<PAGE>

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


                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                                   FORM 10-K

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

                       COMMISSION FILE NUMBER:  0-9628

                      ANCHOR PACIFIC UNDERWRITERS, INC.
           (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                               94-1687187
    (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)              IDENTIFICATION NO.)

    1800 SUTTER STREET, SUITE 400                      94520
         CONCORD, CALIFORNIA                         (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (925) 682-7707

         SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                    None

       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                        Common stock, $.02 par value

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

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.    [X]

       The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 13, 1998 was $2,352,712.

       As of March 13, 1998, the Registrant had 4,709,727 shares of common
stock outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the Proxy Statement to be mailed to shareholders in
connection with the Registrant's 1998 Annual Meeting of Shareholders are
incorporated by reference into Part III hereof.

       Exhibit Index is on page 18

================================================================================
<PAGE>

                       ANCHOR  PACIFIC UNDERWRITERS, INC.


                               TABLE OF CONTENTS


    PART I.

        ITEM 1.     Business...............................................  3

        ITEM 2.     Properties.............................................. 8

        ITEM 3.     Legal Proceedings....................................... 9

        ITEM 4.     Submission of Matters to a Vote of Security Holders..... 9


    PART II.

       ITEM 5.     Market for Registrant's Common Equity and Related Shareholder
                   Matters.................................................. 9

       ITEM 6.     Selected Financial Data ................................ 10

       ITEM 7.     Management's Discussion and Analysis of Financial Condition
                   and Results of Operations .............................. 10

       ITEM 8.     Financial Statements and Supplementary Data ............ 17

       ITEM 9.     Changes in Disagreements With Accountants on Accounting and
                   Financial Disclosure ................................... 17


   PART III.

       Item 10.    Directors and Executive Officers of Registrant ......... 17

       ITEM 11.    Executive Compensation ................................. 17

       ITEM 12.    Security Ownership of Certain Beneficial Owners and
                   Management ............................................. 17

       ITEM 13.    Certain Relationships and Related Transactions ......... 18


   PART IV.

       ITEM 14.    Exhibits, Financial Statement Schedules, and Reports on Form
                   8-K ................................................... 18
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

SUMMARY

     Anchor Pacific Underwriters, Inc. is a holding company that is primarily
engaged in insurance brokerage and administration services through its three
direct and indirect wholly-owned subsidiaries.  Anchor Pacific Underwriters,
Inc. and the subsidiaries listed in the chart below are collectively referred to
as "Anchor" unless the context otherwise requires.


                       ANCHOR PACIFIC UNDERWRITERS, INC.
                            (a Delaware corporation)
                                Holding Company
                                       |
                                       |
                           ------------------------
                           |                       |
                           |                       |
                           |                       |
HARDEN & COMPANY INSURANCE SERVICES, INC.       PUTNAM, KNUDSEN & WIEKING, INC.
       (a California corporation)                 (a California corporation)
    Employee Benefits Administrator              Property & Casualty Insurance
       Group Health Insurance                     Targeted Industry Brokerage
                |
                |
                |
       BENEFIT RESOURCES, INC.
       (an Arizona corporation)
    Employee Benefits Administrator
       Group Health Insurance

     Anchor provides the following services to private sector small and middle
market companies, groups, trusts, associations, government agencies and
individual consumers: (a) insurance brokerage; and (b) third-party claims
administration, employee benefits consulting,  underwriting and risk analysis.
Anchor offers its customers, as agent, broker or administrator, a range of
products and services tailored to the specific needs of such customers.

     Anchor markets the products and services of more than 50 commercial
insurance companies and over a dozen managed care and preferred provider
organizations.  The marketing of products and services is carried out through 10
direct sales representatives and over 500 independent insurance brokers.
Anchor's customer base is in the Western United States, primarily in California,
Arizona and Oregon.  For the fiscal year ended December 31, 1997, Anchor
generated in excess of $10 million in revenues.

     The principal executive offices of Anchor are located approximately 30
miles east of San Francisco, California, at 1800 Sutter Street, Suite 400,
Concord, California 94520.

HISTORY

     Anchor was organized in 1986 as a California general partnership for the
specific purpose of acquiring Harden & Company Insurance Services, Inc., a
third-party employee benefits administrator ("Harden"), from Alex Brown
Financial Group.  Anchor was reorganized as a private California corporation in
March 1987, and reincorporated in January 1995, as a Delaware corporation in
connection with a merger with System Industries, Inc. ("System").  As a result
of the merger, Anchor became a public company.

                                       3
<PAGE>

     Since its inception, Anchor has expanded its insurance and administration
service capabilities through internal growth as well as a series of
acquisitions.  From 1986 through 1990, Anchor, through Harden, focused on
providing administration services for group insurance benefit plans.  In 1990,
Anchor began to diversify its business by providing property, casualty and
workers' compensation insurance products and services, as well as offering
market studies and program analysis for certain non-profit associations who had
endorsed Anchor's products.

     From 1990 through 1992, Anchor expanded its property and casualty business
by: (a) acquiring certain assets, including insurance brokerage accounts, from
four property and casualty brokerage firms; and (b) organizing Anchor Pacific
Premium Finance Company ("APPFCO"), to complement its property and casualty
business by providing premium financing to Anchor's clients.  Because it had
been largely inactive during the past several years,  Anchor dissolved APPFCO in
1997.

     As part of its expansion strategy Anchor has made a series of acquisitions,
including the acquisitions of: Benefit Resources, Inc. ("BRI"), a third-party
employee benefits administrator located in Scottsdale, Arizona in August 1994;
Putnam, Knudsen & Wieking, Inc. ("PKW"), a property and casualty insurance
brokerage company located in Oakland, California in October 1994; certain third-
party administration accounts from Dutcher Insurance Agency, Inc. ("Dutcher"),
located in Stockton, California in February 1995; R. L. Ferguson Agency ("RLF"),
a property and casualty insurance brokerage located in Walnut Creek, California
in March 1996; certain property and casualty accounts from Norman I. Robins
("Robins"), in April 1996; and certain property and casualty accounts from John
R. McPherson ("McPherson"), in May 1996.   In July 1997, and again in January
1998, Harden took over third-party administration businesses, located in Los
Angeles, California and Portland, Oregon, that were previously serviced by
unrelated third parties.  In connection with this recent expansion Harden hired
34 employees in Los Angeles and 70 employees in Portland which were previously
employed by the prior administrators.  Anchor will continue to look for
opportunities to expand its third-party administration services in the Western
United States.

OPERATIONS

     INSURANCE BROKERAGE

     Anchor first entered the insurance brokerage business in 1990 through an
acquisition.  Since then it has primarily grown its insurance brokerage business
through acquisitions, the largest being PKW which was acquired in 1994.  This
segment of Anchor's business focuses on property and casualty (both commercial
and personal lines), health, life and disability, as well as workers'
compensation.   PKW acts as an agent on behalf of insurers and other
intermediaries in soliciting, negotiating and effecting contracts of insurance,
and as a broker in procuring insurance contracts on behalf of insureds.
Insurance brokerages tend to build long-term relationships with their clients,
with the initial placement of insurance coverage often resulting in subsequent
annual renewals.

     As an insurance agent and broker, PKW derives income from the sale of
insurance products and services and the receipt of commissions generated
therefrom.  Commissions, which generally are based on a percentage of gross
premiums, and contingent commissions, which are generally based on the insurance
carriers underwriting profits derived over a given period of time, can vary
substantially within the insurance industry.  The ultimate size of commissions
may be influenced by a number of factors, including the type of insurance, the
amount of the premium, the insurance carrier's loss experience with respect to
policies placed by Anchor, and the scope of the services that Anchor renders.
Anchor derived 31%, 43% and 41% of its revenues in 1997, 1996 and 1995,
respectively, from its insurance brokerage activities.  Since it acquired PKW,
Anchor has devoted a substantial effort to the financial and management
reorganization of this business segment with particular emphasis on improving
operating procedures which has resulted in improved operating results.

                                       4
<PAGE>

     THIRD-PARTY CLAIMS ADMINISTRATION AND EMPLOYEE BENEFITS CONSULTING

     The employee benefits business segment of Anchor is conducted through
Harden and BRI and primarily involves third-party health benefits administration
activities.  This business segment engages in designing, implementing and
administering health benefit plans for small to medium sized employer groups.
Administration services provided by Harden and BRI include receiving and
managing employer plan contributions and/or premium payments, monitoring
employee and dependent eligibility, preparing required government and tax
reports, handling day-to-day administration, reviewing and analyzing claims data
for coverage, and managing the claims settlement process.  Anchor, through
Harden and BRI, also helps develop insurance products and services tailored to
the specific needs of the client, provides risk analysis, determines appropriate
benefit and funding levels for particular insurance programs, and conducts loss
control and cost studies for insurance companies and self-insured employers.  As
compensation for its claims administration services, Harden and BRI generally
receive fees based on a percentage of premiums collected, or on a per capita
basis.  Anchor derived 69%, 57% and 59% of its revenues in 1997, 1996 and 1995,
respectively, from its third-party administration activities.

     In the third quarter of 1996, the insurance carrier which previously
offered a product that accounted for 51% of Harden and BRI's and 27% of Anchor's
overall third-party administration revenues in 1996 informed Harden and BRI that
as a result of changes in its business strategy, it would discontinue offering
such an insurance product by the end of February 1997.  Harden and BRI
subsequently entered into a multi-year, exclusive contract with an A-
(Excellent) rated insurance carrier to underwrite the risk and provide a
replacement product for Anchor's third-party administration services.  This
contract became effective December 1, 1996.  The transition to the new insurance
carrier was less disruptive for Harden and BRI's clients than an earlier
transition to a new carrier in late 1995 because the new insurance carrier fully
assumed all policies in California and a majority of policies in Arizona.
Unlike the earlier transition, Harden and BRI lost few accounts and the impact
on Harden and BRI's revenue was minimal.

     The new insurance carrier is a subsidiary of the largest HMO in Nevada.
Management believes that the new insurance carrier enabled Anchor to provide the
small group medical insurance market with strong managed care products.  The
new insurance carrier's business strategy has been to aggressively
market group health products in a multi-state distribution system through an
exclusive multi-year contract with Harden and BRI in California and Arizona.
The reaction of the Harden and BRI distributors continues to be favorable and
the change has been widely accepted.  Also, effective July 1, 1997, the same
insurance carrier purchased a significant volume of business from another
insurance carrier in Los Angeles, California.  The new insurance carrier then
entered into a contract with Harden to provide third-party administration
services to this business.

     Effective January 1, 1998, Anchor and Harden entered into an agreement to
acquire the third-party administration business of a firm based in Portland,
Oregon.  This contract will allow Harden to expand its marketing and servicing
territory in Oregon, Washington, Idaho and Nevada and is expected to
substantially enhance the opportunity to increase Harden's revenues in 1998 and
future years.  Thus far, the response from clients formerly serviced by the
Portland administrator has been very encouraging.

     Marketing for new business began during 1996 and coincided with the release
of new products by Harden and BRI.  Anchor continues to take steps to strengthen
its sales management by hiring additional seasoned sales and marketing
executives.  Product development and new product sales continue to be a high
priority, as does geographical diversification into other marketing territories
in the western states.

     INSURANCE PREMIUM FINANCING

     Anchor, through Anchor Pacific Premium Finance Company ("APPFCO"), in the
past has provided insurance premium financing services primarily to property and
casualty clients of PKW.  During 1996, Anchor derived less than 1% of its
revenue from its insurance premium financing activities.  This reduction in
revenue was due primarily to Anchor's placing a greater share of its premium
financing through other financing facilities that were more competitively
advantageous to the client.  As a result of its inactivity, Anchor dissolved
APPFCO effective May 30, 1997.

                                       5
<PAGE>

RECENT DEVELOPMENTS/BUSINESS STRATEGY

     Anchor's strategy is to expand its third-party administration services by:
(a) continuing to develop through its marketing partners specialized affiliated
business units that target selected insurance industry market segments defined
by industry type, geographic location and consumer demographics; (b) creating
new products and services; and (c) strengthening management, sales and marketing
staff. In conjunction with this strategy, Anchor seeks to manage its affairs to
achieve expansion through internal growth of its existing and new product lines.
Anchor also regularly considers acquisition and merger opportunities and other
business expansion alternatives.

EMPLOYEES

     As of March 13, 1998, Anchor and its subsidiaries employed approximately
230 full-time employees.  None of its employees are presently represented by a
union or covered by a collective bargaining agreement.  Anchor believes its
employee relations are good.


EXECUTIVE OFFICERS OF THE REGISTRANT

     The following information is provided regarding certain executive officers
of Anchor and/or its subsidiaries.


<TABLE>
<CAPTION>
=====================================================================================================================
NAME                                  Age                            Position                         Held Since
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>                                          <C>
James R. Dunathan                   61               President, Chief Executive Officer and         1987
                                                     Director of Anchor

Earl Wiklund                        50               Senior Vice President, Chief Financial         1987
                                                     Officer, Secretary and Director of Anchor

Christine D. Behrens                60               Senior Vice President, Chief Operating         1997
                                                     Officer of PKW

Lynn A. Boyd                        53               President of Harden                            1996

Raymond P. Petersen                 60               Executive Vice President of Harden             1996

Donald B. Putnam                    65               Chairman of Executive Committee of PKW and     1994
                                                     Director of Anchor

Robert H. Rath                      53               President of BRI                               1997

James P. Wieking                    66               Executive Vice President of PKW and            1994
                                                     Director of Anchor
====================================================================================================================================

</TABLE>

     JAMES R. DUNATHAN.  Mr. Dunathan has over 39 years of experience in the
insurance industry and his family has been involved in the insurance industry
since 1880. He joined Harden in 1985 and initiated the formation of Anchor in
late 1986.  Mr. Dunathan served as a member of the Board of Directors of the
Professional Insurance Agents Association for 11 years and as President of such
Association from 1975 to 1976.  Currently Mr. Dunathan serves on the Business
Leaders Alliance for Contra Costa County, appointed by the Board of Supervisors.
He also serves as a Director of the Barbara Milliff Center in Concord,
California, a non-profit school for children with developmental disabilities.
Mr. Dunathan completed his undergraduate studies at Ohio State University; and
served actively in the U.S. Navy as a naval aviator while he continued graduate
work at the U.S. Armed Forces Institute in Japan.

                                       6
<PAGE>

     EARL WIKLUND.  In addition to his duties at Anchor, Mr. Wiklund also serves
as the Chief Executive Officer of Anchor's subsidiaries, Harden and BRI.  He has
over 26 years of experience in various operational, administrative and financial
management positions.  Mr. Wiklund joined Harden in 1984 as Vice President,
Finance.  Most recently he served as Treasurer for the Independent
Administrators Association, as member of the Legislative Committee, as well as
member of the Board of Directors of such Association.  Mr. Wiklund graduated
from California State University, Sacramento, with a B.S. degree and received
his M.B.A. from St. Mary's College.  He also serves as Chairman of Anchor's
Audit, Budget & Finance Committee.

     CHRISTINE D. BEHRENS.  Ms. Behrens joined Anchor in 1980 as Senior Vice
President in its property casualty division.  Ms. Behrens is currently
responsible for the daily operational functions including all administrative and
client servicing activities at PKW.  Ms. Behrens began her career in the
insurance industry in 1955.  She has been actively involved as an agency owner,
and later as an officer and producer of commercial accounts for Poulton &
Associates and EXPO/PA in Oakland (which were purchased by Anchor in 1980 and
merged into PKW in 1994).  Ms. Behrens has served as a board member of both the
Oakland Association of Insurance Agents and later the Mt. Diablo Chapter of CPCU
where she currently serves as President.   Ms. Behrens serves on the PKW
Executive Committee.

     LYNN A. BOYD.   Mr. Boyd joined Harden in 1991.  He has over 30 years
experience in the group health insurance field including positions with Blue
Cross, Clifton & Company, Curtis Day & Company and Sher Associates.  His sales
responsibilities at Harden primarily focus on the production of self-insured and
large case fully insured accounts.  Mr. Boyd also is responsible for the daily
operational functions of Harden and serves on the Harden  Executive Committee.
He received his B.S.B.A. from the University of Denver with a major in Finance
and a minor in Accounting.

     RAYMOND P. PETERSEN. Mr. Petersen joined Harden in 1987 following several
years with Marsh-McLennan Associates in San Francisco.  His 30 years in the
insurance industry include sales management and marketing positions for both
property and casualty and group health benefits companies.  At Harden he is
responsible for the development of sales from sponsored programs for state
associates and trade groups.  Another priority for him is directing the network
of contracted General Agents and their dedicated Producers.  Mr. Petersen serves
on the Harden Executive Committee.

     DONALD B. PUTNAM.  Mr. Putnam is an insurance professional with over 39
years of experience.  He has been actively involved as a director or officer of
many California insurance associations and served as Director of the National
Association of Insurance Brokers (NAIB) and Intersure, an international
affiliation of insurance brokers.  He also recently served as Chairman of the
NAIB-PAC.  Mr. Putnam received his B.S. degree in Business from the University
of California, Berkeley.

     ROBERT H. RATH.  Mr. Rath joined BRI in 1997 with 25 years of experience in
the employee benefits administration field.  His career includes extensive
management experience in underwriting, sales and claims as well as EPO, PPO and
HMO development and implementation.  For the past 12 years, Mr. Rath's
activities have focused on marketing and sales management of employee benefits
plans in the Western United States.  He has also served as board member and
President of both the Society of Professional Benefit Administrators and the
Independent Administrators Association of California.  Mr. Rath serves on the
BRI Executive Committee.

     JAMES P. WIEKING.  Mr. Wieking has been active in the insurance business
for 40 years.  Mr. Wieking was formerly the owner of Wieking, Connolly &
Associates in Oakland, which merged with PKW in 1983.  Mr. Wieking has been
involved in various civic and professional associations and has served as a
board member of the Pacific Network Group and the Independent Insurance Agents
Association, in Oakland.  He is a graduate of the University of California,
Berkeley.

                                       7
<PAGE>

REGULATION

     The activities of Anchor that are related to insurance brokerage, agency
services and third-party administration are subject to licensing and regulation
by the jurisdictions in which such activities are conducted. In addition to
regulatory requirements applicable to Anchor, most jurisdictions require that
individuals engaged in insurance brokerage and agency activities be personally
licensed. As a result, a number of Anchor's employees are so licensed. Anchor's
operations depend on the validity of and its continued good standing under the
licenses and approvals pursuant to which it operates. Licensing laws and
regulations vary from jurisdiction to jurisdiction. In all jurisdictions, the
applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities. Such authorities generally are vested
with broad discretion as to the granting, renewing, and revoking of licenses and
approvals.

     Other factors, such as client uncertainty about the potential effect of
health care reform, could also affect Anchor's business.  Anchor believes that
its expertise in two areas frequently identified in health care reform proposals
(managed care and managed competition), combined with its strategy of serving
middle market clients, leave it well positioned to operate effectively in a
managed care and managed competition environment.  Anchor also believes that in
the current political environment, the United States will experience
incremental, rather than sudden comprehensive changes in health care
regulations.  It is not possible at this time, however,  to predict the effect
that any future health care reform legislation will have on Anchor's business
condition or operations.  Anchor is unaware of any current regulatory proposals
that could have any material effect on its liquidity, capital resources or
operations.

INFLATION

     Historically, inflation has impacted commission revenues by, among other
things, increasing property replacement costs and workers' compensation and
liability claims, thereby causing some clients to seek higher levels of
insurance coverage and, in turn,  pay higher premiums.  During the past several
years, the United States has experienced very low rates of inflation along with
gradual business expansion.  Consequently, inflation has had minimal impact on
insurance prices in the United States during the past several years.

COMPETITION

     The insurance brokerage and service business is highly competitive and
there are many insurance brokerage and administration service organizations who
actively compete with Anchor in every area of its business.  Anchor competes
directly with national insurance brokerages, insurance companies and health
maintenance organizations that market their own products, through independent
agencies, brokers and third-party administrators, as well as with entities which
self insure or sponsor other insurance programs.  Many of these competitors are
larger than Anchor and have greater resources. Anchor seeks to compete by
specializing in specific market segments, developing specialty products for
those markets, and maintaining relationships with consumers by providing
personal service normally associated with small local businesses, together with
the expertise, flexibility and diversity of products that can only be provided
by a larger broker.  Anchor's claims administration operations compete with
independent claims administration firms and with similar operations conducted by
subsidiaries of large insurance companies and insurance brokerage companies.

     Anchor believes it has several competitive advantages, including:  (a) a
growing market share within its current operating territory as one of the top
ten insurance firms in the Northern California Bay Area; (b) proven ability to
identify and close acquisitions; (c) a public equity currency; and (d) an
experienced management team whose operating philosophy is committed to
preserving and enhancing acquired companies' value.

ITEM 2.  PROPERTIES

     Anchor leases approximately 32,099 rentable square feet of office space at
its executive offices at 1800 Sutter Street, Suite 400, Concord, California
94520.  From November 1, 1994 through October 31, 1999, Anchor must pay rent of
$1.40 per rentable square foot per month (approximately $44,939 per month), and
from November 1, 1999 through October 31, 2004, Anchor must pay rent of $1.75
per rentable square foot per month (approximately $56,173 per month).  Anchor
also has an option to lease additional office space at its executive offices in
Concord.

                                       8
<PAGE>

     In addition to Anchor's leased space, PKW has a lease obligation on
approximately 13,128 rentable square feet of office space in Oakland,
California; BRI leases approximately  6,992 rentable square feet of office space
in Scottsdale, Arizona; and Harden leases approximately 6,005 rentable square
feet of office space in Los Angeles, California.    PKW must pay rent of between
$1.75 and $2.00 per rentable square foot per month under its lease, which
expires on November 30, 1999.  Under its lease, which expires on May 31, 2002,
BRI must pay rent of between $0.84 and $0.90 per rentable square foot per month,
plus operating expenses.  Harden must pay rent in Los Angeles, California of
$1.36 per rentable square foot per month under one lease, which expires on March
31, 1999 and $1.10 per rentable square foot per month under another lease, which
expires on August 7, 1998.

     PKW relocated its offices in December 1994 to Anchor's office space in
Concord, California and subleased its offices in Oakland. In May 1995, December
1995, and October 1997, PKW entered into subleases with respect to 82%, 10% and
8%, respectively, of PKW's prior office space in Oakland. The amounts,
classified as short and long-term liabilities with respect to the PKW leases,
reflect the shortfall between sublease income to be received and PKW's lease
expense to be paid.

ITEM 3.  LEGAL PROCEEDINGS

     Anchor and its subsidiaries are parties from time to time to various
lawsuits that arise in the normal course of business.  Management is not aware
of any lawsuits to which Anchor or its subsidiaries is currently a party or to
which any property of Anchor or any of its subsidiaries is subject, which might
materially adversely affect the financial condition or results of operations of
Anchor.

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

     None.

                                 PART II

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

     Prior to the consummation of the merger with System, Anchor was a privately
held California corporation with approximately 63 shareholders.  Consequently,
there was no established trading market for Anchor's common stock.  As of March
13, 1998, there were approximately 4,709,727 shares of Anchor's common stock
outstanding, held by approximately 2,000 shareholders of record.  As of March
13, 1998, there also were warrants to purchase 714,562 shares of common stock
and options to purchase 648,650 shares of common stock of Anchor outstanding.
The following table sets forth historical trade information for Anchor common
stock.

<TABLE>
<CAPTION>
===================================================================================================================================

COMMON STOCK QUARTERLY TRADE HISTORY              Quarterly Volume        Quarterly High/Ask        Quarterly Low/Bid
------------------------------------------------------------------------------------------------------------------------------------

<S>                                            <C>                      <C>                      <C>
March 31, 1996                                        28,500                    $2.17                     $ .96
------------------------------------------------------------------------------------------------------------------------------------

June 30, 1996                                         21,200                     2.00                      1.21
------------------------------------------------------------------------------------------------------------------------------------

September 30, 1996                                    10,500                     1.83                      1.21
------------------------------------------------------------------------------------------------------------------------------------

December 31, 1996                                    180,500                     1.61                       .83
------------------------------------------------------------------------------------------------------------------------------------

March 31, 1997                                       104,600                     1.25                       .75
------------------------------------------------------------------------------------------------------------------------------------

June 30, 1997                                         51,000                     1.04                       .61
------------------------------------------------------------------------------------------------------------------------------------

September 30, 1997                                    46,400                      .96                       .63
------------------------------------------------------------------------------------------------------------------------------------

December 31, 1997                                     23,100                      .95                       .72
====================================================================================================================================

</TABLE>

     Since the January 1995 merger with System, Anchor's shares of common stock
have publicly traded on the OTC Bulletin Board (Symbol: APUX).  At such time it
meets certain minimum market capitalization requirements, Anchor intends to seek
to list its shares on The Nasdaq Small-Cap Market; however, there can be no
assurance as to when or whether such shares will be so listed.

                                       9
<PAGE>

     Holders of Anchor common stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of legally available
funds.  Anchor has not paid any cash or stock dividends to date.  Anchor does
not expect to pay dividends in the foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth certain historical information for Anchor
which is based on, and should be read in conjunction with, Anchor's audited
financial statements that are being filed as part of this report.

<TABLE>
<CAPTION>
                                                            ANCHOR PACIFIC UNDERWRITERS, INC.
                                                                  Selected Financial Data
==============================================================================================================================
                                  1997                1996                 1995                1994                 1993
                          ----------------      ---------------      ---------------      ---------------      ---------------
<S>                     <C>                  <C>                  <C>                  <C>                  <C>
Revenues 1/                    $10,092,532          $ 7,994,484          $ 8,761,278          $ 6,091,165           $4,767,820

Income (Loss) before
other expenses, net 1/         $  (482,377)         $  (703,696)         $  (235,999)         $    63,349           $  232,674

Loss                           $  (946,691)         $(1,405,800)         $  (867,029)         $  (650,489)          $   (1,662)

Loss Per Share 2/                   $(0.21)              $(0.37)              $(0.23)              $(0.22)              $(0.01)

Weighted Average
Shares Outstanding 2/            4,612,153            3,766,176            3,819,605            3,022,658            2,715,918

Cash Flow From
Operations (Deficit)           $    10,571          $  (786,971)         $   173,340          $  (534,364)          $  345,909

Total Assets                   $ 9,538,165          $10,511,439          $12,732,433          $13,134,383           $7,689,637

Total Long-Term
 Liabilities                   $ 1,836,132          $   922,950          $ 2,412,852          $ 1,656,269           $  514,651

Shareholders'
Equity                         $   457,242          $ 1,107,231          $ 1,563,032          $ 2,740,463           $1,889,987
==============================================================================================================================
</TABLE>


1/  Consistent with Anchor's audited financial statements set forth elsewhere in
--
this Annual Report, both Revenues and Income   (Loss) before other expenses,
net, include interest income.

2/  Earnings (Loss) Per Share and Weighted Average Shares Outstanding have been
--
retroactively restated to reflect effects of the
10 for 1 stock split effected January 6, 1995.


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

BACKGROUND

     Anchor was organized in 1986 as a California general partnership for the
specific purpose of acquiring Harden, a third-party employee benefits
administrator.  Anchor was reorganized as a private California corporation in
March 1987, and became a public reporting Delaware corporation on January 6,
1995, when it merged with System.

     Since its inception, Anchor has expanded its insurance and administration
service capabilities through internal growth and a series of acquisitions.
Anchor expects to continue to expand its third-party administration services
operation and to explore other complementary expansion opportunities.

                                       10
<PAGE>

     Historically, Anchor derived a majority of its revenues from third-party
administration services.  As a result of its acquisitions made during 1994 and
1996, Anchor significantly increased the percentage of its revenues derived from
property and casualty insurance brokerage activities.  In July 1997 and January
1998, Harden entered into significant new contracts through its marketing
partners to provide third-party administration services in Los Angeles,
California and Portland, Oregon.  Management expects that these recent contracts
will substantially increase the percentage of revenues derived from third-party
administration services.

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

GENERAL

     Anchor derives a portion of its revenues from commissions, which generally
are based on a percentage of gross premiums and contingent commissions, which
generally are based on underwriting profits derived over a given period of time
by the insurance carrier, and fees for claims administration (including
underwriting and risk analysis) services, which generally are based on a
percentage of premiums collected, or on a per capita basis.  Anchor does not
assume any underwriting risk in connection with its business.

     Fluctuations in premiums charged by insurance companies may materially
affect commission revenues.  During the last nine years, the property and
casualty insurance industry has experienced a "soft market" in which the
underwriting capacity of insurance companies expanded, stimulating an increase
in competition and a decrease in premium rates, thereby reducing related
commissions and fees.  In addition to the soft market for property and casualty
insurance,  workers' compensation reform in California has had the effect of
reducing workers' compensation insurance premiums resulting in reduced
commissions generated by the sale of related insurance products.  Although some
sources in the insurance industry have predicted future premium increases, the
likelihood of rate increases in the near future remains uncertain.  Anchor
believes that revenues generated from anticipated future growth and continued
diversification of its business will offset weaknesses in the property and
casualty market and any loss of revenues that may result from workers'
compensation reform.

     Anchor has taken steps to strengthen the sales management at Harden and BRI
by hiring seasoned sales and marketing executives to take over marketing
responsibilities.  Product development and new product sales continue to be a
top priority, as does geographical diversification into other states and
marketing territories.  Marketing for new business began in 1996 and coincided
with the release of new products by Harden and BRI.  Market reaction to these
changes has been encouraging and the increase in new revenue is beginning to
match prior periods of production.  Harden and BRI have been successful in
securing an alternative insurance carrier to strengthen and broaden their
product offerings in the small group market, as well as facilitate geographic
diversification.  This new insurance carrier has negotiated a multi-year,
exclusive contract with Harden and BRI which management believes will enhance
sales opportunities in California and Arizona.  Furthermore, Harden has entered
into significant new contracts to provide third-party administration services
through its marketing partners.  Management anticipates that these new contracts
will increase the percentage of revenues Anchor derives from third-party
administration services.   The new administration services operation in Oregon
is also expected to produce substantial revenue increases and provide a platform
for marketing expansion in the northern tier of the western states (Oregon,
Washington, Idaho and Nevada).

REVENUES

     TOTAL REVENUES.  Total revenues for 1997 were $10,092,532, an increase of
$2,098,048, or 26.2%, over 1996 revenues of $7,994,484.  The increase in revenue
was primarily due to the increase in fee income derived from third-party
administration services at both Harden and BRI.  Anchor's revenues vary from
quarter to quarter as a result of the timing of policy renewals and net new/lost
business production, whereas expenses are fairly uniform throughout the year.

     Commissions and fees make up substantially all of Anchor's revenues.  The
following table sets forth the percentages of Anchor's revenues attributable to
insurance brokerage services (for which commissions are generated), and third-
party administration, underwriting and risk analysis services (for which fees
are generated), for the three years ended December 31, 1997, 1996 and 1995.  The
percentage of revenues generated from premium finance services are no longer
included in the following table inasmuch as the premium finance services
conducted by APPFCO were discontinued effective May 30, 1997, due to
inactivity.

                                      11
<PAGE>

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,                                  1997                      1996                      1995
============================================================================================================================
<S>                                            <C>                       <C>                       <C>
Insurance Brokerage Commissions                    31%                       43%                        41%
----------------------------------------------------------------------------------------------------------------------------
Third-Party Administration Fees                    69%                       57%                        59%
----------------------------------------------------------------------------------------------------------------------------
       Total                                      100%                      100%                       100%
                                                  ====                      ====                       ====
===========================================================================================================================
</TABLE>

     Harden has recently entered into new administration contracts through its
marketing partners to provide third-party administration services in Los
Angeles, California and Portland, Oregon. As of result of these new contracts,
management expects that the percentage of its revenues that are derived from
third-party administration services will continue to increase during 1998.

     COMMISSIONS.  Commissions for property and casualty insurance brokerage
services are reported net of sub-broker commissions and generally are recognized
as of the effective date of the insurance policy, except for commissions on
installment premiums which are recognized periodically as billed. Commissions
for 1997 were $3,060,309, a decrease of $310,097, or 9.2%, as compared to
$3,370,406 of commissions for 1996.  A net loss of business at PKW accounted for
all of the decrease.

     FEES.  Fees from Anchor's third-party administration (including
underwriting and risk analysis) services for 1997 were $6,952,655, an increase
of $2,441,975, or 54.1%, as compared to $4,510,680 in fees for 1996.  This
increase in fee income is the direct result of new business generated from
projects associated with the new insurance carrier and new administrative
contracts, as discussed above, and administrative fees generated from the
release of new products.

     Fee revenues generated by Anchor in 1997 from third-party administration
services consist of revenues generated by Harden and BRI.  Harden's third-party
administration revenues are substantially derived from:  (a) an insurance
product underwritten by one insurance carrier, which is A- (Excellent) rated;
and (b) the administration of insurance programs underwritten by various
insurance carriers for a number of self-insured employers.  The insurance
product, described in (a) above, accounted for approximately 49.9% of Harden's
revenues (or approximately 22% of Anchor's total revenues) in 1997, and revenues
related to the administration of self-insured programs, described in (b) above,
accounted for approximately 42.2% of Harden's revenues (or approximately 18.6%
of Anchor's total revenues) in 1997.  Self-insurance is a program in which a
client assumes a manageable portion of its insurance risks, usually (although
not always) placing the less predictable and larger loss exposure with an excess
insurance carrier.  A significant portion of BRI's fee revenues generated from
new clients relate to an insurance product underwritten by the same A-
(Excellent) rated insurance carrier.

     The insurance company which offered the product that accounted for 65% of
Harden's third-party administration revenues in 1994 informed Harden in early
1995 that as a result of changes in its business strategy, it was discontinuing
to offer such an insurance product by the 1995 year end.   Harden obtained a
binding commitment on July 20, 1995 from an A+ (Superior) rated insurance
carrier to underwrite the risk and provide a replacement product as of October
1, 1995.  The transition to the new carrier caused some clients to reevaluate
their insurance needs.  In conjunction with this transition process, existing
clients were also required to satisfy the new insurance carrier's underwriting
requirements.  During the first quarter of 1996, one client who represented
approximately 9% of Harden's 1995 revenues (or 3.7% of Anchor's consolidated
revenues) was advised by the new insurance carrier that it did not meet its
underwriting standards.  As a result of the transition to the new insurance
carrier, Harden experienced a near term loss of business accounts and revenues.

     This new insurance company, the A+ (Superior) rated insurance carrier,
which provided the replacement product as of October 1, 1995, informed Harden in
the third quarter of 1996, that as a result of changes in its business strategy,
it too would discontinue offering such an insurance product by the end of
February 1997.  This product had represented 51% of Harden and BRI's revenue (or
27% of Anchor's total revenue).

     As of October 31, 1996, Harden obtained a commitment from an A- (Excellent)
rated insurance carrier to underwrite the risk and provide a replacement product
effective December 1, 1996.  The transition to the new insurance carrier has
been less disruptive for Harden and BRI's clients than the first transition
because the new insurance carrier assumed all policies in California and
the majority of policies in Arizona thereby

                                       12
<PAGE>

avoiding the loss of accounts which Harden and BRI experienced earlier. As a
result, the impact on Harden and BRI's revenue has been minimal.

     The new insurance carrier is a subsidiary of the largest HMO in Nevada.
Management believes that the new insurance carrier will enable Anchor to provide
the small group medical insurance market with stronger managed care components.
The new insurance carrier's business strategy has been to aggressively market
group health products in a multi-state distribution system through an exclusive
multi-year contract with Harden and BRI in California and Arizona. The reaction
of Harden and BRI distributors has been favorable.

     As of July 1, 1997 and January 1, 1998, respectively, Harden has entered
into contracts through its marketing partners to provide third-party
administration services in Los Angeles, California and Portland, Oregon.
Management expects that these recent agreements will substantially increase the
percentage of income derived from third-party administration services in 1998
and future years. In addition, the contract in Portland will allow Harden to
expand its marketing and servicing territory in Oregon, Washington, Idaho and
Nevada.

     INTEREST INCOME.  Interest income consists of interest earned on insurance
premiums and other funds held in fiduciary accounts and interest earned on
investments.  Interest income was $79,568, $111,656 and $145,156 in 1997, 1996
and 1995, respectively.

EXPENSES

     TOTAL EXPENSES.  Total operating expenses for 1997 were $10,574,909, an
increase of $1,876,729, or 21.6%, as compared to 1996 operating expenses of
$8,698,180.  As discussed below, the increase in total expenses resulted
primarily from an increase in selling, general and administration expenses and
employee compensation and benefits resulting from the expansion of third-party
administration services business at both Harden and BRI.

     EMPLOYEE COMPENSATION AND BENEFITS.  Employee compensation and benefits for
1997 were $6,822,508, an increase of $1,287,959, or 23.3%, as compared to 1996
employee compensation of $5,534,549.  The increase related primarily to greater
staffing needs required to service new third-party administration projects at
both Harden and BRI.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $3,752,401, $3,163,631 and $3,048,242 in 1997, 1996
and 1995, respectively.  The $588,770, or 18.6%, increase in 1997, as compared
to 1996, resulted primarily from an increase in expenses as a result of the
increased third-party administration services business at both Harden and BRI.
General and administrative expenses include rent, travel, insurance, postage,
telephone, supplies and other miscellaneous expenses.

     INTEREST EXPENSE. Interest expense was $285,049, $379,071 and $161,769 in
1997, 1996 and 1995, respectively. The decrease in interest expense in 1997, as
compared to 1996, resulted from the termination of services of an investment
banker and; the conversion of the $600,000 Series A Debenture and $315,000 of
the Debentures and Bridge Notes into shares of Anchor's common stock (as
discussed below).

     AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES.  Goodwill represents the
excess of the cost of acquisitions over the fair value of net assets acquired.
Other intangibles include covenants not to compete, customer lists and other
contractual rights.  Amortization of goodwill and other intangibles was
$228,635, $380,832 and $409,908 in 1997, 1996 and 1995, respectively.  The
decrease in amortization of goodwill and other intangibles is a result of
goodwill being fully amortized at Harden as of December 31, 1996.

INCOME TAXES

     Anchor's expense for income taxes was $8,470, $6,830, and $4,800 in 1997,
1996 and 1995, respectively. An analysis of Anchor's provision for income taxes
is presented in Note 9 of the Notes to Consolidated Financial Statements.

                                       13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Anchor reported net cash flows provided by operations of $10,571 for the
twelve months ended December 31, 1997,  compared to net cash flows (used in)
from operations of ($786,971) for the twelve months ended December 31, 1996.
During 1997, Anchor met its operating and capital needs from several sources,
including borrowing under its existing credit agreements and the proceeds from
the 1997 Offering (as discussed below).

     During 1996, Anchor raised $225,000 from five members of the Board of
Directors and other qualified investors through the issuance of 10% Subordinated
Bridge Notes with a Warrant to Purchase Shares of Anchor Common Stock ("Bridge
Notes").   The basic terms of the Bridge Notes were: (a) 10% interest per annum,
paid in arrears; (b) one year term; (c) for every $10,000 of principal invested,
the purchaser received a warrant to acquire 1,000 shares of Anchor common stock
at a purchase price of $1.75 per share; (d) "piggyback" registration rights for
three years; and (e) subordination provisions that subordinate the Bridge Notes
to Anchor's "Senior Debt" (as defined in the Bridge Notes).

     In February 1997, Anchor offered the purchasers of said Bridge Notes an
opportunity to either change the terms of the warrants underlying the Bridge
Notes or to participate in the 1997 Offering (discussed below), by an exchange
of the Bridge Notes.  The basic terms of the two alternatives were:  (a) in lieu
of receiving a warrant to acquire  1,000 shares of Anchor common stock at a
purchase price of $1.75 per share, for each $10,000 in principal invested, the
purchaser would receive a warrant to purchase 2,000 shares of Anchor common
stock at a purchase price of $1.35 per share; or (b) participate in the 1997
Offering by exchanging the Bridge Notes and receiving in return (i) interest at
the rate of 10% per annum up to the date of conversion; (ii)  Anchor common
stock in place of the Bridge Notes at a price equal to $0.90 per share; and
(iii) a five year warrant, equal to the number of shares issued in place of the
Bridge Notes, with the right to purchase Anchor's common stock at a purchase
price of $0.90 per share.  The purchasers representing $180,000 of said Bridge
Notes chose alternative (a) above, and the remaining $45,000 chose alternative
(b) above.  Subsequently, Anchor and certain holders of the 1997 Offering agreed
to extend the term of such 1997 Offering.  As of March 13, 1998, $140,000 of the
1997 Offering remained outstanding.

     In 1995, Anchor issued $370,000 of 10% Convertible Subordinated Debentures
(the "Debentures") and $600,000 of Series A 10% Convertible Subordinated
Debentures (the "Series A Debenture").  Investors holding $270,000 of the
Debentures, including seven members of the Board of Directors, and $600,000 of
the Series A Debenture,  converted their debentures into 644,444 shares of
Anchor's common stock at $1.35 per share.  These conversions reduced Anchor's
outstanding indebtedness by $870,000 and, in turn, increased shareholders'
equity by $870,000.  As of March 13, 1998, $40,000 of the Debentures had been
repaid in full, and $60,000 remained outstanding under the terms of the
Debentures.

     On December 17, 1996, Anchor entered into a Financial Advisory Agreement
("Agreement") with The Private Financing Group ("TPFG"), to advise and assist in
planning, locating investors or funding sources, reviewing overall business
needs and promotion of the internal and external business goals of Anchor.  In
particular, TPFG was to contact outside third party and institutional funding
sources concerning possible debt or equity financing opportunities. Although
Anchor had discussions with several potential investors concerning possible
financings, management concluded that the financial condition of Anchor made any
financing proposal too costly.  Consequently, the Board of Directors determined
that management should defer seeking outside financing until Anchor's financial
operating results sufficiently improved to enable it to achieve a cost-effective
private or public financing. The Agreement with TPFG provided for an advisory
consulting fee of $15,000 per month, plus reasonable expenses, commencing
December 17, 1996.  Because the Board of Directors determined that management
should postpone seeking outside financing, in April 1997, management exercised
the cancellation provisions and terminated the Agreement with TPFG.

     During the first quarter of 1997, Anchor began raising additional funds
from members of the Board of Directors and other qualified investors through a
private offering of Anchor common stock along with warrants to acquire shares of
Anchor common stock (the "1997 Offering").  As of March 13, 1998, Anchor had
received $305,000 from said investors.  Anchor utilized a substantial portion of
the proceeds from the 1997 Offering to support current and future working
capital needs of Anchor.  The basic terms of the 1997 Offering are: (a) up to
555,000 shares of Anchor common stock available at a purchase price of $0.90 per
share; (b) five year warrants to acquire one share of Anchor common stock for
each share of Anchor common stock purchased at an exercise price of $0.90 per
share; (c) "piggyback" registration rights for three years; and (d) anti-
dilution protection for stock

                                       14
<PAGE>

splits, stock dividends, recapitalizations and reorganizations. Purchasers of
the 1997 Offering, as of March 13, 1998, consist of eight members of the Board
of Directors and other qualified investors.

     Capital and certain acquisition related expenditures were $108,364 and
$184,035 for the twelve months ended December, 1997 and 1996, respectively.  The
largest 1997 expenditure involved computer equipment purchased by Harden and BRI
during the second quarter.  During the first nine months of 1996, the R.L.
Ferguson Insurance Agency ("RLF") located in Walnut Creek, California and
certain property and casualty accounts maintained by Norman I. Robins ("Robins")
and John R. McPherson ("McPherson") were merged into Anchor's insurance
brokerage subsidiary, PKW.

     Short-term debt, current portion of long-term debt and current portion of
long-term liabilities at December 31, 1997, totaling in the aggregate $1,203,216
(as compared to $2,424,508 at December 31, 1996), consisted of: (a)
approximately $231,000 of future fixed payments under a consulting agreement
entered into with a company affiliated with the former shareholders of BRI; (b)
$351,459 representing the current portion of a $1,600,000 term loan with a
regional San Francisco bank (described below); (c) $214,400 representing the
current portion of obligations with regard to certain real property leased by
PKW prior to its acquisition by Anchor and relocation to Anchor's executive
offices; (d) $60,000 of the Debentures; (e) $180,000 of the 1997 Offering; and
(f) approximately $166,357 the for certain other current liabilities.

     On January 7, 1997, a $1,000,000 bank credit line which Anchor had
maintained with a regional San Francisco bank expired.  Although Anchor was
within the covenants of the bank credit line on the renewal date and was current
with all interest payments, the bank notified Anchor that it would no longer
continue to extend the line to Anchor, under the same terms.  As of September
30, 1997, Anchor successfully replaced the $1,000,000 bank credit line with a
new credit facility (the "New Loan") provided by another bank.  The basic terms
and conditions of this New Loan are:  (a) $1,600,000 term loan; (b) interest
equal to the bank's prime rate plus 2.5%; (c) five year term; (d) monthly
principal payments in installments of $26,666.67 (Not withstanding the
foregoing, 75% of Anchor's monthly EBITDA shall be applied to principal to the
extent such percentage of monthly EBITDA is required to make the scheduled
payment of principal.  To the extent that 75% of monthly EBITDA falls short of
the required principal payment, the difference shall be added to the final
payment); and (e) a five year warrant to acquire 95,000 shares of Anchor common
stock at a purchase price of $1.75 per share.  A portion of the $1,600,000
proceeds from the New Loan was used to pay off $975,000 outstanding under the
$1,000,000 bank credit line.  Another portion of the proceeds from the New Loan
was used to retire and consolidate two credit facilities the bank had previously
extended Anchor.

     On December 22, 1997, the bank that provided Anchor with the $1,600,000
term loan also provided Anchor with a $250,000 loan to support current working
capital needs of Anchor in relations to Harden's expansion in Portland, Oregon.
The basic terms of said loan were:  (a) interest equal to bank's prime rate plus
2.5%; (b)  60 day term; (c) interest only payments through February 15, 1998;
(d)  on February 15, 1998, the outstanding balance shall be converted to an
amortizing loan and will be added to Anchor's existing New Loan (discussed
above); and (e) a new loan will be drawn for the combined balances and amortized
over the remaining life of the original commitment with all other terms and
conditions remaining unchanged.

     As of March 9, 1998, a new term loan in the amount of $1,821,890.33 was
entered into between Anchor and the bank whereby combining both the $1,600,000
term loan and the $250,000 loan (as described above).  The basic terms of said
loan are:  (a)  interest equal to bank's prime rate plus 2.5%; (b) maturity date
of October 5, 2002; (c) monthly principal payments in installments of $33,125.28
beginning April 5, 1998; and (d) all other terms and conditions of the term loan
dated September 30, 1997 including all amendments thereto and replacements
therefor.

     At December 31, 1997, long-term liabilities and long-term debt, less the
current portion discussed above, totaled $1,836,132 (as compared to $922,950 at
December 31, 1996), and primarily consisted of:  (a) $1,223,874 representing the
long-term portion outstanding under a $1,600,000 term loan maintained by Anchor
with a regional San Francisco bank and further described above;  (b)
approximately $87,800 representing the long-term portion of obligations with
regard to certain real property leased by PKW prior to its acquisition by Anchor
and relocation to Anchor's executive offices; (c) approximately $307,000
representing deferred rent with regard to certain real property currently leased
by Anchor; (d) $75,000 outstanding under a $250,000 loan maintained by Anchor
with a regional San Francisco bank; and (e) approximately $144,458 for certain
other long-term liabilities.  In May 1995, PKW entered into a sublease with
respect to 82% of PKW's prior office space.  The sublease expired

                                       15
<PAGE>

on September 30, 1997, and was extended by the subtenant through November 30,
1999, the date on which the term of the master lease expires and requires PKW to
provide a multi-year rent subsidy. In December 1995, PKW entered into a sublease
with respect to an additional 10% of PKW's prior office space. The sublease
expires on November 30, 1999, and requires PKW to provide a multi-year rent
subsidy. In October, 1997, PKW entered into a sublease with respect to the
remaining 8% of PKW's prior office space. The sublease expires on November 30,
1999, and requires PKW to provide a multi-year rent subsidy.

     Anchor has not paid cash dividends in the past and does not expect to pay
cash dividends in the foreseeable future.

STRATEGY

     Anchor's strategy is to expand its third-party administration services by:
(a) continuing to develop through its marketing partners specialized affiliated
business units that target selected insurance industry market segments defined
by industry type, geographic location and consumer demographics; (b) creating
new products and services; and (c) strengthening management, sales and marketing
staff.  In conjunction with this strategy, Anchor seeks to manage its affairs to
achieve expansion through internal growth of its existing and new product lines.
Anchor also regularly considers acquisitions and merger opportunities and other
business expansion alternatives.

RECENTLY ISSUED ACCOUNTING STATEMENTS

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130").  SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and establishes
standards for reporting and displaying of comprehensive income and its
components.  SFAS No. 130 is not expected to have a material effect on Anchor's
financial statements when it is adopted during 1998.

     In June  1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131").  SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997, and establishes standards for the manner in which public
business enterprises report information about operating segments in interim and
annual financial statements.  Under the current accounting policies, Anchor
operates in one business segment.  Following the guidelines of the new standard,
operating segments will generally be defined according to the bases used
internally for evaluating segment performance and resource allocation decisions.
SFAS No. 131 will have no effect on Anchor's results of operations or balance
sheets, but management is currently evaluating what, if any, additional
disclosures may be required upon adoption of SFAS No. 131 during the fourth
quarter of 1998.

     In February 1998, the Financial Accounting Standards Board issued Statement
No. 132 "Employers' Disclosures About Pensions and Other Postretirement
Benefits" ("SFAS No. 132").  SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997, and standardizes the disclosure requirements
for pensions and other postretirement benefits.  SFAS No. 132 will have no
effect on Anchor's results of operations or balance sheets, but management is
currently evaluating what, if any, additional disclosures may be required when
SFAS No. 132 is adopted in 1998.

FORWARD-LOOKING INFORMATION

     This Annual Report on Form 10-K contains forward-looking statements within
the meaning of that term under the Private Securities Litigation Reform Act of
1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934).  Additional written or oral forward-looking
statements may be made by Anchor from time to time, in filings with the
Securities and Exchange Commission or otherwise.  Statements contained herein
that are not historical facts are forward-looking statements made pursuant to
the safe harbor provisions referenced above.  For example, discussions
concerning Anchor's ability to create new products and services, and expansion
of Anchor through internal growth of existing and new products and services, may
involve forward-looking statements.  In addition, when used in this discussion,
the words, "anticipates," "expects," "intends," "plans" and variations thereof
and similar expressions are intended to identify forward-looking statements.

                                       16
<PAGE>

     Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations.  Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward-
looking statements contained in this Annual Report.  Statements in this Annual
Report, particularly in the Notes to Financial Statements and "Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations" describe certain factors, among others, that could contribute to or
cause such differences.  Such forward-looking statements involve risks and
uncertainties, and actual results could differ from those described herein.
While the statements represent management's current judgment as to the near-term
future prospects of its business, such risks and uncertainties could cause
actual results to differ from the above statements.  Factors which could cause
actual results to differ include the following:  Harden's and BRI's relationship
with the new insurance carrier and marketing partners and their ability to
effectively provide third-party administration services; controlling operating
costs; the impact of competitive products, pricing and services; the
availability of capital to finance operations and future expansion; the cyclical
nature of the property and casualty and health insurance markets; and
unanticipated regulatory changes.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements for Anchor appear on pages F-1 through
     F-21 of this report:

     Report of Independent Auditors

     Consolidated Balance Sheets as of December 31, 1997 and 1996

     Consolidated Statements of Operations for the years ended December 31,
     1997, 1996 and 1995

     Consolidated Statements of Shareholders' Equity for the years ended
     December 31, 1997, 1996 and 1995

     Consolidated Statements of Cash Flows for the years ended December 31,
     1997, 1996 and 1995

     Notes to Consolidated Financial Statements

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

     None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information under the headings "Election of Directors" and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" from the Registrant's
Proxy Statement to be mailed in connection with the Registrant's 1998 Annual
Meeting of Shareholders are hereby incorporated by reference.


ITEM 11.  EXECUTIVE COMPENSATION

     The information under the headings "Executive Compensation" and "Employment
Agreement with James R. Dunathan" from the Registrant's Proxy Statement to be
mailed in connection with the Registrant's 1998 Annual Meeting of Shareholders
are hereby incorporated by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information under the headings "Principal Shareholders" and "Stock
Ownership Table" from the Registrant's Proxy Statement to be mailed in
connection with the Registrant's 1998 Annual Meeting of Shareholders are hereby
incorporated by reference.

                                       17
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     The information under the heading "Certain Relationships and Related
Transactions" from the Registrant's Proxy Statement to be mailed in connection
with the Registrant's 1998 Annual Meeting of Shareholders is hereby incorporated
by reference.

                                    PART IV

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

     (a)(1)  Financial Statements.
             --------------------

     Report of Independent Auditors

     Consolidated Balance Sheets as of December 31, 1997 and 1996

     Consolidated Statements of Operations for the years ended December 31,
     1997, 1996 and 1995

     Consolidated Statements of Shareholders' Equity for the years ended
     December 31, 1997, 1996 and 1995

     Consolidated Statements of Cash Flows for the years ended December 31,
     1997, 1996 and 1995

     Notes to Consolidated Financial Statements

     (a)(2) Financial Statement Schedules.
            -----------------------------

     Other schedules are omitted because they are not applicable or the required
     information is shown in the financial statements or notes thereto.

     (a)(3)  Exhibit Index.
             -------------

     2.1     Amended and Restated Agreement and Plan of Merger dated as of
             October 24, 1994, by and between System and Old Anchor, as amended
             by that certain Amendment to the Amended and Restated Agreement and
             Plan of Merger dated as of December 29, 1994, and Agreement of
             Merger attached as an exhibit to the Reorganization Agreement and
             certified by the Delaware Secretary of State on January 6, 1995.
             Incorporated by reference to Exhibit 2.1 of Anchor's Annual Report
             on Form 10-K for the year ended December 31, 1994.

     3.1     Restated Certificate of Incorporation. Incorporated by reference to
             Exhibit 3.1 of Anchor's Annual Report on Form 10-K for the year
             ended December 31, 1994.

     3.2     Bylaws. Incorporated by reference to Exhibit 3.2 of Anchor's Annual
             Report on Form 10-K for the year ended December 31, 1994.

     4.1     Specimen Common Stock Certificate. Incorporated by reference to
             Exhibit 4.1 of Anchor's Annual Report on Form 10-K for the year
             ended December 31, 1994.

     4.2     Specimen Warrant Certificate. Incorporated by reference to Exhibit
             4.2 of Anchor's Annual Report on Form 10-K for the year ended
             December 31, 1994.

     4.3     Warrant Agreement dated as of January 7, 1995, between Anchor and
             U.S. Stock Transfer Corporation. Incorporated by reference to
             Exhibit 4.3 of Anchor's Annual Report on Form 10-K for the year
             ended December 31, 1994.

     4.3a    Letter dated December 29, 1995, to all stockholders from James R.
             Dunathan extending warrants expiration date to January 6, 1997.
             Incorporated by reference to Exhibit 4.3a of Anchor's Annual Report
             on Form 10-K for the year ended December 31, 1995.

                                       18
<PAGE>

     4.4     Form of 10% Convertible Subordinated Debenture. Incorporated by
             reference to Exhibit 4.1 of Anchor's Form 10-Q for the quarter
             ending March 31, 1995.

     4.5     Form of 10% Convertible Subordinated Debenture, Series A.
             Incorporated by reference to Exhibit 4.5 of Anchor's Annual Report
             on Form 10-K for the year ended December 31, 1995.

     4.6     Form of 10% Subordinated Bridge Note. Incorporated by reference to
             Exhibit 4.6 of Anchor's Form 10-Q for the quarter ending September
             30, 1996.

     4.6a    Form of Warrant to Purchase Shares of Common Stock of Anchor
             Pacific Underwriters, Inc. Incorporated by reference to Exhibit
             4.6a of Anchor's Form 10-Q for the quarter ending September 30,
             1996.

     4.6b    Form of Offering to change the terms of the Form of Warrant to
             Purchase Shares of Common Stock of Anchor Pacific Underwriters,
             Inc., which is incorporated by reference to Exhibit 4.6a, above.
             Incorporated by reference to Exhibit 4.6b of Anchor's Annual Report
             on Form 10-K for the year ended December 31, 1996.

     4.7     Form of Subscription Agreement for the Offer and Sale of Shares of
             Common Stock of Anchor Pacific Underwriters, Inc. Incorporated by
             reference to Exhibit 4.7 of Anchor's Annual Report on Form 10-K for
             the year ended December 31, 1996.

     4.7a    Form of Warrant to Purchase Shares of Common Stock of Anchor
             Pacific Underwriters, Inc. Incorporated by reference to Exhibit
             4.7a of Anchor's Annual Report on Form 10-K for the year ended
             December 31, 1996.

     10.1    1994 Stock Option Plan. Incorporated by reference to Exhibit 10.1
             of Anchor's Annual Report on Form 10-K for the year ended December
             31, 1994.*

     10.2    Lease dated October 29, 1990, as amended on June 10, 1991, April
             16, 1994 and September 9, 1994, between Anchor and Societe Generale
             (regarding 1800 Sutter Street, Concord, California). Incorporated
             by reference to Exhibit 10.2 of Anchor's Annual Report on Form 10-K
             for the year ended December 31, 1994.

     10.3    Lease dated May 29, 1990, as amended on December 1, 1992, between
             PKW and Kaiser Center, Inc. (regarding 300 Lakeside Drive, Oakland,
             California). Incorporated by reference to Exhibit 10.3 of Anchor's
             Annual Report on Form 10-K for the year ended December 31, 1994.

     10.3a   Sublease dated May 26, 1995, between PKW and Martin, Ryan &
             Andrada, Inc. (regarding 82% of 300 Lakeside Drive, Oakland,
             California). Incorporated by reference to Exhibit 10.2 of Anchor's
             Form 10-Q for the quarter ending June 30, 1995.

     10.3b   Sublease dated December 1, 1995, between PKW and Logiciel, Inc.
             (regarding 10% of 300 Lakeside Drive, Oakland, California).
             Incorporated by reference to Exhibit 10.3b of Anchor's Annual
             Report on Form 10-K for the year ended December 31, 1995.

     10.4    Lease dated July 3, 1989, as amended on February 10, 1994, between
             BRI and Connecticut General Life Insurance Company (regarding 10301
             N. 92nd Street, Scottsdale, Arizona). Incorporated by reference to
             Exhibit 10.4 of Anchor's Annual Report on Form 10-K for year ended
             December 31, 1994.

     10.5    Employment Agreement dated August 16, 1994, between Anchor and
             James R. Dunathan. Incorporated by reference to Exhibit 10.5 of
             Anchor's Annual Report on Form 10-K for the year ended December 31,
             1994.*

     10.6    Amendment No. 1 to Employment Agreement dated December 19, 1994,
             between Anchor and James R. Dunathan.  Incorporated by reference to
             Exhibit 10.6 of Anchor's Annual Report on Form 10-K for the year
             ended December 31, 1994.*

                                       19
<PAGE>

     10.6a   Employment Agreement dated August 16, 1997, between Anchor and
             James R. Dunathan. Incorporated by reference to Exhibit 10.6a of
             Anchor's Quarterly Report on Form 10Q for the quarter ended
             September 30, 1997.

     10.7    Business Loan Agreement dated as of September 27, 1994, between
             Anchor and Concord Commercial Bank, and related documents.
             Incorporated by reference to Exhibit 10.7 of Anchor's Annual Report
             on Form 10-K for the year ended December 31, 1994.

     10.8    Business Loan Agreement dated as of September 7, 1994, between PKW
             and CivicBank of Commerce, and related documents. Incorporated by
             reference to Exhibit 10.8 of Anchor's Annual Report on Form 10-K
             for the year ended December 31, 1994.

     10.9    Business Loan Agreement dated as of June 17, 1992, between Harden
             and Concord Commercial Bank, and related documents. Incorporated by
             reference to Exhibit 10.9 of Anchor's Annual Report on Form 10-K
             for the year ended December 31, 1994.

     10.10   Lease of Personal Property dated April 6, 1994, between BRI and
             Winthrop Financial Group, Inc. (regarding computer equipment).
             Incorporated by reference to Exhibit 10.10 of Anchor's Annual
             Report on Form 10-K for the year ended December 31, 1994.

     10.12   Information Management Agreement dated as of May 11, 1993, between
             Harden and CMSI, Inc. Incorporated by reference to Exhibit 10.12 of
             Anchor's Annual Report on Form 10-K for the year ended December 31,
             1994.

     10.12a  Mutual Release and Settlement Agreement, Promissory Note and UCC-1
             Financing Statement dated as of March 25, 1996, between Harden and
             BRC (formerly CMSI) of the Information Management Agreement dated
             as of May 11, 1993, between Harden and CMSI, which is incorporated
             by reference to Exhibit 10.12, above. Incorporated by reference to
             Exhibit 10.12a of Anchor's Form 10-Q for the quarter ending March
             31, 1996.

     10.12b  Account Transition Agreement, Promissory Note and UCC-1 Financing
             Statement dated as of March 29, 1996, between Harden and BRC
             (formerly CMSI) of the Management Agreement dated as of May 11,
             1993, between Harden and CMSI, which is incorporated by reference
             to Exhibit 10.12, above. Incorporated by reference to Exhibit
             10.12b of Anchor's Form 10-Q for the quarter ending March 31, 1996.

     10.13   Consulting Agreement dated as of August 1, 1994, between BRI and
             Hightrust, Ltd. Incorporated by reference to Exhibit 10.13 of
             Anchor's Annual Report on Form 10-K for the year ended December 31,
             1994.

     10.14   Agreement for Purchase and Sale of Assets dated as of January 18,
             1995, between Harden and Dutcher. Incorporated by reference to
             Exhibit 10.14 of Anchor's Annual Report on Form 10-K for the year
             ended December 31, 1994.

     10.15   Amendment to Agreement for Purchase and Sale of Assets dated
             February 1, 1995, between Harden and Dutcher. Incorporated by
             reference to Exhibit 10.15 of Anchor's Annual Report on Form 10-K
             for the year ended December 31, 1994.

     10.15a  Amendment to Agreement for Purchase and Sale of Assets dated June
             10, 1996, between Harden and Dutcher, which is incorporated by
             reference to Exhibit 10.15, above. Incorporated by reference to
             Exhibit 10.15a of Anchor's Form 10-Q for the quarter ending June
             30, 1996.

     10.16   Asset Purchase Agreement dated May 17, 1995 between Putnam, Knudsen
             & Wieking Inc. Insurance Brokers and Crestview Leasing.
             Incorporated by reference to Exhibit 10.1 of Anchor's Form 10-Q for
             the quarter ending June 30, 1995.

                                       20
<PAGE>

     10.17   Settlement Agreement and Mutual Release dated August 22, 1995
             between Anchor and Donald B. Putnam, James P. Wieking, Ronald J.
             Marengo, Gary N. Lewis, Edward Wieking and Robert Moser.
             Incorporated by reference to Exhibit 10.1 of Anchor's Form 10-Q for
             the quarter ending September 30, 1995.*

     10.18   Purchase and Sale Agreement dated as of March 1, 1996 between
             Anchor and Roland L. Ferguson, doing business as R.L. Ferguson
             Insurance Agency. Incorporated by reference to Exhibit 10.18 of
             Anchor's Form 10-Q for the quarter ending March 31, 1996.

     10.19   Purchase and Sale Agreement dated as of April 1, 1996 between
             Anchor and Norman I. Robins. Incorporated by reference to Exhibit
             10.19 of Anchor's Form 10-Q for the quarter ending June 30, 1996.

     10.20   Purchase and Sale Agreement dated as of May 1, 1996 between Anchor
             and PKW and John R. McPherson. Incorporated by reference to Exhibit
             10.20 of Anchor's Form 10-Q for the quarter ending June 30, 1996.

     10.21   Engagement Letter dated June 27, 1996 between Anchor and Gerbsman
             Partners. Incorporated by reference to Exhibit 10.21 of Anchor's
             Form 10-Q for the quarter ending June 30, 1996.

     10.22   Industrial Real Estate Lease (Multi-Tenant Facility) dated
             September 12, 1996 between Palo Cristi Airport II, L.L.C., and BRI.
             (Regarding 15721 North Greenway Hayden Loop, Suite 205, Scottsdale,
             Arizona) Incorporated by reference to Exhibit 10.22 of Anchor's
             Form 10-Q for the quarter ending September 30, 1996.

     10.23   Financial Advisory Agreement dated December 17, 1996 between The
             Private Financing Group and Anchor Pacific Underwriters, Inc.
             Incorporated by reference to Exhibit 10.23 of Anchor's Annual
             Report on Form 10-K for the year ended December 31, 1996.

     10.24   Business Loan Agreement dated as of July 3, 1997, between Anchor
             and Imperial Bank, and related documents. Incorporated by reference
             to Exhibit 10.24 of Anchor's Quarterly Report on Form 10-Q for the
             quarter ended June 30, 1997.

     10.25   Central Plaza Office Lease dated July 14, 1997, between Harden and
             Zufu Properties, Co., Ltd. (regarding 3460 Wilshire Boulevard
             Tower, Suite 407, Los Angeles, California). Incorporated by
             reference to Exhibit 10.25 of Anchor's Quarterly Report on Form 10-
             Q for the quarter ended September 30, 1997.

     10.25a  Addendum dated July 14, 1997, to Central Plaza Office Lease dated
             July 14, 1997, between Harden and Zufu Properties, Co., Ltd.
             (regarding 3460 Wilshire Boulevard Tower, Suite 407, Los Angeles,
             California). Incorporated by reference to Exhibit 10.25a of
             Anchor's Quarterly Report on Form 10-

     10.26   Office Building Lease dated July 30, 1997, between BRI and T.W.
             Patterson Investors II/The T.W. Patterson Building (regarding 2014
             Tulare Street, Suite 818, Fresno, California). Incorporated by
             reference to Exhibit 10.26 of Anchor's Quarterly Report on Form 10-
             Q for the quarter ended September 30, 1997.

     10.27   Business Loan Agreement dated of September 30, 1997, between Anchor
             and Imperial Bank, and related documents. Incorporated by reference
             to Exhibit 10.27 of Anchor's Quarterly Report on Form 10-Q for the
             quarter ended September 30, 1997.

     10.28   Business Loan Agreement dated December 22, 1997, between Anchor and
             Imperial Bank, and related documents.

     10.29   Central Plaza Office Lease dated January 6, 1998, between Harden
             and Zufu Properties, Co., Ltd. (regarding 3450 Wilshire Boulevard
             Tower, Suite 210, Los Angeles, California).

                                       21
<PAGE>

     10.30   Business Loan Agreement dated March 9, 1998, between Anchor and
             Imperial Bank, and related documents.

     11.1    Statement Regarding Computation of Per Share Earnings.

     21.1    Subsidiaries of Anchor. Incorporated by reference to Exhibit 21.1
             of Anchor's Annual Report on Form 10-K for the year ended December
             31, 1994.

     27.0    Financial Data Schedule.

             All other exhibits are omitted because they are inapplicable.

             *Denotes management contract or compensatory plan or arrangement.

     (b)     Reports of Form 8-K.

             None.

                                       22
<PAGE>

                                   SIGNATURES

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

                                         ANCHOR PACIFIC UNDERWRITERS, INC.
                                         (Registrant)


Date:  March 23, 1998                    By:   /s/ James R. Dunathan
                                              -------------------------
                                              James R. Dunathan
                                              President and
                                              Chief Executive Officer
                                              (Principal Executive Officer)

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature                               Title               Date
-------------------------------  --------------------  --------------
<S>                              <C>                   <C>
/s/ James R. Dunathan            President,            March 23, 1998
-------------------------------  Chief Executive
James R. Dunathan                Officer and Director
(Principal Executive Officer)

/s/ Earl Wiklund                 Chief Financial       March 23, 1998
----------------                 Officer, Secretary
Earl Wiklund                     and Director
(Principal Financial and
Accounting Officer)

/s/ Audie J. Dudum               Chairman,             March 23, 1998
------------------               Director
Audie J. Dudum

/s/ Steven A. Gonsalves          Director              March 23, 1998
-----------------------
Steven A. Gonsalves

/s/Lawrence A. Hayes             Director              March 23, 1998
--------------------
Lawrence A. Hayes

/s/ R. William MacCullough       Director              March 23, 1998
--------------------------
R. William MacCullough

/s/ Donald B. Putnam             Director              March 23, 1998
--------------------
Donald B. Putnam

/s/ Michael R. Sanford           Director              March 23, 1998
----------------------
Michael R. Sanford

s/ Gordon M. Silverstein         Director              March 23, 1998
------------------------
Gordon M. Silverstein

/s/ James P. Wieking             Director              March 23, 1998
--------------------
James P. Wieking
</TABLE>

                                       23
<PAGE>

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
              ---------------------------------------------------

                       CONSOLIDATED FINANCIAL STATEMENTS
                       ---------------------------------

                          YEAR ENDED DECEMBER 31, 1997
                          ----------------------------


REPORT OF INDEPENDENT AUDITORS.............................................  1


AUDITED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET.................................................  2

CONSOLIDATED STATEMENT OF OPERATIONS.......................................  3

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY.............................  4

CONSOLIDATED STATEMENT OF CASH FLOWS.......................................  5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................  6
<PAGE>

[LETTERHEAD OF ODENBERG, ULLAKKO, MURANISHI & CO.]


                                                                  March 18, 1998


To the Board of Directors
 and Shareholders of
  Anchor Pacific Underwriters, Inc.


                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


  In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Anchor
Pacific Underwriters, Inc. and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.  These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits.  We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for the opinion expressed
above.  The consolidated financial statements of Anchor Pacific Underwriters,
Inc. and its subsidiaries for the year ended December 31, 1995 were audited by
other auditors whose report dated March 18, 1996 expressed an unqualified
opinion on those statements.


                /s/ Odenberg, Ullakko, Muranishi & Co.
<PAGE>

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
               --------------------------------------------------
                           CONSOLIDATED BALANCE SHEET
                           --------------------------

<TABLE>
<CAPTION>
                                                                                             December 31
                                                                                   -----------------------------------
                                                                                     1 9 9 7                1 9 9 6
                                                                                   ----------             ----------
                                  A S S E T S
                                  -----------
<S>                                                                               <C>                      <C>
Current assets:
  Cash and cash equivalents - corporate funds                                      $   44,384             $   151,765
  Cash and cash equivalents - brokerage fiduciary funds                             1,203,594                 977,086
  Cash and cash equivalents - third party administration fiduciary
   funds                                                                            3,058,059               3,580,793

  Accounts receivable (less allowance for doubtful accounts of
   $45,543 and $32,438 in 1997 and 1996, respectively)                              1,351,047               1,309,921

  Prepaid expenses and other current assets                                           375,475                 244,086
                                                                                   ----------             -----------
     Total current assets                                                           6,032,559               6,263,651
                                                                                   ----------             -----------

Property and equipment, less accumulated depreciation and
 amortization                                                                         620,511                 821,197
                                                                                   ----------             -----------

Other assets:
  Goodwill, net                                                                     1,803,713               1,903,729
  Intangible assets, net                                                            1,021,715               1,139,467
  Deferred compensation                                                                     -                 257,784
  Other                                                                                59,667                 125,611
                                                                                   ----------             -----------
                                                                                    2,885,095               3,426,591
                                                                                   ----------             -----------
                                                                                   $9,538,165             $10,511,439
                                                                                   ==========             ===========
                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
  Cash and cash equivalents - third party administration fiduciary
   funds                                                                           $3,058,059              $3,580,793

  Net premiums payable - insurance companies                                        2,035,032               2,037,749
  Accounts payable                                                                    383,299                  85,599
  Accrued expenses                                                                    565,185                 352,609
  Short-term borrowings                                                                     -               1,395,000
  Current portion of long-term debt                                                   629,133                 395,555
  Current portion of long-term liabilities                                            574,083                 633,953
                                                                                   ----------              ----------
     Total current liabilities                                                      7,244,791               8,481,258
                                                                                   ----------              ----------

Long-term liabilities, net of current portion                                         506,944                 851,977
                                                                                   ----------              ----------

Long-term debt, including $240,000 in 1997 and $220,000 in 1996,
 owed to related parties, net of current portion                                    1,329,188                  70,973
                                                                                   ----------              ----------
Shareholders' equity:
     Preferred stock - $.02 par value; 2,000,000 shares authorized; none
      issued and outstanding
     Common stock - $.02 par value; 16,000,000 shares authorized;
      4,690,839 and 4,362,837 shares issued and outstanding at
      December 31, 1997 and 1996, respectively
                                                                                       93,817                   87,256

  Additional paid-in capital                                                        4,215,649                3,925,508
  Accumulated deficit                                                              (3,852,224)              (2,905,533)
                                                                                   ----------               ----------
                                                                                      457,242                1,107,231
                                                                                   ----------               ----------
Commitments and contingencies (Notes 1, 6, 7, 11, and 12)                          $9,538,165              $10,511,439
                                                                                   ==========              ===========
</TABLE>
         See accompanying notes to consolidated financial statements.
<PAGE>

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
               --------------------------------------------------

                      CONSOLIDATED STATEMENT OF OPERATIONS
                      ------------------------------------
<TABLE>
<CAPTION>
                                                                        Year ended December 31
                                                  -------------------------------------------------------------------
<S>                                               <C>                   <C>                    <C>
                                                              1 9 9 7                1 9 9 6                 1 9 9 5
                                                          -----------            -----------              ----------
Revenues:
  Commissions, fees and other income                      $10,012,964            $ 7,882,828              $8,616,122
  Interest income                                              79,568                111,656                 145,156
                                                          -----------            -----------              ----------
                                                           10,092,532              7,994,484               8,761,278
                                                          -----------            -----------              ----------

Operating expenses:
  Salaries, commissions and employee benefits             6,822,508              5,534,549               5,949,035

  Selling, general and administrative expenses            3,752,401              3,163,631               3,048,242
                                                          ---------            -----------              ----------
                                                          10,574,909              8,698,180               8,997,277
                                                          ---------            -----------              ----------
                                                           (482,377)              (703,696)               (235,999)
                                                          ----------            -----------             -----------

Other income (expense):
  Amortization of goodwill and intangible assets            (228,635)              (380,832)               (409,908)
  Interest                                                  (285,049)              (379,071)               (161,769)
  Other                                                       57,840                 64,629                 166,667

  Nonrecurring merger expenses                                     -                      -                (221,220)
                                                          -----------            -----------              ----------
                                                             (455,844)              (695,274)               (626,230)
                                                          -----------            -----------              ----------

Loss before income taxes                                     (938,221)            (1,398,970)               (862,229)

Provision for income taxes                                      8,470                  6,830                   4,800
                                                          -----------            -----------              ----------

Net loss                                                  $  (946,691)           $(1,405,800)             $ (867,029)
                                                          ===========            ===========              ==========

Basic and diluted loss per common share                        $(0.21)                $(0.37)                 $(0.23)
                                                          ===========            ===========              ==========

Weighted average number of common shares
 outstanding                                                4,612,153              3,766,176               3,819,605
                                                          ===========            ===========              ==========

</TABLE>

         See accompanying notes to consolidated financial statements.
<PAGE>

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
               --------------------------------------------------

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                 ----------------------------------------------

<TABLE>
<CAPTION>

                                           Common Stock                Additional
                                   -----------------------------         Paid-In          Accumulated
                                       Shares           Amount           Capital            Deficit           Total
                                   --------------    -------------    --------------    ----------------    -------------
<S>                                <C>               <C>               <C>               <C>                <C>
Balance at December 31, 1994           3,923,258           $78,465        $3,294,702        $  (632,704)      $ 2,740,463

 Shares issued for warrants
  exercised                                  163                 3               486                  -               489
 Canceled stock:
    Acquisition related
     adjustment                         (248,710)           (4,974)         (305,917)                 -          (310,891)
    Fractional shares                       (210)               (4)                4                  -                 -
 Net loss                                      -                 -                 -           (867,029)         (867,029)
                                       ---------           -------        ----------        -----------       -----------
Balance at December 31, 1995           3,674,501            73,490         2,989,275         (1,499,733)        1,563,032
 Shares issued for warrants
  exercised                                   36                 1               107                  -               108
 Convertible debentures
  exchanged for stock                    644,444            12,889           857,111                  -           870,000
 Shares issued for acquisitions           43,928               879            79,120                  -            79,999
 Canceled stock -
    Fractional shares                        (72)               (3)             (105)                 -              (108)
 Net loss                                      -                 -                 -         (1,405,800)       (1,405,800)
                                       ---------           -------        ----------        -----------       -----------
Balance at December 31, 1996           4,362,837            87,256         3,925,508         (2,905,533)        1,107,231
 Stock issued for warrants
  exercised                                  567                11             1,691                  -             1,702
 Bridge notes exchanged for
  stock                                   50,000             1,000            44,000                  -            45,000

 Issuance of stock for cash              277,778             5,557           244,443                  -           250,000
 Canceled stock -
    Fractional shares                       (343)               (7)                7                  -                 -
 Net loss                                      -                 -                 -           (946,691)         (946,691)
                                       ---------           -------        ----------        -----------       -----------
Balance at December 31, 1997           4,690,839           $93,817        $4,215,649        $(3,852,224)      $   457,242
                                       =========           =======        ==========        ===========       ===========
</TABLE>





          See accompanying notes to consolidated financial statements.
<PAGE>

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
               --------------------------------------------------

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      ------------------------------------

<TABLE>
<CAPTION>
                                                                                 Year ended December 31
                                                                     -------------------------------------------------
                                                                       1 9 9 7            1 9 9 6            1 9 9 5
                                                                     ----------         -----------         ----------
<S>                                                                 <C>                 <C>                 <C>
Operations:
  Net loss                                                           $ (946,691)        $(1,405,800)        $ (867,029)
  Items not requiring the current use of cash:
     Depreciation and amortization                                      298,183             319,770            295,410
     Amortization of goodwill and intangible assets                     228,635             380,832            409,908
     Changes in items affecting operations:
       Cash and cash equivalents - brokerage fiduciary
       funds                                                           (226,508)            552,438           (206,152)
       Accounts receivable                                              (41,126)            (54,586)            51,292
       Prepaid expenses and other current assets                       (131,389)             51,451             87,268
       Other assets                                                      65,944             (65,589)            83,626
       Deferred compensation                                            257,784             103,560            205,560
       Net premiums payable - insurance companies                        (2,717)           (473,234)           254,670
       Accounts payable and accrued expenses                            510,276              33,407             39,712
       Other liabilities                                                 (1,820)           (229,220)          (180,925)
                                                                     ----------         -----------         ----------
Cash provided by (used in) operating activities                          10,571            (786,971)           173,340
                                                                     ----------         -----------         ----------

Investments:
  Purchases of property and equipment                                  (108,364)            (84,035)          (394,291)
  Purchases of customer lists                                                 -            (100,000)           (63,368)
                                                                     ----------         -----------         ----------
Cash used in investing activities                                      (108,364)           (184,035)          (457,659)
                                                                     ----------         -----------         ----------

Financing:
  Short-term borrowings (repayments)                                   (970,000)            220,000            325,000
  Borrowings on long-term debt                                        1,260,000             225,000          1,482,583
  Repayment of long-term debt                                          (148,207)           (204,127)          (494,997)
  Payments on long-term liabilities                                    (403,083)            (22,883)          (461,467)
  Repayment of capital lease obligations                                      -                   -            (46,610)
  Issuance of stock                                                     250,000                   -                  -
  Common stock - warrants exercised                                       1,702                   -                489
                                                                     ----------         -----------         ----------
Cash provided by (used for) financing activities                         (9,588)            217,990            804,998
                                                                     ----------         -----------         ----------

Increase (decrease) in cash and cash equivalents                       (107,381)           (753,016)           520,679
Cash and cash equivalents - corporate funds:
  Beginning of period                                                   151,765             904,781            384,102
                                                                     ----------         -----------         ----------
  End of period                                                      $   44,384         $   151,765         $  904,781
                                                                     ==========         ===========         ==========
</TABLE>
         See accompanying notes to consolidated financial statements.
<PAGE>

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
               --------------------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



NOTE 1 - NATURE OF BUSINESS

ORGANIZATION

Anchor Pacific Underwriters, Inc. ("Anchor"or "Company") is a holding company
that provides insurance administration and property and casualty brokerage
services through its three direct and indirect subsidiaries. Administration
services are provided to employer groups of varying sizes, primarily located in
California and Arizona. Anchor also operates a property and casualty insurance
agency which services customers located primarily in the greater San Francisco
Bay Area. Anchor derived 28% of its revenue from administration services for
clients underwritten by one insurance company.

The consolidated financial statements include the accounts of Anchor and its
wholly-owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated in consolidation.

BASIS OF PRESENTATION

The financial statements have been prepared on the going concern basis. The
Company has reported a net loss during the past three years.  The decrease in
net loss from 1996 to 1997 relates primarily to an increase in fee income as the
result of new business generated from projects associated with new insurance
carriers and marketing partners within the third-party administration division
and administrative fees generated from the release of new products.

On July 1, 1997, Harden & Company's ("Harden") primary insurance carrier
purchased a significant volume of business from an insurance carrier in Los
Angeles, California.  The new insurance carrier then entered into a contract
with Harden to provide third-party administration services to this business.
Fees from Anchor's third-party administration services for 1997 increased 54.1%
over the fees for 1996, in large part due to new business generated from the
contract with the Los Angeles carrier.  In addition, effective January 1, 1998,
Harden assumed a significant volume of administration business from an insurance
carrier in Portland, Oregon.

Management's plan to achieve profitability includes a strategy to expand its
third-party administration services and property and casualty insurance
businesses by:  (a) continuing to develop specialized affiliated business units
that target selected insurance industry market segments defined by industry
type, geographic location and consumer demographics; (b) creating new products,
services, and marketing partner relationships; and (c) strengthening management,
sales and marketing staff.  In conjunction with this strategy, Anchor seeks to
manage its affairs to achieve expansion through internal growth of its existing
and new product lines.  Anchor also regularly considers acquisition and merger
opportunities and other business expansion alternatives.
<PAGE>

RECAPITALIZATION AND RESTATEMENT

On January 6, 1995, Anchor merged with System Industries, Inc. ("System"),
previously a dormant, publicly traded shell corporation.  As a result of the
merger, Anchor became a public company.  For accounting purposes, the merger has
been treated as a recapitalization of Anchor with Anchor as the acquirer.  Upon
consummation of this merger, shareholders and certain creditors of System each
received one share of Anchor common stock and one warrant to purchase one share
of Anchor common stock at a price of $3.00 for every 42.3291 shares of issued
and outstanding System common stock.  Warrants to purchase 194,886 shares of
common stock expired January 6, 1997, and unissued warrants to purchase 195,789
shares of common stock will expire one year after their issuance.

Costs incurred in conjunction with the merger, totaling $221,220 in 1995, were
expensed. There were no merger related costs incurred in 1996 or 1997.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.

REVENUE RECOGNITION

The majority of revenue from third-party administration services consists of
fees charged for the administration of fully insured and self-insured group
health plans.  Fee income is recognized at the time employers remit monthly
premiums and when services are rendered. Anchor derived 69%, 57%, and 59% of its
revenues in 1997, 1996, and 1995, respectively, from its third-party
administration activities.

Insurance brokerage revenue consists principally of insurance commissions (net
of split or shared commissions), fees in lieu of commissions for insurance
placement services and interest income on fiduciary and corporate funds.
insurance commissions and fees in lieu of commissions for insurance placement
services are recognized when coverage becomes effective, the premium due under
the policy is known or can be reasonably estimated, and substantially all
required services related to placing the insurance have been provided.

Broker commission adjustments and commissions on premiums billed directly by
underwriters are recognized principally when such amounts can be reasonably
estimated.

In addition, Anchor receives annual contingency commissions from various
property and casualty insurance carriers.  The commissions are based upon the
carrier's loss experience as well as the number of policies placed.  Revenue
from contingency commissions is recognized when received.  Fee income for
services other than placement of insurance coverages is recognized as those
services are provided. Anchor derived 31%, 43%, and 41% of its revenues in 1997,
1996, and 1995, respectively, from its insurance brokerage activities.
<PAGE>

EXPENSE RECOGNITION

All costs are expensed as incurred.

CASH AND CASH EQUIVALENTS

Anchor considers all highly liquid investments with a maturity of three months
or less at the date of acquisition to be cash equivalents.

FIDUCIARY FUNDS AND LIABILITIES

Funds held for self-funded employers, fully insured programs and unremitted
insurance premiums are held in a fiduciary capacity.

Interest earned on certain fiduciary funds is included in Anchor's earnings.
Interest income on fiduciary funds amounted to $75,094, $97,591, and $138,051 in
1997, 1996, and 1995, respectively.

CONCENTRATION OF CREDIT RISK

Cash and cash equivalents are on deposit in approximately 164 separate accounts
with certain accounts exceeding $100,000.  The FDIC insures accounts up to
$100,000 each.  If several accounts are maintained for the same entity at the
same bank, the FDIC applies the $100,000 limit to the combined group.  The
accounts are maintained in well-established regional and national commercial
banks.  These banks have satisfied the FDIC'S more stringent capitalization
requirements, qualifying them to accept broker deposits.  The banks have
received high ratings from bank rating services.  As a result, credit risk is
deemed to be minimal.

ACCOUNTS RECEIVABLE

Anchor provides for future estimated credit losses based on an evaluation of a
current aging of the accounts, current economic conditions and other factors
necessary to provide for losses that can be reasonably anticipated.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of financial instruments such as cash and cash equivalents,
fiduciary funds, and debt obligations approximate their fair market value.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.
<PAGE>

Short-term borrowings: The carrying amounts on the lines of credits and other
short-term borrowings approximate their fair values.

Long-term borrowings: The fair values of Anchor's long-term borrowings are
estimated using discounted cash flow analyses, based on the current incremental
borrowing rates for similar types of borrowing arrangements.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.  Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which range from three to ten years.

Software costs relating to the upgrading and enhancing of existing programs are
capitalized and amortized over a period of five years.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the cost of acquisitions over the fair value
of net assets acquired.  Intangible assets relate to covenants not to compete,
customer lists and other contractual rights acquired in acquisitions.  Goodwill
is amortized on the straight-line basis over 10 to 25 years.  Covenants not to
compete and customer lists are amortized on the straight-line basis over 5 to 13
years.

Impairment of goodwill and intangible assets is measured on the basis of
anticipated undiscounted cash flows for each asset.  Based upon the Company's
analysis, no impairment of such assets was indicated for the years ended
December 31, 1997, 1996, or 1995.

INCOME TAXES

Anchor and its subsidiaries file a consolidated federal income tax return and
combined returns for state franchise tax purposes.

LOSS PER SHARE

In 1997, Anchor adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share."  This standard requires that both basic earnings or loss
per share and diluted earnings or loss per share be presented.  All prior period
per share amounts have been restated, following the new standard requirements.
Diluted loss per share excludes the effect of convertible debt, stock options,
and warrants (See Notes 7, 10 and 12), because their effect would have been
antidilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130").  SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997 and establishes standards for
reporting and displaying of comprehensive income and its components.  SFAS No.
130 is not expected to have a material effect on Anchor's financial statements
when the statement is adopted during 1998.
<PAGE>

In June 1997, the Financial Accounting Standards Board Issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131").  SFAS No. 131 is effective for fiscal years beginning after December 15,
1997 and establishes standards for the manner in which public business
enterprises report information about operating segments in interim and annual
financial statements.  Under the current accounting policies, Anchor operates in
one business segment.  Following the guidelines of the new standard, operating
segments will generally be defined according to the bases used internally for
evaluating segment performance and resource allocation decisions.  SFAS No. 131
will have no effect on anchor's results of operations or balance sheets, but
management is currently evaluating what, if any, additional disclosures may be
required upon adoption of SFAS No. 131 during the fourth quarter of 1998.

In February 1998, the Financial Accounting Standards Board issued Statement No.
132 "Employers' Disclosures About Pensions and Other Postretirement Benefits"
("SFAS No. 132").  SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997 and standardizes the disclosure requirements for pensions and
other postretirement benefits.  SFAS No. 132 will have no effect on Anchor's
results of operations or balance sheets, but management is currently evaluating
what, if any, additional disclosures may be required when SFAS No. 132 is
adopted in 1998.

RECLASSIFICATIONS

Certain prior years' balances have been reclassified to conform with the current
year presentation.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                           December 31
                                                                           -------------------------------------------
                                                                                   1997                   1996
                                                                           ---------------------  --------------------

<S>                                                                        <C>                    <C>
     Leasehold improvements                                                           $   47,376            $   47,376
     Furniture and equipment                                                             868,769               818,800
     Office equipment                                                                    703,149               694,865
     Computer equipment                                                                  589,718               539,607
     Computer software                                                                   875,849               875,849
                                                                                      ----------            ----------
                                                                                       3,084,861             2,976,497
     Less - accumulated depreciation and amortization                                  2,464,350             2,155,300
                                                                                      ----------            ----------
                                                                                      $  620,511            $  821,197
                                                                                      ==========            ==========
</TABLE>

The foregoing assets are pledged as security for certain indebtedness (See Note
7).
<PAGE>

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31                     Amortization
                                                      -------------------------------------------
                                                             1997                   1996                 Period
                                                      -------------------  ----------------------  -------------------

<S>                                                   <C>                  <C>                     <C>
Goodwill                                                       $3,042,924              $3,052,828     10 - 25 years
Less - accumulated amortization                                 1,239,211               1,149,099
                                                               ----------              ----------
                                                               $1,803,713              $1,903,729
                                                               ==========              ==========

Covenants not to compete                                       $  285,100              $  285,100     5 - 7  years
Customer lists                                                  2,121,730               2,121,730     5 - 13 years
                                                               ----------              ----------
                                                                2,406,830               2,406,830
Less - accumulated amortization                                 1,385,115               1,267,363
                                                               ----------              ----------
                                                               $1,021,715              $1,139,467
                                                               ==========              ==========
</TABLE>

The foregoing assets are pledged as security for certain indebtedness (See Note
7).

NOTE 5 - SHORT-TERM BORROWINGS

In December 1997, Anchor obtained a $250,000 line of bank credit expiring in
February 1998.  Borrowings under the line of credit amounted to $75,000 at
December 31, 1997 with annual interest at the bank's prime rate plus 2.5%
(10.75% at December 31, 1997).  In March 1998, borrowings under the line of
credit were combined with a term loan with the bank (See Note 7).  As a result,
borrowings under the line of credit at December 31, 1997 were included in long-
term debt.

Anchor had outstanding borrowings under two lines of bank credit totaling
$1,395,000 at December 31, 1996.  These borrowings were repaid or converted to a
term loan in 1997 (See Note 7).

NOTE 6 - OTHER LONG-TERM LIABILITIES

Other long-term liabilities primarily consist of future contingent payments
relating to contractual agreements negotiated with the previous owners of
businesses acquired, deferred rent and other liabilities.  The future contingent
payments are generally based upon the amount of net commission income generated
from the books of business acquired.

At December 31, 1997, future payments of these liabilities are as follows:

<TABLE>
<CAPTION>
    Year
    ----
<S>                                                       <C>
     1998                                                          $  574,083
     1999                                                             153,592
     2000                                                              99,980
     2001                                                              78,638
     2002                                                              69,038
     Thereafter                                                       105,696
                                                                   ----------
                                                                    1,081,027
     Less - current portion                                           574,083
                                                                   ----------
                                                                   $  506,944
                                                                   ==========
</TABLE>
<PAGE>

NOTE 7 - LONG-TERM DEBT

Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
                                                                           December 31
                                                                   ---------------------------
                                                                        1997          1996
                                                                   --------------  -----------
<S>                                                              <C>                    <C>
     Term bank loan - with interest at prime rate plus 2.5%
      (11.0% at December 31, 1997)                                $1,573,333


     Line of bank credit - with interset at prime rate plus
      2.5% (11.0% at December 31, 1997)                               75,000


     10% Subordinated bridge notes, maturing in 1998                 180,000            $225,000

     10% Convertable subordinated debentures, maturing in 1998
                                                                      60,000             100,000

     Equipment loans - with annual interest at 8.25%, maturing
      In 1998 to 2000                                                 69,988             141,528
                                                                  ----------            --------
                                                                   1,958,321             466,528
     Less - current portion                                          629,133             395,555
                                                                  ----------            --------
                                                                  $1,329,188            $ 70,973
                                                                  ==========            ========
</TABLE>

In October 1997, Anchor obtained a $1.6 million term bank loan.  The loan bears
interest at the bank's prime rate plus 2.5% and is payable in monthly principal
installments of $26,667 plus interest over a five-year period.  The principal
payments may be reduced if anchor's cash flow (as defined) is not sufficient to
make the principal payments.  In connection with obtaining the loan, Anchor
issued to the lender a warrant to purchase 95,000 shares of its common stock at
$1.75 per share until october 2002.  The proceeds of the loan were used to repay
existing borrowings under Anchor's lines of bank credit (See Note 5).

In December 1997, the term loan lender provided Anchor with a $250,000 line of
credit which expired in February 1998.  Borrowings under the line of credit
amounted to $75,000 at December 31, 1997 with interest at the bank's prime rate
plus 2.5%.

In early March 1998, the bank combined the outstanding balances of the term loan
and line of credit into a new $1.82 million term loan.  The term loan is secured
by certain receivables, property and equipment, and other assets.  The new loan
bears interest at the bank's prime rate plus 2.5% and is payable in monthly
principal installments of $33,125 plus interest through October 2002.  The
principal repayments may be reduced if Anchor's cash flow (as defined) is not
sufficient to make the principal payments.  The loan agreements with the bank
contain certain restrictive covenants which, among other things, require Anchor
to maintain certain levels of net worth and cash flow (as defined), and
prohibits the payment of dividends.

During 1997, bridge notes totaling $45,000 were converted into 50,000 shares of
Anchor's common stock at $.90 per share and the maturity dates of the remaining
notes were extended to various dates in 1998.
<PAGE>

During 1996, convertible subordinated debentures totaling $870,000 were
converted into 644,444 shares of Anchor's common stock at $1.35 per share.
During 1997, $40,000 of the debentures were repaid by Anchor, and the maturity
dates of the remaining debentures were extended to various dates in 1998.  The
remaining debentures may be converted into common stock at $1.35 per share.

Scheduled principal payments due on long-term debt after December 31, 1997 are
as follows:

<TABLE>
<CAPTION>
     Year
     ----
<S>                                                         <C>
     1998                                                    $  629,133
     1999                                                       426,821
     2000                                                       400,494
     2001                                                       397,500
     2002                                                       104,373
                                                             ----------
                                                              1,958,321
     Less - current portion                                     629,133
                                                             ----------
                                                             $1,329,188
                                                             ==========
</TABLE>

NOTE 8 - INCOME TAXES

The provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                                          -----------------------------------------
                                                              1997           1996          1995
                                                          -------------  ------------  ------------
<S>                                                       <C>             <C>            <C>
     Current tax expense - state                              $8,470         $6,830        $4,800
                                                              ======         ======        ======
</TABLE>

Deferred income taxes are provided for the temporary differences between the
financial reporting and tax bases of Anchor's assets and liabilities.  Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.

Deferred tax liabilities and assets are comprised of the following:

<TABLE>
<CAPTION>
                                                                                December 31
                                                                   -------------------------------------
                                                                          1997               1996
                                                                   ------------------  -----------------
<S>                                                                <C>                 <C>
     Deferred tax liabilities:
       Depreciation and amortization                                     $   195,862        $   210,416
       Rent                                                                        -              8,088
                                                                         -----------        -----------
                                                                             195,862            218,504
                                                                         -----------        -----------
     Deferred tax assets:
       Vacation pay                                                           94,969             67,525
       Sublease liability                                                    120,897            160,469
       Tax credits                                                            41,188             41,188
       Other                                                                  74,805             69,300
       Net operating loss carryforward                                     1,250,760            989,556
                                                                         -----------        -----------
                                                                           1,582,619          1,328,038
     Valuation allowance for deferred tax assets                          (1,386,757)        (1,109,534)
                                                                         -----------        -----------
     Net deferred tax asset                                                  195,862            218,504
                                                                         -----------        -----------
                                                                         $       -          $       -
                                                                         ===========        ===========
</TABLE>
<PAGE>

At December 31, 1997 and 1996, deferred tax liabilities are noncurrent.  At
December 31, 1997 and 1996, current deferred tax assets are $30,980 and $34,316,
respectively, and noncurrent deferred tax assets are $164,902 and $184,188,
respectively.

The change in the valuation allowance is comprised of the following items:

<TABLE>
<CAPTION>
                                                                         Year ended December 31
                                                                   -----------------------------------
                                                                         1997               1996
                                                                   -----------------  ----------------
<S>                                                                <C>                <C>
     Increase due to net operating losses                                  $286,123         $ 469,921
     Change in estimate of temporary differences for fixed and
      intangible assets, sublease liability, deferred rent,
      vacation pay and other                                                 (8,900)         (192,470)
                                                                           --------         ---------

     Net increase                                                          $277,223         $ 277,451
                                                                           ========         =========
</TABLE>

At December 31, 1997, $130,000 of the valuation allowance related to
acquisitions.  When realized, the tax benefit will be accounted for as a
reduction of goodwill.

A reconciliation of income tax computed at the federal statutory corporate tax
rate to the provision for income taxes follows:

<TABLE>
<CAPTION>
                                                                        Year ended December 31
                                              ------------------------------------------------------------------------
                                                        1997                     1996                     1995
                                              ------------------------------------------------------------------------
                                                  Amount     Percent       Amount     Percent       Amount     Percent
                                              ------------------------------------------------------------------------
<S>                                             <C>          <C>         <C>          <C>         <C>          <C>
   Income taxes at federal statutory rate       $(318,995)   (34.0)%     $(475,649)   (34.0)%     $(294,790)   (34.0)%

   Increase (decrease) in income taxes
    resulting from:
     State and local income taxes, net of
      federal tax benefit                          (56,293)     (6.0)       (83,938)     (6.0)       (51,559)     (6.0)
     Amortization of goodwill and other
      intangibles                                   78,538       8.3         79,949       5.7        100,817      11.6
     Employee benefits                              10,627       1.1          9,717       0.7         11,388       1.3
     Purchase accounting                                 -         -              -         -       (259,792)    (30.0)
     State minimum tax                               8,470       0.9          6,830       0.5          4,800       0.6
     Net operating loss                            286,123      30.6        469,921      33.6        493,936      57.1
                                              ------------------------------------------------------------------------
                                                 $   8,470       0.9%     $   6,830       0.5%     $   4,800       0.6%
                                              ========================================================================
</TABLE>

At December 31, 1997, Anchor had federal and state net operating loss
carryforwards of approximately $3,388,000 and $1,728,000, respectively.  The
federal and state net operating losses will begin to expire in the years ending
December 31, 2003 and 1998, respectively.

At December 31, 1997, Anchor had federal general business credits of $25,104.
The general business credits expire in the years ending December 31, 1997 to
December 31, 2000. At December 31, 1997, Anchor had state tax credits of
$16,084.  The state tax credits may be carried forward indefinitely.
<PAGE>

As discussed in Note 1, Anchor consummated a merger with System Industries,
Inc., resulting in shares of Anchor being issued.  Federal and state tax laws
impose limitations on the use of the net operating losses and tax credits
following certain changes in ownership.  If such an ownership change has
occurred, the limitation would reduce the amount of the benefit of the net
operating losses and general business credits that would be available to offset
future taxable income starting in the year of the ownership change.

NOTE 9 - RETIREMENT AND EMPLOYEE BENEFIT PLANS

Anchor has a 401(k) profit sharing plan to which eligible employees may
contribute up to 15% of their salaries, or a maximum of $9,500 as deferred
compensation.  The plan also provides for voluntary employer contributions
whereby Anchor may match 50% of the employee contribution up to a maximum of 3%
of the employee's gross salary.  Anchor made no contributions to the plan during
the years ended December  31, 1997, 1996, and 1995.

In addition, Anchor offers active eligible employees certain life, health,
vision and dental benefits.  There are several plans which differ in amounts of
coverage and deductibles.  Anchor does not extend such benefits to retirees.

NOTE 10 - STOCK OPTION PLAN

On December 5, 1994, the Board of Directors of Anchor adopted the Anchor Pacific
Underwriters, Inc. 1994 Stock Option Plan (the "1994 Plan").  The aggregate
number of shares that are available for issuance pursuant to the exercise of
options granted under the 1994 Plan may not exceed 700,000 shares of common
stock.  Options granted to members of the Board of Directors in 1995 vested
immediately upon grant.  Other options granted in 1995 generally vested after
one year.  Options granted in 1996 and 1997 generally vest over a four-year
period, with 25% vesting each year, with the exception of 50,000 options granted
to a member of the Board of Directors in 1997, which vested immediately upon
grant.  The options are priced at fair market value of the stock at the date of
grant, except for shareholders of more than 10% of Anchor, in which case the
options are priced at 110% of the market price at the date of grant.  Options
generally have a ten-year life.

Anchor applies the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") to its stock option plan.
Accordingly, no compensation cost has been recognized for the plan for the years
ended December 31, 1997, 1996 and 1995.

Had Anchor adopted Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the net loss of
$946,691 as reported for the year ended December 31, 1997 would compare to a pro
forma net loss of $968,462, and the net loss of $1,405,800 as reported for the
year ended December 31, 1996 would compare to a pro forma loss of $1,441,189.
Basic and diluted loss per share of $.21 as reported for the year ended December
31, 1997 would not change on a pro forma basis; for the year ended December 31,
1996, the reported basic and diluted loss per share of $.37 would compare to a
pro forma basic and diluted loss per share of $.38; and for the year ended
December 31, 1995, the reported basic and diluted loss per share of $.23 would
compare to a pro forma basic and diluted loss per share of $.29.

The effects of applying SFAS No. 123 in the preceding pro forma disclosure are
not indicative of the effect on reported net income for future years.  SFAS No.
123 does not apply to awards granted prior to 1995.
<PAGE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively:  expected volatility
of approximately 25% for both years, risk-free interest rates of 6.5% for both
years, and expected lives of 6.3 and 5.8 years.  No dividend yield was used as
Anchor has not paid dividends in the past and does not anticipate paying
dividends in the future.  As Anchor's common stock does not have an adequate
length of time of being publicly traded, a public entity with similar lines of
business was used to estimate expected volatility.

A summary of the status of Anchor's stock option plan as of December 31, 1997
and 1996, and changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                                          1997                             1996
                                            --------------------------------  -------------------------------
                                                                Weighted                          Weighted
                                                                 Average                           Average
                                                Number          Exercise           Number         Exercise
                                               of Shares          Price          of Shares          Price
                                            ---------------  ---------------  ----------------  -------------
<S>                                         <C>              <C>              <C>               <C>
Outstanding at beginning of year                   557,350      $1.52          505,250           $1.52
Granted                                            112,400      $ .91           62,200           $1.54
Canceled or expired                                (38,400)     $1.58          (10,100)          $1.50
                                                   -------      -----          -------           -----
Outstanding at end of year                         631,350      $1.41          557,350           $1.52
                                                   =======      =====          =======           =====

Options exercisable at year end                    541,450                     494,400

Weighted average grant-date fair value of
 options granted during the year whose
 exercise price equaled market price on
 date of grant                                                  $ .34                            $ .58

Weighted average grant-date fair value of
 options granted during the year whose
 exercise price exceeded market price on
 date of grant                                                  $ .32                            $ .59

</TABLE>

   The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                      Options Outstanding                                        Options Exercisable
------------------------------------------------------------------         -------------------------------
     Range                        Weighted Average     Weighted                                 Weighted
      of                              Remaining         Average                                 Average
   Exercise          Number          Contractual       Exercise                  Number         Exercise
    Prices         Outstanding          Life             Price                 Exercisable       Price
---------------  ---------------  -----------------  -------------           ---------------  ------------
<S>              <C>              <C>                <C>                     <C>              <C>
$  .90-$1.00          112,400           9.6 years            $.91                    50,000          $.90
$1.45-$1.65           517,950           7.6 years           $1.52                   490,950         $1.52
$2.19                   1,000           7.6 years           $2.19                       500         $2.19
------------          -------           ---------           -----                   -------         -----
$  .90-$2.19          631,350           8.0 years           $1.41                   541,450         $1.46
============          =======           =========           =====                   =======         =====
</TABLE>
<PAGE>

NOTE 11 - LEASES:

Anchor rents its office facilities in Concord, California under an operating
lease which expires in 2004.  The terms of the lease include a 12-month rent
deferral and fixed rental escalation.  The total rent for the lease term which
reflects the 12-month deferral and the escalation is being amortized on the
straight-line basis over the full term of the lease, resulting in deferred rent
liability of approximately $306,923 and $286,000 at December 31, 1997 and 1996,
respectively.  The deferred rent liability is included in long-term liabilities
in the accompanying balance sheet.

In connection with a business acquisition in October 1994, Anchor assumed the
lease obligation for certain facilities in Oakland, California.  Anchor has
subleased the facilities to two tenants.  The subleases will remain in effect
until Anchor's lease obligation expires in 1999.

Anchor also leases office facilities in Southern California and Arizona.  Such
leases expire during the period from August 1998 through May 2002.

The consolidated statement of operations includes rent expense of $757,666,
$683,591, and $623,563 reflected in selling, general and administrative expenses
for the years ended December 31, 1997, 1996, and 1995, respectively.

Future minimum annual lease payments under operating leases as of December 31,
1997, exclusive of net amounts owed under the Oakland lease which are disclosed
in the schedule of payments under long-term liabilities in Note 6, are as
follows:

<TABLE>
<CAPTION>
     Year
     ----
<S>                                                       <C>
     1998                                                 $  771,590
     1999                                                    720,535
     2000                                                    787,080
     2001                                                    775,438
     2002                                                    716,664
     Thereafter                                            1,179,633
                                                          ----------
                                                          $4,950,940
                                                          ==========
</TABLE>

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Anchor is subject to certain legal proceedings and claims arising in connection
with the normal course of its business.  It is management's opinion that the
resolution of these claims will not have a material effect on Anchor's
consolidated financial position.

Anchor had warrants outstanding to purchase 714,562 shares of its common stock
at prices ranging from $.90 to $3.00 per share.  The warrants expire during the
period from August 2001 to October 2002.

NOTE 13 - RELATED PARTY TRANSACTIONS

Anchor is contingently liable on certain bank loans made to three of its
shareholders.  The amounts outstanding on these loans total approximately
$107,708 at December 31, 1997 and the loans mature at various dates from March
1998 to June 2002.
<PAGE>

In 1995, 10% convertible subordinated debentures totaling $790,000 were sold to
seven members of the Board of Directors and three shareholders.  Total interest
incurred and accrued for these debentures was $6,849 and $78,340 for the years
ended December 31, 1997 and 1996, respectively.  As of December 31, 1997, two
Board members had not converted their debentures (which total $60,000) to
equity.  This liability is classified under the current portion of long-term
debt.  All other Board members and shareholders have converted their debentures
to equity (See Note 7).

Subordinated bridge notes totaling $170,000 and $10,000 were sold in 1997 and
1996, respectively, to five members of the Board of Directors and two
shareholders (See Note 7).  Total interest incurred and accrued for these bridge
notes was approximately $18,000 and $6,000 for the years ending December 31,
1997 and 1996, respectively.  This liability is classified under the current
portion of long-term debt.

NOTE 14 - CASH FLOW DISCLOSURES:

<TABLE>
<CAPTION>
Supplemental cash flow information:
  Cash paid during the period for:
<S>                                                        <C>                 <C>              <C>
     Interest                                                        $285,049         $379,071          $161,769
                                                                     ========         ========          ========
     Income taxes                                                    $  8,526         $  6,830          $  5,600
                                                                     ========         ========          ========

Supplemental schedule of noncash investing and financing
 activities:
  Bridge notes exchanged for common stock                            $ 45,000         $  -             $  -
                                                                     ========         ========         =========
  Convertible debentures exchanged for common stock                  $  -             $870,000         $  -
                                                                     ========         ========         =========
  Increase in intangible assets and common stock related
   to purchase of customer lists                                     $  -             $176,999         $  -
                                                                     ========         ========         =========
  Decrease in goodwill and intangible assets related to
   adjustment in deferred taxes                                      $  -             $111,322         $  -
                                                                     ========         ========         =========
  Increase in goodwill related to adjustment of sublease
   liability                                                         $  -             $  -             $104,542
                                                                     ========         ========         =========
  Decrease in goodwill related to cancellation of stock
   issued for PKW merger                                             $  -             $  -             $310,890
                                                                     ========         ========         =========
  Increase in intangible assets and note payable related
   to the purchase of customer lists                                 $  -             $  -             $140,395
                                                                     ========         ========         =========
</TABLE>