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

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

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

         FOR THE QUARTER ENDED MARCH 31, 1998    COMMISSION FILE NUMBER: 0-9628
                                       OR

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

         FOR THE TRANSITION PERIOD FROM [             ]  TO  [                 ]


                        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 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

  As of March 31, 1998, the Registrant had 4,710,060 shares of common stock 
                                 outstanding.

                    This document is comprised of 27 pages

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

<PAGE>
 
                       ANCHOR PACIFIC UNDERWRITERS, INC.

                                      INDEX
<TABLE>
<CAPTION>

PART I.   FINANCIAL INFORMATION
<S>                                                     <C>                            
          ITEM 1.     Financial Statements:

                      Consolidated Balance Sheets, March 31, 1998 (unaudited) and 
                      December 31, 1997....................................................          1
                      
                      Consolidated Statements of Operations for the three
                      months ended March 31, 1998 and 1997 (unaudited).....................          3

                      Consolidated Statements of Shareholders' Equity for the three 
                      months ended March 31, 1998 (unaudited) and year ended 
                      December 31, 1997....................................................          4

                      Consolidated Statements of Cash Flows for the three
                      months ended March 31, 1998 and 1997 (unaudited).....................          5

                      Notes to Consolidated Financial Statements...........................          6

          ITEM 2.     Management's Discussion and Analysis of Financial
                      Condition and Results of Operations..................................          8


PART II.  OTHER INFORMATION

          ITEM 1.     Legal Proceedings....................................................         14
 
          ITEM 2.     Changes in Securities................................................         14

          ITEM 3.     Defaults Upon Senior Securities......................................         14

          ITEM 4.     Submission of Matters to a Vote of Security Holders..................         14

          ITEM 5.     Other Information....................................................         14

          ITEM 6.     Exhibits and Reports on Form 8-K.....................................         14


</TABLE>
<PAGE>
 
PART I - FINANCIAL INFORMATION

               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                      March 31,               December 31,
                                                                         1998                     1997
                                                                  -------------------      -------------------
                                                                     (unaudited)
<S>                                                                <C>                      <C> 
ASSETS
Current Assets:
    Cash and cash equivalents - corporate funds                    $        170,128         $           44,384
    Cash and cash equivalents - brokerage
         fiduciary funds                                                    898,675                  1,203,594
    Cash and cash equivalents - third-party
         administration fiduciary funds                                   2,949,591                  3,058,059
    Accounts receivable (less allowance for
         doubtful accounts of $45,864 and $45,543
         in 1998 and 1997, respectively)                                  1,703,659                  1,351,047
    Prepaid expenses and other current assets                               264,769                    375,475
                                                                  -------------------      -------------------
Total current assets                                                      5,986,822                  6,032,559
                                                                  -------------------      -------------------


Property and equipment, less accumulated
            depreciation and amortization                                   749,037                    620,511
                                                                  -------------------      -------------------

Other assets:
    Goodwill, net                                                         1,779,136                  1,803,713
    Intangible assets, net                                                  992,435                  1,021,715
    Other                                                                    83,899                     59,667
                                                                  -------------------      -------------------
                                                                          2,855,470                  2,885,095
                                                                  -------------------      -------------------


Total assets                                                      $       9,591,329          $       9,538,165
                                                                  -------------------      -------------------

</TABLE>

                                       1
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
                                                                      March 31,               December 31,
                                                                         1998                     1997
                                                                  -------------------      -------------------
                                                                     (unaudited)
<S>                                                                <C>                       <C> 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
    Cash and cash equivalents - third-party
         administration fiduciary funds                           $        2,949,591       $        3,058,059
    Net premiums payable - insurance companies                             1,960,585                2,035,032
    Accounts payable and accrued expenses                                    963,534                  948,484
    Current portion of long-term debt                                        408,752                  629,133
    Current portion of long-term liabilities                                 573,834                  574,083
                                                                  -------------------      -------------------
Total current liabilities                                                  6,856,296                7,244,791
                                                                  -------------------      -------------------


Long-term liabilities, net of current portion                                467,395                  506,944
                                                                  -------------------      -------------------


Long-term debt, including $210,000 in 1998 and
     $240,000 in 1997, owed to related parties, net
     of current portion                                                    1,741,002                1,329,188
                                                                  -------------------      -------------------


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; 4,710,060 and 4,690,839 
             shares issued as of 3/31/98 and 12/31/97,
             respectively                                                     94,201                   93,817
    Additional paid-in capital                                             4,232,265                4,215,649
    Accumulated deficit                                                   (3,799,830)              (3,852,224)
                                                                  -------------------      -------------------
Total shareholders' equity                                                   526,636                  457,242
                                                                  -------------------      -------------------
Total liabilities and shareholders' equity                          $      9,591,329        $       9,538,165
                                                                  -------------------      -------------------

</TABLE>

See accompanying notes.

                                       2
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 Three Months
                                                                                Ended March 31,
                                                                 ----------------------------------------------
                                                                        1998                       1997
                                                                    (unaudited)                (unaudited)
<S>                                                                 <C>                        <C> 
Revenues:
    Commissions, fees and other income                           $        4,164,999             $    2,005,254
    Interest income                                                          17,126                     21,595
                                                                 -------------------        -------------------
Total revenue                                                             4,182,125                  2,026,849
                                                                 -------------------        -------------------


Operating expenses:
    Salaries, commissions and employee benefits                           2,472,074                  1,384,807
    Selling, general and administrative expenses                          1,534,499                    755,227
                                                                 -------------------        -------------------
Total operating expenses                                                  4,006,573                  2,140,034
                                                                 -------------------        -------------------
                                                                            175,552                   (113,185)
                                                                 -------------------        -------------------

Other income (expense):
    Amortization of goodwill and intangible assets                          (53,856)                   (62,529)
    Interest                                                                (78,504)                   (51,218)
    Other                                                                    15,422                      3,346
                                                                 -------------------        -------------------
Total other income (expense)                                               (116,938)                  (110,401)
                                                                 -------------------        -------------------


Income (loss) before income taxes                                            58,614                   (223,586)

Income tax expense                                                            6,220                      4,470
                                                                 -------------------        -------------------

Net income (loss)                                                $           52,394          $        (228,056)
                                                                 -------------------        -------------------


Basic and diluted income (loss) per common share                 $              .01          $            (.05)
                                                                 -------------------        -------------------

Weighted average number of common shares
    outstanding                                                           4,710,060                  4,456,205
                                                                 -------------------        -------------------

</TABLE>
See accompanying notes

                                       3
<PAGE>
 
                        ANCHOR PACIFIC UNDERWRITERS, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                     Additional          Retained
                                           Common Stock                Paid-In           Earnings
                                       Shares          Amount          Capital           (Deficit)          Total
                                  ---------------- --------------- ---------------- ---------------- ------------------
<S>                               <C>               <C>            <C>                 <C>            <C> 
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
    Stock issued for
      services                             18,888             378          16,622                 -             17,000
    Fractional shares
      adjustment                              333               6              (6)                -                  -
    Net Income                                  -               -               -            52,394             52,394
                                  ---------------- --------------- ---------------- ---------------- ------------------

Balance at March 31, 1998
   (Unaudited)                          4,710,060     $    94,201     $ 4,232,265     $  (3,799,830)      $    526,636
                                  ---------------- --------------- ---------------- ----------------- -----------------

</TABLE>

See accompanying notes

                                       4
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Three Months
                                                                                Ended March 31,
                                                                  --------------------------------------------
                                                                         1998                      1997
                                                                     (unaudited)               (unaudited)
<S>                                                               <C>                          <C>            
OPERATING ACTIVITIES
Net income (loss)                                                 $           52,394            $      (228,056) 
Items not requiring current use of cash:                                                                        
      Depreciation and amortization                                           80,366                     76,331  
      Amortization of goodwill and other intangibles                          53,856                     62,529  
      Stock issued for services                                               17,000                          -  
Changes in items affecting operations:                                                                          
      Cash and cash equivalents - brokerage                                                                     
         fiduciary funds                                                     304,919                   (205,157) 
      Accounts receivable                                                   (352,612)                   276,087  
      Prepaid expenses and other current assets                              110,012                      7,536  
      Other assets                                                           (24,232)                     2,194  
      Deferred compensation                                                        -                     51,000  
      Net premiums payable - insurance companies                             (74,447)                  (160,663) 
      Accounts payable and accrued expenses                                   15,000                    (77,083) 
                                                                    -----------------         -------------------
Cash provided by (used in) operating activities                              182,306                   (195,282) 
                                                                    -----------------         -------------------
                                                                                                                
INVESTING ACTIVITIES                                                                                            
Notes receivable, net                                                            694                     18,591  
Purchases of property and equipment                                         (208,892)                    (3,464) 
                                                                    -----------------         -------------------
Cash provided by (used in) investing activities                             (208,198)                    15,127  
                                                                    -----------------         ------------------- 


FINANCING ACTIVITIES
Issuance of stock:
    Common stock                                                                   -                    155,300 
    Warrants exercised                                                             -                      1,702 
Borrowings on long-term debt                                                 200,000                     35,000 
Repayment on long-term debt and liabilities                                  (48,364)                  (105,867)
                                                                  -------------------        -------------------
Cash provided by financing activities                                        151,636                     86,135 
                                                                  -------------------        -------------------
                                                                                                                
Net increase (loss) in cash                                                  125,744                    (94,020)
Cash and cash equivalents - corporate funds at                                                                  
   beginning of period                                                        44,384                    151,765 
                                                                  -------------------        -------------------
Cash and cash equivalents - corporate funds at                                                                  
   end of period                                                  $          170,128         $           57,745 
                                                                  -------------------        -------------------
                                                                                                                
SUPPLEMENTAL CASH FLOW INFORMATION                                                                              
Cash paid during the period for:                                                                                
   Interest                                                       $           78,504         $           51,218 
                                                                  -------------------        -------------------
   Income taxes                                                   $            6,220         $            4,470 
                                                                  -------------------        ------------------- 
</TABLE>

See accompanying notes

                                       5
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                 MARCH 31, 1998

NOTE 1 - BASIS OF PRESENTATION
------------------------------

                  The accompanying unaudited consolidated financial statements
of Anchor Pacific Underwriters, Inc. and its subsidiaries ("Anchor") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1998, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in Anchor's Annual Report on
Form 10-K for the year ended December 31, 1997.

Reclassifications
-----------------

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

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 year 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.

NOTE 2 - ACQUISITIONS
---------------------

                  To date, acquisitions by Anchor have involved both relatively
small acquisitions of insurance brokerage and administration accounts, as well
as larger acquisitions, such as the 1995 acquisitions of the insurance brokerage
company, Putnam, Knudsen & Wieking, Inc. ("PKW"), and the third-party
administrators, Benefit Resources, Inc. ("BRI"). The results of operations from
these acquisitions are included in Anchor's consolidated financial statements
from the date of purchase. Anchor expects to continue to expand its third-party
administration business. Anchor conducts its third-party administration business
through its wholly-owned subsidiary, Harden & Company Insurance Services, Inc.
("Harden") and through Harden's wholly-owned subsidiary, BRI. Effective January
1, 1998, Harden, assumed a significant volume of third-party administration
business from an insurance carrier in Portland, Oregon.

                  Effective March 20, 1998, Harden acquired from the same
company that it had recently assumed the third-party administration business
from in Portland, Oregon, all of the outstanding stock of Pacific Heritage
Administrators of Nevada, Inc., to further its business of administering
third-party health insurance contracts.

NOTE 3 - CONTINGENCIES
----------------------

                  Anchor is subject to certain legal proceedings and claims
arising in the ordinary 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.

                                       6
<PAGE>
 
NOTE 4 - SUBORDINATED BRIDGE NOTES AND WARRANT
----------------------------------------------

                  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 five year 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 (Note 6 below), by
exchanging the Bridge Notes. The basic terms of these two alternatives were: (a)
in lieu of receiving a five year warrant to purchase 1,000 shares of Anchor
common stock at a purchase price of $1.75 per share, for every $10,000 in
principal invested, the purchaser would receive a five year 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
conversion 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.
Purchasers representing $180,000 of said Bridge Notes chose alternative (a)
above, and the remaining $45,000 chose alternative (b) above. Certain purchasers
agreed to extend the term of the Bridge Notes. As of March 31, 1998, $140,000 of
the Bridge Notes remained outstanding.

NOTE 5 - 10% CONVERTIBLE SUBORDINATED DEBENTURES
------------------------------------------------

                  In 1995, Anchor issued $370,000 of 10% Convertible
Subordinated Debentures (the "Debentures") and $600,000 of Series A 10%
Convertible Subordinated Debenture (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
outstanding indebtedness by $870,000 and, in turn, increased shareholders'
equity by $870,000. Certain holders agreed to extend the term of the Debentures.
As of March 31, 1998, $40,000 of the Debentures had been repaid in full, and
$60,000 remained outstanding.

NOTE 6 - 1997 OFFERING
----------------------

                  During 1997, Anchor raised $305,000 from eight members of the
Board of Directors and other qualified investors through a private offering
which consisted of shares of Anchor common stock along with warrants to acquire
shares of Anchor common stock (the "1997 Offering"). 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
were: (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 splits, stock dividends,
recapitalizations and reorganizations.

NOTE 7 - COMMITMENTS
--------------------

         On September 30, 1997, Anchor obtained a $1,600,000 bank loan. The
basic terms and conditions of this loan are: (a) monthly interest payments equal
to the bank's prime rate plus 2.5%; (b) five year term; (c) monthly principal
payments in installments of $26,666.67 (Not withstanding the foregoing, 75% of
Anchor's monthly earnings before interest, taxes, depreciation and amortization
("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 (d) a five year warrant
to acquire 95,000 shares of Anchor common stock at a purchase price of $1.75 per
share. The proceeds of the loan were used to retire outstanding credit
facilities with another bank.

                                       7
<PAGE>
 
         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 connection with Harden's expansion in Portland,
Oregon.

         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 combining both the $1,600,000 term loan
and the $250,000 loan. The basic terms of this new term loan are: (a) monthly
interest payments 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 on 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.

ITEM 2.  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 brokerage 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.

         Historically, Anchor derived a majority of its revenues from
third-party administration services. As a result of 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. These new contracts have substantially
increased the percentage of revenues derived from third-party administration
services.

RESULTS OF OPERATIONS -- QUARTERS ENDED MARCH 31, 1998 AND 1997

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.

         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 pricing.

                                       8
<PAGE>
 
         At times, 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 servicing 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 a material effect on
its liquidity, capital resources or operations.

         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. 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 to 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.
These new contracts have increased the percentage of revenues Anchor derives
from third-party administration services. The new third-party administration
services operation in Oregon has also substantially increased revenues and will
provide a platform for expanding marketing activities in the northern tier of
the western states (Oregon, Washington, Idaho and Nevada).

REVENUES

         TOTAL REVENUES. Total revenues for the first quarter of 1998, were
$4,182,125, an increase of $2,155,276 or 106.3%, as compared to 1997 first
quarter revenues of $2,026,849. The increase in revenue in this three month
period was primarily due to the increase in fee income derived from third-party
administration services at Harden which included $1,342,711 from the new
business in Portland, Oregon.

         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 months ended March 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>

============================================= ===================== ====================== =====================
          QUARTER ENDED MARCH 31,                     1998                  1997                   1996
--------------------------------------------- --------------------- ---------------------- ---------------------
<S>                                                      <C>                 <C>                    <C>
Insurance Brokerage Commissions                          19%                 40%                    42%
--------------------------------------------- --------------------- ---------------------- ---------------------
Third-Party Administration Fees                          81%                 60%                    58%
--------------------------------------------- --------------------- ---------------------- ---------------------
         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 a result of these new contracts,
the percentage of its revenues that are derived from third-party administration
services has substantially increased in 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 the first quarter of 1998 were $778,346, a decrease of $21,685 or 2.7%,
compared to $800,031 of commissions for the same period of 1997. A net loss of
commission revenue at PKW accounted for all of the decrease.

                                       9
<PAGE>
 
         FEES. Fees from Anchor's third-party administration (including
underwriting and risk analysis) services for the first quarter of 1998, were
$3,386,653, an increase of $2,181,563 or 181%, as compared to $1,205,090 in fees
for the same period in 1997. This increase in fee income is largely 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 the first quarter of 1998 from
third-party administration services consist of revenues generated by Harden and
BRI. The third-party administration revenues are primarily derived from: (a) an
insurance product underwritten by one insurance carrier, which is A-
(Excellent); 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 10% of the
third-party administration revenues (or approximately 8% of Anchor's total
revenues) in the first quarter of 1998, and revenues related to the
administration of self-insured programs, described in (b) above, accounted for
substantially all of the remaining portion of revenues in the first quarter of
1998. Self-insurance is an alternative to fully insured programs 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.

         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 continue to increase the
percentage of income derived from third-party administration services in 1998
and future years. In addition, the contract in Oregon 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 $17,126 and $21,595 for the three
months ended March 31, 1998 and 1997, respectively.

EXPENSES

         TOTAL EXPENSES. Total operating expenses for the first quarter of 1998,
were $4,006,573, an increase of $1,866,539 or 87.2% as compared to operating
expenses of $2,140,034 for the same period in 1997. As discussed below, the
increase in total expenses resulted primarily from an increase in selling,
general and administration expenses and employee compensation and benefits
related to the recent expansion of the third-party administration services
business at Harden.

         EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits
for the first quarter of 1998, were $2,472,074, an increase of $1,087,267 or
78,5% as compared to $1,384,807 for the same period in 1997. The increase
related primarily to greater staffing needs required to service new third-party
administration projects at Harden, including a $697,447 increase which resulted
from the hiring of new employees to staff the Portland, Oregon operation.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,534,499 and $755,227 for the quarter ended March
31, 1998 and 1997, respectively. The $779,272 or 103.2% increase in 1998, as
compared to 1997, resulted primarily from an increase in expenses associated
with the increased third-party administration services business at Harden,
including the new Portland, Oregon office which accounted for $265,086 of the
increase. General and administrative expenses include rent, travel, insurance,
postage, telephone, supplies and other miscellaneous expenses.

         INTEREST EXPENSE. Interest expense was $78,504 and $51,218, for the
first quarter of 1998 and 1997, respectively. The increase in interest expense
of $27,286 in the first quarter of 1998, as compared to the same period in 1997,
was due to the increase in borrowings on the bank line of credit.

         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 $53,856
and $62,529, for the first quarter of 1998 and 1997, respectively. The decrease
in amortization and other intangibles is a result of intangibles at PKW becoming
fully amortized. 

                                       10
<PAGE>
 
INCOME TAXES

                  Anchor's expense for income taxes was $6,220 and $4,470 for
the first quarter of 1998 and 1997, respectively. An analysis of Anchor's
provision for income taxes is presented in Note 9 of the Notes to Consolidated
Financial Statements in Anchor's Annual Report on Form 10-K for the year ending
December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

                  Anchor reported net cash flows provided by operations of
$182,306 for the first quarter ended March 31, 1998, compared to net cash flows
(used in) operations of $(195,282) for the same period in 1997. During 1997,
Anchor met its operating and capital needs from various sources, including
borrowing under its existing credit agreements and the use of proceeds received
from the 1997 Offering. See Note 6, above.

                  During 1996, Anchor raised $225,000 from five members of the
Board of Directors and other qualified investors through the issuance of Bridge
Notes. As of March 31, 1998, $140,000 of the Bridge Notes remained outstanding
(for further information, refer to Note 4 above).

                  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. Certain holders agreed to extend the
term of the Debentures. As of March 31, 1998, $40,000 of the Debentures had been
repaid in full, and $60,000 remained outstanding.

                  During 1997, Anchor raised $305,000 from eight members of the
Board of Directors and other qualified investors through a private offering
which consisted of Anchor common stock along with warrants to acquire shares of
Anchor common stock (the "1997 Offering"). 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 were: (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 splits, stock dividends, recapitalizations
and reorganizations.

                  Capital and certain acquisition related expenditures were
$208,892 and $3,464 for the first quarter of 1998 and 1997, respectively. The
larger 1998 expenditures primarily involved the acquisition of furniture,
fixtures and computer equipment at the new Portland, Oregon location. During the
first quarter of 1997, the largest expenditure involved computer equipment
purchased by Harden.

                  Short-term debt, current portion of long-term debt and current
portion of long-term liabilities at March 31, 1998, totaling in the aggregate
$982,586 (as compared to $1,203,216 at December 31, 1997) consisted of: (a)
approximately $180,000 of future fixed payments under a consulting agreement
entered into with a company affiliated with the former shareholders of BRI; (b)
$200,000 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; (c) $60,000 of Debentures; (d) $140,000 of the
Bridge Notes; and (e) approximately $402,586 for certain other current
liabilities.

                  On September 30, 1997, Anchor obtained a $1,600,000 bank loan.
The basic terms and conditions of this loan are: (a) monthly interest payments
equal to the bank's prime rate plus 2.5%; (b) five year term; (c) 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 (d) a five year warrant to acquire 95,000 shares of Anchor common
stock at a purchase price of $1.75 per share. The proceeds of the loan were used
to retire outstanding credit facilities with another bank.

                                       11
<PAGE>
 
                  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 connection with Harden's expansion in
Portland, Oregon.

                  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 combining both the
$1,600,000 term loan and the $250,000 loan. The basic terms of this new term
loan are: (a) monthly interest payments 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 on 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 March 31, 1998, long-term liabilities and long-term debt,
less the current portion discussed above, totaled $2,208,397 (as compared to
$1,836,132 at December 31, 1997), and primarily consisted of: (a) $1,574,397
representing the long-term portion outstanding under a $1,821,890 term bank loan
maintained and further described above; (b) approximately $50,560 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 $328,000 representing deferred rent with regard to
certain real property currently leased by Anchor; (d) approximately $165,900
representing obligations relating to the purchase of furniture, fixtures and
computer equipment at the new Portland, Oregon location; and (e) approximately
$88,839 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
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.

YEAR 2000 ISSUES

                  Anchor has established a plan to achieve Year 2000 compliance
in its electronic information systems. A corporate team has been created to
coordinate the identification and implementation of the necessary changes
required to computer systems and applications. An initial impact assessment is
being completed and renovation efforts are expected to begin in the second
quarter of 1998.

                  Anchor is working to complete programming efforts for the Year
2000 related projects by June 30, 1999, with final certification testing
occurring in the remainder of the 1999 year. Anchor's focus is not only on its
internal systems, but also upon the compliance of its key business partners,
vendors, and other suppliers. Management believes that the redeployment of
Anchor's resources will not adversely impact new product or software
development. The total cost of Year 2000 compliance is presently estimated to
not exceed $250,000 through 1999.

FORWARD-LOOKING INFORMATION

                  This Quarterly Report on Form 10-Q 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.

                                       12
<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 Quarterly Report. Statements in this
Quarterly Report, particularly in the Notes to Consolidated Financial Statements
and Item 2. 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.

STRATEGY

                  Anchor's current plan 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.

                                       13
<PAGE>
 
PART II - OTHER INFORMATION

ITEM 1. 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 2.  CHANGES IN SECURITIES

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.  Exhibits

10.31   Stock Purchase Agreement effective March 20, 1998, between Anchor and
        Harden and Pacific Assurance Company (regarding Pacific Heritage
        Administrators of Nevada, Inc.)

10.32   Agreement dated February 26, 1998, between Russell Miller, Inc. and
        Anchor.

27.0    Financial Data Schedule

B.  Reports on Form 8-K

None

                                       14
<PAGE>
 
                                  SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
Anchor has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

<TABLE>
<CAPTION>

                                                       ANCHOR PACIFIC UNDERWRITERS, INC.

<S>                                                     <C> 
Date:     May 7, 1998                                  /s/ James R. Dunathan
          ------------------------------------         -----------------------------------------------------
                                                       James R. Dunathan
                                                       President and Chief Executive Officer

Date:     May 7, 1998                                  /s/ Earl Wiklund
          ------------------------------------         -----------------------------------------------------
                                                       Earl Wiklund
                                                       Senior Vice President and Chief Financial Officer
</TABLE>

                                       15