance of
our common stock is held by approximately 1,100 unaffiliated shareholders. We
would like to give our shareholders liquidity which they have never enjoyed
since our common stock has never traded publicly and is not likely to in the
future.

(b) Use of securities acquired.

It is our intention to hold the fractional shares acquired in the reverse split
as treasury shares.

Except for our plan to terminate our obligation to file reports under
Section 15(d) of the Securities Exchange Act, we have no plans, proposals or
negotiations that relate to or would result in:

(1) Any extraordinary transaction, such as a merger, reorganization or
liquidation of our company or any of its affiliates;
(2) Any purchase, sale or transfer of a material amount of our assets or any
subsidiaries;
(3) Any material change in our present dividend rate or policy, or
indebtedness or capitalization;
(4) Any change in our present board of directors or management, including,
but not limited to, any plans or proposals to change the number or the term of
directors or to fill any existing vacancies on the board or to change any
material term of the employment contract of any executive officer;

(5) Any other material change on our corporate structure or business.
(6) The acquisition by any person of additional securities of our company or
the disposition of our securities.
(7) Any change in our charter, bylaws or other governing instruments or
other actions that could impede the acquisition of control of our company.

(d) Subject company negotiations.

Not applicable

ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS.

(a) Purposes.

We are proposing this transaction in order to take the company private and
thereby become eligible to terminate our reporting obligations under Section
15(d) of the Act. Because we are subject to the Act we are required to incur
considerable annual legal and accounting expenses to comply with the Act's
reporting requirements including preparation of audited financial statements,
annual reports of Form 10K, Quarterly reports on Form 10Q and compliance with
the Proxy Rules The purpose of the Act is to provide current public information
to the marketplace for companies whose shares are publicly traded. There has
been no public market for our common stock for over twenty years. Our management
is the record and beneficial owner, or has voting authority for 927,357.4 shares
approximately 81.44% of the outstanding common stock and 3,000 shares (100%) of
our outstanding preferred stock. The balance of our common stock is held by
approximately 1,100 unaffiliated shareholders. We would like to give our
shareholders liquidity for their shares which they have not had since we became
subject to the Act in 1985.

(b) Alternatives.
We considered the alternative of maintaining the status quo of remaining a
reporting company with no public trading market and the possibility of
attempting to establish an active public market for our shares. We rejected the
status quo approach because of the considerable expense and commitment of
management resources to fulfill our reporting requirements with no perceived
benefit to us as a company or to our shareholders. We rejected the approach of
attempting to establish a public market for our shares after we were unable to
identify potential market makers or investment bankers who might have an
interest in assisting us in those efforts.

The principal reasons for taking the Company private are as follows:

(i) to enable the directors, officers and other affiliates of the
Company to own the entire equity interest in the Company and to ensure for the
Company the continued services of senior management;

(ii) to afford such directors, officers and other affiliates maximum
flexibility in operating the Company and planning for its future;

(iii) to permit the stockholders of the Company, other than the
directors, officers and other affiliates, to receive cash for their common stock
and thereby achieve liquidity that is not now afforded, nor anticipated to be
afforded because there is no public market for the common stock; and to
eliminate the cost of meeting the proxy and periodic reporting requirements of
the Exchange Act.

(d) Effects.

The effect of the transaction will be that our approximately 1,100 unaffiliated
shareholders will receive fractional shares in the reverse split. We will
purchase those fractional shares for cash based on a pre reverse split price of
$3.00 per share. After the transaction our shares will be 100% owned by our
current management. Immediately thereafter we intend to apply to have our
reporting obligations under the Act terminated and we will be a privately held
corporation.

ITEM 8. FAIRNESS OF THE TRANSACTION.

(a) Fairness.

We reasonably believe that the transaction is fair to unaffiliated
shareholders. No director dissented or abstained from voting on the transaction.

(b) Factors considered in determining fairness.

The board of directors has concluded that the Offer is fair to the
nonaffiliated shareholders of the Company. In reaching its conclusion, the
board of directors considered, in order of importance, the following factors:
(i) the valuations contained in the Pagano Appraisal Group report; (ii) there is
no market for the Shares (iii) the fact that the market for the Shares is
illiquid and offers little opportunity to the nonaffiliated shareholders to
receive fair value for the shares; (iv) the fact that the Company is unlikely to
declare a dividend in the foreseeable future; (v) the price to be paid to
holders of Shares pursuant to the reverse stock split provides immediate
liquidity (in the form of cash in the amount of $3.00 per share); (vi) that if
consummated, the reverse stock split will relieve the Company of the significant
on-going expense of meeting its periodic and other reporting obligations under
the Exchange Act and (vii) that if consummated, the reverse stock split will
enable the executive officers, directors and other affiliates of the Company to
own all or significantly all of the equity of the company, thereby giving such
persons a greater economic incentive in managing the Company. In view of the
wide variety of factors considered in connection with its evaluation of the
fairness of the terms of the transaction the Board did not find it practicable
to, and generally did not, quantify or otherwise assign relative weights to the
individual factors considered in reaching its determination.

The transaction is not structured so that approval of at least a majority of the
unaffiliated shareholders is required.

(d) Unaffiliated representative.

A majority of the directors who are not our employees did not retain
an unaffiliated representative to act solely on behalf of the unaffiliated
security holders for the purposes of negotiating the terms of this transaction
and/or preparing a report concerning the fairness of the transaction.

(e) Approval of directors.

The transaction has been approved by the unanimous consent of all the directors.

(f) Other offers.

We have received no other offers.

ITEM 9. REPORTS, OPINIONS, APPRAISALS AND NEGOTIATIONS.

(a) Report, opinion or appraisal.

We retained Pagano Appraisal Group, LLC to provide an opinion on the
fair value of our common stock.

(b) Preparer and summary of the report, opinion or appraisal.

The appraisal report was prepared by Pagano Appraisal Group, LLC, 4215
S.E. King Rd., Milwaukie, Oregon 97222. Pagano Appraisal Group specializes in
the appraisal of businesses and business interests for gift and estate tax
documentation, Employee stock ownership plans (ESOPs), mergers and acquisitions,
shareholder transactions, estate planning, buy/sell agreements, stock options,
litigation support, arbitration, dissolution and various other appraisal
purposes. The report itself was prepared by Mark P. Pagano. Mr. Pagano is an
Accredited Senior Appraiser - Business Valuation by the American Society of
Appraisers and is a Chartered Financial Analyst.

Pagano Aappraisal Group is independent of the management, owners and agents
of Pacific Security Financial, Inc. and has no present or prospective interest
in the property that is the subject of their report, and has no personal
interest or bias with respect to the parties involved. The fee for this
engagement was in no way influenced by the results of the valuation analysis.

The following is a summary of the Pagano Appraisal Group report:

Opinions of the values of the common stock of Pacific Security Financial, Inc.
as of July 2000 were reached on several different bases. The reason for the
appraisal was to aid the Board of Directors in placing a value on the shares
pursuant to a possible "going private" transaction to redeem the shares held by
"unaffiliated" shareholders. No other purpose is intended or should be
inferred. The shares in question are owned by numerous minority shareholders
that are not related to the Guthrie family.

Value opinions of the common stock were provided on the following three distinct
bases that are commonly used in the business appraisal profession: an
unmarketable, minority interest; a marketable, minority interest; and an
enterprise (or controlling interest) value. An active trading market has never
developed for the common stock of Pacific Security Financial, Inc.

The following factors were considered in arriving at our opinion:

1. The nature and history of the enterprise.
2. The economic outlook and condition of the specific industry.
3. The book value of the stock and the financial condition of the business.
4. The earnings capacity of the company.
5. The dividend-paying capacity.
6. The existence of goodwill or other intangible asset value.
7. Prior sales of stock and the size of the block to be valued.
8. Market prices of similar stocks actively traded in open markets.
9. The transaction prices at which similar companies were sold in their
entirety.

the shares were actively traded on an exchange or over-the-counter) of the
common stock was $3.00 per share. It is our opinion that the enterprise value
of the stock was $4.80 per share as of the same date.

The appraisal was prepared in accordance with the Uniform Standards of
Professional Appraisal Practice. It adheres to standards set forth in the
American Society of Appraisers' Standards of Practice and Code of Ethics.

The Pagano Group Report will be made available for inspection and copying
at our principal executive offices during regular business hours by any
interested equity security holder or representative who has been so designated
in writing.

ITEM 10. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.

(a) Source of funds.

The cost of the transaction is estimated at $602,553 including
approximately $564,291 for the redemption of fractional shares resulting from
the reverse split and transaction costs of approximately $38,262. The funds to
pay these costs will come from available cash.

(b) Conditions.

There are no material conditions other than the approval of the majority of
shares entitled to vote on the amendment to the Articles of Incorporation
providing for the reverse stock split. It is management's intention to vote all
of its shares in favor of each matter to be considered by the Shareholders,
thereby assuring approval.

Filing Fees $ 112.00
Legal Fees 9,500.00
Accounting Fees 5,000.00
Valuation Report 16,000.00
Printing 3,500.00
Mailing 1,650.00
Misc. 2,500.00
-------------
Total Costs $ 38,262.00

We have paid or will be responsible for paying all of the above costs
and expenses.

(d) Borrowed funds

None of the funds or other consideration required is, or is expected to be,
borrowed, directly or indirectly, for the purpose of this transaction.

ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.

(a) Securities ownership.

The following table sets forth as of July 31, 2001 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:

AMOUNT OF
SHARES AND
NATURE OF
TITLE NAME OF BENEFICIAL PERCENT
OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------- --------------------- ------------------ ---------------
Common stock Wayne E. Guthrie 142,541.5 12.52
Common stock Constance Guthrie 142,541.5 12.52
Common stock Kevin Guthrie 222,718.0 19.56
Common stock David Guthrie 222,718.0 19.56
Common stock Julian Guthrie 196,838.4 17.28
------------------ ---------------
Common stock All directors and
officers as a group 927,357.4 81.44
================== ===============
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%
================== ===============

(b) Securities transactions.

During the past sixty days the Company has made unsolicited purchases of
its securities from certain unaffiliated shareholders. The transactions were
primarily accommodations made for the estates of deceased shareholders.

DATE SHARES $ AMOUNT PRICE/SHARE
-------- --------- ------------- -----------
9/12/01 1002.20 $ 3,006.60 3.00
9/20/01 5.40 16.20 3.00
9/24/01 837.50 2,512.50 3.00
9/26/01 171.40 514.20 3.00

ITEM 12. THE SOLICITATION OR RECOMMENDATION.

(a) Intent to tender. - Not applicable

(b) Reasons. -- Not applicable

It is management's intention to vote all of its shares in favor of each matter
to be considered by the Shareholders, thereby assuring approval.

(d) Recommendations of others. - Not applicable

ITEM 13. FINANCIAL STATEMENTS.

This information is incorporated by reference to the consolidated balance
sheets and the related consolidated statements of operations, stockholders'
equity and cash flows appearing in the Company's Form 10K for the fiscal year
ended July 31, 2001 as filed with the Securities and Exchange Commission on
October 26, 2001. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) through which the Form 10K and other information can be
retrieved.

ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.

(a) Solicitations or recommendations.

We have not directly or indirectly employed or retained or intend to
compensate any person or class of person to make solicitations or
recommendations in connection with the transaction.

(b) Employees and corporate assets.

We do not intend to employ or use any officer, class of employees in connection
with the transaction. The expenses set forth in item 10 are the only corporate
assets to be used in connection with the transaction.

ITEM 15. ADDITIONAL INFORMATION.

Not applicable

ITEM 16. EXHIBITS.

(a-3) Going Private Disclosure Document (Information Statement)
(c) Pagano Appraisal Group Report
(f) Statement re: Appraisal Rights - Incorporated by reference to
Exhibit A of the Information Statement included as Exhibit (a-3) of this Rule
13e-3 Transaction Statement

After due inquiry and to the best of my knowledge and belief, I certify that the
information set forth in this statement is true, complete and correct.

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

November 26, 2001

Exhibit a-3

GOING PRIVATE DISCLOSURE DOCUMENT
INFORMATION STATEMENT

SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES EXCHANGE ACT
OF 1934

Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement

PACIFIC SECURITY FINANCIAL, INC.
(Name of Registrant as Specified in Its Charter)

Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14c-5(g).
[ ] Fee Computed on Table Below Per Exchange Act Rules 14c-5(g) and 0-11.

1) Title of Each Class of Securities to Which Transaction Applies: Common Stock

2) Aggregate Number of Securities to Which Transaction Applies: 188,097

3) Per Unit Price or Other Underlying Value of Transaction Computed Pursuant to
Exchange Act Rule 0-11 (Set Forth the Amount on Which the Filing Fee Is
Calculated and State How It Was Determined.): $ 3.00

4) Proposed Maximum Aggregate Value of Transaction: $564,291

5) Total fee paid: $ 0.00

[ ] Fee paid previously with preliminary materials

[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: $112.86

(2) Form, Schedule, or Registration Statement No: 13e-3

(3) Filing Party: Pacific Security Financial, Inc.

(4) Date Filed: Contemporaneously with the filing of this Preliminary
Information Statement

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER XX, 2001

NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of PACIFIC
SECURITY FINANCIAL, INC. [formerly Pacific Security Companies] (the "Company"),
will be held at 10:00 a.m. (PST), on XXXXX, 2001, at the Sixth Floor Conference
Room of the Peyton Building, 10 North Post Street, Spokane, Washington 99201,
to consider and act upon the following matters:

1. To consider and vote upon the adoption of an amendment to the Company's
Articles of Incorporation to consolidate each two thousand two hundred
outstanding shares of Common Stock into one share of Common Stock;

2. To transact such other business as may properly come before the meeting
or any adjournment thereof.

Only Shareholders of record on the books of the Company at the close of business
on November XXX, 2001 will be entitled to notice of and to vote at the meeting
or any adjournment thereof.

By Order of the Board of Directors

/s/ Wayne E. Guthrie
- ---------------------------------------------
Wayne E. Guthrie, Chairman of the Board

PACIFIC SECURITY FINANCIAL, INC.
[FORMERLY PACIFIC SECURITY COMPANIES]
10 NORTH POST STREET
SPOKANE, WA 99201

INFORMATION STATEMENT

For the Special Meeting of Shareholders
To be Held November , 2001

This Information Statement is furnished in connection with matters to be voted
at the Special Meeting of Shareholders of PACIFIC SECURITY FINANCIAL, INC., (the
"Company") to be held at 10:00 a.m. (PST), on XXXX , 2001 at the Sixth Floor
Conference Room of the Peyton Building, 10 North Post Street, Spokane,
Washington 99201, and at any and all adjournments thereof with respect to the
matters referred to in the accompanying notice. This Information Statement is
first being mailed to Shareholders on or about YYYY, 2001.

As of July 31, 2001, management of the Company (together with certain family
members) was the record and beneficial owner, or had voting authority for
927,357 shares (approximately 81.44%) of the outstanding common stock and 3,000
shares (100%) of the outstanding preferred stock of the Company. It is
management's intention to vote all of its shares in favor the Amendment to the
Articles of Incorporation to be considered by the Shareholders, thereby assuring
approval. Although approval of the amendment to the Articles of Incorporation
is assured, the Company is required by applicable law to submit the matter to be
considered to the vote of all Shareholders. There are dissenters' rights
applicable with respect to the amendment to the Articles of Incorporation.

The Company has determined November XXX, 2001 as the record date with respect
to the determination of Shareholders entitled to vote at the Special Meeting of
Shareholders.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS: APPROVED OR DISAPPROVED OF THE TRANSACTION; PASSED UPON THE
MERITS OR FAIRNESS OF THE TRANSACTION; OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURE IN THE DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.

PURPOSE OF THE SPECIAL MEETING

To consider and vote upon the adoption of an amendment to the Company's Articles
of Incorporation to consolidate each two thousand two hundred outstanding shares
of Common Stock into one share of Common Stock (SEE "AMENDMENT OF THE COMPANY'S
ARTICLES OF INCORPORATION").

SUMMARY OF TERMS

- - There are dissenters' rights applicable with respect to the matters to be
considered by the Shareholders.

MATERIAL TERMS

At a Special Meeting, the stockholders will be asked to consider and vote upon a
proposal to approve an amendment to Article 4 of the Company's Articles of
Incorporation which would effect a 1- for - 2200 reverse split of the common
stock of the Company by reducing the number of authorized shares of common stock
from 2,500,000 shares to 1,136 shares. The Company will make a cash payment of
$3.00 per share of currently outstanding Common Stock in lieu of the issuance
of any resulting fractional shares of the post- reverse split Common Stock.
There are dissenters' rights applicable with respect to the matters to be
considered by the Shareholders.

If the reverse split is effected, the officers, directors and certain family
members will own 100% of the outstanding common stock. Such individuals now own
approximately 81.4 % of the outstanding common stock.

Other than as disclosed herein, neither the Company nor the management has any
current plans or proposals to effect any extraordinary corporate transactions
such as mergers, reorganizations or liquidation; to sell or transfer any
material amount of its assets; to change its board of directors or management;
to materially change its dividend policy of indebtedness or capitalization or
otherwise to effect any material change in its corporate structure or business.

FEDERAL INCOME TAX CONSEQUENCES

THE FOLLOWING DISCUSSION SUMMARIZING CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
BASED ON CURRENT LAW AND IS INCLUDED FOR GENERAL INFORMATION ONLY. STOCKHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX EFFECTS OF THE REVERSE STOCK SPLIT IN LIGHT OF THEIR INDIVIDUAL
CIRCUMSTANCES.

A stockholder who owns 2,200 or more shares of Common Stock and does not hold a
number of shares of Common Stock that is evenly divisible by 2,200 will receive
both shares of Post-Reverse Split Common Stock and cash in lieu of fractional
shares of Post-Reverse Split Common Stock. The federal income tax treatment of
the cash received will be as described above, unless the Reverse Stock Split has
the "effect of the distribution of a dividend." If the Reverse Stock Split has
the effect of the distribution of a dividend, the cash received in lieu of
fractional shares of Post-Reverse Split Common Stock will be treated as a
dividend to the extent of the stockholder's ratable share of the Company's
undistributed earnings and profits, and the balance of the cash will be treated
as received in exchange for property. Taxable gain or loss will be realized on
this exchange of property equal to the difference between the portion of the
cash not treated as a dividend and the stockholder's adjusted tax basis in the
Common Stock exchanged for cash. The rules for characterization of any such
gain or loss for federal income tax purposes are as described above.

The federal income tax rules that determine whether the cash received will have
the "effect of the distribution of a dividend" are beyond the scope of this
discussion and should be discussed with a personal tax adviser.

Special taxation and withholding rules may apply to any stockholder that is a
nonresident alien or a foreign corporation. Those rules are beyond the scope of
this discussion and should be discussed with a personal tax advisor.
Stockholders will be required to provide their social security or other taxpayer
identification numbers (or, in some instances, certain other information) to the
Company in connection with the Reverse Stock Split to avoid backup withholding
requirements that might otherwise apply. See "Exchange of Certificates and
Payment for Fractional Shares." The letter of transmittal will require each
stockholder to deliver such information when the Common Stock certificates are
surrendered following the effective date of the Amendment. Failure to provide
such information may result in backup withholding.

THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND
DOES NOT REFER TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY SPECIFIC
STOCKHOLDER. STOCKHOLDERS, PARTICULARLY THOSE WHO HAVE ACQUIRED SHARES OF
COMMON STOCK IN COMPENSATION-RELATED TRANSACTIONS, ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS FOR MORE SPECIFIC AND DEFINITIVE ADVICE AS TO THE FEDERAL
INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTION, AS WELL AS ADVICE AS TO THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

SURRENDER OF CERTIFICATES FOR CASH

DISSENTERS' RIGHTS

A copy of RCW 23B.010.310 setting forth the right and procedure for shareholders
to dissent is attached as Exhibit A.

SPECIAL FACTORS

PURPOSES

We are proposing this transaction in order to take the company private and
thereby become eligible to terminate our reporting obligations under Section
15(d) of the Securities Exchange Act of 1934, as amended, (the "Act"). Because
we are subject to the Act we are required to incur considerable annual legal and
accounting expenses to comply with the Act's reporting requirements including
preparation of audited financial statements, annual reports of Form 10K,
Quarterly reports on Form 10Q and compliance with the Proxy Rules. The purpose
of the Act is to provide current public information to the marketplace for
companies whose shares are publicly traded. There has been no public market for
our common stock for over twenty years. Our management is the record and
beneficial owner, or has voting authority for 927,357.4 shares approximately
81.44% of the outstanding common stock and 3,000 shares (100%) of our
outstanding preferred stock. The balance of our common stock is held by
approximately 1,100 unaffiliated shareholders. We would like to give our
shareholders liquidity for their shares which they have not had since we became
subject to the Act in 1985.

ALTERNATIVES

We considered the alternative of maintaining the status quo of remaining a
reporting company with no public trading market and the possibility of
attempting to establish an active public market for our shares. We rejected the
status quo approach because of the considerable expense and commitment of
management resources to fulfill our reporting requirements with no perceived
benefit to us as a company or to our shareholders. We rejected the approach of
attempting to establish a public market for our shares after we were unable to
identify potential market makers or investment bankers who might have an
interest in assisting us in those efforts.

REASONS

The principal reasons for taking the Company private are as follows:

(i) to enable the directors, officers and other affiliates of the Company
to own the entire equity interest in the Company and to ensure for the Company
the continued services of senior management;

(ii) to afford such directors, officers and other affiliates maximum
flexibility in operating the Company and planning for its future;

EFFECTS

FAIRNESS OF THE TRANSACTION

FAIRNESS

We reasonably believe that the transaction is fair to unaffiliated
shareholders. No director dissented or abstained from voting on the
transaction.

FACTORS CONSIDERED IN DETERMINING FAIRNESS.

The board of directors has concluded that the Offer is fair to the
nonaffiliated shareholders of the Company. In reaching its conclusion, the
board of directors considered, in order of importance, the following factors:
(i) the valuations contained in the Pagano Appraisal Group report; (ii) there is
no market for the Shares (iii) the fact that the illiquid market for the Shares
offers little opportunity to the nonaffiliated shareholders to receive fair
value for the shares; (iv) the fact that the Company is unlikely to declare a
dividend in the foreseeable future; (v) the price to be paid to holders of
Shares pursuant to the reverse stock split provides immediate liquidity (in the
form of the cash of $3.00 Shares); (vi) that if consummated, the reverse stock
split will relieve the Company of the significant on-going expense of meeting
its periodic and other reporting obligations under the Exchange Act and (vii)
that if consummated, the reverse stock split will enable the executive officers,
directors and other affiliates of the Company to own all or significantly all of
the equity of the company, thereby giving such persons a greater economic
incentive in managing the Company. In view of the wide variety of factors
considered in connection with its evaluation of the fairness of the terms of the
transaction the Board did not find it practicable to, and generally did not,
quantify or otherwise assign relative weights to the individual factors
considered in reaching its determination.

APPROVAL OF SECURITY HOLDERS

The transaction is not structured so that approval of at least a majority of the
unaffiliated shareholders is required.

UNAFFILIATED REPRESENTATIVE

A majority of the directors who are not our employees did not retain an
unaffiliated representative to act solely on behalf of the unaffiliated security
holders for the purposes of negotiating the terms of this transaction and/or
preparing a report concerning the fairness of the transaction.

APPROVAL OF DIRECTORS

The transaction has been approved by the unanimous consent of all the directors.

OTHER OFFERS

We have received no other offers .

VALUATION

We retained Pagano Appraisal Group, LLC to provide an opinion on the fair value
of our common stock.

The appraisal report was prepared by Pagano Appraisal Group, LLC, 4215 S.E. King
Rd., Milwaukie, Oregon 97222. Pagano Appraisal Group specializes in the
appraisal of businesses and business interests for gift and estate tax
documentation, Employee stock ownership plans (ESOPs), mergers and
acquisitions, shareholder transactions, estate planning, buy/sell agreements,
stock options, litigation support, arbitration, dissolution and various other
appraisal purposes. The report itself was prepared by Mark P. Pagano. Mr. Pagano
is an Accredited Senior Appraiser - Business Valuation by the American Society
of Appraisers and is a Chartered Financial Analyst.

Pagano Appraisal Group is independent of the management, owners and agents of
Pacific Security Financial, Inc. and has no present or prospective interest in
the property that is the subject of their report, and has no personal interest
or bias with respect to the parties involved. The fee for this engagement was in
no way influenced by the results of the valuation analysis.
The following is a summary of the Pagano Appraisal Group report:

The following factors were considered in arriving at our opinion:

- - The nature and history of the enterprise.
- - The economic outlook and condition of the specific industry.
- - The book value of the stock and the financial condition of the business.
- - The earnings capacity of the company.
- - The dividend-paying capacity.
- - The existence of goodwill or other intangible asset value.
- - Prior sales of stock and the size of the block to be valued.
- - Market prices of similar stocks actively traded in open markets.
- - The transaction prices at which similar companies were sold in their
entirety.

Based upon the various appraisal approaches employed, it is our opinion that the
value of the common stock in Pacific Security Financial, Inc. was $2.25 per
share on an unmarketable, minority basis as of July 2000 based on 3,000
outstanding preferred shares and 1,139,550.58 outstanding common shares. This
value would be most consistent with the fair market value of a minority
interest. It is our opinion that the marketable, minority interest value (as if
the shares were actively traded on an exchange or over-the-counter) of the
common stock was $3.00 per share. It is our opinion that the enterprise value
of the stock was $4.80 per share as of the same date.

AVAILABILITY OF DOCUMENTS

The Pagano Group Report will be made available for inspection and copying at our
principal executive offices during regular business hours by any interested
equity security holder or representative who has been so designated in writing

A copy of RCW 23B.010-.310 setting forth the right and procedure for
shareholders to dissent is attached to this Information Statement as Exhibit A.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following information as of July 31, 2001 is provided with respect to each
director and executive officer of the Company:

Year First Term as Position
Elected as Director (date elected to
Name Age Director Expires in postion.
- ---------------------- --- ---------- ----------- -------------------------
Wayne E. Guthrie 81 1970 2003 Chairman of the Board
(January 17, 1970);
Director
David L. Guthrie 37 1987 2001 President
(February 18, 1999);
Director
Kevin M. Guthrie 46 1980 2001 Vice President
(May 2, 1985);
Director
Donald J. Migliuri 54 1992 2002 Secretary/Treasurer
(May 29, 1990);
Director
Constance Guthrie 67 1981 2003 Director
Robert N. Codd 71 1994 2001 Director
Julian Guthrie 36 1998 2001 Director

FAMILY RELATIONSHIPS

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

BUSINESS EXPERIENCE

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

No person listed above has been convicted in a criminal proceeding during the
past five years (excluding traffic violations or similar misdemeanors).

COMMITTEES OF THE BOARD

The Company has no standing audit, nominating or compensation committees, or
committees performing similar functions.

BOARD MEETINGS

During the fiscal year ended July 31, 2001, there was one special meeting of the
Board and one regular meeting. All the incumbent directors except Julian
Guthrie were present at the regular meeting of the Board of Directors. The
special meeting was accomplished with the unanimous consent of all directors.

LEGAL PROCEEDINGS

As of the date hereof, it is the opinion of management that there is no material
proceeding to which any director, officer or affiliate of the registrant, any
owner of record or beneficially of more than five percent of any class of voting
securities of the registrant, or any associate of any such director, officer,
affiliate of the registrant, or security holder is a party adverse to the
registrant or any of its subsidiaries or has a material interest adverse to the
registrant or any of its subsidiaries

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NOTE RECEIVABLE

INSTALLMENT CONTRACTS, MORTGAGE NOTES AND NOTES PAYABLE

At July 31, 2001 and 2000, the following related-party notes payable were
outstanding:

2001 2000 INTEREST RATE MONTHLY
PAYMENT
----------- ----------- ------------- -----------
Wayne E. Guthrie $ 85,898 $ 135,457 7.00% $ 4,789
Wayne/Constance
Guthrie - 16,829 6.75% $ 2,000
----------- ----------- ------------- -----------
$ 85,898 $ 152,286
=========== ===========

The scheduled future maturities of these notes are as follows:

YEAR ENDING
JULY 31,
---------------
2002 $ 53,142
2003 $ 32,756
---------
$ 85,898
=========

DEBENTURE BONDS

Included in debenture bonds at July 31, 2001 and 2000, is approximately $146,000
and $163,000, respectively, that is payable to related parties. These bonds bear
interest at the prevailing market rate on the date of issuance.

ACCRUED EXPENSES AND OTHER LIABILITIES

At July 31, 2001 and 2000, the following demand notes were payable to related
parties:

INTEREST INCOME AND EXPENSE

The approximate amount of related-party interest income and expense included in
the accompanying consolidated statements of operations during the years ended
July 31, 2001, 2000 and 1999 is as follows:

2001 2000 1999
---------- ---------- ----------
Interest income $ 24,000 $ 27,000 $ 36,000
Interest expense 22,000 32,000 53,000

PARTICIPATIONS

The President of Cornerstone Realty Advisors, Inc., a subsidiary of the Company,
has directly invested in certain loans through participation agreements. The
total amount of such participation was $250,000 at July 31, 2001.

In addition certain stockholders also directly invested in certain loans through
participation agreements. The total of such participation was $100,000 at July
31, 2000.

REMUNERATION AND OTHER COMPENSATION OF MANAGEMENT

The following table lists, on an accrual basis, for each of the three years
ended July 31, 2001, 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, 2001:

Name of
Individual Capacities Annual Compensation
or Number of in Which Fiscal ----------------------
Persons in Group Served Year Salary Bonus
- --------------------- ----------------------- ------ ---------- ----------
David L. Guthrie President and Director 2001 $ 110,340 -
President and Director 2000 $ 105,086 $ 50,500
President and Director 1999 $ 101,045 $ 7,500

Kevin M. Guthrie Vice Pres. and Director 2001 $ 110,863 -
Vice Pres. and Director 2000 $ 105,515 $ 50,500
Vice Pres. and Director 1999 $ 101,396 $ 7,500

Officers and Directors 2001 $ 399,783 -
as a group (5)

The Company has no qualified or nonqualified stock option plans as of July
31, 2001.

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

The Company has two classes of voting securities entitled to vote at the Annual
Meeting. At July 31, 2001, there were 1,110,385 shares of Common Stock
outstanding and 3,000 shares of Class A Preferred Stock outstanding. Each share
of Common Stock and Class A Preferred Stock is entitled to one vote on each
matter to be considered. The presence in person of the holders of a majority of
the outstanding voting shares is necessary to constitute a quorum at the Annual
Meeting. Approval of the proposals to be presented at the Annual Meeting will
require the affirmative vote of the holders of a majority of the shares present
at the meeting.

The Company has determined YYYY, 2001, as the record date with respect to the
determination of Shareholders entitled to vote at the Special Meeting of
Shareholders.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information concerning parties, excluding
management, who are known by the Company to directly own more than 5% of any
class of the Company's voting shares on July 31, 2001: none.

(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of July 31, 2001 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:

MATTERS TO BE CONSIDERED AND VOTED UPON AT
THE SPECIAL MEETING OF SHAREHOLDERS

1. AMENDMENTS TO THE COMPANY'S ARTICLES OF INCORPORATION

RESOLVED: that Article 4 of the Amended Articles of Incorporation of the Company
shall be amended to provide for a reverse split on a 1 - for - 2200 basis so
that common shareholders shall receive one share of common stock for each two
thousand two hundred shares of common stock held before the reverse split.

BE IT FURTHER RESOLVED: That in lieu of the issuance of any fractonal shares
resulting from the reverse split, the Company shall purchase all fractional
shares for cash based on a pre-reverse split price of $3.00 per share.

2. OTHER MATTERS

Management does not know of any other matters likely to be brought before the
Special Meeting of Shareholders. However, in the event any other matters
properly come before the Special Meeting of Shareholders, such matters will be
acted upon accordingly.

FINANCIAL AND OTHER INFORMATION

A copy of the company's annual report for the period ended July 31, 2001 (Form
10-K) as filed with the Securities and Exchange Commission, including the
financial statements and schedules thereto, may be obtained by shareholders on
EDGAR at the Securities and Exchange Commission's website at www.sec.gov, or
without charge by writing to:

PACIFIC SECURITY FINANCIAL, INC.
325 PEYTON BUILDING, 10 NORTH POST STREET
SPOKANE, WASHINGTON 99201

WAYNE E. GUTHRIE, CHAIRMAN OF THE BOARD NOVEMBER , 2001

EXHIBIT A

REVISED CODE OF WASHINGTON
CHAPTER 23B.13
DISSENTERS' RIGHTS

23B.13.010. DEFINITIONS

As used in this chapter:

(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.

(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.

(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.

(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.

(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.

(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.

(7) "Shareholder" means the record shareholder or the beneficial
shareholder.

23B.13.020. RIGHT TO DISSENT

(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:

(a) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled to
vote on the merger, or (ii) if the corporation is a subsidiary that is merged
with its parent under RCW 23B.11.040;

(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;

(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;

(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a share
if the fractional share so created is to be acquired for cash under RCW
23B.06.040; or

(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.

(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.

(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:

(a) The proposed corporate action is abandoned or rescinded;

(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or

23B.13.030. DISSENT BY NOMINEES AND BENEFICIAL OWNERS

(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.

(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:

(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and

(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.

23B.13.200. NOTICE OF DISSENTERS' RIGHTS

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.

(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.

23B.13.210. NOTICE OF INTENT TO DEMAND PAYMENT

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.

(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.

23B.13.220. DISSENTERS' NOTICE

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.

(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:

(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;

(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;

(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;

(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days after
the date the notice in subsection (1) of this section is delivered; and

(e) Be accompanied by a copy of this chapter.

23B.13.240. SHARE RESTRICTIONS

(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.

(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.

23B.13.250. PAYMENT

(1) Except as provided in RCW 23B.13.270, within thirty days of the later
of the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.

(2) The payment must be accompanied by:

(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;

(b) An explanation of how the corporation estimated the fair value of
the shares;

(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and

(e) A copy of this chapter.

23B.13.260. FAILURE TO TAKE ACTION

(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.

(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.

23B.13.270. AFTER-ACQUIRED SHARES

(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.

(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.

23B.13.280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER

(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:

(a) The dissenter believes that the amount paid under RCW 23B.13.250
or offered under RCW 23B.13.270 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;

(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or

(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for demanding
payment.

(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.

23B.13.300. COURT ACTION

(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.

(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.

(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.

(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.

(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.

(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.

23B.13.310. COURT COSTS AND COUNSEL FEES

(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.

(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:

(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or

(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by chapter 23B.13 RCW.

(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.

EXHIBIT (C)
PAGANO APPRAISAL GROUP REPORT
Pagano Appraisal Group, LLC

LETTER OF TRANSMITTAL

September 7, 2000

David L. Guthrie
President
Pacific Security Financial, Inc.
10 N. Post, Suite 325
Spokane, WA 99201

Dear Mr. Guthrie:

We have reached opinions of the values of the common stock of Pacific
Security Financial, Inc. as of July 2000 on several different bases. The reason
for the appraisal was to aid the Board of Directors in placing a value on the
shares pursuant to a possible "going private" transaction to redeem the shares
held by "unaffiliated" shareholders. No other purpose is intended or should be
inferred. The shares in question are owned by numerous minority shareholders
that are not related to the Guthrie family.

The appropriate standard of value for the aforementioned transaction is "fair
value." However, as outlined in our report, Pacific Security's legal counsel
was not able to provide a clear definition of fair value in Washington state for
"going private" transactions. As such, we provided value opinions of the common
stock on the following three distinct bases that are commonly used in the
business appraisal profession: an unmarketable, minority interest; a marketable,
minority interest; and an enterprise (or controlling interest) value. An active
trading market has never developed for the common stock of Pacific Security
Financial, Inc.

The following factors were considered in arriving at our opinion:

Based upon the various appraisal approaches employed, it is our opinion
that the value of the common stock in Pacific Security Financial, Inc. was $2.25
per share on an unmarketable, minority basis as of July 2000 based on 3,000
outstanding preferred shares and 1,139,550.58 outstanding common shares. This
value would be most consistent with the fair market value of a minority
interest. It is our opinion that the marketable, minority interest value (as if
the shares were actively traded on an exchange or over-the-counter) of the
common stock was $3.00 per share. It is our opinion that the enterprise value
of the stock was $4.80 per share as of the same date.

This appraisal was prepared in accordance with the Uniform Standards of
Professional Appraisal Practice. It adheres to standards set forth in the
American Society of Appraisers' Standards of Practice and Code of Ethics. As
part of those standards we certify that, to the best of our knowledge and
belief:

- - The statements of fact contained in the report are true and correct.
However, during the course of our analysis, we relied upon financial statements
and related operational data as fairly representing the operating results and
financial position of Pacific Security Financial, Inc. We have not audited this
information and therefore we express no opinion or other form of assurance
regarding its accuracy or the fairness of presentation.

- - We relied in part on management's analysis of past operations and on
management's assessment of expected future business conditions.

- - The reported analyses, opinions and conclusions are limited only to the
reported assumptions and limiting conditions, and are our personal unbiased
professional analyses, opinions and conclusions.

- - We are independent of the management, owners and agents of Pacific
Security Financial, Inc.

- - We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with respect to
the parties involved.

- - The fee for this engagement was in no way influenced by the results of our
valuation analysis.

- - The analyses, opinions and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice.

- - No one who is unnamed provided significant professional assistance to the
preparer of the report, who is also the signer of this transmittal letter.

- - In addition, the American Society of Appraisers has a mandatory
recertification program for all of its Accredited Senior Appraisers. All
Accredited Senior Appraisers employed by Pagano Appraisal Group are in
compliance with the requirements of that program.

An appraisal report, that further explains our valuation theory,
methodology and conclusion, accompanies this letter. The Contingent and
Limiting Conditions contained in Appendix A are an integral part of that
appraisal report.

Thank you for allowing Pagano Appraisal Group to serve your business valuation
needs. Please do not hesitate to call if we can be of further assistance.

Sincerely,

/s/ Mark P. Pagano
----------------------------
Mark P. Pagano, CFA, ASA

Confidential Report Prepared For
Pacific Security Financial, Inc.

on
PACIFIC SECURITY FINANCIAL, INC.
Appraisal Date: July 2000

Prepared By:
Mark P. Pagano, CFA, ASA

Pagano Appraisal Group, LLC
TABLE OF CONTENTS

INTRODUCTION 1
DESCRIPTION OF ASSIGNMENT 1
SUMMARY DESCRIPTION OF THE COMPANY 1
DEFINITION OF FAIR VALUE 2
SOURCES OF INFORMATION 3
SUMMARY AND CONCLUSION 6
ECONOMIC CONDITIONS 7
SPOKANE REGIONAL ECONOMY 7
INDUSTRY CONDITIONS 13
REAL ESTATE MARKETS 13
SUMMARY 14
COMPANY POSITION 16
BACKGROUND 16
BUSINESS 20
PROPERTY HOLDINGS 26
OPERATIONS 28
MANAGEMENT/OWNERSHIP 30
FINANCIAL ANALYSIS 34
INCOME STATEMENT 34
CASH FLOWS 41
BALANCE SHEET 41
FINANCIAL RATIO AND COMPARATIVE INDUSTRY
ANALYSIS 45
SUMMARY OF SIGNIFICANT FINDINGS 47
ECONOMIC/INDUSTRY FACTORS 47
COMPANY FACTORS 47
FINANCIAL FACTORS 49
APPRAISAL OF FAIR MARKET VALUE 52
OVERVIEW 52
ADJUSTED BALANCE SHEET 53
ORDERLY LIQUIDATION VALUE 61
ADJUSTMENTS TO HISTORICAL STATEMENTS OF
INCOME 64
EXPECTED FUTURE INCOME 67
MARKET APPROACHES 70
SIMILAR PUBLICLY-TRADED COMPANIES 70
REAL ESTATE LIMITED PARTNERSHIPS 76
ACQUISITION MARKET DATA 84
CONTROL PREMIUM 91
PAST TRANSACTIONS 92
CONCLUSION 93

LIST OF TABLES

TABLE TITLE PAGE

TABLE I MORTGAGE LOANS RECEIVABLE,
AS OF APRIL 30, 2000 20A
TABLE II SCHEDULE OF REAL PROPERTY,
AS OF APRIL 30, 2000 22A
TABLE III INCOME STATEMENT, 1995 - 1999 34A
TABLE IV CONSOLIDATED STATEMENT OF
CASH FLOWS, 1995 - 2000 41A
TABLE V BALANCE SHEET, 1995 - 1999 42A
TABLE VI CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY, 1995 - 2000 45A
TABLE VII ADJUSTED BALANCE SHEET, AS OF APRIL 30, 2000 59A
TABLE VIII ADJUSTMENTS TO INCOME, 1995 - 2000 66A
TABLE IX MARKET DATA FROM REITS 72A
TABLE X LIQUIDATING NON-DISTRIBUTING
REAL ESTATE PARTNERSHIPS 86A
TABLE XI ACQUISITIONS OF PUBLIC REITS 87A

TABLE OF APPENDICES

Appendix A Qualifications of Appraisers

Pagano Appraisal Group, LLC

INTRODUCTION

DESCRIPTION OF ASSIGNMENT

Pacific Security Financial, Inc. retained Pagano Appraisal Group, LLC ("PAG")
to provide an opinion of the fair value of the common stock of Pacific Security
Financial, Inc. as of July 2000. The reason for the appraisal is to aid the
Board of Directors in placing a value on the shares pursuant to a possible
offer to redeem the shares held by "unaffiliated" shareholders. The shares in
question are owned by numerous minority shareholders that are not related to
the Guthrie family.

The equity of Pacific Security Financial, Inc. consists of 3,000 outstanding
shares of preferred stock and 1,139,550.58 outstanding shares of common stock.
Chairman Wayne Guthrie and members of his family own all of the preferred stock
and nearly 85% of the outstanding common stock. The balance of the common stock
is owned by approximately 1,111 unaffiliated minority shareholders. The Company
hopes to redeem the shares of these minority shareholders to reduce Pacific
Securities' financial reporting requirements and ongoing administrative
expenses.

The opinions of PAG expressed in this report are subject to the Contingent and
Limiting Conditions contained in Appendix A.

SUMMARY DESCRIPTION OF THE COMPANY

Pacific Security Financial, Inc. (the "Company" or "PSF") is a Washington C
corporation engaged in the business of owning, selling and leasing real
properties, and in financing contracts and loans collateralized by real estate.
PSF is based in Spokane, Washington. The Company owns seven rental properties
(primarily office or office/commercial buildings) in or near Spokane and two
buildings recently acquired in Boise, Idaho. PSF also owns two development
properties near Spokane and one parcel of developable land near Auburn,
Washington.

Lending activities are centered in PSF's wholly-owned subsidiary, Cornerstone
Realty Advisors ("CRA"). CRA provides bridge financing on commercial real
estate projects located in the western United States. PSF's portfolio of
long-term receivables consists of both third-party contracts purchased in the
secondary market and seller-financed notes from past sales of real estate owned
by the Company. Due to the growth of the lending activities of CRA, the Company
changed its name to Pacific Security Financial, Inc. in November 1999 from
Pacific Security Companies previously.

DEFINITION OF FAIR VALUE

PAG's assignment was to provide an opinion of the "fair value" of the common
stock of PSF for purposes of the proposed transaction, i.e., making a tender
offer for the stock of unaffiliated shareholders. According to PSF's legal
counsel, federal securities laws describe the proposed "going private"
transaction as a "rule 13e-3 transaction." For purposes of a "rule 13e-3
transaction," PAG's opinion is that "fair value" should have a clear legal
definition. Our value conclusion hinges on the legal interpretation of "fair
value" appropriate in this instance. According to PSF management and its legal
counsel, the relevant statutes in Washington state provide no clear definition
of "fair value." With no such interpretation, PAG is unable to opine as to the
"fair value" of the shares for purposes of the proposed transaction.

However, we can opine as to the value of the shares on the following three
distinct bases that are commonly used in the business appraisal profession: an
unmarketable, minority interest; a marketable, minority interest; and an
enterprise (or controlling interest) value. An active trading market has never
developed for the common stock of PSF. As such, our opinion of the fair market
value of the shares held by unaffiliated shareholders would be on an
unmarketable, minority interest basis. "Fair market value" is defined as the
amount at which property would change hands between a willing seller and a
willing buyer when neither is acting under compulsion and when both have
reasonable knowledge of the relevant facts. "Fair value" is typically defined
by state statute or case precedent and is generally used in situations that may
give rise to dissenting stockholder appraisal rights, including "going private"
transactions.

Among other factors, this opinion takes into consideration the elements of
appraisal listed in Internal Revenue Service Revenue Ruling 59-60, which
generally outlines the valuation of stocks and bonds, including the following:

1. The nature of the business and history of the enterprise.
2. The economic outlook, in general, and condition and outlook of the
specific industry, in particular.
3. The book value of the stock and the financial condition of the business.
4. The earnings capacity of the Company.
5. The dividend-paying capacity.
6. Whether or not the enterprise has goodwill or other intangible value.
7. Sales of stock and the size of the block to be valued.
8. The market prices of stocks of corporations engaged in the same or
similar lines of business whose stocks are actively traded in a free and
open market, either on an exchange or over-the-counter.

Although not explicitly mentioned by Revenue Ruling 59-60 the final
generalized guideline that is useful in the valuation of stocks and bonds is:

9. The transaction prices at which similar companies were sold in their
entirety.

SOURCES OF INFORMATION

Information to complete this appraisal was provided by a number of sources.
Mark Pagano of PAG inspected PSF's headquarters and one of its office properties
in Spokane and interviewed President David Guthrie and Chief Financial Officer
Donald Migliuri. Other people contacted in person or by phone included the
Company's attorney, Greg Litsker, of the firm of Workland & Witherspoon. Mr.
Pagano also spoke with Barry Vinocur, editor of Realty Stock Review; Spencer
Jefferies, editor of The Partnership Spectrum; and Robert Tessier, a mortgage
broker with Choice Finance in Spokane, Washington.

Written sources of information provided by the Company or its agents
included:

1. Annual reports of PSF for the years ended July 31, 1995 through July 31,
1998. The annual reports included annual financial statements, audited by
Coopers & Lybrand, LLP, from fiscal 1995 through fiscal 1997 and audited by
PricewaterhouseCoopers LLP in fiscal 1998.

2. PSF's Form 10-K annual report for the years ended July 31, 1999 and July
31, 1998. The 1999 report included annual financial statements audited by the
accounting firm of PriceWaterhouseCoopers LLP.

3. PSF's Form 10-Q third quarter report for the nine months ended April 30,
2000 and April 30, 1999.

4. A list of shareholders of PSF as of July 2000.

5. CRA Loan Profile Summary and outstanding loan balances as of April 30,
2000.

6. Seller's Closing Statements for the Southridge Apartments and a U.S. Bank
branch, dated June 28, 1999 and August 3, 1999, respectively.

7. Details of PSF's officers' salaries in fiscal 1998 and 1999.

8. Schedule of PSF common stock redeemed by the Company from April 1998
through June 2000.

9. Offering Circular of PSF, dated November 28, 1997, for debentures offered
to Washington state residents.

10. Miscellaneous marketing literature of CRA.

11. Real property appraisal of the Peyton Building, prepared by Terra
Property Analytics, LLC, in May 1999.

12. Real property appraisal of the Hutton Building, prepared by Terra
Property Analytics, LLC, in August 1999.

13. Real property appraisal of the Cornerstone Building, prepared by Michael
J. Sprute, MAI, in July 1999.

14. Summary and conclusion of a real property appraisal of the AT&T Wireless
Building, prepared by Kyes & Associates, in August 1997. Schedule, prepared by
management in August 2000, updating the calculations from the earlier appraisal.

15. Schedules of the estimated value of the Pier One Building, prepared by
management, in August 2000.

16. Real property appraisal of the Broadmoor Apartments, prepared by Palmer,
Groth & Pietka, Inc., in October 1998.

17. Real property appraisal of the Apex Physical Therapy Building, prepared
by Michael J. Sprute, MAI, in April 2000.

18. Real property appraisal of undeveloped land near Auburn, Washington,
prepared by Cain and Scott, Inc., in October 1994.

19. Schedule, prepared by management, of the listing prices of the land
parcels remaining to be sold in Cornerstone Office Park, along with supporting
market data.

20. Schedule, prepared by management, of the parcels (and listing prices)
remaining to be sold in The Crest residential development, along with estimated
selling costs.

21. PSF pro-forma income statement, prepared by management, for the year
ending July 31, 2001.

22. Article on PSF from the Spokane Business Journal.

23. Schedule of the cost, accumulated depreciation and net book value of
PSF's rental properties as of April 30, 2000.

24. Schedule of PSF development properties sold during the first nine months
of fiscal 2000.

25. Documents relating to the bankruptcy reorganization of Security Savesco,
Inc.

Information provided by sources other than the Company included:

1. Standard & Poor's Outlook and Corporation Records.
2. Annual and quarterly reports of similar publicly-traded companies.
3. The July/August 1998 through July/August 2000 issues of Mergers &
Acquisitions magazine.
4. The 1999 and 2000 editions of Mergerstat Review, published by Houlihan,
Lokey, Howard & Zukin, Inc. ("HLHZ").
5. The 1999/2000 Control Premium Study, prepared by HLHZ.
6. The 2000 Mergerstat Transaction Roster.
7. The January 1999 through July 2000 issues of Realty Stock Review.
8. A Mergerstat Custom Report on REIT acquisitions.
9. The March/April 2000 and May/June 2000 issues of The Partnership
Spectrum, published by Partnership Profiles, Inc.

SUMMARY AND CONCLUSION

Several valuation methods were examined when providing an opinion of the
value of the common stock in PSF. These methods included an adjusted net asset
(and liquidating) approach and multiple market approaches. The market
approaches utilized data from publicly-traded REITs and publicly-registered real
estate partnerships. Past transactions in the shares were also examined. Value
conclusions were arrived at on both a minority interest basis and on a "total
enterprise" (or controlling interest) basis.

Based on the aforementioned appraisal approaches, it is our opinion that the
value of the common stock in Pacific Security Financial, Inc. was $2.25 per
share on an unmarketable, minority basis as of July 2000 based on 3,000
outstanding preferred shares and 1,139,550.58 outstanding common shares. This
value would be most consistent with the fair market value of a minority
interest. It is our opinion that the marketable, minority interest value (as if
the shares were actively traded on an exchange or over-the-counter) of the
common stock was $3.00 per share. It is our opinion that the enterprise value
of the stock was $4.80 per share as of the same date.

ECONOMIC CONDITIONS

When valuing a business, it is important to review the economic conditions
that existed as of the appraisal date and to assess the impact they might be
expected to have on the Company. The financial performance of some companies is
heavily impacted by general economic conditions, while other companies operate
somewhat independently of the cyclicalities of the economy. Pacific Security
Financial, Inc. should be significantly impacted by general economic conditions
as these influence the health of the real estate market.

In conjunction with this assignment, real estate appraisals were prepared on
several of PSF's properties. The following description of the regional economy
is taken from real estate appraisals prepared by Palmer, Groth & Pietka, Inc.,
Terra Property Analytics, LLC and Michael J. Sprute, MAI.

SPOKANE REGIONAL ECONOMY

Spokane County is located near the eastern border of Washington state, in the
heart of a region covering parts of four states that is commonly referred to as
the "Inland Empire." Spokane County encompasses approximately 1,758 square
miles, ranking it as the 19th largest county in Washington. The city of Spokane
is the largest city in Spokane County and the county seat. Spokane is the
recognized financial and economic center of the Inland Empire. It is located
276 miles east of Seattle, 18 miles west of the Idaho border and 110 miles south
of the Canadian border.

Spokane is situated at the base of the west slope of the Rocky Mountains. To
the north lies a forested, mountainous region and the south is comprised of the
rolling hills of the Palouse farming region. The Palouse region is
characterized by wheat farms and ranch lands, while timber and recreational uses
dominate the land to the east and north. The Spokane River runs through the
center of the city. Also considered to be part of Spokane is the Spokane
Valley, a developing, unincorporated area that stretches from the eastern city
limits to the Idaho border. The Spokane Valley is a growing area of
residential, commercial and industrial uses.

POPULATION. Spokane County has experienced cyclical population growth over the
past 40 years. From 1950 until as recently as 1990, the city of Spokane was the
urban base of most of the region's population. During the last several years,
the majority of the population increase in the area has occurred primarily from
suburban residential development in the unincorporated area of the county to the
north and east of Spokane. Since 1990, population growth within the city has
been nominal at 2% per year or less. In contrast, the unincorporated, outlying
areas experienced solid growth although it too has slowed during the past three
years. In 1994, the unincorporated area's population overtook that of the city
of Spokane. In 2000, population within the city was estimated at 210,000 while
population in the unincorporated area was estimated at 205,000. Overall
population growth for Spokane County averaged 2.4% per year during the first
half of the 1990s. However, during the last three years, the county's overall
population growth has been more subdued, averaging approximately 1.0% annually,
a rate that is more in line with longer-term averages.

Most population growth has been from in-migration to the region, especially from
people in the 20- to 50-year age group. The population of the entire Inland
Empire region has grown approximately 20% since 1970, or about twice the
national average. There is a demand for the lifestyle this area offers, and
in-migration from other areas of the United States has been strong, especially
from the Puget Sound region of Washington and from southern California.
However, during the past two years, in-migration into the area has slowed as
local housing prices have risen significantly and employment opportunities have
improved in the Puget Sound area and in southern California.

Spokane County's future population trends are expected to be less cyclical than
in the past. The region has been successful in diversifying its economy from
its dependency on resource-based industries and/or heavy manufacturing. As
such, future population trends are less likely to experience the cyclicality
generated by mass hiring or layoffs typically associated with resource-based
and/or heavy industrial employers.

INCOME AND EMPLOYMENT. The Spokane metropolitan area is the largest urban area
between Seattle and Minneapolis-St. Paul. Historically, the economy of the
region was closely related to natural resource-based industries such as timber,
mining and agriculture. Due to the dependency on resource-based industries,
Spokane's economy remained relatively flat during most of the 1980s when the
rest of the nation began to recover from the recession of the early 1980s. In

1987, in response to stagnant economic development in the Spokane area, local
business and community leaders launched a concerted effort to diversify the
area's economy. Between 1987 and 1993, more than 70 businesses expanded in or
relocated to Spokane. However, during the past few years, improving economies
in the Puget Sound area and southern California have prompted slower
in-migration into the Spokane area. The most noteworthy of the new companies
that have moved into the Spokane market area during the past few years include
The Boeing Company, SeaFirst Bank Credit Card Services, Pitney Bowes, Guardian
Life Insurance and Medco Containment Services.

According to the Washington State Department of Employment Security, total
employment in the Spokane Metropolitan Statistical Area ("MSA") steadily
increased during the past few years, rising from 179,900 in 1995 to 194,400 in
1998, a compound annual gain of 2.6%. Job growth within the MSA is projected at
1% to 2% during the next five years. The unemployment rate for the region, as
well as for Washington state, decreased during 1998. At the end of 1999, the
unemployment rate in Spokane was 4.2%, down from 4.5% at the end of 1998 and
5.9% at the end of 1997. The unemployment rate at the end of 1999 was below
longer-term norms. From 1990 through 1996, the average unemployment rate in
Spokane County ranged from 5.0% to 6.8%. Longer-term gains in employment are
expected to be more subdued than those experienced in 1998.

Historically, the region's economy revolved around resource-based industries.
Major industries include aluminum, railroads, healthcare, electronics
manufacturing and government services. These industries account for about 35%
of the area's non-agricultural wage and salary employment. The majority of the
region's employment gains over the past several years have been in
non-manufacturing, especially in the service and trade sectors. During 1998,
only 10.5% of the MSA's employment was in manufacturing while 25.8% was in
wholesale and retail trade, and 31.1% was in services. The service sector has
been Spokane County's fastest-growing employment category since 1990.

PERSONAL INCOME. Per-capita income in Spokane County increased significantly
during the past several years, rising from $14,296 in 1988 to $21,555 in 1996
and an estimated $24,880 in 1999. The steady gains are traced in part to
diversifying and strengthening the employment base to include more manufacturing
companies, high-technology businesses, service industries and tourism.
Per-capita income growth is expected to moderate to 4.0% to 4.5% annually during
the next few years.

MAJOR EMPLOYERS. Healthcare is the largest single employer within the service
sector. Spokane is the leading medical service center in the Inland Empire.
The Spokane area has five major hospitals and eight specialty hospitals. The
healthcare industry employs over 18,000 people in the Spokane area. The largest
private sector employer in the area is Sacred Heart Hospital. Empire Health
Services is also a large private sector employer. However, employment in the
healthcare sector has been flat in recent years. Future employment gains could
be minimal due to industry pressures to consolidate and contain costs.
Kaiser Aluminum and Chemical Corporation is the largest employer in the
manufacturing sector. Kaiser operates a large aluminum rolling mill as well as
an aluminum reduction plant in the Spokane area. Kaiser Aluminum employs nearly
2,700 people in the area, making it the region's second-largest private
employer. Kaiser's future employment is expected to remain relatively steady.
Hewlett Packard is probably the next largest manufacturing employer, with total
employment of approximately 875. Except for Boeing, most of the other large
manufacturing concerns in the Spokane area are in the high-tech industries of
computers and electronics. One such company is Keytronic Corporation, a
manufacturer of computer keyboards.

The Boeing Company operates a manufacturing plant near the Spokane airport. The
plant was completed in 1990 and had initial employment of 325. Although Boeing
experienced layoffs at its Puget Sound area plants during the 1990s, the Spokane
Boeing plant was not impacted. In 1998, employment at Boeing's Spokane plant
was approximately 575. However, it does not appear that Boeing plans to expand
its presence in the Spokane market.

The government sector has a major impact on the Spokane area economy.
Government-related jobs provided 17.4% of the area's total employment in 1998.
Fairchild Airforce Base (located about 10 miles west of downtown Spokane) is
easily the largest government employer in the area, with approximately 6,000
full-time employees. The air base is home to the Air Mobility Command.
Employment at the base has been stable for several years, and no major personnel
changes are expected in the near term.

The Spokane school district is a major employer, with total employees of
approximately 3,000. Spokane is also home to Gonzaga University, Whitworth
College and Eastern Washington University, as well as Spokane Falls Community
College and Spokane Community College.

Agriculture continues to be an important part of the Spokane area economy.
Major crops include wheat, alfalfa, grass seed, hops, apples, pears, lentils and
dry field peas. Livestock also contributes to local agricultural production.
The Spokane area serves as the major agricultural distribution, trade and
service center for eastern Washington and northwestern Idaho.

Recreation and tourism is the last important component of the economy. The
region contains numerous lakes, streams and ski areas that provide a wide
variety of summer and winter sports activities for Inland Empire residents.
There are four ski areas within a 1-1/2 hour drive from Spokane. In addition,
there are as many as 75 lakes within a 50-mile radius of Spokane.

SUMMARY AND OUTLOOK. Spokane is the heart of the Inland Empire and, as such, is
the center of commerce for a region containing approximately two million people.
The area's economy grew rapidly during the early 1990s due in part to
diversification efforts and strong in-migration from Puget Sound and southern
California. From this rapid pace, economic growth slowed considerably during
the second half of the 1990s to a level that approximated longer-term norms. A
major restructuring of the area's economy occurred during the early- to
mid-1990s. The benefits of that restructuring should continue, although
long-term growth should remain at the more modest pace of recent years.
It appears the region's economic expansion peaked in 1993. Job gains averaged
nearly 5,000 annually during the 1993 to 1995 period compared to 2,000 to 2,500
during the last few years. Most economists believe about 2,500 jobs will be
added in 2000. The Spokane area is expected to record slow, steady growth
during the next few years but at a slower pace than experienced during the last
five years. The shift from manufacturing to service industries should continue
over the next few years. Manufacturing employment growth should hold steady but
decline relative to total employment.

INDUSTRY CONDITIONS

Conditions in the specific industry often have a greater impact on a company
than do economic conditions. In homogeneous or commodity-type businesses,
industry-wide conditions can have a significant impact on the financial
performance of individual companies. Other companies of a more specialized
nature may be little affected by broader industry trends. Pacific Security
Financial's rental and development properties should be significantly impacted
by the overall health of the local real estate market.

The following section on Spokane area real estate markets is taken primarily
from a real estate report prepared by Terra Property Analytics, LLC in August
1999 and supplemented by a real estate appraisal prepared by Michael J. Sprute
in April 2000.

REAL ESTATE MARKETS

OFFICE. The Spokane office market is relatively strong. Central Business
District ("CBD") occupancy rates are between 90% and 95% for average- to
good-quality buildings. The occupancy rate for Class C buildings is somewhat
lower due to functional problems, age and a lack of parking. Rental rates for
Class A product are still too low to justify the cost of construction in the
CBD. Outside the CBD, lower land costs and less-costly construction are
satisfying requirements for new space that cannot be met with the existing
product. However, there is some level of oversupply in the perimeter markets.
Broker surveys report an average 10% vacancy in the suburban segment.
INDUSTRIAL. The industrial market is also stable, with industrial brokers
reporting vacancy rates between 4% and 7%. Rental rates in this segment support
marginally feasible new construction, and there are few geographic barriers to
constrict new supply. Nonetheless, the market is dominated by owner/users who
have restrained new development. Speculative development has also been minimal,
and the market should not become oversupplied.

RETAIL. Spokane has seen tremendous amounts of retail product built in the last
10 years. The most notable projects are the new Spokane Valley Mall at the
intersection of Sullivan and I-90. Sears, J.C. Penney and the Bon March anchor
this regional mall. It was developed by the Price Company and opened in 1997.
A new Wal-Mart and several national big box retailers have also located in this
submarket. In response to this competition, the owners of the existing
Northtown Mall and Riverpark Square have announced expansions of their centers.
Northtown announced intentions to expand by approximately 25%, or 250,000 square
feet, adding another department store and a multi-screen theater. Riverpark
Square resigned Nordstrom downtown to a larger store and is adding a
multi-screen theater on one of its CBD blocks that is being redeveloped. These
projects are in addition to a plethora of freestanding stores and strip centers
and a number of new grocery/drug centers. Overall, despite strong population,
employment and personal income growth, the retail market is saturated.
LODGING. This market is stable in terms of demand. February 1999 occupancy was
53.5%, up from 48.5% in February 1998. However, Average Daily Rents ("ADRs")
have dropped over the same period, from $59.86 to $58.45. The most
rapidly-growing sector is the limited service market, which has seen a number of
new units, generally along the I-90 corridor. Occupancy and ADRs are not strong
enough to support a new full-service facility, which is the reason that the
Davenport Hotel rehabilitation has not occurred.

APARTMENT. This segment is growing steadily in response to low vacancy
rates in the early 1990s. New supply is outstripping demand, and vacancy rates
are climbing. A comprehensive vacancy survey completed in March 1999 reported
an overall vacancy rate of 7.68%. This vacancy is down approximately 100 basis
points from the prior year. Newer complexes fared slightly better than older
complexes, but all segments have some softness.

SUMMARY

The general outlook for the Spokane region continues to be positive.
Regional trends are for nominal-to-moderate growth in population and personal
income. The regional unemployment figures are currently lower than those
experienced during the earlier part of the decade, a result of strong employment
growth in 1997 and 1998. Increasing employment should continue to drive demand
for existing office supply and the development of a moderate amount of new
supply in the near term.

Michael J. Sprute, MAI, believes the slowing pace of economic growth will result
in less in-migration and a corresponding decline in new construction of both
single family homes and apartments. In early 2000, there was an increasing
inventory of unsold new homes and vacant apartments. According to Mr. Sprute,
there should be additional expansion of retail space, small office buildings and
some warehouse/light industrial buildings. Most of this growth is expected to
be in the suburban areas of North Spokane, Spokane Valley and South Spokane.

COMPANY POSITION

BACKGROUND

Pacific Security Financial, Inc. traces its beginnings to the 1940s when
Chairman Wayne Guthrie founded Guthrie Construction, a builder of single family
homes. Pacific Security was formed in 1957. Residential construction was the
mainstay of the Company through the mid-1960s. At that time, the business
changed, and PSF evolved into a finance company specializing in mortgage
financing for commercial and residential projects. To help finance its
activities, PSF began selling debentures to Washington residents in 1969, a
practice that continues today under the auspices of the Washington State
Securities Commission.

PSF continued to focus on lending activities through the 1970s. In addition to
providing real estate financing, the Company began to acquire seller-financed
real estate notes at a discount to face value. PSF also began to acquire
commercial properties during this period, primarily apartments or office
buildings.

In May 1985, PSF merged with Security Savesco, Inc., a company that was involved
in real estate financing and owning, leasing and selling real property.
Security Savesco, formerly owned solely by Wayne Guthrie, declared bankruptcy in
1969 and issued stock to the public in 1971 as part of a plan of reorganization.
Security Savesco, Inc. was the surviving corporation; however, its name was
changed to Pacific Security Companies as of the date of the merger. PSF
acquired public shareholders as a result of the merger with Security Savesco;
however, there has never been an active market for PSF stock.

During the mid-1980s, PSF was being managed primarily by John Guthrie and Robert
Guthrie, sons of Wayne Guthrie. John Guthrie (President at the time) left the
Company's employ in 1988 and Robert Guthrie was appointed President. Robert
Guthrie's vision was to turn PSF into a property development company. During
the 1989 through 1991 period, PSF acquired several parcels of land for future
development. However, Robert Guthrie left the Company's employ in 1991 and
Wayne Guthrie, age 71 at the time, again became President.

Until this time, the majority of PSF's income stemmed from its real estate
financing activities. However, competitive conditions in the secondary mortgage
market increased during the early 1990s. Several publicly-traded funds were
created to acquire pools of mortgages in the secondary market. The increased
demand for mortgage contracts in the secondary market drove yields lower. Due
to the decreased profitability of real estate lending activities, PSF began to
focus more heavily on its investment properties. Financing activities and the
size of the receivables portfolio steadily declined. PSF also began to develop
the land holdings that had been acquired by Robert Guthrie. To this point, the
Company was not experienced in property development.

In 1986, PSF made a loan to Robert Guthrie, John Guthrie and Linda Guthrie to
make improvements on the Evergreen Town Homes apartments. The loan was
increased during the 1990 through 1992 period. The PSF loans allowed the three
individuals to refinance an existing bank loan that was due. PSF commenced
foreclosure proceedings when the Guthries were not able to make their loan

payments to PSF. Litigation ensued, as John Guthrie was forced to declare
personal bankruptcy. The litigation lasted into 1996. However, PSF prevailed,
was able to foreclose on the property (since renamed Evergreen Apartments) and
resold it to an unrelated party in 1996. PSF booked a gain on the sale and
financed the transaction.

In 1992, Robert Guthrie filed an unrelated lawsuit. Wayne Guthrie had divorced
and remarried during the 1950s. Robert Guthrie, John Guthrie and Linda Guthrie
are Wayne Guthrie's children from his first marriage. David Guthrie and Julian
Guthrie are Wayne Guthrie's children from a second marriage; Kevin Guthrie is
the son of Constance Guthrie from a prior marriage. Kevin Guthrie and David
Guthrie were both employed by PSF. The lawsuit alleged improprieties in the
original marital dissolution property settlement during the 1950s and asserted
that a portion of Wayne Guthrie's assets were still community property with his
first wife.

After a protracted litigation, the suit was settled prior to trial in January
1998. The Company agreed to settle all claims of the "minority stockholders"
(among them Robert Guthrie, John Guthrie and Linda Guthrie) by redeeming their
PSF common stock for a combination of $317,000 in cash, PSF real property with
an estimated fair market value of $643,500 and notes payable of approximately
$729,000. The Company redeemed 408,419 of its common shares pursuant to the
settlement agreement. In addition, PSF obtained a non-compete covenant from one
of the minority stockholders in return for a note payable of $125,000. In
connection with the settlement, the Company also agreed to reimburse the
plaintiff's for their legal costs, aggregating $150,000. The total legal
expenses incurred by PSF during fiscal 1998 relating to this settlement were
approximately $300,000.

PSF's real estate lending activities continued to wind down during the
mid-1990s, and the Company focused on remodeling its rental properties. PSF
also continued to develop its investment property, the legacy left by Robert
Guthrie. One such development project was Birdies Golf Center. In fiscal 1996,
the Company completed construction of Birdies Golf Center ("Birdies"). The golf
center featured a 56-tee driving range, a fully-lighted, contoured fairway with
five target greens, a pro shop, teaching studios and an 8,000 square foot
putting green. Birdies served as a practice and teaching center for all levels
of golfers and additionally sold golf clubs and related golfing supplies.
Birdies was constructed on land that had been acquired for development in 1990.
Birdies Golf Center was never profitable and, on December 1, 1998, management
elected to close this operation and commenced liquidating the related assets.
The Birdies facility was converted into an office building known as the
Cornerstone Building. Following approximately $280,000 of renovation costs, the
facility was leased to two tenants during fiscal 1999 (ended July 31). The
acreage (known as the Nevada-Holland property) formerly surrounding Birdies Golf
Center is being developed into the Cornerstone Office Park. Cornerstone Office
Park originally had 12 parcels available for sale. Two parcels were sold prior
to April 30, 2000 and two parcels were sold subsequent to April 30. As of the
appraisal date, management had received a verbal commitment from a bank to
finance construction of a 12,000 square foot office building adjacent to the
Cornerstone Building. Construction costs are estimated at $1.3 million.
PSF's other ongoing development project is known as Tanglewood Ranch Park
Estates ("The Crest"), a residential development located in south Spokane
County. This property was acquired through foreclosure in 1991. The Crest
features 24 10-acre parcels suitable for home construction. The Company began
developing this project in fiscal 1997 and began marketing the parcels in fiscal
1998. A total of 15 lots had been sold as of April 30, 2000.

According to management, the Company was unable to do any strategic planning
while the minority shareholder lawsuit was ongoing. The settlement of the suit
allowed PSF to move forward. David Guthrie and Kevin Guthrie had been primarily
responsible for managing day-to-day operations since the early 1990s. However,
all major strategic decisions were put on hold while the shareholder dispute was
ongoing. Following the settlement of the lawsuit in January 1998, David Guthrie
assumed operating control of the Company; he was named President and Chief
Executive Officer in 1999.

One of the most important decisions was the formation of Cornerstone Realty
Advisors, Inc., a wholly-owned subsidiary of PSF that is involved in commercial
real estate lending and brokerage. CRA provides construction and bridge
financing. Its activities have increased significantly since being formed in
March 1998, and it promises to provide an increasing portion of PSF's income.
The formation of CRA allowed PSF to return to its historical area of expertise -
real estate lending.

The name of the Company was changed to Pacific Security Financial, Inc. in
November 1999 to reflect the change in focus toward commercial real estate
lending. New subsidiary companies were also formed, including Cornerstone
Properties and Development, Inc. and Pacific Realty Management, Inc. According
to management, the intent is for PSF to become a holding company, owning three
major operating subsidiaries: CRA, involved in commercial real estate lending;
Cornerstone Properties and Development, involved in property development; and
Pacific Realty Management, which manages the Company's rental properties.
In July 2000, PSF acquired two adjacent office/retail buildings in Boise, Idaho
for approximately $2.9 million.

BUSINESS

PSF's business can be separated into four segments: 1) originating real
estate contracts and acquiring seller-financed contracts in the secondary
market, 2) providing short-term real estate loans for construction or interim
financing through Cornerstone Realty Advisors, 3) owning/operating commercial
properties, primarily in the Spokane area, and 4) property development. As of
April 30, 2000, the assets (at net book value) devoted to these four activities
were as follows:

Assets Employed
----------------
Long-Term Real Estate Contracts $ 4,848,803
Short-Term Real Estate Contracts 15,964,842
Rental Properties 15,013,610
Development Properties 1,879,178

LONG-TERM MORTGAGE LENDING. A summary of PSF's mortgage loans receivable
as of April 30, 2000 is included in Table I. The largest individual long-term
contracts are seller-financed notes for properties that were once owned by PSF.
Some of these properties were acquired through foreclosure and re-sold.
Long-term receivables include ones secured by the East Valley Terrace Apartments
($939,000 @ prime plus 2%) and North Riverbank land ($740,000 @ 8.0%). The
latter was a development property that was sold in July 1999; the contract was
paid in full in June 2000. Another large, long-term contract on the Evergreen
Town House Apartments ($1.6 million @ 10.5%) was paid in full in October 1999.
In addition, PSF has a portfolio of real estate contracts that were either
purchased on the secondary market (often at a discount to face value) or are
smaller, seller-financed notes from the sale of property. The total carrying
amount of these mortgage contracts as of April 30, 2000 was $3,169,280 while the
face amount was $3,216,072. The loan portfolio includes approximately 56
separate notes. The weighted average yield-to-maturity rate of the "all other"
loan category was estimated at 10%. Management estimates the average maturity
date at approximately six years.

PSF carries a modest loan loss reserve of $20,000 on the long-term mortgage
portfolio. The loan loss reserve was increased from $4,908 at the end of fiscal
1999.

SHORT-TERM COMMERCIAL LENDING. PSF's short-term lending is provided by
Cornerstone Realty Advisors, Inc. CRA specializes in short-term loans for
commercial real estate. The majority of CRA's loans are construction or bridge
financing for commercial properties until permanent financing can be arranged.
CRA's market area includes the western United States. As of the appraisal date,
CRA had loans outstanding for properties located in Washington, Idaho,
California, Utah, Arizona, Nevada and Alaska.

CRA provides loans ranging from $200,000 to $3.5 million on commercial projects
such as multi-family residential, warehouse, light industrial, office and
professional buildings, retail, etc. Nearly all of the loans are secured by a
first mortgage on the property and personal guarantees. All loans are floating
rate, with interest rates ranging from 3.0% to 4.25% over prime and loan
fees/points of another 2.0% to 4.0%. Maturities generally range from 12 to 24
months.

Details of CRA's loan portfolio as of April 30, 2000 are shown in Table I. Only
the largest loans are detailed. As of that date, CRA's portfolio of loans
consisted of 23 loans totaling $16.0 million, the largest of which was for $2.9
million. The average interest rate was prime plus 3.50%, and the typical loan
term was 12 months. The average loan-to-value ratio was about 75%. The CRA
loan loss reserve was modest at $30,000 as of April 30, 2000. Between April 30,
2000 and June 30, 2000, three loans totaling $2.5 million were paid off while
six loan commitments totaling $8.9 million were added to CRA's loan portfolio.
Hence, CRA was continuing to add to its loan portfolio as of the appraisal date.
PSF finances the activities of CRA with bank lines of credit. The credit lines
to finance the activities of CRA consist of floating rate debt. CRA does not
speculate on the direction of interest rates but rather earns income by
maintaining its interest rate spread and generating substantial loan fees.
CRA's niche is in providing financing on projects that may not initially be
"bankable" through conventional lenders because of the lack of an appraisal,
limited pre-leasing, limited cash equity, etc. By understanding the real estate
market, CRA can provide a quick response to a borrower's opportunity. Although
CRA is in a high-risk business, it has proven to be quite successful since being
formed in March 1998. Since that time, PSF's portfolio of long-term mortgage
loans has declined while the portfolio of short-term construction loans provided
by CRA has steadily increased. This trend is likely to continue, subject to the
changing level of demand for construction financing and PSF's ability to finance
the activities of CRA.

RENTAL PROPERTY. PSF's owned rental property and property held for investment
is listed in Table II. It should be noted that the respective property values
noted in Table II do not include furniture and fixtures. According to Don
Migliuri, furniture/fixtures consist largely of carpeting, lighting fixtures,
air conditioning units, etc. that would reasonably be considered part of the
building in the event of a sale. The net carrying value of the respective
properties including related furniture/fixtures is outlined later in this
report.

The two most valuable properties are the Peyton Building and the Hutton
Building, office buildings that are located in downtown Spokane. The Peyton
Building has seven floors with 85,000 square feet of rentable space. A $400,000
remodel of the third floor was in process as of the appraisal date. As of the
appraisal date, the building was approximately 80% leased, with most of the
vacancies being on the third floor. According to management, a target occupancy
rate is closer to 90%.

PSF's offices are located on the fifth floor of the Peyton Building. Despite
the remodel, PSF had not been successful in attracting a major tenant for the
third floor. As of the appraisal date, management had decided to move PSF's
offices to the third floor and renovate most of the fifth floor. The tentative
move date is September 2000.

The Hutton Building has seven floors covering 56,000 square feet. Remodeling
has been ongoing over the past several years. This building is approximately
89%-leased.

According to David Guthrie, the real estate market in Spokane's Central Business
District ("CBD") is improving. Some major renovation projects were being
discussed as of the appraisal date. A new owner reportedly plans to renovate
the Davenport Hotel. A new development, River Park Square, was recently
completed. The former Washington Water Power steam plant has been restored as
offices and restaurants. According to David Guthrie, a Local Improvement
District may be formed south of the Davenport Hotel. A parking structure is
also planned, contingent on the Davenport renovation. Inadequate parking is one
of the major problems faced by the CBD.

Other commercial buildings owned by PSF in the Spokane area include the Pier One
Building, the AT&T Wireless Building and the Cornerstone Building. The Pier One
Building is a retail/office building that was acquired in 1992 and extensively
remodeled in 1993. The building has approximately 31,000 square feet of
rentable space. The building is fully leased, with two major tenants (Pier One
Imports and American Express) occupying over 60% of the space.

The AT&T Wireless Building, located on the north riverbank in Spokane, was
constructed by PSF in 1992. The building contains 7,878 square feet of rental
area. The entire building is leased to AT&T under a 10-year lease that expires
in August 2001.

Excluding the newly-constructed Apex Physical Therapy building, PSF's newest
rental property is the Cornerstone Office Building. This 9,971 square foot
building originally housed Birdies Golf Center. The building was remodeled in
early 1999 to convert it into an office building. Remodeling costs were
approximately $280,000. As of the appraisal date, the building was fully leased
to two tenants.

PSF entered into a build-to-suit arrangement with one tenant (Apex Physical
Therapy) of the Cornerstone Office Park. Construction was completed in early
2000, and Apex began occupying the building on March 11, 2000. Apex has a
two-year option to acquire the property expiring on March 11, 2002. According
to David Guthrie, PSF would record an approximate $100,000 gain if Apex
exercised the option. For most of the balance of the project, PSF plans to sell
undeveloped lots rather than construct/own/lease buildings on the property.
Another commercial building, the Bank Branch Building located at West 102
Indiana, was sold in August 1999. The net realizable proceeds to the Company
were $1.1 million, and a $719,146 gain was recorded on the sale.

PSF owns one apartment building, the 128-unit Broadmoor Apartments located in
Spokane. Until recently, the building (formerly the Aqua View Apartments) was
operated as a HUD Section 8 low-income housing project. A long-term remodeling
project was nearing completion as of the appraisal date. Over 80 of the 128
units have been remodeled. According to management, as of the appraisal date,
the building had achieved stabilized occupancy.

A second multi-family building, the Southridge Apartments, was sold in fiscal
1999. The net proceeds to PSF from the 21-unit complex were approximately
$720,000.

Given the gradual decline in PSF's lending activities during the 1990s, the
Company sought to improve the occupancy of its rental properties by
upgrading/remodeling the facilities. As noted, remodeling projects at the
Peyton Building and Broadmoor Apartments were nearing completion at the end of
fiscal 2000.

In July 2000, PSF acquired two adjacent commercial buildings in Boise, Idaho.
The purchase price was approximately $2.9 million. The buildings are located on
a corner lot; the purchase price also includes some excess land valued at about
$150,000. According to David Guthrie, both buildings are combination
office/retail buildings and both are fully leased. One building is 10,896
square feet and the second building covers 8,292 square feet.

Management also plans to construct a 12,000 square foot office building on the
Nevada-Holland property adjacent to the Cornerstone Building. The project is a
speculative building; there are no pre-leasing commitments. Construction costs
are estimated at $1.3 million; the targeted completion date is mid-2001.
According to David Guthrie, PSF has a financing commitment from a bank. The
loan commitment would cover both Cornerstone buildings, including the equity in
the original Birdies Golf Center Building that has since been converted to the
Cornerstone Building. All of the incremental funds needed to construct the
second building should be borrowed.

DEVELOPMENT PROPERTY. PSF had two major property development projects underway
as of the appraisal date. Tanglewood Ranch Park Estates (known as The Crest)
was acquired through foreclosure in 1991. The property, located in south
Spokane County, covers approximately 300 acres of undeveloped land. PSF has
developed the property into 24 10-acre lots suitable for home construction. The
Company began marketing the parcels in 1998. A total of 15 of the parcels had
been sold as of the appraisal date, including three in fiscal 2000.
The other major development project is Cornerstone Office Park. This property
is part of the "Nevada-Holland" property that once housed Birdies Golf Center.
The property covers approximately 15 acres and is being developed into an office
park. As of April 30, 2000, PSF had sold two of the 12 available parcels; two
more parcels were sold subsequent to April 30, 2000.

PSF also owns six acres of undeveloped land in Auburn, Washington that was
acquired through foreclosure in 1993. The property was originally zoned for
multi-family housing but was down-zoned to single family. It had been for sale
but is currently not listed.

PSF sold one development property in fiscal 1999. In July 1999, PSF sold a
parcel of undeveloped commercial real estate located along the north riverbank
in Spokane. The net realizable proceeds were approximately $905,000.

During the first nine months of fiscal 2000 (ended April 30, 2000), PSF sold
three Crest parcels and two Nevada-Holland parcels. As noted, PSF also sold one
rental property, the Bank Branch Building located at West 102 Indiana, in August
1999. According to David Guthrie, the best of the Crest parcels had been sold
as of the appraisal date as had two of the most desirable Nevada-Holland
parcels. It may take an extended period to sell the balance of the properties.

PROPERTY HOLDINGS

PSF should continue to invest in and hold real property on a long-term
basis. In the past, some properties were sold on an installment basis for tax
purposes in order to defer income taxes and conserve cash. This practice could
change in the future based on 1999 changes in the tax law. Some of the
development properties sold by the Company may be seller-financed, thereby
adding to PSF's portfolio of mortgage receivables. According to management, all
of the Company's properties have been inspected and there are "no recognizable
environmental problems."

A summary of PSF's rental and development properties as of April 30, 2000 is
provided below:

<table>
As of April 30, 2000
-----------------------------------------
Rental/ Net Mortgage or
Date Development Carrying Contract
Acquired Description of the Property Status Value Obligation
- -------- -------------------------------- ------------- ------------ ------------
<s> <c> <c> <c> <c>
RENTAL PROPERTY
Commercial:
1979 The PEYTON BUILDING
at N. 10 Post Street Substantially $ 4,416,613 $ 2,422,444
contains approximately 85,000 Leased
square feet of rentable space.
Substantial improvements have
been made to the building since
its acquisition. Remodeling of
this office building continues
as new occupancy warrants. PSF's
offices are located in this
building.
1979 The HUTTON BUILDING
at S. 10 Washington Substantially 3,463,383 1,400,000
contains approximately 56,000 Leased
square feet of rentable space.
Substantial improvements have
been made to the building since
its acquisition. PSF also
acquired 25,000 square feet
for parking near this building.
1992 The PIER ONE BUILDING is a Leased 3,082,735 1,316,668
commercial building. The
building has two major
tenants, who occupy over 60%
of the space, and several
smaller tenants.
1992 The AT&T WIRELESS BUILDING is a Leased 702,258 801,216
commercial building constructed
by PSF on the north river bank
in Spokane. It is leased to
AT&T.
1995 The CORNERSTONE OFFICE BUILDING Leased 1,559,220 693,965
is the remodeled Birdies Golf
Center, constructed on two acres
of the Cornerstone Office Park
property. It has approximately
8,300 square feet of rental
space occupied by two tenants.
2000 The APEX PHYSICAL THERAPY BLDG Leased 590,100 0
is a 4,685 square foot
build-to-suit building that was
completed in 2000. It is leased
to a single tenant (Apex Physical
Therapy) through March 2005.
Apex has a two-year option to
acquire the property for
$690,751.
</table>

1969 The BROADMOOR PARTMENTS, Occupied $ 1,193,793 $ 474,435
formerly the Aqua View
Apartments, is a 129-unit
apartment complex.

DEVELOPMENT PROPERTY
1991 TANGLEWOOD RANCH PARK ESTATE Being Marketed 871,118 0
in south Spokane County was
acquired through a judicial
foreclosure. The area consisted
of approximately 300 acres of
undeveloped land. A total of
15 lots were sold through
April 30, 2000, leaving
approximately nine lots
available for sale.
1990 CORNERSTONE OFFICE PARK AND
PROPERTY Being Marketed 835,674 0
consists of approximately 12
remaining acres of raw land in
a location where there has
been substantial commercial
and residential development.
Two parcels were sold through
April 30, 2000, leaving
10 available for sale.
1993 Approximately six acres in
Auburn, Washington Being Marketed 172,386 0
originally zoned for multi-
family housing were acquired
through a foreclosure.
</table>

OPERATIONS

PSF's corporate offices (and those of CRA) are located in the Peyton Building.
As of the appraisal date, PSF had 21 employees, in the following capacities:

Management 5
Administration 5
Property Management 1
Maintenance 3
Janitorial 7
---
Total 21

Total employment is down from 33 one year earlier due to the closure of Birdies
Golf Center. Of PSF's 21 employees, three are allocated to CRA. With the
exception of the janitorial staff, most employees have been with PSF for several
years.

PSF's business is dependent on the health of the local real estate market.
According to management, the commercial real estate market in the Spokane area
is in equilibrium, with demand consistent with supply. Rental rates are
expected to be flat in the foreseeable future. According to David Guthrie, the
Spokane area is experiencing nominal real growth; it would not be characterized
as a "growth market." However, the downtown Central Business District could be
revitalized due to certain re-development and renovation projects that are
currently in the planning stages.

PSF's rental properties compete with numerous other commercial/multi-family
buildings in the Spokane area. Similarly, there are other projects that are in
competition with The Crest and Cornerstone Office Park.

In addition to owning/managing rental property, PSF's primary ongoing business
is the lending activity of CRA. CRA competes with conventional financing
sources such as banks and insurance companies. One of CRA's competitive
advantages is that it can act quickly in granting loan approvals. CRA is not
constrained by strict rules pertaining to loan-to-value ratios or pre-leasing
requirements. By analyzing the market conditions surrounding each project, CRA
is able to grant loans (that are good credit risks) on projects that do not
initially qualify for conventional financing. CRA charges interest rates and
fees that are higher than conventional lenders but are less expensive than
asset-based lenders and a better alternative to developers than seeking an
equity partner.

The scope of CRA's activities depends on the availability of funds. The funds
to finance CRA's short-term lending activities are provided by revolving credit
lines with banks. As of the appraisal date, PSF had an $11 million credit line
with U.S. National Bank of Washington, an $8 million credit line with Western
Bank and a $7.5 million credit line with Sterling Savings and Loan. Fund
availability is enhanced by the equity that PSF has built in several of its
rental properties, thereby providing increased collateral over and above that
provided by the project itself. The credit lines are also personally
guaranteed.

According to David Guthrie, construction activity in CRA's marketing area
remained relatively strong as of the appraisal date, despite the increase in
interest rates over the past year. CRA is constrained by the availability of
funds rather than by a shortage of suitable construction projects. However,
commercial construction activity such as that financed by CRA has historically
been subject to the cyclicalities of the economy.

As noted, PSF has intermittently sold debentures to Washington residents since
1969 as a way to help finance the Company's operations. General risk factors
included in the most recent debenture Offering Circular included PSF's need for
ongoing financing, the uncertainties associated with the Company's property
development activities, the risk that PSF will not be able to maintain its
interest rate spread due to changing interest rates, the risk of borrower
default especially since PSF's loan portfolio may entail higher risks than a
conventional lender, the risk of regulatory compliance and the lack of
management depth. Other risk factors were cited that dealt specifically with
the debentures.

MANAGEMENT/OWNERSHIP

Management of PSF is headed by founder and Chairman Wayne Guthrie, age 80.
Mr. Guthrie has been Chairman since 1970. He has over 50 years of experience in
the areas of construction, financing of real estate and personal property, and
real estate investments. Wayne Guthrie was responsible for managing the Company
for many years but is now no longer actively involved in day-to-day operations.

David Guthrie, 36, was elected President in February 1999. He had been a Vice
President of PSF since 1989. David Guthrie is in charge of all aspects of PSF's
operations, with an emphasis on lending activities, asset management and
property development, and maintaining the Company's banking relationships.
Kevin Guthrie, 45, is Vice President of PSF, a position he has held since 1985.
Kevin Guthrie's responsibilities revolve around managing the Company's rental
properties. He has served as PSF's Property Manager since 1976.

Donald Migliuri, 53, has been Treasurer of PSF since 1990 and Secretary since
1991. He serves as the Company's Chief Financial Officer. Mr. Migliuri is a
Certified Public Accountant and a Certified Management Accountant.

John Lloyd, 37, is the President of CRA. He has been with PSF since CRA was
formed in March 1998. Mr. Lloyd was previously employed by Washington Trust
Bank where he was involved in real estate loan underwriting and loan
administration. He has 11 years of experience in commercial real estate
lending.

The Board of Directors consists of Wayne Guthrie, Kevin Guthrie, David Guthrie,
Donald Migliuri, Constance Guthrie, Robert Codd and Julian Guthrie. Constance
Guthrie is the wife of Wayne Guthrie. David Guthrie, Kevin Guthrie and Julian
Guthrie are the children of Wayne and Constance Guthrie. Constance Guthrie is a
housewife and Julian Guthrie is a reporter for the San Francisco Examiner. Mr.
Codd, 69, is employed by PSF. Former PSF Secretary Raymond Fisher retired from
the Board in April 2000. His Board seat remained vacant as of the appraisal
date. Wayne Guthrie, Kevin Guthrie and David Guthrie are the only Guthrie
family members employed by PSF.

The shareholders of the Company as of July 31, 2000 were as follows:

Common Percent
Shareholder Shares of Total
------------------- --------------- ----------------
Wayne Guthrie 142,521.50 12.52%
Constance Guthrie 142,521.50 12.52
Kevin Guthrie 241,424.00 a 21.20
David Guthrie 241,424.00 a 21.20
Julian Guthrie 196,838.40 17.28
------------------- --------------- ----------------
Subtotal 964,729.40 84.72

All Other
(1,111 shareholders) 174,065.98 15.28
------------------- --------------- ----------------
Total 1,138,795.38 100.00%
=============== ================

a - Including 18,706 shares held by minor children.

As of the appraisal date, PSF had 3,000 shares of preferred stock outstanding.
All were owned individually or jointly by Wayne and Constance Guthrie. The
preferred stock has a $100 per share par value, is voting, has a 6.0% cumulative
dividend and a liquidation preference (at par value) over the common stock.

The preferred stock was issued in fiscal 1995 at a 50% discount to face value.
A total of 10,400 shares were originally issued. PSF has the right to redeem
the shares at par after three years from the date of issuance. A total of 1,000
preferred shares were redeemed in fiscal 1997, 2,400 shares were redeemed in
fiscal 1998 and 4,000 shares were redeemed in fiscal 1999.

The preferred shares originally contained a mandatory redemption (at par value)
after 10 years. This gradual increase in the value of the preferred stock (due
to the difference between the original issue price and par value) was reflected
as an annual charge against retained earnings. During fiscal 1999, the
shareholders voted to rescind the mandatory redemption requirement, such that
the preferred stock should now be considered a part of PSF's permanent capital.
There have been significant shareholder redemptions during the past few years.
As noted, 7,400 shares of preferred stock were collectively redeemed over the
fiscal 1997 through fiscal 1999 period at par value of $100 per share.
The major transaction in common shares in recent years resulted from the
settlement of the "minority shareholder" lawsuit in January 1998. As part of
the settlement agreement, 408,419 shares of common stock held by the minority
shareholders were redeemed for a combination of cash, property and notes payable
totaling $1,689,500, or $4.14 per share.

PSF is not publicly-traded and has no market for its stock. However, the
Company has numerous small shareholders not affiliated with the Guthrie family
(or management) that date back to Security Savesco's reorganization in 1971 and
the merger with Pacific Security in 1985. A bankruptcy court established a
value for the common stock of $1.72 per share in 1987. Cash dividends of $0.05
per share, $0.075 per share and $0.10 per share were paid in the successive
three years. No common dividends have been paid since that time. Since 1990,
PSF has had a standing offer to acquire any shares held by unaffiliated
shareholders at $1.55 per share. There were numerous redemptions at $1.55 per
share over this period.

A major common stock redemption with a related party occurred on July 31, 1998
when 200,000 common shares were redeemed from the Guthrie Family Limited
Partnership. The purchase price was $500,000, or $2.50 per share. PSF paid for
the redemption by distributing a commercial property (the Yellowfront Building
in Coeur d'Alene, Idaho) to the Partnership. PSF recorded a $420,000 gain on
the transaction.

The most recent related party redemption occurred in January 2000 when 12,000
common shares held by the minor children of Kevin Guthrie and David Guthrie were
redeemed for $1.55 per share. From August 1999 through March 2000, a total of
547.8 shares were redeemed from unaffiliated shareholders for $1.55 per share.
Beginning in April 2000, the Board increased its standard redemption price to
$3.00 per share. Between April 1, 2000 and June 30, 2000, 856.7 common shares
were redeemed from unaffiliated shareholders at $3.00 per share. According to
David Guthrie, the increase in the standing redemption price offered by the
Board was based on a combination of factors including recent appraisals of the
properties, the success of CRA and preliminary work by Pagano Appraisal Group.

FINANCIAL ANALYSIS

The following sections review Pacific Security Financial's income statement,
statement of cash flows and balance sheet during the six years preceding the
appraisal date. Such an analysis identifies relevant trends and puts the
Company's current revenues, profits and financial condition in perspective
with historical norms. Unusual items and those that had an appreciable impact
on the Company's financial history are highlighted.

INCOME STATEMENT

Table III illustrates PSF's income statement from fiscal 1995 (ended July
31) through the nine months ended April 30, 2000. PSF closed Birdies Golf
Center during fiscal 1999, and prior years' income statements were restated to
reflect Birdies as a discontinued operation. We consider PSF to have three
major ongoing businesses: rental real estate; Cornerstone Realty Advisors and
the ongoing collection of long-term mortgage receivables. Although the Company

has had ongoing gains from the sale of real estate and had two development
projects in process as of the appraisal date, we do not consider real estate
development/sales as an ongoing business of PSF.

The income associated with PSF's rental operations can be segregated from
the data contained in Table III. A summary of the revenue and direct expenses
associated with rental operations is shown below:
<table>
12 Months Years Ended July 31,
Ended ---------------------------------------------------
April 30, 2000 1999 1998 1997 1996
-------------- ---------- ---------- ---------- ----------
<s> <c> <c> <c> <c> <c>
Rental Revenues $2,271,811 $2,268,810 $2,220,979 $2,398,369 $2,714,563
Rental Expenses 2,061,139 2,094,537 2,036,315 2,097,783 2,460,071
-------------- ---------- ---------- ---------- ----------
Rental Income 210,672 174,273 184,664 300,586 254,492
Depreciation and
Amortization 690,536 663,272 628,149 640,105 714,474
-------------- ---------- ---------- ---------- ----------
Cash Flow $ 901,208 $ 837,545 $ 812,813 $ 940,691 $ 968,966
</table>

The decline in rental revenues in fiscal 1997 is attributable primarily to
the sale of the Evergreen Apartments and a mini storage facility. Rental income
in any given year is dependent on the amount of rental property owned by the
Company. This has not been constant over the years due to the sale and
acquisition of various properties. Cash flow (defined as income before non-cash
depreciation/amortization charges) is often used as a better proxy of operating
performance for real estate companies. This is because depreciation on real
property is often not "real" in an economic sense, i.e., the property does not
decline in value. However, if cash flow is used as the proxy of profitability,
ongoing expenses for remodeling/refurbishment should also be considered.
Also, it should be stressed that the "rental expenses" noted above include only
direct expenses. PSF has substantial expenses for salaries and
general/administrative items that could reasonably be allocated to rental
operations. The contribution to income from rental operations, as portrayed
above, is overstated. After three years of decline, cash flow from rental
operations increased slightly in fiscal 1999 and exhibited greater improvement
through the first nine months of fiscal 2000. According to management, the
recent improvement in rental operations is due primarily to the completion of
the long-term remodeling project at the Broadmoor Apartments and the related
increase in occupancy and rents. The Cornerstone Office Building also
contributed to income during the first nine months of fiscal 2000.

The formation of CRA in March 1998 has had a significant impact on PSF's
income statement. CRA generates income both from its loan fees and its net
interest spread. The sizable increase in PSF's interest income and loan/service
fee income in fiscal 1999 and through the 12 months ended April 30, 2000 is
related directly to the growth of CRA. The following is a summary of the
revenues and income associated with PSF's "commercial lending operations," i.e.,
CRA. The data was taken from the business segment data contained in the
footnotes to the annual financial statements. This segmented data was not
available for the most recent nine-month interim period; however, the growth of
CRA's operations is evidenced by PSF's interest and loan fee income, which
increased to $2.0 million during the nine months ended April 30, 2000 from less
than $1.6 million in the comparable year-earlier period.

Year Ended July 31,
----------------------
1999 1998
---------- ----------
Commercial Lending Operations
Revenue $1,524,139 $183,272
Income from Continuing Operations 476,088 3,245

The significant growth in CRA's activities is amply illustrated in the
above data. CRA has made great strides since being formed in March 1998.
During the most recent quarter, PSF's interest and loan fee income was $687,000,
or an annual rate of $2.7 million. Further, CRA is quite profitable. The
"income from continuing operations" listed above is on a pretax basis and
includes some allocated general and administrative expenses. In contrast, the
income from rental operations previously discussed did not include allocated
general and administrative charges. A significant amount of general and
administrative expenses are attributable to "rental operations." As of the
appraisal date, CRA was the most profitable aspect of PSF's ongoing operations.
However, management believes a higher portion of corporate general and
administrative expenses could reasonably be allocated to CRA.

The balance of PSF's ongoing income is attributable to interest income on its
portfolio of long-term receivables. This income has been decreasing with the
declining face amount of PSF's long-term receivables portfolio; the Company has
not been active in acquiring mortgage notes in the secondary market in recent
years. Most new receivables added to its portfolio (other than the short-term
receivables of CRA) have been from seller-financed sales of real estate such as
the Evergreen Town House and North Riverbank properties. While the long-term
mortgage receivables have provided a positive contribution to income, the value
of such financial instruments is best reflected through an adjusted balance
sheet valuation approach rather than through an income approach. A portion of
the income from these receivables stems from the amortization of the discount to
face value. The income associated with such amortization of discounts was
$72,317 during the latest 12 months ended April 30, 2000.

PSF has repeatedly recognized sizable gains on the sale of real estate. As
illustrated in Table III, during the past five years, such gains ranged from
$486,000 in fiscal 1996 to $1.6 million in fiscal 1997. The average gain during
the period was $865,000 per year. Properties sold in fiscal 1999 include the
Southridge Apartments and North Riverbank property. We have not labored to
identify the specific gains in past years. The level of expected future gains
is dependent on the property available for sale at any point in time and the
estimated unrealized appreciation in that property. For appraisal purposes, the
more relevant question is to determine the unrealized appreciation (if any) in
the Company's existing properties.

During the first nine months of fiscal 2000, PSF generated gains on the sale of
real estate of $899,000. The majority of this gain was attributable to the sale
of the Bank Branch Building in August 1999. This property resulted in a gain of
$719,000. The balance of the gains were attributable to PSF's development
properties. The three Crest parcels sold in the nine-month interim period of
fiscal 2000 resulted in losses averaging $8,900. The two Nevada-Holland parcels
resulted in gains of $78,000 and $159,000.

PSF recorded an uncharacteristic $279,082 gain from the sale of marketable
securities in fiscal 1999. According to management, the majority of this was
from the realization of some value from securities that were originally written
off in 1992. As with the gains on real property, such gains on securities
should not be considered ongoing. Rather, one should concentrate on the current
fair market value of the securities portfolio and whether the portfolio has any
unrealized gains.

The expenses associated with PSF's rental operations were previously discussed.
Besides the direct expenses associated with rental operations, PSF's other major
expense is interest expense. The latter relates to the loans that were used to
finance CRA's lending activities, loans that were used to finance the
acquisition of long-term receivables or any other loans for non-rental real
estate assets. The significant increase in PSF's non-rental interest expense in
fiscal 1999 relates entirely to the growth of CRA's loan portfolio. As noted,
the interest income and loan/service fee income generated by CRA more than
offsets its cost of funds. CRA's borrowings are all variable-rate, allowing it
to maintain its net interest margin. During the nine months ended April 30,
2000, the difference between PSF's interest/loan fee income and its non-rental
interest expense was $560,000, up from $189,000 during the year-earlier period.
Most of this higher income is due to the activities of CRA.

Salaries and commissions are another major ongoing expense. Total labor-related
expenses averaged approximately $730,000 during the past two fiscal years,
rising to $815,000 during the 12 months ended April 30, 2000. The compensation
of David Guthrie and Kevin Guthrie averaged $109,000 each during the past two
fiscal years. Wayne Guthrie's compensation was $48,000 in fiscal 1999. The
most highly compensated employee in fiscal 1999 was John Lloyd, President of
CRA. His compensation was $152,000 in fiscal 1999 and should increase in fiscal
2000 due to incentives and the increasing income of CRA.

General and administrative expenses were unusually high in fiscal 1998 at nearly
$796,000. According to management, general and administrative expenses included
professional fees of approximately $300,000 in fiscal 1998 related to the
minority shareholder litigation. Lesser professional fees associated with the
litigation were incurred in prior years. The cost of uncollectible accounts was
minimal prior to fiscal 2000. The $50,025 expense for uncollectible accounts
during the first nine months of fiscal 2000 stems from management instituting a
loan loss reserve of $50,000; the Company carried a negligible loan loss reserve
in prior years.

As noted, PSF's operating results have been adjusted to reflect the losses of
Birdies Golf Center as a discontinued operation. However, even with this
adjustment, PSF's income from continuing operations has been highly erratic
based on the varying gains from the sale of real estate. The high level of
income from continuing operations in fiscal 1997 and fiscal 1999 both reflect
large gains from the sale of real estate and/or marketable securities. In
contrast, the loss from continuing operations in fiscal 1998 is also overstated
since it includes significant expenses associated with the minority shareholder
litigation.

Further complicating matters is the growth of CRA during the past two years.
According to the business segment information contained in the annual financial
statements, PSF's total pretax income from continuing operations was $853,559 in
fiscal 1999, of which $476,088 was from CRA and $377,471 was from rental real
estate and receivables operations. However, the latter benefited from a $1.1
million gain from the sale of real estate and a $279,000 gain on the sale of
marketable securities. Hence, on a fully-costed basis, PSF's non-CRA operations
generated a loss of over $1.0 million in fiscal 1999 when one eliminates the
gains on real estate and securities.

PSF's pretax income from continuing operations rose substantially during the
nine months ended April 30, 2000 to $691,000 from $396,000 during the comparable
year-earlier period. Excluding gains on real estate and securities, PSF had a
pretax loss of $210,000 during the interim period of 2000 compared to a loss of
$507,000 during the nine months ended April 30, 1999. Most of this $297,000
year-to-year improvement is due to increasing profits from CRA, higher rental
income from the Broadmoor Apartments and rental income from the Cornerstone
Office Building.

In our opinion, due to the changing composition of PSF's business during the
past few years and the impact of several significant non-recurring items, the
Company's historical consolidated income from continuing operations may not
necessarily be indicative of future prospects. We believe the Company's future
prospects include higher income from the increased activity of CRA (with this
activity limited by the funds available to CRA), lower losses from PSF's rental
real estate operations due primarily to greater occupancy/rents at the Broadmoor
Apartments and modest gains from the sale of development property. The gains
from the sale of the Nevada-Holland parcels should be partially offset by losses
on the Crest lots.

The operations of Birdies Golf Center are segregated in Table III as
discontinued operations. Birdies was consistently unprofitable during the
fiscal 1996 through fiscal 1998 period, and losses widened in fiscal 1999 due to
the liquidation of assets.

PSF's historical income available to common shareholders is negatively impacted
by dividends paid on the outstanding preferred stock as well as the accretion of
discount on preferred stock. Most of PSF's preferred stock has now been
redeemed, so ongoing preferred dividends should be well below those of past
years. The mandatory redemption provisions of the preferred shares were also
eliminated during fiscal 1999. Since the remaining preferred stock is now
considered part of PSF's permanent capital, there will be no future charges for
the accretion of the discount from face value.

PSF's income per common share has benefited from a gradual decline in weighted
average common shares outstanding. The number of outstanding common shares
dropped significantly between fiscal 1997 and fiscal 1999 due to the settlement
of the minority shareholder lawsuit in January 1998 (resulting in the redemption
of 408,419 common shares) and the redemption of another 200,000 shares from the
Guthrie Family Limited Partnership on July 31, 1998.

In summary, CRA experienced substantial growth in fiscal 1999. Assuming ongoing
demand for bridge financing and the continued availability of funds, CRA should
continue to generate an ongoing level of net interest income and loan/service
fee income. CRA's revenues and profits continued to show healthy growth through
the first nine months of fiscal 2000. In contrast, even excluding Birdies Golf
Center, the Company's rental real estate activities have historically been
unprofitable when one excludes gains on the sale of properties. David Guthrie
believes the chronic poor financial performance of PSF's rental operations is
attributable both to low rents in the Spokane market and high general and
administrative costs. However, it appears losses from rental operations began
to decline during fiscal 1999 and showed continued improvement through the first
nine months of fiscal 2000.

CASH FLOWS

A review of PSF's consolidated statements of cash flows can provide added
insight into the Company's operations. Table IV illustrates PSF's statement of
cash flows from operating activities, investing activities and financing
activities during the past six years. The cash flows from operating activities
highlight the substantial depreciation and amortization charges contained within
the income statement. As noted, depreciation on real property is often
eliminated when measuring the financial performance of a real estate holding
company although we note that improvements do actually experience economic
depreciation (i.e., physical wear and tear). The substantial gains on the sale
of real estate and other assets are also highlighted in the cash flow statement.
The cash flows from investing activities illustrate the funds received from the
sale of real estate as well as the funds expended for additional capital assets
such as property and equipment. The statement also highlights the significance

of CRA. The sizable increase in real estate loan activity in fiscal 1998 and
fiscal 1999 is directly related to CRA. PSF loaned $18.5 million during fiscal
1999 compared to $6.5 million in fiscal 1998 and $1.5 million in fiscal 1997.
The offset to the lending activity is the amount of short-term funds borrowed.
PSF's net borrowings under its line of credit agreements increased $7.3 million
in fiscal 1999 compared to a $1.2 million increase in fiscal 1998. In contrast,
the sale of long-term debentures (with fixed interest rates rather than variable
interest rates) has become a less important source of funds for PSF.
Redemptions of preferred and common stock have also been significant during the
past three years. The total amount of the redemptions is significantly greater
than the amount shown on the cash flow statement because a portion of the
redemptions were not paid in cash.

BALANCE SHEET

Table V illustrates PSF's balance sheet over the last five years. As an
overview, PSF's assets consist primarily of real estate-related receivables,
rental real estate, and property held for development and sale. The changing
composition of PSF's receivables portfolio has been noted. The portfolio of
long-term, fixed-rate real estate receivables has gradually declined, as the
Company has not acquired new receivables in the secondary market to replace
those that matured. Most new long-term receivables added during the past few
years have been in conjunction with the sale of PSF-owned real estate that was
seller-financed.

The composition of PSF's loan portfolio as of April 30, 2000 was previously
detailed in Table I. Of the $20.8 million carrying amount of the portfolio as
of that date, $16.0 million represented short-term, variable-rate receivables of
CRA while $4.8 million represented longer-term, fixed-rate receivables of PSF.
Most CRA loans have maturities of 12 to 24 months, carry a variable interest
rate of approximately prime plus 3.5% and are payable interest-only until due.
The longer-term loans of PSF generally carry fixed interest rates of 8.0% to
10.5% and are payable in fixed monthly payments of principal and interest until
due. Loans with conservative interest rates were acquired at a discount to face
value.

PSF's long-term receivables declined significantly during the year preceding the
appraisal date. A $1.6 million real estate contract relating to the sale of the
Evergreen Town House Apartments was paid in full in October 1999 while a
$740,000 receivable relating to the sale of the North Riverbank property was
repaid in June 2000. These funds will likely be invested in additional
receivables of CRA.

The composition of PSF's rental properties has also changed over the years.
PSF's investment in rental properties as of April 30, 2000 was previously
detailed in Table II. As of that date, PSF owned seven rental properties. One
property, the Bank Branch Building, was sold in August 1999 but was replaced by
the Apex Physical Therapy Building that was completed in March 2000. The three
most valuable properties (based on cost) are the Peyton Building, the Hutton
Building and the Pier One Building. A comparison of the estimated market values
of PSF's rental properties to their April 30, 2000 net book values is included
later in this report.

PSF previously had a sizable investment in Birdies Golf Center. However, that
investment in real property has since been shifted to the Cornerstone Office
Building, Apex Physical Therapy Building (both included with rental property)
and the Cornerstone Office Park (aka Nevada-Holland property), which is included
with property held for sale and development. Besides the Cornerstone Office
Park, the other properties held for sale and development are The Crest
residential development and the undeveloped land held near Auburn, Washington.

Details of the cost of these properties were previously included in Table II.
In addition to cash of $586,692 as of April 30, 2000, PSF has a portfolio of
marketable securities. According to management, the market value of the
portfolio as of the appraisal date was not significantly different than cost of
$41,724. As of that same date, PSF owned vehicles and equipment with a
depreciated book value of $29,160. The vehicles and equipment are heavily
depreciated and do not include the furniture and fixtures associated with the
rental properties. The net book value of the furniture associated with the
rental properties was $586,806 as of April 30, 2000, the majority of which is
attributable to the Broadmoor Apartments. "Prepaid and other assets" of
$202,342 include the $66,667 unamortized portion of the $125,000 non-compete
covenant that was issued in connection with the settlement of the minority
shareholder litigation.

In summary, PSF had total assets of $39.0 million as of April 30, 2000. Of
this, $20.8 million (53.39%) was real estate receivables, $15.0 million (38.5%)
was rental properties and $1.9 million (4.8%) was property held for sale and
development.

The liability side of the balance sheet suggests a trend toward higher leverage
because of the increasing importance of CRA. CRA's lending activities are
generally matched on a dollar-for-dollar basis with short-term borrowings on
PSF's credit lines. While this makes for a leveraged balance sheet, CRA earns
significant income on the interest rate spread and on its related loan/service
fees. PSF's notes payable to banks increased to $16.5 million (42.2% of total
liabilities and equity) as of April 30, 2000, up from $6.6 million (21.5%) as of
July 31, 1998.

PSF's major source of short-term funds is its $11.0 million credit line
with U.S. Bank of Washington. Interest is charged at the prime rate plus 0.25%.
The credit line is personally guaranteed by Wayne Guthrie. PSF has an $8.0
million credit line with Western Bank at an interest rate of prime plus 0.25%.
This line is guaranteed by both Wayne Guthrie and David Guthrie. PSF has a
third credit line with Sterling Savings Bank for $7.5 million at an interest
rate of the Bank of America Reference Rate plus 0.25%. This line is also
personally guaranteed by Wayne Guthrie and David Guthrie. Borrowings on these
credit lines as of April 30, 2000 are detailed below:

As of April 30, 2000
------------------------
Notes Payable to Banks
U.S. Bank of Washington $ 5,860,178
Western Bank 6,301,476
Sterling Savings Bank 4,296,879
-------------
Total $ 16,458,533

The notes payable to banks are collateralized by the receivables of CRA and
also by the equity that PSF has in its rental properties. According to
management, certain of the Company's rental properties that were once owned free
and clear of any mortgage debt have recently been used as collateral to obtain
additional bank financing to fund the continued growth of CRA.

Other installment contracts and mortgage notes payable totaled $3.3 million as
of April 30, 2000. These contracts include a variety of notes payable with
interest rates ranging from 7.0% to 9.0%. Approximately $199,595 of these notes
were payable to Wayne Guthrie. The notes are collateralized by various
properties. As of the same date, PSF had demand notes of $120,682 that were
payable to related parties.

PSF's major source of long-term financing was historically its debenture bonds.
Since 1969, the Company has issued unsecured investment bonds to Washington
state residents under the Securities Act of Washington. The bonds have original
maturities ranging from one to 10 years and interest rates that vary depending
upon the maturity. As of the end of fiscal 1999, interest rates on the
debenture bonds ranged from 6.0% to 11.0%; the weighted average interest rate
was 8.3%. PSF's outstanding debenture bonds totaled $9.8 million as of April
30, 2000 (25.0% of total liabilities and equity).

PSF's total liabilities were $31.6 million as of April 30, 2000, up from $23.8
million as of July 31, 1998. Nearly all of the increase was attributable to
higher short-term borrowings to finance the activities of CRA.

In fiscal 1995, PSF issued 10,400 shares of $100 par value redeemable Class A
preferred stock. The shares were issued at a 50% discount to par value. It was
mandatory for the Company to redeem all of the shares within 10 years of
issuance. A total of 7,400 shares were redeemed in recent years, including
4,000 shares in fiscal 1999. In February 1999, the shareholders voted to
eliminate the mandatory redemption provisions of the preferred stock. The 3,000
preferred shares that remained outstanding were reclassified to stockholders'
equity as part of the Company's permanent capital.

PSF's total stockholders' equity was $7.4 million as of April 30, 2000. Of this
amount, $300,000 was for the preferred stock, which has a liquidation preference
of par value plus accumulated and unpaid dividends. The equity attributable to
common stock was $7,128,568, or $6.26 per share based on 1,139,551 total
outstanding common shares as of April 30, 2000.

A summary of changes in PSF's equity is contained in Table VI. The major item
impacting equity in recent years was the significant redemption of common stock
in fiscal 1998. During that year, PSF redeemed nearly $2.3 million of common
stock. The redemptions were attributable primarily to the settlement of the
minority shareholder lawsuit in January 1998 (408,419 shares) and the redemption
of 200,000 common shares held by the Guthrie Family Limited Partnership in July
1998. The former transaction was for an average of $4.14 per share while the
latter transaction was at $2.50 per share. Due in part to the significant
redemptions in fiscal 1998 and the additional borrowings of CRA in fiscal 1999,
PSF's stockholders' equity accounted for 18.3% of total liabilities and equity
as of April 30, 2000 compared to 30.0% at the end of fiscal 1997.

FINANCIAL RATIO AND COMPARATIVE INDUSTRY ANALYSIS

Financial ratios are often used as part of a company's financial analysis.
The ratios can identify improving or deteriorating trends in a company's
profitability, financial position, etc. In PSF's case, the Company's historical
profits have been significantly impacted by seemingly non-recurring items like
gains from the sale of assets, litigation expenses, etc. Further, the primary
contributor of ongoing profits is a subsidiary that was formed in fiscal 1998.
The growth of CRA substantially impacted PSF's income statement and balance
sheet in fiscal 1999. For these reasons, we did not believe an historical
financial ratio analysis would be particularly enlightening for PSF.

Similarly, a comparative industry analysis is also oftentimes utilized to help
gauge a company's financial strengths and weaknesses relative to "industry
norms." PSF is difficult to classify into an industry category since it is a
combination finance company, real estate holding company and property
development company. Accordingly, a so-called "comparative industry analysis"
was not undertaken.

SUMMARY OF SIGNIFICANT FINDINGS

The prior sections discussed the economic/industry conditions, company
position and financial characteristics surrounding Pacific Security Financial,
Inc. The following provides an overview of those factors that are most likely
to have an impact on value.

ECONOMIC/INDUSTRY FACTORS

1. The Spokane area grew rapidly during the early- to mid-1990s due in part
to in-migration from the Puget Sound area of Washington and southern California.
Economic growth moderated during the second half of the 1990s to a level that
approximated longer-term norms.

2. Due to diversification efforts that decreased the dependence on
resource-based industries, future growth is expected to be less cyclical than in
the past. The near-term outlook is for slow, steady growth.

3. According to a recent real estate report by Terra Property Analytics, the
Spokane office market is relatively strong. Occupancy rates in the Central
Business District are between 90% and 95% for average- to good-quality
buildings. Office vacancy rates are somewhat higher in suburban markets.

4. Rental rates for Class A office space are still reportedly too low to
justify the cost of construction in the CBD. Increasing employment is expected
to generate the demand required for the development of a moderate amount of new
office space in the near term.

5. There is expected to be a moderate increase in demand for retail, office
and warehouse/light industrial buildings, primarily in the suburban areas.

COMPANY FACTORS

1. PSF traces its beginnings to the 1940s when Wayne Guthrie founded a
predecessor company, Guthrie Construction. Pacific Security was formed in 1957.
PSF merged with Security Savesco, Inc. in 1985. Security Savesco had "public"
shareholders dating back to its bankruptcy reorganization in 1971. However,
there has never been an active market for PSF stock.

2. Two of Wayne Guthrie's sons managed the Company for a short time during
the late-1980s and early-1990s. Certain property held for future development
was acquired during this period. Wayne Guthrie resumed primary management
responsibilities in 1991.

3. Competitive conditions in the secondary mortgage market increased during
the early-1990s, and PSF began to focus more heavily on its rental properties
and less heavily on its lending activities. The Company also began to develop
its property holdings.

4. PSF was involved in a protracted lawsuit with "minority shareholders"
(i.e., Wayne Guthrie's children from a prior marriage) from 1992 through 1997.
Most major management decisions were put on hold while the lawsuit was ongoing.
The dispute was settled prior to trial in January 1998. The settlement required
the Company to redeem the PSF common stock held by the plaintiffs and to pay
their related legal expenses. David Guthrie assumed operating control in
January 1998.

5. PSF developed one of its investment properties into Birdies Golf Center.
The project was completed in fiscal 1996, but was never profitable. Management
opted to close this operation in December 1998. The building was converted to
an office building, and the surrounding property is being developed into
Cornerstone Office Park. A second Company-owned office building is planned for
this site.

6. PSF's other ongoing development project is The Crest, a residential
development in south Spokane County. A majority of the available lots had been
sold as of the appraisal date.

7. The major development impacting PSF during the past few years was the
formation of its Cornerstone Realty Advisors subsidiary in March 1998. CRA is
involved in providing bridge financing on commercial construction projects that
cannot obtain conventional financing. As of the appraisal date, CRA had grown
to be the major contributor to PSF's income.

8. PSF's commercial lending activities and real estate development
activities are both relatively new. The Company's main business historically
was in acquiring long-term real estate contracts in the secondary market and
owning/managing rental properties such as office buildings. PSF's portfolio of
purchased real estate contracts has gradually declined over the years; most
long-term receivables are from past sales of Company properties that were
seller-financed. PSF has had ongoing sales of property during the past few
years. However, the purchase and sale of property (and the development of
property) is not PSF's primary business.

9. Prior to forming CRA, the Company's major business was owning/managing it
rental properties. As of the appraisal date, PSF owned nine rental properties -
three office buildings, five office/commercial buildings (including two
purchased in July 2000) and one apartment complex. One build-to-suit building
was completed in the Cornerstone Office Park in March 2000. Management was
planning construction of a speculative office building at this site.
Development properties included The Crest, Cornerstone Office Park and one
additional parcel of undeveloped land.

10. PSF had 21 employees as of the appraisal date. Most employees are
involved with the management and maintenance of the rental properties.
Approximately three employees are those of CRA.

11. CRA's marketing area includes the western United States. Its business
is dependent not only on commercial construction activity but also on the
availability of funds. CRA's activities are financed through bank lines of
credit. Collateral is provided not only by the specific project but also by the
rental properties of PSF and the personal guarantees of major shareholders.

12. Wayne Guthrie remains as PSF's Chairman but is no longer actively
involved in day-to-day operations. Management is headed by President David
Guthrie, Vice President Kevin Guthrie, CFO Don Migliuri and CRA President John
Lloyd.

13. Although there is no one controlling shareholder, members of the Guthrie
family collectively own nearly 85% of the outstanding common stock. The
remaining 15% is owned by numerous minority shareholders, most of whom
originally held shares in Security Savesco, Inc. There are also 3,000 shares of
preferred stock outstanding. The preferred stock is owned entirely by Wayne
and/or Constance Guthrie and has a liquidation value of $300,000.

14. There is no market for PSF's common stock. Since 1990, the Company has
had a standing offer to acquire any shares held by unaffiliated shareholders at
$1.55 per share. The settlement of the lawsuit with minority shareholders in
January 1998 resulted in the redemption of a large block of stock for aggregate
consideration totaling $4.14 per share. Another large redemption of Guthrie
family stock occurred on July 31, 1998 at a price of $2.50 per share. Beginning
in April 2000, the Board increased the standard redemption price to $3.00 per
share.

FINANCIAL FACTORS

1. PSF's financial statements have been restated to reflect Birdies Golf
Center as a "discontinued operation." Continuing operations consist of
owning/managing rental property, owning a portfolio of long-term real estate
receivables and the commercial lending activities of CRA.

2. The Company's rental operations appear to make a positive contribution to
consolidated income and a larger contribution to cash flow in that they include
substantial depreciation/amortization charges. Rental operations are not
profitable with costs on a fully-allocated basis, although it appears that
losses were reduced in fiscal 1999 and through the first nine months of fiscal
2000.

3. CRA has grown significantly since being formed in March 1998. The
majority of PSF's consolidated income from continuing operations was from CRA.
CRA does not suffer from interest rate risk. Its commercial loans and its
source of funds are both tied to fluctuating market interest rates, thereby
guaranteeing a steady interest rate spread. CRA's net interest income and loan
fees should provide an ongoing source of income to PSF.

4. PSF has recognized substantial gains on the sale of real estate in past
years. These have had a major positive impact on the Company's income.
However, future gains should be isolated to those resulting from the two
property development projects that were ongoing as of the appraisal date. While
PSF's future income should benefit from the ongoing income of CRA, it should not
benefit from gains on property sales nearly to the extent as in the past.

5. PSF has also benefited from intermittent gains on the sale of marketable
securities. These should also be considered non-recurring, rather than as a
source of ongoing income. The major non-recurring expense impacting the Company
in recent years was the litigation fees associated with the minority shareholder
lawsuit.

6. Executive compensation has been reasonable. Due to incentive compensation,
the compensation of CRA President John Lloyd was above that of David Guthrie
and Kevin Guthrie in fiscal 1999.

7. The income available to minority shareholders was negatively impacted by
preferred dividends and the accretion of the discount to face value of the
preferred stock stemming from its mandatory redemption requirements. However,
most of the preferred stock has now been redeemed and the mandatory redemption
requirements have been eliminated. The number of outstanding common shares has
also declined during the past few years due in part to major redemptions in
January 1998 and July 1998.

8. PSF's assets consist primarily of real estate-related receivables, rental
real estate, and property held for development and sale. The composition of the
receivables portfolio has shifted more heavily toward the short-term receivables
of CRA. PSF's portfolio of third-party receivables acquired in the secondary
market has gradually declined.

9. As of April 30, 2000, CRA's receivables totaled $16.0 million. Most have
a maturity of 12 months and a variable interest rate of prime plus 3.50%. PSF's
portfolio of long-term receivables totaled $4.8 million. These notes carry
fixed interest rates ranging from 8.0% to 10.5%. Those notes with conservative
coupon rates were purchased at a discount to face value.

10. The total net book value of PSF's seven rental properties (and related
furniture and improvements) was $15.1 million as of April 30, 2000. According
to management, the appraised values of some of these properties are well above
net book value while others are worth less than book value. The cost of PSF's
three properties held for sale and development was $1.8 million.

11. The Company's remaining assets are modest in comparison. They include
cash, marketable securities, vehicles and equipment, prepaid expenses and other
assets, including a covenant not to compete.

12. PSF's liabilities consist primarily of borrowings on its bank credit
lines that are used to finance the operations of CRA. The Company has a total
short-term borrowing capacity of $26.5 million with three banks, of which $16.5
million was outstanding as of April 30, 2000. The credit lines are personally
guaranteed by Wayne Guthrie and/or David Guthrie.

13. The major source of long-term financing is debenture bonds sold through
a series of offerings to Washington state residents. As of April 30, 2000, PSF
had total borrowings on the debenture bonds of $9.8 million. Other long-term
liabilities include installment contracts, generally secured by specific
properties.

14. As of April 30, 2000, PSF had 3,000 shares of preferred stock
outstanding with an aggregate liquidation value of $300,000. The book equity
attributable to common stock was $7,128,568, or $6.26 per share based on
1,139,550.58 total outstanding common shares.

APPRAISAL OF FAIR MARKET VALUE

OVERVIEW

There are numerous factors that should be considered in determining the
value of a business or business interest. Some of these factors were previously
noted as part of Internal Revenue Service Revenue Ruling 59-60. Additional
factors must also be examined depending on the circumstances.

The three general valuation approaches used by appraisers of real property,
machinery and equipment, personal property, etc. are the cost approach, the
income approach and the market approach. With some modification, business
valuation approaches also fit into these three general categories. In many
cases, more than one approach is used and the resulting value conclusions are
contrasted. The appraiser must then justify why some approaches are more
relevant than others in the specific situation and reconcile the different value
estimates to a single opinion of value.

In business valuation, the "cost approach" is often termed an adjusted net asset
approach. This approach values the equity of a company by valuing its
individual assets and liabilities at their respective fair market values. An
adjusted net asset approach is generally most appropriate when valuing "holding
companies" or operating companies that are capital-intensive, have highly
unpredictable earnings or are contemplating liquidation.

An "income approach" is generally preferred when valuing an "operating company"
that is expected to continue as a going concern. In this approach, the value of
a company is the present value of its projected future income (or cash flow).
The approach is applied by either discounting a long-term forecast of future
cash flows to the present by a required rate of return or, alternatively, by
capitalizing the company's current income-generating capacity by a
capitalization rate, the latter defined as the required rate of return minus a
long-term growth rate.

The third approach is the "market approach." This approach values the subject
business interest by comparisons with similar business interests that have
"known" values based on recent transactions. The market approach can be based
on comparisons of income, cash flow, net assets, sales, dividends or other
financial variables. The market approach is often the most convincing way to
determine fair market value. The practical problem with applying a market
approach is in finding market "comparables" or guideline companies that are
similar enough to the subject company to provide valid conclusions.

The adjusted net asset and market approaches were the two primary methods of
determining the fair value of the common stock of PSF. Two variations of an
adjusted net asset approach were examined - one based on the estimated economic
value of the assets and one based on the net realizable (or orderly liquidation)
value of the assets. Several variations of the market approach were examined
including market data from publicly-traded real estate investment trusts
("REITs"), publicly-registered real estate partnerships, acquisitions of public
REITs and liquidations of publicly-registered partnerships. The market
approaches considered value conclusions based on funds from operations,
dividends and net asset value.

ADJUSTED BALANCE SHEET

An adjusted net asset approach replaces the cost-based "book value" of a
company's assets and liabilities with estimates of their current economic value.
Common adjustments to assets include those for marketable securities, doubtful
receivables, LIFO inventory accounting, appreciated real property,
overly-depreciated machinery and equipment, investments and/or "nonoperating
assets." Typical adjustments to liabilities include ones for long-term debt,
deferred income (or capital gain) taxes and contingencies.

PSF's most recent balance sheet is as of April 30, 2000. There would be no
adjustment for cash and cash equivalents of $586,692.

Various receivables account for the largest portion of PSF's assets. As
detailed in Table I, the total carrying value of PSF's receivables was $20.8
million as of April 30, 2000. Of this amount, $16.0 million was the relatively
short-term (one to two years) receivables of CRA. The typical interest rate is
prime plus 3.50%, although it can be higher or lower based on specific
circumstances. The typical loan-to-value ratio is 75%. Since these loans were
recently negotiated between unrelated parties, we believe their terms should be
representative of fair market rates, suggesting that the carrying amount of the
notes is reflective of their fair market values.

The longer-term mortgage contracts are conceptually more difficult. These are
fixed-rate notes with longer maturities. These individual notes were also
previously detailed in Table I. Although the interest rates differ, management
believes that, when taken as a whole, the aggregate fair market value of the
long-term receivables portfolio is consistent with its carrying value. Certain
notes carrying low coupon rates were acquired at a discount to face value. The
unamortized portion of the discount is reflected in the current carrying value.
According to management, the yield to maturity of these loans is in line with
current market rates.

In considering the estimated market value of PSF's loan portfolio, we note that,
as part of the audit process, management and the auditor are required to
disclose the fair market value of financial instruments that are assets or
liabilities of the Company. According to the footnotes contained in the most
recent audited financial statement, the carrying values of PSF's receivables
approximated fair market values as of July 31, 1999. PSF historically carried
little or no loan loss reserve. During fiscal 2000, management instituted a
$20,000 loan loss reserve for PSF's long-term receivables and a $30,000 loan
loss reserve for the receivables of CRA. The amounts carried on the books are
net of the loan loss reserves. Management believed the loan loss reserve of
$50,000 was adequate as of April 30, 2000; however, the reserve might be
increased at the end of the July 2000 fiscal year. In conclusion, we believe
the aggregate net book value of PSF's contracts, notes and mortgages receivable
was consistent with their aggregate market value as of April 30, 2000.
Details of the cost, accumulated depreciation and net book value of PSF's rental
properties were contained in Table II. The market values of the properties were
based either on an independent appraisal or the estimates of management.
The value of the Peyton Building was based on a May 1999 appraisal by Andrew T.
Robinson, MAI, of Terra Property Analytics, LLC that was prepared for Western
Bank. At the time of his inspection, the third floor was vacant and "in a shell
condition in anticipation of a new buildout for a larger tenant." Mr. Robinson
provided value conclusions on an "as is" basis and upon reaching "stabilization"
with the third floor remodel complete and occupied. The "as is" value as of
April 26, 1999 was $3,230,000 while the stabilized value in May 2000 was
estimated at $3,750,000.

According to management, the remodel of the third floor was in process as of
April 30, 2000 (the date of our most recent financial statement). The costs to
complete the third-floor remodel were estimated at $200,000 to $250,000. By our
July 2000 appraisal date, PSF had not secured a major tenant for the third
floor. Management had decided to relocate PSF's fifth-floor offices to the
third floor and renovate the fifth floor. These remodeling costs were also
estimated at $200,000 to $250,000.

In conclusion, it was estimated by management that it would cost at least
$400,000 to bring the Peyton Building to the "stabilized" condition assumed in
the appraisal. Accordingly, we estimated a reasonable market value at
$3,350,000 - the appraised stabilized value of $3,750,000 minus remodeling costs
of $400,000. The estimated market value of $3,350,000 was $1,066,613 below the
net book value of the property of $4,416,613 as of April 30, 2000. It should be
noted that the net book values of the properties include improvements such as
carpeting, lighting, etc.

The Hutton Building was appraised by Timothy Overland of Terra Property
Analytics, LLC in August 1999. The appraisal was prepared for Sterling Savings
Bank. Value conclusions were again given on an "as is" and "prospective
stabilized" basis. In this instance, the different value conclusions were due
to the fact that the building was only 90%-leased and had an above-average
number of month-to-month tenants at conservative rents. The "as is" value was
$3,310,000 as of August 3, 1999 while the "prospective stabilized" value in
February 2000 was estimated at $3,370,000. We utilized a value of $3,350,000,
which was $113,383 below net book value of $3,463,383 as of April 30, 2000.
The value of the Broadmoor Apartments was based on a September 1998 appraisal by
Philip Steffen, MAI, of Palmer, Groth and Pietka, Inc. that was prepared for
U.S. Bank of Washington. The building was in the process of substantial
renovations in September 1998. Occupancy was low and was expected to remain low
during the remodeling process. Values were again given on an "as is" and
"stabilized" basis following the remodel and assuming fuller occupancy. The
stabilized value projected in March 2000 was $2,850,000. The "as is" value in
September 1998 was $2,365,000. The latter was calculated by reducing the
stabilized value by the cost of remaining renovations, absorption costs, lost
profits during the renovation period, etc.

According to management, the remodel of the Broadmoor Apartments was nearly
complete as of April 30, 2000; management estimated it might cost $50,000 to
gradually renovate the remaining units. Hence, the estimated market value was
based on the appraised "stabilized" value of $2,850,000 minus $50,000. The
estimated market value of $2.8 million was $1,606,207 greater than net book
value as of April 30, 2000.

The value of the Pier One Building was based on the estimate of management. PAG
did not independently verify the reasonableness of management's opinion.
Management's concluded value of $3,313,926 as of June 2000 was based on the
income approach by applying a capitalization rate of 9.50% to estimated net
operating income of $314,823. The estimated market value of the property
exceeded net book value of $3,082,735 by $231,191.

The value of the AT&T Wireless Building was based primarily on an August 1997
appraisal by Shawn Kyes, MAI, of Kyes & Associates for U.S. Bank of Washington.
The concluded value at that time was $1,150,000. Based on updated information,
management estimated the value in June 2000 at $1,097,247, or $394,989 above net
book value of $702,258. We note that the 10-year lease on this property expires
in August 2001.

The value of the Cornerstone Office Building was based on a July 1999 appraisal
by Michael Sprute, MAI, prepared for Washington Mutual Bank. Assuming it would
take three months to lease the remaining 25% of the building, the "stabilized"
value in October 1999 was estimated at $1,150,000; the "as is" value was
marginally less at $1,135,000. Since the building is now fully leased, we
believe the "stabilized" value is most appropriate. The estimated market value
of $1,150,000 was $409,220 below April 30, 2000 net book value of $1,559,220.
This building is the converted Birdies Golf Center, which helps explain why
market value is below cost.

The value of the Apex Physical Therapy Building was based on an April 2000
appraisal prepared by Michael Sprute, MAI, for United Security Bank. Mr. Sprute
gave equal consideration to the cost, sales comparison and income appraisal
approaches. The concluded value was $695,000, or $104,900 above PSF's net book
value for the recently-completed building of $590,100.

PSF was actively marketing The Crest residential properties as of the appraisal
date. As of April 30, 2000, the Company had sold 15 parcels. A total of nine
parcels remained available. The aggregate gross value (asking price) of the
nine remaining parcels was $762,500. Management estimates selling costs at 10%,
leaving a net realizable value of $686,250.

According to management, it might take two or three years to sell the balance of
the parcels. The funds would be used either to make new CRA loans or to reduce
borrowings on the credit line. The marginal cost of the latter is 10.0%.
Assuming the remaining parcels are sold gradually over 30 months, the present
value of the sales proceeds are $604,976 based on a discount rate of 10.0%. The
net book value of the remaining Crest lots was $871,118. It is not surprising
that the estimated market value of the remaining Crest lots is below cost. The
three Crest lots sold thus far in fiscal 2000 were all at a loss. Management
plans to write the cost of these properties down to their estimated market value
at the end of fiscal 2000.

Cornerstone Office Park consists of 12 acres of raw land that was once part of
the Birdies Golf Center. The surrounding area is developing rapidly. Two of
the original 12 parcels had been sold as of April 30, 2000. Two more parcels
were sold subsequent to this date for an aggregate sales price of $474,123. The
aggregate asking price of the eight remaining lots was $1,522,758. Management
estimated the aggregate market value of the eight unsold parcels at 5% below the

listed price. The net realizable proceeds to the Company were reduced 8% for
selling and other expenses. The resulting net value was $436,193 for the two
lots sold in May 2000 and $1,330,891 for the eight unsold lots. The latter made
no provision for the estimated three-year selling period. Assuming an
opportunity cost of 10.0% and equal sales over 36 months, the present value of
the eight unsold lots is $1,145,721; the total net market value of the 10 lots
available as of April 30, 2000 was $1,581,914.

In addition, the Cornerstone property contains approximately 40,000 square feet
of land that is scheduled to be developed into a rental building. The value of
the land was based on the April 2000 appraisal of the Apex Physical Therapy
Building by Michael Sprute. The land value conclusion in that appraisal was
$5.10 per square foot. The total market value of the land was estimated at
$204,000. When the $1,581,914 estimated net value of the Cornerstone lots is
combined with the $204,000 value of the land associated with the new building,
the total market value is $1,785,914, or $950,240 above net book value of
$835,674.

PSF's remaining property consists of six acres of undeveloped land near Auburn,
Washington. The property was appraised at $150,000 in October 1994. The
property was previously listed for sale at $180,000, but with no takers. It is
currently not being actively marketed. Management believes a reasonable sales
price is $155,000. Subtracting excise taxes, fees and commissions of 8%, the
net realizable proceeds are estimated at $142,600, or $29,786 below net book
value of $172,386.

PSF holds a small portfolio of marketable securities. According to management,
the market value of the portfolio was not significantly different than the April
30, 2000 cost of $41,724. PSF's remaining assets consist of a modest amount of
vehicles and equipment, a non-compete agreement, prepaid expenses and
miscellaneous other items. PSF's vehicles and equipment have not been
separately appraised. While the items are heavily depreciated and may be worth
something more than net book value of $29,160, we did not believe the adjustment
would be material relative to PSF's overall asset value. In our opinion, the
$66,667 unamortized portion of the non-compete agreement issued in conjunction
with the settlement of the minority shareholder litigation has no economic value
and should be eliminated for appraisal purposes. Prepaid and other assets were
assumed to be worth book value.

A summary of the net book values and estimated economic values of PSF's various
assets is contained in Table VII. The total estimated market value of
$40,382,556 was $1,335,716 above net book value of $39,046,840 as of April 30,
2000.

PSF's liabilities consist primarily of short-term notes payable to banks and
long-term debenture notes. The $16.5 million of short-term notes payable as of
April 30, 2000 was payable to three banks as previously detailed. The notes
were floating rate, generally at prime plus 0.50%. The notes were assumed to be
worth face value.

Long-term debt consists primarily of debentures payable to Washington state
residents with an aggregate face value of $9.8 million as of April 30, 2000.
Maturities range from one to 10 years and the weighted average interest rate was
8.3%. In PAG's opinion and that of management, the aggregate market value of
the debentures is consistent with face value.

Other long-term borrowings consist of a number of installment contracts and
notes payable collateralized by various properties. Interest rates range from
7.0% to 9.0%. In PAG's opinion and that of management, the aggregate market
value of these notes was consistent with their face values. Further, in its
footnote regarding financial instruments, the auditors indicated that the

carrying values of PSF's debentures and installment contracts payable were
consistent with their fair values as of July 31, 1999; we presume this has not
changed.

PSF's miscellaneous accrued expenses, income taxes payable and other liabilities
were assumed to be worth book value. For purposes of this engagement, we
believe the preferred stock should be valued at liquidation value. The
liquidation value of the 300 outstanding shares of preferred stock was par value
of $100 per share plus accumulated but unpaid dividends. Since there were no
accumulated but unpaid dividends as of April 30, 2000, the liquidation value of
the preferred stock was its aggregate par value of $300,000.

We believe one adjustment is appropriate for the liability side of the balance
sheet. In our opinion, deferred taxes should be considered on the net
unrealized appreciation in the Company's real property and other assets. If the
market values of the properties were realized (which is an implicit assumption
in an adjusted net asset approach), taxable gains would be triggered, resulting
in a tax liability to the Company. The net realizable value of the assets to
the equity holder should be net of related capital gain taxes. In our opinion,
if the asset side of the balance sheet assumes that the market value of the
assets will be realized, this same assumption should carry through to the
liability and equity side of the balance sheet.

We believe our view toward deferred taxes is enforced by Statement of Financial
Accounting Standards ("FASB") 115, "Accounting for Certain Investments in Debt
and Equity Securities." FASB 115 requires marketable equity securities that are
available for sale to be recorded at fair value, with changes in net unrealized
gains and losses recorded directly to stockholders' equity. Previously,
marketable equity securities available for sale were recorded at cost.
For appraisal purposes, the more important aspect of FASB 115 is that
liabilities include a provision for the deferred income taxes that would be
triggered if the unrecognized gains on the marketable securities were realized.
Equity is adjusted by the post-tax effect of the unrealized appreciation, and
the effect is clearly labeled in the equity section of the balance sheet with a
description such as "net unrealized holding gains on investments." While FASB
115 relates specifically to marketable securities, we believe the logic with
regard to the post-tax effect on equity has broader implications.

A similar accounting analogy exists for the use of Last In, First Out ("LIFO")
inventory accounting. Companies with large LIFO inventory reserves sometimes
show the financial effect of LIFO in footnotes to the financial statements. In
our experience, equity is always adjusted by the post-tax effect of the LIFO
reserve.

For years, the Internal Revenue Service (and the Tax Court) would not recognize
the concept that unrealized taxable gains on assets have a negative impact on
the fair market value of the related equity interest. In effect, the IRS's
position was to ignore the idea of potential deferred income taxes on trapped-in
capital gains. However, in several recent court cases, the Tax Court has begun
to recognize the economic reality that potential capital gains taxes would be
considered by willing buyers and sellers of various equity interests, especially
C corporations. The Tax Court has apparently begun to recognize the validity of
the argument that appraisers such as ourselves have been espousing for years.
The total net unrealized appreciation on PSF's real property and other assets
was estimated at $1,335,716 as of April 30, 2000. Assuming taxes at a marginal
federal rate of 34%, the deferred tax liability would be $454,143.

In conclusion, it is our opinion that the adjusted net asset value of the common
equity of PSF was $8,010,141 as of April 30, 2000, or $7.03 per share based on
1,139,550.58 total outstanding common shares. The adjusted balance sheet is
detailed in Table VII.

ORDERLY LIQUIDATION VALUE

In our opinion, a second variation of an adjusted balance sheet is
appropriate - one that seeks to estimate the orderly liquidation value of the
Company rather than the value as a going concern. In our opinion, the
historical and expected future income and cash flow of the Company does not
support the "going concern" net asset value for the common equity of $8.0
million. The ongoing return on equity is low relative to the "value" of the
investment. When this is the case, the more appropriate adjusted net asset
methodology is one of orderly liquidation, wherein the estimated net realizable
values from the sale of the Company's assets are substituted for their going
concern values.

For companies whose major assets consist of real property, the primary
difference in asset values between going concern values and orderly liquidation
values are the estimated costs involved in selling the property. Going concern
values may include the properties at their appraised fair market values.
Orderly liquidation values deduct selling and other expenses to arrive at the
estimated net realizable proceeds from the sale of the property. For properties
previously sold by PSF, the net realizable value to the Company was below the
"sales price" of the property.

There would be no additional adjustment for cash. There would realistically be
some broker commissions on the sale of marketable securities. These were
estimated at 2% of the market value of the portfolio, or $834.

For the net realizable value of the contracts receivable, PAG relied on the
advice of Robert Tessier of Choice Finance, a mortgage broker in Spokane.
According to Mr. Tessier, for loans secured by commercial properties, Choice
Finance demanded a yield-to-maturity of about 14.0% as of July 2000.

The East Valley Terrace receivable has an interest rate of prime plus 2.0%
(11.50% as of the appraisal date), monthly payments (principal and interest) are
$9,014, with a balloon due on November 1, 2006. Assuming interest rates remain
constant, we estimate the balloon payment at $938,343. The present value of the
payment stream, discounted to yield 14.0%, is $839,685.

The $740,000 receivable on the North Riverbank land is payable interest only of
$4,933 until due in full on July 1, 2000. It was assumed to be worth face
value. According to management, the balance of the contracts of $3,169,280 have
an average interest rate of about 10% and an average maturity of about six
years. The aggregate face amount of the contracts is $3,216,072. Based on the
terms assumed above, average monthly payments would be $59,580. The total
present value discounted at 14.0% is $2,891,448, or $277,832 below the carrying
value of $3,169,280.

According to Mr. Tessier, the CRA receivables involve more risk. He would price
these loans assuming a 14.0% return and a 15-year repayment period. The face
value of the contracts is $15,964,842. Assuming an average interest rate of
13.0% (prime plus 3.50%), the monthly payment is $201,994; the present value is
$15,167,653 at a discount rate of 14.0%. The estimated orderly liquidation
value of the portfolio is 95% of its face value. Alternatively, this could be
viewed as increasing the provision for the loan loss reserve.

The total net realizable value of PSF's receivables was $20,119,275, as
summarized below:

Long-Term Receivables
East Valley Terrace $ 839,685
North Riverbank Land 740,000
Other 2,891,448
-------------
Subtotal 4,471,133
CRA Loans 15,167,653
Miscellaneous 480,489
-------------
Total $ 20,119,275
=============

The net realizable value of the rental properties is definitely below their
appraised market values. Sales commissions, excise taxes and other expenses
would all have to be considered. The recent sales of the Southridge Apartments
and Bank Branch Building both involved selling commissions of 6.0%, excise taxes
of 1.78% and miscellaneous other selling costs.

The relative level of the sales commission is inversely related to the value of
the property. According to Andrew Robinson, MAI, of Terra Property Analytics, a
reasonable selling commission for the Peyton Building, Hutton Building and Pier
One Building (all worth approximately $3.3 million) would be 3% to 4%.
Management estimates a commission at 4% to 5%. A point estimate of 4% appeared
reasonable. The selling commission associated with the Broadmoor Apartments was
estimated at 5% while the commissions associated with the AT&T Wireless
Building, Cornerstone Office Building and Apex Physical Therapy Building were
estimated at 6%. In all cases, excise taxes and miscellaneous other expenses
were estimated at 2.0% of the estimated market values of the properties.

As illustrated below, the difference between the estimated market value and net
realizable value of the rental properties was $1,032,216.

Estimated Net Realizable
Market Value Value
-------------- --------------
Peyton Building $ 3,350,000 $ 3,149,000
Hutton Building 3,350,000 3,149,000
Broadmoor Apartments 2,800,000 2,604,000
Pier One Building 3,313,926 3,115,090
AT&T Wireless Building 1,097,247 1,009,467
Cornerstone Office Building 1,150,000 1,058,000
Apex Physical Therapy Building 695,000 639,400
Additional Furniture 5,508 5,508
-------------- --------------
Total $ 15,761,681 $ 14,729,465
============== ==============

With one exception, the value of the "property held for development and
sale" was already based on its estimated net realizable value. The exception is
the land associated with the additional building proposed at Cornerstone.
Assuming a 6% commission and 2% for expenses, the net realizable value of the
land is $187,680 based on an estimated market value of $204,000.

The only adjustment to liabilities is for deferred taxes. The difference
between the book value and net realizable value of PSF's assets is now a loss of
$888,513. Using identical reasoning as before, the deferred tax benefit is now
$302,094. As illustrated in Table VII, the new adjusted net asset value of
common equity is $6,542,149 ($5.74 per share). This compares to the figure

prior to selling costs of $7.03 per share. The reader should note that our
derivation of net realizable value did not include any liquidating discounts
that might be appropriate in a situation of financial distress. It only sought
to estimate the net proceeds available to the shareholders resulting from the
sale of the Company's assets.

ADJUSTMENTS TO HISTORICAL STATEMENTS OF INCOME

Adjustments are often required to a company's historical reported income to
make the information more useful for appraisal purposes. Typical adjustments
include those for unusual accounting practices, nonrecurring items,
discretionary items such as executive compensation and the impact of
nonoperating assets.

Different adjustments are reasonably required depending on whether a controlling
or minority interest in the subject company is being appraised. When valuing a
controlling interest, any adjustment that more accurately reflects a company's
current earning capacity is relevant. When valuing a minority interest,
however, one generally assumes that the current management operating philosophy
will remain in place, even if this philosophy may not appear to maximize
profits. For appraisal purposes, the difference in income available to a
controlling shareholder versus a minority shareholder can sometimes be
substantial.

The most common discretionary item impacting a company's income statement is the
direct and indirect level of executive compensation. David Guthrie and Kevin
Guthrie are the two most highly compensated "related parties." Their average
compensation of $109,000 during the past two years did not appear to be
unreasonable. John Lloyd, President of CRA, was the most highly compensated
employee in fiscal 1999, including incentive compensation based on the financial
performance of CRA. Mr. Lloyd is an unrelated party such that his compensation
should be considered equivalent to a fair market rate. However, according to
David Guthrie, PSF is still a "family" business employing a number of family
members. This is one reason why PSF's general and administrative expenses may
be above industry norms. PAG did not adjust income for the employment of other
Guthrie family members.

Inappropriate discretionary expenditures in prior years were reportedly minimal
due in part to the scrutiny connected with the minority shareholder litigation.
Similarly, we are unaware of any accounting practices employed by PSF that
differ from industry norms.

However, there have been a number of unusual items that have impacted PSF's
income statement in recent years. The most obvious is Birdies Golf Center.
However, it is now closed, and its historical negative impact on the Company's
income has been included as a "discontinued operation."

The most significant items impacting income have been gains from the sale of
real estate. The Company has also intermittently recorded gains from the sale
of marketable securities. We consider PSF to be primarily in the real estate
rental and commercial lending business, not in the property development
business. Excluding the Company's two ongoing development projects (The Crest
and Cornerstone Office Park), future gains from property sales should not be
recurring unless the Company opts to sell one of its rental properties. In our
opinion, for purposes of reviewing ongoing income, past gains from the sale of
real estate and marketable securities should be eliminated.

The major non-recurring expense impacting the Company in recent years was the
$300,000 of professional fees expensed in fiscal 1998 related to the shareholder
litigation. A non-compete agreement was signed as part of the settlement. In
our opinion, the amortization associated with that agreement should be

eliminated as an unusual item. According to management, the protracted
litigation also had an indirect effect in that it diverted management's time and
energy away from operating the business. However, these costs are impossible to
calculate. Finally, the $50,000 expense in fiscal 2000 to create a loan loss
reserve was viewed as non-recurring and eliminated.

The adjustments to income are detailed in Table VIII. When the gains from the
sale of real estate are eliminated, PSF has been consistently unprofitable from
continuing operations. This is true even in fiscal 1999 and through the latest
12 months when CRA made significant positive contributions to income. While CRA
is profitable, the summary indicates that the balance of PSF's operations is
not. David Guthrie believes that low rents in the Spokane Central Business
District and high general and administrative expenses are two reasons for the
Company's poor level of ongoing profits.

The adjusted income statement includes income taxes at a consistent 34% federal
rate. In this instance, however, income taxes provide a benefit since PSF was
consistently unprofitable on an adjusted pretax basis. The historical effect of
the preferred stock (i.e., dividends and accretion of the discount) was replaced
with the $18,000 of preferred dividends that are payable based on the current
amount of preferred stock outstanding. This further increased the loss
attributable to common shareholders. The adjusted level of depreciation and
amortization was eliminated from both revenues and expenses to arrive at the net
cash flow available to common shareholders. Due to the substantial depreciation
associated with PSF's rental properties, cash flow was consistently positive
even though income was consistently negative.

A summary of the adjusted data is shown below. The reader should keep in
mind that net income and cash flow in all years benefit from the assumed
recovery of income taxes. This situation cannot last indefinitely.
<table>
12 Months Years Ended July 31,
Ended ----------------------------------------------------
April 30, 2000 1999 1998 1997 1996 1995
-------------- --------- --------- --------- --------- --------
<s> <c> <c> <c> <c> <c> <c>
Net Income (Loss)
Available to
Common
Shareholders(000s) $ (138) $ (367) $ (360) $ (501) $ (239) $ (245)
Cash Flow to
Common
Shareholders (000s) 493 324 337 214 432 390
Weighted Average
Common Shares (000s) 1,150 1,162 1,591 1,895 1,938 1,961
Per Share:
Net Income (0.12) (0.32) (0.23) (0.26) (0.12) (0.12)
Cash Flow 0.43 0.24 0.21 0.11 0.22 0.20
</table>

Over the past five years, adjusted earnings per share ranged from a loss of
$0.12 per share to a loss of $0.32 per share. Cash flow over this same period
ranged from $0.11 per share to $0.43 per share. One encouraging trend is the
steadily-increasing cash flow over the past three years. This is due in part to
the positive contribution from CRA. Also, it should be noted that the per-share
amounts during the past three years are magnified by the reduction in the
weighted average number of outstanding common shares.

EXPECTED FUTURE INCOME

For the buyer of a business interest, it is expected future income rather
than past income that is of primary importance. Adjusted historical operating
results are only useful to the extent they aid in predicting future income. In
some instances, expected future income can reasonably be projected based on an
extrapolation of past trends. In other circumstances, because of dramatically
changing conditions in the industry or at the company, historical results may
have little or no bearing on expected future results.

The company's budget, developed by management, is often the best indication of
near-term prospects. However, the appraiser must make an independent assessment
of the reasonableness of the management forecast based on market conditions,
past performance, the accuracy of past management projections, etc.

Management does not prepare budgets in the ordinary course of business.
However, given the growth of CRA, the higher income from the Broadmoor
Apartments and the additional lease income from the Apex Physical Therapy
Building, PAG specifically requested that management provide a forecast for the
year ending July 31, 2001. Our historical analysis indicated that, excluding
gains on the sale of real estate or other assets, PSF has been consistently
unprofitable (although the Company has generated positive cash flow). This was
the case even during the last two years when CRA generated a significant amount
of income. A near-term forecast is required to determine if the trends of the
past are expected to continue.

Management's budget assumes a higher level of rental income due to fuller
occupancy at the Broadmoor Apartments and lease income from the Apex Physical
Therapy Building. Interest income and loan fees are also budgeted to be
modestly higher due to the continued growth of CRA. However, net gains on real
estate are budgeted to decline to $200,000, attributable primarily to the
Cornerstone lots. Total revenues (exclusive of the amortization of discounts on
real estate contracts) are budgeted at $5.9 million, down from a comparative
figure of $6.4 million during the 12 months ended April 30, 2000. The lower
revenues are attributable solely to lower gains on real estate. The management
budget did not include the projected revenues and expenses of the two buildings
recently acquired in Boise, Idaho.

Operating expenses are budgeted to increase to $5.9 million from $5.3 million
during the latest 12 months. The higher expenses include higher rental expenses
(including depreciation), higher interest expense from CRA and higher salaries,
general and administrative expenses. Budgeted pretax profits are a loss of
$76,000.

However, just as PSF's historical income data was adjusted as appropriate for
appraisal purposes, adjustments must also be made to the budget. Specifically,
the budget included a $200,000 net gain on the sale of real estate. Excluding
gains on the sale of property and an assumed $25,000 of non-compete
amortization, the budget calls for a pretax loss of $251,000, somewhat above the
adjusted loss during the latest 12 months of $182,237. The budgeted loss may be
slightly overstated because the budget did not include income from the
amortization of real estate contracts. Assuming a tax refund of $85,000, the
net loss is $166,000. The income available to common shareholders is a $184,000
loss after the payment of an $18,000 preferred dividend.

The adjusted level of depreciation/amortization charges is budgeted to increase
to $783,000. The cash flow available to common shareholders would be $599,000,
up from the adjusted level of $493,000 assumed during the latest 12 months. The
cash flow figures are not impacted by the omission of income from the
amortization of real estate contracts. Adjusted budgeted cash flow is $0.53 per
share based on 1,139,551 total outstanding common shares, up from the
similarly-defined figure of $0.43 per share during the latest 12 months.

A summary of the adjusted budgeted income statement is shown below:

Year Ending July 31, 2001
-------------------------
Revenues $ 5,870,000
Minus Gain on Real Estate (200,000)
-------------------------
Adjusted Revenues 5,670,000
Operating Expenses 5,946,000
Minus Non-Compete Amortization (25,000)
-------------------------
Adjusted Operating Expenses 5,921,000
Pretax Income (Loss) (251,000)
Income Tax Benefit @ 34% (85,000)
-------------------------
Net Income (Loss) (166,000)
Minus Preferred Dividends (18,000)
-------------------------
Loss Attributable to Common
Shareholders (184,000)
Depreciation/Amortization - Net 783,000
-------------------------
Cash Flow to Common Shareholders $ 599,000
=========================

Common Shares Outstanding 1,139,551
Per Common Share:
Income (0.16)
Cash Flow 0.53

MARKET APPROACHES

SIMILAR PUBLICLY-TRADED COMPANIES

One series of market approaches in business valuation relies on comparisons
with equity securities in similar publicly-traded companies, often referred to
as "guideline" companies. Since shares in closely-held companies are not
readily bought and sold, the closest substitutes are often publicly-traded
guideline companies. Share prices of public companies represent the price
negotiated between knowledgeable, willing buyers and knowledgeable, willing
sellers.

All companies within a given industry should be similarly affected by current
economic and industry conditions. The stock prices of publicly-traded guideline
companies should implicitly have these common factors built into them. The goal
of the appraisal exercise is to determine how shares in a given industry are
typically valued in relation to earnings, cash flow, dividends, sales, equity,
adjusted equity or some other measure of value.

It is then necessary for the appraiser to identify the subject company's
investment strengths and weaknesses relative to the publicly-traded guideline
companies and to determine if its proper valuation parameters should be higher,
lower or similar to the norm of the publicly-traded companies. Investment
strengths and weaknesses are generally measured in terms of growth prospects and
risk characteristics, with the latter split between operating risk, financial
risk and liquidity risk.

PSF is a difficult company to classify because it is in a number of related
businesses. It owns/operates rental real estate (primarily office buildings),
holds long-term mortgage receivables, originates short-term bridge financing for
commercial construction projects and holds the related mortgage receivable, and
is involved in property development. In PAG's opinion and that of management,
PSF is most similar to real estate investment trusts ("REITs") that hold both
real property and mortgage receivables. These are known in the trade as
"hybrid" REITs.

To our knowledge, the best information published on publicly-traded REITs is
contained in Realty Stock Review. Realty Stock Review regularly publishes
investment information on a number of publicly-traded REITs. Based on our
experience, REITs are valued based on a combination of their dividend, funds
from operations (defined as pretax income before gains/losses on asset sales and
depreciation) and adjusted net asset value ("NAV"). In calculating the NAVs of
publicly-traded REITs, the market values of the companies' assets are replaced
with estimated market values, with the latter based on the opinions of
independent security analysts, company management or actual appraisals.

Realty Stock Review issues "comprehensive REIT listings" quarterly. However,
some of the companies listed in the "comprehensive" list are not regularly
followed because the companies are small or have incomplete financial data, such
as an estimate of adjusted NAV. The most recent comprehensive listing contained
in Realty Stock Review covered 199 REITs, of which 165 were "equity" REITs, 24
were "mortgage" REITs and 10 were "hybrid" REITs. Of the 10 "hybrid" REITs,
only four were followed on a continuing basis. All four of these REITs were in
the "healthcare" sector. PSF would most closely resemble REITs in the "office"
sector since the majority of the Company's real estate holdings are office
buildings. There were no "hybrid" REITs in the "office" sector. Table IX lists
relevant financial information on the four "hybrid" REITs, the 12 "office"
equity REITs and the 10 "mixed office/industrial" REITs followed by Realty Stock
Review.

FUNDS FROM OPERATIONS. Table IX lists information on the REITs' estimated 2000
funds from operations ("FFO") and on their projected FFO in 2001. In our
opinion, since the financial markets are forward-looking, the valuation
multiples based on projected 2001 FFO are more relevant. Also, due to changes
at PSF, its ongoing operating results projected in fiscal 2001 are expected to
continue the positive trend of the past two years. As of July 14, 2000, the 12
"office" REITs were selling at an average price/projected 2001 FFO multiple of
8.1 times and a median multiple of 8.0 times. A representative multiple for the
four "hybrid" REITs was 4.2 times. A representative multiple of the 10
office/industrial REITs was 8.1 times.

We can fine-tune this approach to a subset of the market data that is more
similar to PSF. Based on our past experience, size and leverage are two factors
that influence an individual company's relative appraisal multiples. Small size
and a high degree of leverage generally both serve to lower valuation multiples.
In this instance, however, there did not appear to be a reasonable correlation
between size and valuation multiples since the smallest of the REITs (based on
total market capitalization) were trading at FFO multiples that were consistent
with the average for the group as a whole.

However, there did appear to be a rational relationship between multiples and
leverage. Excluding the hybrid REITs, four of the office or office/industrial
REITs had debt that exceeded 50% of total market capitalization. PSF is more
highly leveraged than any of these companies. The median price/projected FFO
multiple of these four companies was 6.4 times. We have excluded the hybrid
REITs from our analysis since it appears that their conservative valuation
multiples relate to the fact that they are all in the healthcare field rather
than to the fact that they are hybrid REITs.

In conclusion, if PSF were a publicly-traded REIT, we believe the market data
suggests that it would be valued at 6.5 times to 7.0 times projected 2001 FFO.
In our opinion, a reasonable multiple is 6.8 times, representing an approximate
15% risk discount from the market norm of about 8.0 times. The comparative risk
discount is attributable to PSF's smaller size, lack of geographic
diversification, leveraged financial position and lack of management depth.
Also, we believe one additional adjustment should be made to PSF's budgeted FFO.
The publicly-traded REITs do not include a provision for income taxes.
Excluding the assumed tax benefit of $85,000 reduces PSF's budgeted fiscal 2001
FFO to $514,000, or $0.45 per share. Assuming a multiple of 6.8 times, the
publicly-traded equivalent value would be $3.06 per share based on projected
fiscal 2001 FFO of $0.45 per share.

A similar approach can be used based on PSF's cash flow during the LTM. For
this comparison, the relevant multiples are those based on the estimated 2000
FFOs of the publicly-traded REITs. A representative price/estimated 2000 FFO
multiple of the 12 office REITs was 8.8 times; a representative multiple of the
office/industrial REITs was also 8.8 times. The median multiple of the four
leveraged companies was 7.0 times. In our opinion, a reasonable multiple for
PSF is 7.5 times. Excluding the assumed tax refund, PSF's adjusted FFO during
the LTM was $430,886, or $0.37 per share. The publicly-traded equivalent value
is $2.78 per share based on FFO of $0.37 per share and a multiple of 7.5 times.

DIVIDEND YIELD. A valuation approach based on dividend yield is used
infrequently in business valuation because most closely-held C corporations do
not pay dividends. However, a primary investment attribute of REITs (possibly
the most important attribute) is the dividend because nearly all of a REIT's
income must be paid out as dividends. Dividends play a larger role in the
pricing of REITs than in the pricing of most manufacturing, wholesale/retail or
service companies in the public market. The dividend yields of the REITs are
summarized below:

Type of Number Dividend Yield
Property of REITs Mean Median
-------- --------- ---- ------
Hybrid REITs 4 23.2% 21.1%
Office REITs 12 6.8 6.3
Office/Industrial 10 7.1 7.4

Excluding the hybrid REITs, a representative yield for the publicly-traded
REITs was approximately 7.0%. PSF has not paid a common dividend in the past
and, according to management, there is little prospect of paying a common
dividend in the foreseeable future. The lack of a dividend would be a major
comparative drawback of a minority interest in PSF relative to a publicly-traded
REIT.

MULTIPLE OF ADJUSTED EQUITY. The final valuation method based on comparisons
with publicly-traded REITs is the multiple of equity method. In this method,
the key variable is the stock price/adjusted NAV multiple of the publicly-traded
REITs. Adjusted net asset values were previously listed in Table IX.

An important determinant of the price/NAV ratio is often the return on equity
(income/equity or "ROE"). All other things being equal, the higher the ROE, the
more an investor should be willing to pay to purchase an interest in a company
and, therefore, the higher the price/NAV ratio. To fine-tune this method, one
should rely more heavily on those publicly-traded REITs that have an ROE similar
to the subject company rather than taking an average ratio (multiple) for the
publicly-traded companies as a whole. Once this is done, the multiple can be
adjusted for remaining quality differences between PSF and the publicly-traded
REITs.

For purposes of comparing to the REITs, we believe the relevant adjusted NAV of
PSF is "estimated economic value" rather than "net realizable value" as
differentiated in Table VII. Further, PSF's adjusted NAV should exclude the
provision for deferred taxes of $454,143 since deferred taxes are not considered
in the adjusted NAVs of the REITs. Excluding deferred taxes, the total adjusted
NAV of PSF's common equity was $8,464,284, or $7.43 per common share based on
1,139,550.58 total outstanding common shares. PSF's return on adjusted equity
of $7.43 per share was 6.1% based on estimated 2001 FFO of $0.45 per share.
For purposes of this comparison, the most relevant publicly-traded REITs are
those that had a return based on estimated FFO of approximately 6.1% and had a
comparatively low return based on the indicated annual dividend. The ROEs of
the publicly-traded REITs were quite consistent. Based on projected 2001 FFO,
the ROEs of the office and office/industrial REITs ranged from 9.8% to 13.5%,
with most being 11.0% to 12.5%. The median price/NAV multiple of the office
REITs was 0.95 times; the median multiple of the mixed office/industrial REITs
was also 0.95 times. All other things being equal, if PSF had an ROE of
approximately 12.0% and paid most of its cash flow out as a dividend, it would
probably be valued at 0.80 times to 0.95 times NAV of $7.43 per share.
There were only six REITs with an ROE based on projected 2001 FFO of below
11.0%. The average ROE of these six companies was 10.3% and their average
price/NAV multiple was 0.97 times. There were six REITs that had a return based
on the dividend (i.e., dividend/NAV) of less than 6.0%. The dividend/NAV of
these companies averaged 4.7% and their price/NAV multiples averaged 0.93 times.
The average price/NAV multiple of the four most highly leveraged REITs was 0.72
times. In summary, there did not appear to be a strong correlation between NAV
and ROE but there was a definite inverse relationship with leverage.
PSF's ROE based on LTM FFO of $0.37 per share was just 5.0%, less than half of
the norm of the guideline companies. PSF's ROE based on projected FFO of $0.45
per share is still well below even the least profitable REITs. PSF is easily
more highly leveraged than any of the publicly-traded REITs. Further, PSF has
no near-term prospects of paying a common dividend. This suggests that major
adjustments are required to the valuation parameters of the publicly-traded
REITs.

In our opinion, if PSF were a publicly-traded REIT, it would merit a discount of
45% to 50% from the 0.95 times average price/NAV multiple of all of the REITs
and a 30% discount from the 0.72 times average multiple of the four leveraged
REITs. Based on these subjective discounts, we believe a price/NAV multiple of
0.50 times would be reasonable for PSF, yielding a publicly-traded equivalent
value of $3.72 per share based on an adjusted NAV of $7.43 per share.

SUMMARY AND CONCLUSION. A summary of the various methods using data from
publicly-traded REITs is outlined below:

Company Publicly-
Data Appropriate Traded
Method Per Share Multiple Equivalent Value
------------------------ ---------- ---------- ----------------
Multiple of:
Projected 2001 FFO $0.45 x 6.8 = $3.06
LTM FFO 0.37 x 7.5 = 2.78
Dividends 0 / 8.2% = 0
Adjusted Equity 7.43 x 0.50 = 3.72

The value conclusions varied widely. In our opinion, the value based on
projected FFO should receive primary consideration. This value was below that
based on NAV but above the conclusion based on dividends. We believe a
reasonable range is $2.75 per share to $3.25 per share. PAG's best estimate is
a "publicly-traded equivalent value" of $3.00 per share based on market data
from publicly-traded REITs. A value conclusion of $3.00 per share assumes
shares in PSF have the same marketability as a publicly-traded REIT.

REAL ESTATE LIMITED PARTNERSHIPS

OVERVIEW. Another source of market data on the value of a minority
interest relative to adjusted net asset value is from real estate limited
partnerships. A secondary market exists for these issues, and pricing in the
secondary market indicates that significant discounts from the partnerships'
underlying net asset values are routine. To our knowledge, the best information
on partnership price/net asset value discounts is that compiled annually in The
Partnership Spectrum, published by Partnership Profiles, Inc. of Dallas, Texas.
For the past several years, a study was undertaken by Partnership Profiles to
examine the relationship between limited partnership unit prices in the
secondary market and the partnership units' underlying net asset values ("NAVs")
and expected distributions.

The studies are generally prepared in May or June, using recent prices and
adjusted asset values (as reported by the partnerships) as of December 31 of the
prior year. The partnership-adjusted NAVs as of December 31 are usually not
reported until sometime between February 1 and April 1 of the following year.
The study generally uses transaction prices for the two-month period ending May
30, after the most recent NAV data is known by informed buyers and sellers.

According to The Partnership Spectrum:
"The 87 partnerships selected for this year's price-value discount study
are all publicly-registered with the Securities and Exchange Commission, though
none of the partnerships are publicly-traded on any recognized securities
exchange. Instead, units of the partnerships are bought and sold in the
so-called limited partnership secondary market. This market is comprised of ten
to twelve independent securities brokerage firms that act primarily as
intermediaries in matching up buyers and sellers of units in non-listed
partnerships of all types."

The partnerships are all finite-life. Most of the partnerships in the
study were originally expected to operate for periods ranging from six to 12
years before liquidating and paying out the resulting net proceeds to the
partners. Due to the lengthy real estate recession that began in the late 1980s
as well as other factors, many of these partnerships are now operating beyond
their originally-anticipated time frames. However, partnership liquidations
have accelerated during the past few years.

The study concentrates on the market value of the limited partnership interests
relative to an estimated orderly liquidation value based on the allocation
provisions set forth in the Partnership Agreements. The orderly liquidation
value assumes certain expenses associated with selling the property. The NAVs
represent the estimated amount of cash that would be distributed to limited
partners based on the hypothetical sale of the real estate, the liquidation of
the partnership and after payment of all related costs. The estimated current
market value of the partnerships' real estate is based on internally-prepared
valuations by general partners, independent valuations prepared by appraisal
firms or some combination of the two. To be included in the study, the
partnership must have a reliable NAV and must have traded in the two-month
period covered by the study.

For this comparison, we believe PSF's adjusted NAV based on "net realizable
value" is the more appropriate measure. However, the NAVs of the
publicly-registered partnerships exclude consideration of deferred taxes.
Excluding the deferred tax benefit of $302,094, the similarly-defined adjusted
NAV of PSF's common equity was $6,240,055, or $5.48 per share based on
1,139,550.58 total outstanding common shares.

The discounts from adjusted net asset value reflect the fact that limited
partners cannot compel liquidation of the partnership. Historically, the most
important factors affecting the price/NAV discount were the level (and perceived
safety) of distributions and the degree of debt financing. According to The
Partnership Spectrum, "The results of this year's price-to-value discount study
are consistent with prior studies in that the two most important factors
considered by secondary market buyers when pricing units of real estate
partnerships continue to be (i) whether the partnership has the ability to pay
operating distributions, and (ii) the degree of debt financing utilized by the
partnership."

RECENT RESULTS. The average price-to-NAV discount was 25% in the spring of
2000, 27% in 1999 and 29% in 1998. According to the May/June 2000 issue of The
Partnership Spectrum, the average price-to-NAV discounts have been steadily
declining since 1994. During the 1994 through 1997 period, most of the decline
in discounts was likely attributable to the real estate recovery and the
increased efficiency of the secondary limited partnership market. In 1998, the
decline was due in part to the changing composition of partnerships included in
the study toward lower risk/lower discount partnerships like insured mortgage
programs and triple-net lease programs. However, during 1999, The Partnership
Spectrum believes the lower discounts are "apparently due to buyers anticipating
near-term liquidations, even for those partnerships that have not announced any
such plans." Speculation regarding near-term liquidation prospects have
prompted buyers to raise their offer prices in hopes of a relatively quick
capital gain.

According to The Partnership Spectrum, "A veritable avalanche of partnership
liquidations in recent years has given secondary market buyers good reason for
factoring relatively short holding periods into their pricing models."
Approximately 115 publicly-registered partnerships sold all of their remaining
assets in 1998 and 100 did so in 1999; The Partnership Spectrum believes
partnership liquidations could approach 200 in 2000.

The Spring 2000 study covered 87 real estate partnerships, down from 95
partnerships one year earlier due primarily to partnership liquidations in the
past year. Partnerships that have announced definitive plans to liquidate
within the next 12 months are excluded from the study. Despite the lower number
of qualifying partnerships, the study covered 564 purchase transactions in 1999,
up from 508 transactions one year earlier. The total trading volume in the
partnership secondary market dropped to $110 million in 1999, down only modestly
from $120 million in 1998 but only roughly half of the 1996 peak of $225
million. A continued decline in activity is expected in 2000 as liquidation
activity takes its toll.

While liquidation activity has resulted in a decline in the number of qualifying
transactions contained in the study, it may also be biasing the prices of the
covered transactions. According to The Partnership Spectrum, "While it is
possible to eliminate from this study those partnerships that have announced
near-term liquidation plans, it is not possible to quantify the extent to which
secondary market buyers are factoring into their pricing models their
expectations of near-term liquidations involving those partnerships that have
given no indication whatsoever concerning a liquidation time-frame."

The May/June 2000 study separated the real estate partnerships into six
broad categories. A summary of the NAV discounts and distribution yields is
provided below:
Average
Partnership Number of Average NAV Distribution
Category Partnerships Discount Yield
-------- ------------ ------------ ------------
Equity - Distributing
Low or No Debt 24 24% 9.2%
Moderate-to-High Debt 18 26% 7.7%
-------- ------------ ------------ ------------

Total 42 25% 8.8%

Equity - Non-Distributing 9 35% 0.0%

Undeveloped Land 3 40% 0.0%

Triple-Net Lease 24 21% 10.5%

Insured Mortgages 9 21% 12.5%

NA - Not Available.

The most common real estate partnerships are "Equity - Distributing"
partnerships. These equity-based partnerships that pay cash distributions
comprise most of the secondary market trading volume in real estate
partnerships. The 42 partnerships in this category own primarily equity
interests in income-producing real estate properties like shopping centers,
apartment buildings, office buildings, etc. Despite the number of partnership
liquidations over the past year, the total number of Equity - Distributing
partnerships included in the May/June 2000 study of 42 was down only marginally
from 44 partnerships one year earlier. This is because the improvement in real
estate conditions allowed previously non-distributing partnerships to begin
making at least sporadic distributions, thus moving them into the Equity -
Distributing category.

The average price/NAV discount for partnerships in the Equity - Distributing
category was 25% in the Spring 2000 study, down from 29% one year earlier.
According to The Partnership Spectrum, "The only apparent explanation for this
decline in discount is that secondary market buyers are paying higher prices for
the units of these partnerships in anticipation of a near-term liquidation, even
though no such plans have been announced by these partnerships."

Within this large group, however, relative values varied based on the amount of
leverage. The 24 partnerships that utilized little or no debt financing had an
average price/NAV discount of 24%, down slightly from 25% one year earlier. In
contrast, the 18 partnerships in this group that employed moderate to high
levels of debt financing had an average price/NAV discount of 26%, down
significantly from 35% one year earlier. The average distribution yield of the
low or no debt partnerships was 9.2% while the average yield of the
moderate-to-high debt partnerships was 7.7%. Buyers are apparently willing to
accept lower NAV discounts in exchange for higher current distributions yields,
and vice versa.

While the price/NAV discount of low or no debt distributing partnerships has
remained relatively constant in recent years, the discounts of the
moderate-to-high debt distributing partnerships have declined. The study
indicated that the pricing differential between distributing non-leveraged and
leveraged equity partnerships has narrowed considerably. A year ago, the
price/NAV "discount gap" was 10% (25% versus 35%); the most recent study

indicates a differential of only 2% (24% versus 26%). Thus, the data indicates
that as long as steady (or sporadic) distributions are being paid, the effect of
high leverage on value is not as significant as in past years. Further, in the
past, the data indicated that secondary market buyers placed a premium on
partnerships that pay a predictable level of monthly or quarterly distributions
rather than paying distributions sporadically at unpredictable intervals. This
distinction also seems to have blurred in the most recent study.

The partnerships that were trading at the highest discounts were those that do
not pay cash distributions. Nearly all of these partnerships employ significant
debt financing, which is the primary reason they are unable to pay regular cash
distributions. The average price/NAV discount for these nine partnerships was
35%, down significantly from an average discount of 46% based on 15 partnerships
one year earlier. The material reduction in the average discounts of
non-distributing partnerships ( and leveraged, distributing partnerships) may be
attributable to buyers speculating on a near-term liquidation of these
partnerships despite the fact that none of the partnerships have made any such
announcement. Another reason for the higher prices being paid for
non-distributing partnerships is that their financial fundamentals, on average,
improved over the last year. Many of even the most debt-laden partnerships now
have the potential to begin paying distributions; in contrast, several
partnerships in the year-earlier study had little prospect of making near-term
distributions.

Regardless of the reasons, the fact remains that there is a narrower spread in
the price/NAV discounts between distributing and non-distributing partnerships.
Relative to a year ago, the 25% average discount of distributing partnerships is
modestly lower, while the 35% discount for non-distributing partnerships is
materially lower. Business appraisers often use the non-distributing
partnerships as guideline companies where the subject interest under appraisal
is 1) a minority interest, 2) there is no prospect of liquidation in the
foreseeable future, and 3) the prospect of operating distributions is remote.
However, it now appears that buyers of publicly-registered, non-distributing
partnerships are now speculating on near-term liquidations and paying higher
prices. To remedy this potential bias, The Partnership Spectrum notes that
instead of using non-distributing equity partnerships as their source of market
data, "appraisers might want to consider undeveloped land partnerships when
determining discounts for minority interests in real estate entities with no
liquidation on the horizon and no plans for making operating distributions."
The May/June 1999 study began to include a new category of partnerships - those
that own undeveloped land. The objective of these partnerships is to enhance
the value of their land through pre-development activities such as rezoning,
annexation and land planning. These partnerships generally have no debt and pay
a cash distribution only as land parcels are sold to developers.

Although there were only three partnerships in the "Undeveloped Land" category
(down from four one year earlier), the price/NAV discounts were consistent,
averaging 40%. The average discount was down from 46% one year earlier. The
three remaining land partnerships are all managed by Inland Real Estate Corp.
which has not indicated any near-term plans to liquidate the partnerships.
Assuming the prices of these units are free of liquidation speculation, they may
represent the best comparables for a minority interest in a closely-held real
estate entity that will not pay operating distributions and has no near-term
liquidation plans.

The least risky category of equity partnerships is "Triple-Net Lease Programs"
where the properties are leased to tenants pursuant to long-term Lease
Agreements, with the tenants responsible for essentially all expenses. These
partnerships typically pay high cash distributions on a predictable basis. In
contrast to the lower discounts found on other categories of equity
partnerships, the most recent study indicated higher NAV discounts (21% from

14%) on Triple-Net Lease partnerships. Average distribution yields similarly
increased to 10.5% from 9.5% one year earlier. The reason for the lower prices
(and higher NAV discounts) is probably that buyers view these partnerships
primarily as income investments, with the underlying real estate taking on less
importance due to the long-term nature of the leases. Higher interest rates
over the past year no doubt raised the distribution yields required on these
investments.

"Insured Mortgages" also experienced higher NAV discounts and distribution
yields over the past year. Most of the decline in prices is due to higher
interest rates since these partnerships' distribution yields and the market
value of their loan portfolios should be highly interest-rate sensitive.
However, the quality of the loan portfolios may also have declined over the past
year.

PSF does not fit neatly into one of the categories delineated by Partnership
Profiles. According to The Partnership Spectrum editor Spencer Jefferies, there
are no more "hybrid" partnerships that own both property and receivables. The
few "hybrid" partnerships that once existed have since been liquidated.
However, according to Mr. Jefferies, the "hybrid" partnerships were valued most
like those in the "Equity - Distributing" category. In our opinion, PSF would
be considered most similar to partnerships in the "Equity - Non-Distributing"
category although the prices of these partnerships may be biased upward due to
speculation regarding future liquidation. The average NAV discount of
partnerships in this category was 35%. The Partnership Spectrum suggests that
the financial characteristics of PSF may be closest to the "Undeveloped Land"
partnerships since PSF does not pay a dividend and there are no near-term
liquidation plans. These three partnerships were valued at an average 40%
discount to NAV.

In conclusion, we believe the market data from publicly-registered real estate
partnerships suggests a price/NAV discount of 35% to 40% or, conversely, a
price/NAV multiple of 0.60 times to 0.65 times. Considering PSF's smaller size,
lack of geographic diversification, dividend prospects, degree of leverage and
the remote possibility of near-term liquidation, we believe a multiple of 0.55
times is reasonable. This suggests a value of $3.01 per common share based on
an adjusted NAV of $5.48 per common share. A value conclusion of $3.01 per
common share assumes a minority interest in PSF has the same marketability as a
publicly-registered real estate partnership.

ACQUISITION MARKET DATA

Thus far, we have determined that the orderly liquidation value of PSF is
approximately $5.74 per common share. We have also ascertained that if PSF were
a publicly-traded REIT or a publicly-registered real estate partnership, the
value of a minority common equity interest would be about $3.00 per share. The
large discrepancy in value is due to the fact that PSF has such a low return on
equity, i.e., its income is very low relative to the value of the net assets
owned. Appraisals of minority interests tend to give significant consideration
to a company's earnings and dividend-paying capacity, even for real
estate-intensive companies where the value of the enterprise as a whole would
likely be based largely on adjusted net asset value rather than dividend-paying
capacity.

PARTNERSHIP DATA. For purposes of this engagement, the most relevant market
data may be acquisition data. The best market data would be from acquisitions
of real estate-intensive companies that are highly leveraged and have a low
return on adjusted equity. According to Spencer Jefferies at Partnership
Profiles, Inc., until this year, he has never done a study of the prices of
publicly-registered partnerships after the partnership has announced its

intention to liquidate. These companies are specifically excluded from the
annual studies contained in The Partnership Spectrum. Ideally, this data would
identify the NAV discounts (if any) that exist once the partnerships have
announced plans to liquidate.

The March/April 2000 issue of The Partnership Spectrum contained the first study
prepared by Partnership Profiles of price-to-value discounts once partnerships
have announced definitive liquidation plans. The new study covers 70
partnerships that sold their remaining assets from 1996 through April 2000. The
group includes 59 real estate partnerships and 11 partnerships that owned cable
television systems. To be included in the study, a partnership's units must
have traded in the secondary market after the partnership announced a definitive
liquidation plan and before the partnership completed the sale of its remaining
assets. Also, the partnership's liquidation plan must have been reported in an
S.E.C. filing, and the liquidation announcement must have provided an estimate
of the ultimate per-unit liquidation proceeds that would be paid to limited
partners. Most of the trade prices involved transactions that occurred within
six months of when the partnerships sold their remaining assets.

Many liquidating partnerships were excluded from the study because they did not
meet the above criteria. Several partnerships announced liquidation plans but
did not provide an estimate of liquidation proceeds. The general partners of
other liquidating partnerships suspend all secondary market trading activity
once liquidation plans are announced. Transactions involving "arbitrage
tenders" also do not show up in secondary trading activity. Once a partnership
has reported a definitive plan of liquidation, limited partners are often
swamped with direct buy-out offers from arbitrageurs within a few days of the
liquidation announcement.

The results of the study indicate an average price-to-value discount of 16%.
The average discount of the 11 cable television partnerships was 14% while the
average discount of the 59 real estate partnerships was 17%. Whether the
partnership was paying distributions at the time of the liquidation announcement
appears to have an impact on the subsequent price of the units. With respect to
the 59 real estate partnerships, the 50 partnerships that were paying periodic
distributions traded at an average discount of 16%, while the nine partnerships
with no recent history of paying operating distributions traded at an average
discount of 22%. The average price-to-value discounts of partnerships that have
announced liquidation plans are obviously below those that have no near-term
liquidation plans. According to The Partnership Spectrum, "The high likelihood
of realizing these smaller discounts through near-term liquidations makes for a
worthwhile investment play."

However, The Partnership Spectrum notes that the price-to-value discounts on
liquidating partnerships exists for good reason. There are a number of factors
that can make even a definitive plan of liquidation go awry. Lawsuits can
thwart or delay the payment of liquidation proceeds. The long process of S.E.C.
approval is required if the assets are to be sold to (or merged with) an entity
affiliated with the general partner. Finally, there is the possibility that
potential environmental problems will be discovered at a property during the
buyer's due diligence.

PSF would be most similar to a non-distributing real estate partnership.
Information on the nine non-distributing real estate partnerships included in
the study is included in Table X. The price/NAV discounts of the nine
transactions listed in Table X ranged from 13% to 32%. The average discount was
22% and the median discount was 18%. In conclusion, if PSF had announced
tentative liquidation plans, the market data indicates that the shares would
still be valued at an approximate 20% discount to estimated liquidation value.

For comparison to publicly-registered partnerships, PSF's liquidation value was
$5.48 per share. Hence, even on a pro-rata enterprise (or controlling interest)
basis, a reasonable value conclusion based on partnership market data might be
80% of $5.48 per share, or $4.38 per share.

REIT DATA. Data is also available on publicly-traded REITs. PAG researched
several sources of acquisition data on publicly-traded REITs. One source was
Mergers & Acquisitions magazine. A second source was acquisition data provided
in Mergerstat Review, published by the specialty investment banking firm of
Houlihan, Lokey, Howard & Zukin ("HLHZ"). PAG also researched HLHZ's Control
Premium Study. Finally, PAG researched Mergerstat's on-line database for
acquisitions.

These various sources of published acquisition data all provided different types
of information. For example, Mergers & Acquisitions magazine generally provided
a description of the terms of the deal (i.e., whether it was cash, stock or a
combination of the two) and a calculated cash flow multiple for the acquiree.
The Mergerstat "Custom Report" provided various measures of earnings multiples
for the acquirees, including the value of total invested capital ("TIC") to
earnings before interest, taxes, depreciation and amortization ("EBITDA"). The
HLHZ data provided information on the relationship between the acquisition price
and the price at which the shares were trading prior to the announcement of the
merger or acquisition. The focus of the HLHZ information was in computing a
so-called "control premium."

While these published sources of acquisition data provided market multiples
based on various measures of income, they contained no information about the
acquiree's adjusted NAV. To our knowledge, the only place where NAV is
contained is in Realty Stock Review. PAG made a master list of acquisitions of
publicly-traded REITs from the various sources of acquisition data noted above
and determined which of those companies were followed by Realty Stock Review
prior to their merger or acquisition. We then compared the acquisition price to
the financial information of the acquiree contained in the latest issue of
Realty Stock Review published prior to the target company being acquired. The
goal of this exercise was to identify the relationship between the purchase
price for a controlling interest and the target company's FFO and adjusted NAV.
The results of this extensive acquisition research are summarized in Table XI.
We stress that this is a compilation of acquisition data obtained from several
sources. Hence, certain information is listed for some companies but not for
others, depending on the specific source of the acquisition data. We emphasize
that PAG did not research actual source documents on the respective acquirees.
The data contained in Table XI is strictly from published sources and has not
been verified by PAG.

The data listed in Table XI contains information on the buyer; the seller; the
date of the transaction; the aggregate value of equity; and whether the
transaction was cash, stock or a combination of the two. The majority of the
transactions were mergers wherein the target company was acquired with stock of
the acquirer. Once the terms of the transaction are set (such as the exchange
ratio in a stock-for-stock merger), the "value" received by the selling
shareholders fluctuates with the market price of the acquiring company. When
this was the case, PAG computed two share prices for the target company - one
based on the value of the stock of the acquirer at the time of the announcement
and a second price based on the updated value of the shares of the acquirer just
prior to the effective date of the transaction. Table XI contains four
valuation parameters based on the information contained in the respective
sources of published information.

In our opinion, the most valuable information based on income is the price/FFO
multiple. This data was obtained by comparing the total equity price of the
transaction to the FFO reported in Realty Stock Review. We were able to obtain
this information on 16 of the 30 transactions included in Table XI. The mean
price/FFO multiple was 10.6 times while the median was 10.8 times. In our
opinion, a multiple of 10.7 times is representative of the data. Applying an
approximate 15% comparative risk discount reduces the multiple appropriate for
PSF to 9.1 times. Applying a multiple of 9.1 times to PSF's projected FFO of
$0.45 per share yields a value on a controlling interest basis of $4.10 per
share.

The "cash flow multiple" was reported on 15 transactions included in Mergers &
Acquisitions magazine. The average cash flow multiple of these 15 transactions
was 13.6 times. The median cash flow multiple was also 13.6 times. The higher
multiple is curious since cash flow is similar to FFO. We believe the higher
multiples contained in Mergers & Acquisitions magazine relate in part to the
timing of the data. Mergers & Acquisitions reports its multiples based on the
cash flow in the most recent fiscal year of the acquiree. In contrast, the
multiples based on FFO from Realty Stock Review were based on projected FFO
during the current fiscal year. Since income generally increased for most of
the REITs, it is logical that a price/cash flow multiple based on historical
data is greater than one based on projected future data.

In our opinion, a representative cash flow multiple based on the information
contained in Table XI is 13.6 times. Applying a 15% comparative risk discount
reduces the multiple appropriate for PSF to 11.5 times. The value of PSF on a
controlling interest basis would be $4.26 per share based on a multiple of 11.5
times and adjusted LTM cash flow of $0.37 per share.

A third measure of value is based on the relationship between TIC and EBITDA.
TIC is the combined value of the equity and debt of the enterprise, commonly
referred to as "invested capital." Once the value of TIC is determined, the
value of debt is subtracted to arrive at the residual value of equity. The
TIC/EBITDA multiples were based on those reported in the Mergerstat computerized
acquisition search. Multiples were listed for 25 of the transactions contained
in Table XI. Excluding three outliers, the average multiple of the 22 remaining
transactions was 12.5 times and the median multiple was 12.8 times. In our
opinion, a multiple of 12.7 times is representative of the data. We believe a
lesser comparative risk discount is appropriate here because PSF's high level of
debt is explicitly considered in an invested capital method. In our opinion, a
multiple of 12.0 times is reasonable.

PSF's adjusted EBITDA during the latest 12 months was $2,720,363,
illustrated as follows:

12 Months Ended
April 30, 2000
----------------
Adjusted Pretax Loss (From Table VIII) $ (182,237)

Plus:
Adjusted Depreciation/Amortization - Net 631,123
Interest Expense 2,271,477
------------
EBITDA $ 2,720,363

Based on a multiple of 12.0 times and EBITDA of $2,720,363, the value of
TIC is $32,644,356. This is the value of debt and equity. As of April 30,
2000, the combined value of PSF's bank notes payable, installment contracts and
mortgage notes payable, debenture bonds and preferred stock was $29,815,268.
The residual value of common equity was $2,829,088, or $2.48 per share based on
1,139,550.58 outstanding common shares.

The final valuation approach based on acquisition data is potentially the most
valuable. It is based on the relationship between the acquisition price and the
target company's adjusted NAV, as reported by Realty Stock Review. We were able
to obtain the price/NAV multiple for 14 of the transactions listed in Table XI.
The multiples varied widely, ranging from 0.76 times to 1.31 times. The average
price/NAV multiple of the 14 transactions was 1.04 times; the median was also
1.04 times.

There appeared to be at least a loose correlation between the ROE (as measured
by FFO/NAV) and the price/NAV multiple. The ROEs of the 14 transactions ranged
from 8.7% to 14.0%. A total of six of the companies had ROEs below 10%. The
average ROE of these six companies was 9.3%. The mean price/NAV ratio of these
six companies was 0.99 times and the median was 1.00 times. Hence, the data
suggested that the average price/NAV multiple of these "low yielding" companies
was approximately 1.00 times.

However, based on projected cash flow of $0.45 per share and an NAV of $7.43 per
share, PSF's ROE is only 6.1%, well below the average ROE of even the
lowest-yielding public companies. In our opinion, due to its low ROE, PSF would
merit a price/NAV ratio below 1.0 times, even when valuing a controlling
interest.

A total of six of the companies listed in Table XI were merged or acquired at a
value that was below the NAV reported by Realty Stock Review. The NAV multiples
of these six companies averaged 0.88 times. The average ROE of these six
companies was 10.5%. Also, we should consider that the majority of the
transactions listed in Table XI were actually stock-for-stock mergers rather
than cash acquisitions. All other things being equal, empirical data has shown
that acquisition prices based on stock transactions are above those based on
cash transactions. In conclusion, based on the data listed in Table XI, we
believe a reasonable NAV multiple for a controlling interest in PSF would be
0.75 times NAV of $7.43 per share, resulting in a value of $5.57 per share.

A summary of the various conclusions based on the acquisition data is
contained below:
Company Controlling
Data Per Appropriate Interest
Share Multiple Value
---------- ---------- ---------
Multiple of:
Projected FFO $0.45 x 9.1 = $4.10
LTM Cash Flow 0.37 x 11.5 = 4.26
EBITDA NA x NA = 2.48
NAV 7.43 x 0.75 = 5.57

NA - Not Available.

The value conclusions based on cash flow averaged $4.18 per share. The
conclusion based on EBITDA was lower because this approach explicitly considered
PSF's high level of debt. The value based on NAV was higher at $5.57 per share
because it did not fully reflect PSF's comparatively low income. In contrast to
the value of a minority interest where primary consideration was given to cash
flow, we believe primary consideration should be given to NAV when valuing a
controlling interest. A best estimate is a value of $5.00 per share.

CONTROL PREMIUM

The other useful information listed in Table XI is the "premium over
existing stock price." This information was as reported by HLHZ. It represents
the relationship between the merger or acquisition price and the trading price
of the stock prior to the merger/acquisition announcement.

The control premium data listed in Table XI can be utilized to transform the
earlier value conclusions based on a minority interest to value conclusions
appropriate for a controlling interest. Information on control premiums was
available on 27 of the transactions listed in Table XI. The control premiums
varied widely, ranging from a negative premium of 26.3% to a positive premium of
50.0%. Excluding five outliers, the average premium of the remaining 22
transactions was 9.5% while the median was 9.8%. This included six transactions
with negative premiums.

A broader Control Premium Study conducted by HLHZ covering 705 transactions of
companies in all industries concludes a median control premium during the 12
months ended March 31, 2000 of 33.1%. In our opinion, the average control
premium for a REIT should be below the 33.1% average for all companies included
in the HLHZ study. However, we believe that PSF would deserve an above-average
control premium. This is because there is a wide disparity in the value
conclusions based on FFO versus net assets. While a minority interest value may
rely heavily on income and dividend-paying capacity, a controlling interest
value would be based more heavily on adjusted NAV. Based on this discrepancy,
we believe an above-average control premium would apply to PSF if the beginning
value conclusion were based on a minority interest value.

A total of 12 of the companies included in Table XI had control premiums
within a range of 13.3% to 26.8%. We believe a control premium for PSF should
be above this range because of the FFO-NAV discrepancy. In our opinion, a
reasonable control premium is 35%, well above the average of the companies
listed in Table XI and slightly above the 33.1% average premium for all
industries. Applying this control premium to the previously-derived value
conclusions based on publicly-traded REITs and publicly-registered real estate
partnerships derives value conclusions on a controlling interest basis of $4.05
per share and $4.06 per share, respectively, as follows:

Minority Control
Value Premium Value
Method Per Share For Control Per Share
------ ---------- ------------ ----------
Based on Publicly-Traded REITs $3.00 x 1.35 = $4.05
Based on Publicly-Registered
Partnerships 3.01 x 1.35 = 4.06

PAST TRANSACTIONS

There have been several past transactions in the stock. Since 1990, PSF
has had a standing offer to redeem any shares held by unaffiliated shareholders
at $1.55 per share. There have been numerous redemptions at this price over the
past several years. The settlement of the "minority shareholder" lawsuit in
January 1998 resulted in a redemption of 408,419 shares of common stock for a
combination of cash, property and notes payable totaling $1,689,500, or $4.14
per share. Another sizable redemption occurred on July 31, 1998 when 200,000
common shares were redeemed from the Guthrie Family Limited Partnership for
aggregate consideration of $500,000, or $2.50 per share. The purchase price was
paid through the exchange of property.

Board was based on a combination of factors including recent appraisals of the
properties and the success of CRA. The increase was also based on preliminary
findings of PAG regarding a possible tender offer for the shares of all
unaffiliated shareholders.

CONCLUSION

Our assignment was to arrive at an opinion of the "fair value" of the common
stock of PSF for purposes of making a possible "going private" offer for the
stock of unaffiliated shareholders. "Fair value" is a legal term that requires
clarification. PAG is not qualified to make that interpretation. We requested
clarification on this matter by asking if "fair value" for the purpose of the
proposed transaction was on a total enterprise (or controlling interest) basis;
a marketable, minority interest basis; or an unmarketable, minority interest
basis. Our value conclusion hinges on the legal interpretation of "fair value"
appropriate in this instance.

It is our understanding that the federal securities laws describe the
proposed "going private" transaction as a "rule 13e-3 transaction." According
to PSF management and its legal counsel, the relevant statutes in Washington
state provide no clear definition of "fair value." Research conducted by PSF's
legal counsel also did not generate much in the way of helpful legal precedent.
Perhaps the best precedent regarding value is provided by a Washington Supreme
Court decision in Northwest Greyhound Lines v. McCormack (No. 31918, December
18, 1952) in which the Court stated:

"Generally speaking, we believe that the word 'value' contemplates a
consideration of all the facts and circumstances pertinent to a particular case
in an effort to arrive at a fair and reasonable compromise or arbitration which
may in some degree be lacking in mathematical exactness or certitude."

With no legal guidance as to the proper definition of "fair value" in this
instance, we can only provide opinions of value based on the bases of value
previously noted (i.e., a controlling interest basis; a marketable, minority
basis; and an unmarketable, minority basis). It will be PSF's Board of
Directors' decision to determine "fair value" for purposes of the proposed
transaction based on the range of conclusions provided.

The value on a "marketable, minority interest" basis is best determined by the
market approaches based on publicly-traded REITs and publicly-registered
partnerships. This assumes an active or semi-active market in PSF's shares,
even though an active public market has never developed for the stock. The
market approaches considered PSF's actual and projected FFO, its past and
potential common dividends and its adjusted net asset (or liquidation) value.
The value conclusion based on REITs gave primary consideration to FFO and
arrived at a conclusion of $3.00 per share. The value conclusion based on
publicly-registered partnerships gave primary consideration to orderly
liquidation value and arrived at a value conclusion of $3.01 per share. We have
somewhat more confidence in the value conclusion based on publicly-registered
real estate partnerships than the method based on publicly-traded REITs because
PSF's financial characteristics were more similar to the non-distributing
partnerships than to the publicly-traded REITs. However, the value conclusions

from the two methods were nearly identical. Our opinion of the value of a
marketable (or semi-marketable) minority interest in PSF is $3.00 per share.

We do not believe the fair market value of the shares on an "enterprise
basis" is necessarily PSF's estimated orderly liquidation value of $5.74 per
share. The partnership market data following a liquidation announcement
indicated that units routinely trade at a discount to estimated liquidation
value due to the risk (and timing) of actually receiving the estimated
liquidation proceeds. The value conclusion from this method was $4.38 per
share. The acquisition data for REITs was based both on NAV and FFO. Even
considering the improvement in FFO projected for the coming year, the value
conclusion based on FFO is below adjusted NAV because of PSF's below-average ROE
and dividend-paying capacity. A value conclusion based on the REIT acquisition
data was $5.00 per share. A final "enterprise basis" value is determined by
applying a control premium to the minority value. Assuming a minority value of
$3.00 per share and a 35% control premium, the value conclusion from this method
is $4.05 per share. The four value conclusions based on an enterprise value are
summarized below:

Enterprise
Value Per Share
-----------------
Orderly Liquidation Value $5.74
Market Approach Based on:
Partnership Data 4.38
REIT Data 5.00
Control Premium 4.05

Based on this summary, our best estimate of value on an enterprise basis is
$4.80 per share.

A value on an unmarketable, minority interest basis is generally determined by
applying a discount for lack of marketability to the "publicly-traded
equivalent" (or marketable, minority) value of the shares. Studies have
indicated a reasonable discount for lack of marketability between a
publicly-traded minority interest and one with no active market at 35% to 40%.
PAG has not labored to cite the numerous empirical studies that justify such a
discount because we do not think this basis of value is appropriate in the
current circumstance. Our initial value conclusion was on a semi-marketable
basis because it relied in part on market data from "publicly-registered"
partnerships; hence, we believe a below-average discount for lack of
marketability of 25% is reasonable. In conclusion, we believe a reasonable
value on an unmarketable, minority basis is $2.25 per share.

Outside of the context of a "rule 13e-3 transaction," we believe the fair market
value of a minority interest in PSF would be consistent with its unmarketable,
minority value of $2.25 per share. An active market has never developed for
PSF's stock. If our assignment were to advise the Board as to the fair market
value of the stock for purposes of updating its "standing offer" to redeem
shares, it would be at approximately $2.25 per share.

Past transactions in the stock must also be considered. Until April 2000, the
long-standing redemption price was $1.55 per share. This was increased to $3.00
per share in April 2000. This large increase was based in part on the estimated
enterprise value of the shares contained in preliminary work by PAG. Small
related-party redemptions have occurred at the standing redemption price offered
to unaffiliated shareholders. A large, related-party redemption occurred in
July 1998 at $2.50 per share. The settlement of the family shareholder
litigation in January 1998 was at $4.14 per share. The shareholders in question

held approximately 24% of the stock at the time. We do not consider the latter
transaction as "arms-length;" the Company was under considerable pressure to
settle because the litigation was proving to be costly, protracted and
time-consuming for management.

In conclusion, it is our opinion that the value of the common stock in Pacific
Security Financial, Inc. was $2.25 per share on an unmarketable, minority basis
as of July 2000 based on 3,000 outstanding preferred shares and 1,139,550.58
outstanding common shares. This value would be most consistent with the fair
market value of a minority interest. It is our opinion that the marketable,
minority interest (as if the shares were actively traded on an exchange or
over-the-counter) value of the common stock was $3.00 per share. It is our
opinion that the enterprise value of the common stock was $4.80 per share as of
the same date.

Without a definition of fair value, PAG cannot opine as to a reasonable value
for the proposed "going private" transaction. However, outside of a legal
context, it would appear that a value within the range outlined by the
marketable, minority ($3.00 per share) and enterprise ($4.80 per share) values
would be prudent. This range of value conclusions is well above our opinion of
the current fair market value of a minority interest in the common stock of PSF.

APPENDIX A

Qualifications of Appraisers
Contingent & Limiting Conditions
Independence of Appraisers
Professional Parameters

QUALIFICATIONS OF APPRAISERS

This appraisal report was prepared by Pagano Appraisal Group, LLC. Pagano
Appraisal Group specializes in the appraisal of privately-held businesses and
business interests for gift and estate tax documentation, Employee Stock
Ownership Plans (ESOPs), mergers and acquisitions, shareholder transactions,
estate planning, Buy/Sell Agreements, stock options, litigation support,
arbitration, dissolution and various other business appraisal purposes.
Entities appraised include C corporations, S corporations, general partnerships,
limited partnerships, limited liability companies and sole proprietorships.

MARK P. PAGANO, CFA, ASA

RELEVANT EXPERIENCE

1999 - Present Principal, Pagano Appraisal Group, LLC.
1983 - 1999 Vice President, Corporate Valuations, Inc.
1978 - 1983 Research Analyst, Willamette Management Associates, Inc.

COURT EXPERIENCE

Mr. Pagano is qualified as an expert witness in Oregon.

PROFESSIONAL ORGANIZATIONS

ASA Accredited Senior Appraiser - Business Valuation,
American Society of Appraisers
CFA Chartered Financial Analyst,
The Institute of Chartered Financial Analysts

Association of Investment Management and Research
Portland Society of Financial Analysts
The Employee Stock Ownership Plan (ESOP) Association
The Northwest Chapter of the ESOP Association -
Participant in Professional Practitioners Round Table
The National Center for Employee Ownership (NCEO)

OFFICES HELD

1986 - 1987 President, Portland Chapter, American Society of Appraisers
1985 - 1986 Vice President, Portland Chapter, American Society of
Appraisers
1991 - Present Member, International Board of Examiners of the
American Society of Appraisers
1992 Member, Committee to Develop an Appraisal Course on ESOPs,
American Society of Appraisers
1993 - Present Member, ESOP Association Valuation Advisory Committee
1993 Member, Leveraged ESOP Subcommittee of the ESOP
Association's Valuation Advisory Committee
1994 Member, "Valuing ESOP Shares" Subcommittee of the ESOP
Association's Valuation Advisory Committee

MARK P. PAGANO, CFA, ASA (CONTINUED)

EDUCATION

1977 Bachelor of Science in Business Administration and Economics
(Summa Cum Laude), Lewis & Clark College

INSTRUCTOR/LECTURER

Speaker on "The ESOP Valuation Process" at the April 1999
Northwest Regional ESOP Conference, Seattle, Washington

Speaker on "The ESOP Valuation Process" at the March 1998
Northwest Regional ESOP Conference, Seattle, Washington

Speaker on "Valuation For ESOP Purposes" at the March 1998
National Center For Employee Ownership ESOP Workshop
Portland, Oregon

"Meet the Press" Panel at the December 1997
Conference of the ESOP Association, Las Vegas, Nevada

Speaker on "Re-Leveraging Your ESOP" at the March 1996
meeting of The Northwest Chapter of the ESOP Association,
Portland, Oregon

Course Instructor on Business Valuation for The Russian-
American School of Business Administration (RASBA) in
Tambov Russia - November 1995

Guest Lecturer on Business Valuation at Portland State
University for various groups of visiting Russian RASBA
students - 1995 and 1996

PUBLICATIONS

"Uniform Appraisal Practices are Needed in Leveraged ESOP
Valuations," Business Valuation Review - March 1991

CERTIFICATION

The American Society of Appraisers conducts a mandatory program of periodic
recertification for its Accredited Senior Appraisers. The criteria for
recertification includes required participation in continuing education
programs. Optional recertification criteria include instructional duties in
appraisal courses, literary contributions to the profession and contributions to
the society itself, such as serving as an elected chapter or national officer.
Mr. Pagano is recertified under this program through June 20, 2003.

COMMUNITY INVOLVEMENT

1993 - 1998 Member, Gladstone City Council, Gladstone, Oregon
1993 - 1994 Chairman, Gladstone School District Budget Committee
1991 - 1993 Member, Gladstone School District Budget Committee

CONTINGENT AND LIMITING CONDITIONS

This appraisal opinion of value is subject to the following contingent and
limiting conditions:

1. Information, estimates and opinions contained in this report are obtained
from sources considered reliable. However, Pagano Appraisal Group, LLC ("PAG")
has not independently verified such information and no liability for such
sources is assumed by PAG. The financial statements used in the opinion of
value were not audited by PAG and no responsibility is assumed for their
completeness or accuracy by PAG.

2. The client and/or its representatives have warranted to PAG that the
information supplied to PAG was complete and accurate to the best of client's
knowledge; and that any reports, analysis, or other documents prepared for it by
PAG will be used only in compliance with all applicable laws and regulations.

3. Unless specifically stated in the report to the contrary, PAG assumes no
responsibility for the following and assumes:

* Management is competent and the ownership is in responsible hands;
* No responsibility for legal matters;
* No survey of the real property that may be owned by the business has been
made and the value opinion is reported without regard to questions of title,
boundaries, encumbrances and encroachments;
* No investigation has been made of the legal description or legal matters,
including title or encumbrances;
* There is full compliance with all applicable federal, state and local
zoning, use, environmental and similar laws and regulations;
* There are no environmental conditions or hazardous waste conditions that
might impact value;
* The subject's building(s) meets the tenets of the Federal Americans with
Disabilities Act ("ADA") and there is no outstanding ADA penalty associated with
the subject real property.
* Value is reported in dollars on the basis of the currency prevailing on
the date of appraisal.
* A willing buyer, as defined in the definition of value, is protected
against undisclosed, unknown or contingent liabilities or claims against the
company, and is willing to sign normal documents at closing.

4. We have no knowledge concerning the presence of any hazardous materials
on the site or in the improvements as of the date of the appraisal. We have not
conducted any tests to determine whether or not such hazardous materials and/or
related conditions exist on the site or in the improvements. We recommend that
the reader direct any questions concerning this issue to a firm of registered
professional engineers specializing in providing such testing and analysis.

5. The ADA became effective January 26, 1992. We have not made a specific
compliance survey and analysis of this property to determine whether or not it
is in conformity with the various detailed requirements of the ADA. It is
possible that a compliance survey of the property, together with a detailed
analysis of the requirements of the ADA, could reveal that the property is not
in compliance with one or more of the requirements of ADA. If so, this fact
could have a negative effect upon the value conclusion. Since we have no direct
evidence relating to this issue, we did not consider a possible noncompliance
with the requirements of ADA in estimating the value of the property.

CONTINGENT AND LIMITING CONDITIONS (CONTINUED)

6. Possession of this report, or a copy thereof, does not carry with it the
right of publication of all or part of it, nor may it be used for any purpose by
any but the client, without the previous written consent of the appraiser and
the client. Neither all nor any part of the contents of this report shall be
conveyed to the public through advertising, public relations, news, sales or
other media without the previous written consent and approval of PAG,
particularly as to valuation conclusions, or any reference to the American
Society of Appraisers, the ASA designation or the CFA designation. Authorized
copies of this report will be signed in blue ink. Unsigned copies, or copies
not signed in blue ink, should be considered to be incomplete.

7. PAG is not required to give testimony in court, or be in attendance
during any hearings or depositions with reference to the company being
appraised, unless previous, mutually agreeable arrangements have been made as to
time, fee and PAG employee or subcontractor. All files relating to the opinion
of value that are held by PAG remain the confidential property of the client.

8. The various estimates of value presented in this report apply to this
appraisal only and may not be used out of the context presented herein.

9. The value premise(s) cited in the report are considered foundational and
basic to the value opinions reported therein, and the right is hereby reserved
by PAG to alter, revise and/or rescind any of the value opinions should any
subsequent or additional data be found, or in the event the conditions are
modified to any extent.

10. The appraised estimate of Fair Market Value reached in this report is
necessarily based on the Definition of Fair Market Value as stated in the Letter
of Transmittal and in the Introduction Section. An actual transaction may be
concluded at a higher value or lower value, depending on the circumstance
surrounding the company, the particular business interest(s) and/or the
motivations and knowledge of the specific buyers and sellers at that time. PAG
makes no guarantees as to what values individual buyers and sellers may reach in
an actual transaction.

11. The conclusions reached in this report are advisory only and do not
constitute a recommendation for purchase or sale of these securities.

12. Liability of PAG and its employees or subcontractors for errors and
omissions, if any, in this work is limited to the amount of its compensation for
the work performed in this assignment.

INDEPENDENCE OF APPRAISERS

Pagano Appraisal Group, LLC and the individuals involved in preparing this
appraisal do not have any present or contemplated future interest in the subject
property, or any other interest that might prevent them from rendering a fair
and unbiased opinion.

PROFESSIONAL PARAMETERS
ASA DESIGNATION

The American Society of Appraisers is a professional organization of
individual appraisers. International in structure, it is self-supporting and
unaffiliated. The Society works cooperatively for the elevation of the
standards of practice of the appraisal profession. The only major appraisal
organization representing all of the multi-disciplines of appraisal specialists,
the Society was founded in 1952 and is headquartered in Washington, D.C.

Society members include valuation specialists in equities, securities,
land, equipment, buildings, art objects, engineering, finance, assessment,
insurance law, accounting, natural resources, public utilities, and gems; in
short, all types of property, tangible and intangible, real or personal.
Each Society member who has satisfactorily demonstrated that he or she is
qualified to appraise one or more of the existing kinds of property has been
granted the right to use the professional designation Accredited Senior
Appraiser, "ASA". Such designation is predicated upon the following society
criteria: written examinations, submission of representative appraisal reports,
five years of full-time valuation experience and screening of the applicant's
practice and ethics. Accredited Senior Appraisers are required to recertify
every five years.

Ethical practices and conduct required of Society members are defined in
"The Principles of Appraisal Practice and Code of Ethics of the American
Society of Appraisers."

PROFESSIONAL PARAMETERS
CFA DESIGNATION

The Institute of Chartered Financial Analysts ("ICFA") is a professional
self-regulatory organization. The primary goal of the ICFA, founded in 1962, is
to establish, maintain and regulate standards of practice in the field of
financial analysis.

Members of the ICFA are entitled to use the designation Chartered Financial
Analyst ("CFA"). A college degree or equivalent is required to enter the CFA
program. A successful candidate must have had at least three years of
experience in financial analysis (related to investments) and subscribe to the
highest ethical standards of practice.

The candidate must also complete a three-year study and examination series.
Candidates are required to pass each of three separate, annually-administered,
six-hour examinations covering the fields of financial accounting, equity
securities analysis, fixed income securities analysis, portfolio management,
economics and ethical and professionals standards.

All Chartered Financial Analysts are required to adhere to ethical standards
as defined in the ICFA Code of Ethics and Standards of Professional Conduct.