<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 September 30, 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  September 30, 1998, the Registrant had 4,710,058 shares of common
stock outstanding.


================================================================================
<PAGE>
 
                       ANCHOR PACIFIC UNDERWRITERS, INC.

                                     INDEX


<TABLE>
<CAPTION>
PART I.       FINANCIAL INFORMATION
<S>           <C>        <C>                                                                      <C>
              ITEM 1.    Financial Statements:
 
                         Consolidated Balance Sheets, September 30, 1998 (unaudited) and
                         December 31, 1997.................................................        1
  
                         Consolidated Statements of Operations for the nine months and
                         quarters ended September 30, 1998 and 1997 (unaudited)............        3
  
                         Consolidated Statements of Shareholders' Equity for the nine
                         months ended September 30, 1998 (unaudited) and year ended
                         December 31, 1997.................................................        4
   
                         Consolidated Statements of Cash Flows for the nine months
                         ended September 30, 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.................................................       16
 
              ITEM 2.    Changes in Securities.............................................       16
 
              ITEM 3.    Defaults Upon Senior Securities...................................       16
 
              ITEM 4.    Submission of Matters to a Vote of Security Holders...............       16
 
              ITEM 5.    Other Information.................................................       16
 
              ITEM 6.    Exhibits and Reports on Form 8-K..................................       16
</TABLE>
<PAGE>
 
PART I - FINANCIAL INFORMATION


               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                 September 30,              December 31,
                                                                      1998                      1997
                                                             -------------------       --------------------
                                                                  (unaudited)
 
ASSETS
Current Assets:
<S>                                                            <C>                       <C>
 Cash and cash equivalents - corporate funds                          $   29,770                 $   44,384
 Cash and cash equivalents - brokerage
   fiduciary funds                                                     1,164,823                  1,203,594
 Cash and cash equivalents - third-party
   administration fiduciary funds                                      2,793,723                  3,058,059
 Accounts receivable (less allowance for
   doubtful accounts of $46,308 and $45,543
  in 1998 and 1997, respectively)                                      1,250,508                  1,351,047
 Prepaid expenses and other current assets                               215,919                    375,475
Total current assets                                                   5,454,743                  6,032,559
                                                             -------------------       --------------------
 
 
Property and equipment, less accumulated
  depreciation and amortization                                          618,651                    620,511
                                                             -------------------       --------------------
 
Other assets:
 Goodwill, net                                                         1,730,129                  1,803,713
 Intangible assets, net                                                  935,858                  1,021,715
 Other                                                                    82,560                     59,667
                                                                       2,748,547                  2,885,095
                                                             -------------------       --------------------
 
 
Total assets                                                          $8,821,941                 $9,538,165
                                                             ===================       ====================
</TABLE>

                                       1
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                    CONSOLIDATED BALANCE SHEETS (CONTINUED)



<TABLE>
<CAPTION>
                                                                September  30,             December 31,
                                                                     1998                      1997
                                                            -------------------       --------------------
                                                                 (unaudited)
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
<S>                                                           <C>                       <C>
    Cash and cash equivalents - third-party
         administration fiduciary funds                             $ 2,793,723                $ 3,058,059
    Net premiums payable - insurance companies                        1,988,355                  2,035,032
    Accounts payable and accrued expenses                               903,514                    948,484
    Current portion of long-term debt                                   460,485                    629,133
    Current portion of long-term liabilities                            443,915                    574,083
                                                            -------------------       --------------------
Total current liabilities                                             6,589,992                  7,244,791
                                                            -------------------       --------------------
 
 
Long-term liabilities, net of current portion                           411,136                    506,944
                                                            -------------------       --------------------
 
 
Long-term debt, including $210,000 in 1998 and
     $240,000 in 1997, owed to related parties, net
     of current portion                                               1,460,167                  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; 4,710,058 and 4,690,839
      shares issued as of 9/30/98 and 12/31/97, respectively             94,201                     93,817
      
    Additional paid-in capital                                        4,232,265                  4,215,649
    Accumulated deficit                                              (3,965,820)                (3,852,224)
                                                            -------------------       --------------------
 
Total shareholders' equity                                              360,646                    457,242
                                                            -------------------       --------------------
Total liabilities and shareholders' equity                          $ 8,821,941                $ 9,538,165
                                                            ===================       ====================
</TABLE>


See accompanying notes.

                                       2
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                         Nine Months                                      Quarters
                                                     Ended September  30,                           Ended September  30,
                                         -----------------------------------------       ----------------------------------------
                                                 1998                    1997                    1998                   1997
 
Revenues:
<S>                                        <C>                     <C>                     <C>                     <C>
  Commissions, fees and other income            $11,724,987             $6,944,887               $3,609,670            $2,922,912
  Interest Income                                    48,043                 60,591                   13,269                18,456
                                         ------------------      -----------------       ------------------      ----------------
Total revenue                                    11,773,030              7,005,478                3,622,939             2,941,368
 
Operating expenses:
  Salaries, commissions and employee
    benefits                                      7,533,787              4,678,236                2,436,664             1,881,939
  Selling, general and administrative
    expenses                                      4,029,111              2,639,766                1,320,169             1,070,007
                                         ------------------      -----------------       ------------------      ----------------
Total operating expenses                         11,562,898              7,318,002                3,756,833             2,951,946
                                         ------------------      -----------------       ------------------      ----------------
                                                    210,132               (312,524)                (133,894)              (10,578)
 
Other income (expense):
  Amortization of goodwill &
    intangible assets                              (161,419)              (172,725)                 (53,783)              (53,429)
  Interest                                         (203,736)              (152,152)                 (62,691)              (52,823)
  Other                                              47,647                 39,330                    8,211                24,028
                                         ------------------      -----------------       ------------------      ----------------
 
Total other income (expense)                       (317,508)              (285,547)                (108,263)              (82,224)
                                         ------------------      -----------------       ------------------      ----------------
 
Income (loss) before income taxes                  (107,376)              (598,071)                (242,157)              (92,802)
 
Income tax expense                                    6,220                  4,470                        -                     -
                                         ------------------      -----------------       ------------------      ----------------
 
Net income (loss)                               $  (113,596)            $ (602,541)              $ (242,157)           $  (92,802)
                                         ==================      =================       ==================      ================
 
Basic and diluted income (loss)
  per common share                                   $(0.02)                $(0.13)                  $(0.05)               $(0.02)
                                         ==================      =================       ==================      ================
 
Weighted average number of
  common shares outstanding                       4,708,137              4,568,525                4,710,058             4,644,277
                                         ==================      =================       ==================      ================
</TABLE>


See accompanying notes

                                       3
<PAGE>
 
                       ANCHOR PACIFIC UNDERWRITERS, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                  Additional
                                        Common Stock                Paid-In         Accumulated
                                  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                         334                6               (6)                 -                 -
   Canceled stock:
      Fractional shares                   (3)               -                -                  -                 -
    Net loss                               -                -                -           (113,596)         (113,596)
                            ---------------------------------------------------------------------------------------
 
Balance at September 30,
 1998   (Unaudited)                4,710,058          $94,201       $4,232,265        $(3,965,820)       $  360,646
                             ======================================================================================
</TABLE>


See accompanying notes

                                       4
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   Nine Months
                                                                               Ended September  30,
                                                             -----------------------------------------------------
                                                                       1998                           1997
<S>                                                            <C>                           <C>
OPERATING ACTIVITIES
Net loss                                                                 $(113,596)                      $(602,541)
Items not requiring current use of cash:
      Depreciation and amortization                                        244,600                         228,947
      Amortization of goodwill and other intangibles                       159,439                         172,724
Changes in items affecting operations:
      Cash and cash equivalents - brokerage
         fiduciary funds                                                    38,771                        (444,056)
      Accounts receivable                                                  100,539                         385,219
      Prepaid expenses and other current assets                            158,862                         (19,372)
      Other assets                                                         (22,893)                        (23,377)
      Deferred compensation                                                      -                          51,000
      Net premiums payable - insurance companies                           (46,677)                         45,030
      Accounts payable and accrued expenses                                (44,970)                        146,232
                                                             ---------------------         -----------------------
Cash provided by (used in) operating activities                            474,075                         (60,194)
                                                             ---------------------         -----------------------
 
 
INVESTING ACTIVITIES
Notes receivable, net                                                          694                         (12,008)
Purchases of property and equipment                                       (242,739)                        (56,516)
                                                             ---------------------         -----------------------
Cash used in investing activities                                         (242,045)                        (68,524)
                                                             ---------------------         -----------------------
 
 
FINANCING ACTIVITIES
Issuance of Common stock                                                    17,000                         296,702
Borrowings on long-term debt                                               175,000                         185,000
Repayment on long-term debt and liabilities                               (438,644)                       (366,064)
                                                             ---------------------         -----------------------
Cash provided by (used in) financing activities                           (246,644)                        115,638
                                                             ---------------------         -----------------------
 
Net loss in cash                                                           (14,614)                        (13,080)
Cash and cash equivalents - corporate funds at
   beginning of period                                                      44,384                         151,765
                                                             ---------------------         -----------------------
Cash and cash equivalents - corporate funds at
   end of period                                                         $  29,770                       $ 138,685
                                                             =====================         =======================
 
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
   Interest                                                              $ 203,736                       $ 152,152
                                                             =====================         =======================
   Income taxes                                                          $   6,220                       $   4,470
                                                             =====================         =======================
</TABLE>
See accompanying notes

                                       5
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                               SEPTEMBER 30, 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 nine month period ended September 30, 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 of System received 5%
of Anchor's then outstanding stock (195,789 shares).  The System shareholders
received for every 42.3291 shares of issued and outstanding System common stock
one share of Anchor common stock along with a warrant to purchase one share of
Anchor common stock at a price of $3.00. A total of 903 warrants were exercised
and the remaining 194,886 warrants expired on January 6, 1997.   In addition,
certain creditors of System were to be issued 5% of Anchor's common stock
(195,789 shares) and one warrant to purchase a similar number of shares of
common stock.    The 195,789 shares were issued on August 27, 1998 to the
Disbursing Agent of the System Industries Creditor Estate.   A total of 195,789
warrants remain reserved for issuance to certain creditors of System pending a
final determination by the System Bankruptcy Creditor Committee.  These unissued
warrants will expire one year after their issuance.
 
NOTE 2 - ACQUISITIONS
---------------------

          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, Harden & Company of Arizona ("Harden-AZ"), formerly 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 conducts its third-party administration business through its
wholly-owned subsidiary, Harden & Company Insurance Services, Inc. ("Harden-CA")
and through Harden-CA's wholly-owned subsidiary, Harden-AZ.  On January 1, 1998,
Harden-CA assumed a significant volume of third-party administration business,
Pacific Heritage Administrators ("PHA"), from an insurance carrier in Portland,
Oregon.  Effective March 20, 1998, Harden-CA acquired all of the outstanding
stock of Pacific Heritage Administrators of Nevada, Inc. ("PHA-NV") to further
its business of administering third-party health insurance contracts.  Anchor
expects to continue to expand its third-party administration business.

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) be allowed to
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 September 30, 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 the
owner of the $600,000  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 September 30, 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 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES B
----------------------------------------------------------

          At the end of the third quarter 1998, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series B (the
"Series B Debentures").  As of November 6, 1998, Anchor had raised $60,000 and
had oral commitments from investors to purchase an additional $115,000 of the
Series B Debentures.   Anchor intends to utilize a substantial portion of the
proceeds from the Series B Debentures to support current and future working
capital needs of Anchor.  The basic terms of the Series B Debentures are:  (a)
10% interest, payable semi-annually in arrears; (b) two year maturity; (c)
conversion price of $0.50 per share; (d) "piggyback" registration rights for
three years; (e) for each $5,000 of Series B Debentures acquired, an investor
receives a five year warrant to acquire 2,000 shares of Anchor common stock at
an exercise price of $0.50 per share; (f) subordination provisions that
subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the
Series B Debentures);

                                       7
<PAGE>
 
(g) provisions that permit Anchor to redeem the Series B Debentures at par at
any time;  and (h) provisions that give each purchaser a one-time right to cause
Anchor to redeem all or a portion of their Series B Debentures, at par, plus any
outstanding interest, in the event Anchor sells Putnam, Knudsen & Wieking, Inc.
("PKW") for an amount in excess of $2 million.  Purchasers of the Series B
Debentures as of November 6, 1998, consisted of four members of the Board of
Directors.

NOTE 8 - 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.
 
          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 the
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 were:  (a)
monthly interest payments equal to bank's prime rate, plus 2.5%; (b) a maturity
date of October 5, 2002; and (c) monthly principal payments in installments of
$33,125.28 beginning on April 5, 1998.  All other terms and conditions contained
in the term loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remained in place.
 
          On June 2, 1998, a new term loan in the amount of $1,741,841.30 was
entered into between Anchor and the bank which replaced the $1,821,890.33 term
loan.  The basic terms of this new term loan are:  (a) monthly interest payments
equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002;
(c) monthly principal payments in installments of $16,500.00 beginning on June
5, 1998; and (d) deletion of the provision which required 75% of Anchor's
monthly EBITDA to be applied to principal to the extent such percentage of
monthly EBITDA was required to make the scheduled payment of principal.  All
other terms and conditions contained in the term loan dated September 30, 1997,
including all amendments thereto and replacements therefor, remain operative.
As of September 30, 1998, $1,658,167 remained outstanding under the bank term
loan.

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.

                                       8
<PAGE>
 
          In conjunction with a new marketing strategy, in June 1998 Anchor
reorganized the company's third-party administration services division.  In the
new organizational structure, "Harden Group" was established as the consolidated
name for the management and marketing of third-party administration services.
Under Harden Group identify, the current third-party administration operations
of Anchor continue to function as before in their respective territories.
Currently, Harden Group includes four third-party administration operations
providing services to clients through the Western States from seven offices
located in Concord, Los Angeles and Fresno, CA; Scottsdale, AZ; Portland, OR;
and Las Vegas and Reno, NV.

          Harden Group includes, Harden & Company Insurance Services, Inc.
("Harden-CA"); Harden
& Company of Arizona ("Harden-AZ"); Pacific Heritage Administrators ("PHA"); and
Pacific Heritage Administrators, Inc. of Nevada ("PHA-NV").

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

GENERAL

          Anchor derives its revenues from commissions and fees for claims
administration (including underwriting and risk analysis) services.  Commissions
generally are based on a percentage of gross premiums and contingent
commissions, which, in turn, generally are based on underwriting profits derived
over a given period of time by the insurance carrier.  Claims administration
fees 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.

          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
Group 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 Group has been successful in securing an alternative
insurance carrier to strengthen and broaden its 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
Group which management believes will enhance sales opportunities in California
and Arizona. Furthermore, Harden Group has entered into significant new
contracts to provide third-party administration services through its marketing
partners. These new contracts

                                       9
<PAGE>
 
have increased the percentage of revenues Anchor derives from third-party
administration services. The new third-party administration services operation,
PHA, in Oregon has also substantially added to the increase in revenues and is
expected to 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 nine months ended September 30,
1998, were $11,773,030, an increase of $4,767,552 or 68%, as compared to
$7,005,478 in revenues for the same period in 1997. The increase in revenue in
this nine month period was primarily due to the increase in fee income derived
from third-party administration services at Harden-CA, which includes $3,993,936
from PHA, 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 nine months ended September 30, 1998, 1997 and
1996.

<TABLE>
<CAPTION>
 
==================================================================================================== 
  NINE MONTHS ENDED SEPTEMBER  30,            1998                 1997                 1996
<S>                                    <C>                  <C>                  <C>
---------------------------------------------------------------------------------------------------
    Insurance Brokerage Commissions            20%                  34%                  44%
---------------------------------------------------------------------------------------------------
    Third-Party Administration Fees            80%                  66%                  56%
---------------------------------------------------------------------------------------------------
         Total                                100%                 100%                 100%
==================================================================================================== 
</TABLE>

          As of January 1, l998, Harden Group entered into new administration
contracts through its marketing partners to provide third-party administration
services in Portland, Oregon.  As a result of these contracts, the percentage of
its revenues that are derived from third-party administration services have
substantially increased.

          COMMISSIONS. Commissions for property and casualty insurance brokerage
services from PKW 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 nine months of 1998 were $2,254,704, a decrease of
$92,007 or 4%, compared to $2,346,711 of commissions for the same period of
1997.

          FEES. Fees from Harden Group, Anchor's third-party administration
services division (including underwriting and risk analysis), for the first nine
months of 1998 were $9,470,283 an increase of $4,872,197 or 106%, as compared to
$4,598,086 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 a new insurance carrier and new administrative contracts, as discussed
above, and administrative fees generated from the release of new products.

          Fee revenues reported by Anchor in the first nine months of 1998 from
third-party administration services consist of revenues generated by Harden
Group.  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 12.6% of
the third-party administration revenues (or approximately 8.5% of Anchor's total
revenues) in the first nine months 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 nine months
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
loss insurance carrier.

                                       10
<PAGE>
 
          As of January 1, 1998, respectively, Harden Group has entered into
contracts through its marketing partners to provide third-party administration
services in Portland, Oregon.  Management expects that these  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 Group to expand its marketing and servicing territory
to 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 $48,043 and $60,591 for the nine
months ended September 30, 1998 and 1997, respectively.

EXPENSES

          TOTAL EXPENSES.  Total operating expenses for the first nine months of
1998, were $11,562,898, an increase of $4,244,896 or 58% as compared to
operating expenses of $7,318,002 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 Group.

          EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits
for the first nine months of 1998, were $7,533,787, an increase of $2,855,551 or
61% as compared to $4,678,236 for the same period in 1997. The increase related
primarily to staffing needs required to service new third-party administration
projects at Harden-CA. Included in this increase are the expenses related to
PHA, the new third-party administration operation in Portland, Oregon.

          SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $4,029,111 and $2,639,766 for the nine months ended
September 30, 1998 and 1997, respectively.  The $1,389,345 or 53% increase in
1998, as compared to 1997, resulted primarily from expenses associated with the
increased third-party administration services business at Harden-CA, including
PHA in Portland, Oregon.  General and administrative expenses include rent,
travel, insurance, postage, telephone, supplies and other miscellaneous
expenses.

          INTEREST EXPENSE.  Interest expense was $203,736 and $152,152, for the
first nine months of 1998 and 1997, respectively.  The increase in interest
expense of $51,584 in the first nine months of 1998, as compared to the same
period in 1997, was due to increased borrowings under the bank loan.

          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
$161,419 and $172,725, for the first nine months of 1998 and 1997, respectively.
The decrease in amortization and other intangibles is a result of intangibles at
PKW becoming fully amortized.

INCOME TAXES

          Anchor's expense for income taxes was $6,220 and $4,470 for the first
nine months 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.

RESULTS OF OPERATIONS -- QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997

REVENUES

          TOTAL REVENUES.  Total revenues for the third quarter of 1998 were
$3,622,939, an increase of $681,571 or 23%, as compared to 1997 third quarter
revenues of  $2,941,368.  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-CA, including the revenue increase from PHA,
the new third-party administration operation in Portland, Oregon.

                                       11
<PAGE>
 
          COMMISSIONS. Commissions from PKW for the third quarter of 1998 were
$666,003, a decrease of $53,153 or 7.4%, compared to $719,156 of commissions for
the same period of 1997.

          FEES. Fees from Harden Group, Anchor's third-party administration
services division (including underwriting and risk analysis), for the third
quarter of 1998, were $2,943,667, an increase of $739,911 or 34%, as compared to
$2,203,756 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 a new insurance carrier and new administrative contracts, as discussed
above, administrative fees generated from the release of new products; and,
revenue from the new PHA operation in Portland, Oregon.

          INTEREST INCOME. Interest income was $13,269 and $18,456 for the
quarters ended September 30, 1998 and 1997, respectively.

EXPENSES

          TOTAL EXPENSES. Total operating expenses for the third quarter of
1998, were $3,756,833, an increase of $804,887 or 27% as compared to operating
expenses of $2,951,946 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 Group.

          EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits
for the third quarter of 1998, were $2,436,664, an increase of $554,725 or 29%
as compared to $1,881,939 for the same period in 1997. The increase related
primarily to greater staffing needs required to service new third-party
administration projects at Harden-CA, including the new employee costs related
to the PHA operation in Portland, Oregon.

          SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $1,320,169 and $1,070,007 for the quarters ended
September 30, 1998 and 1997, respectively.  The $250,162 or 23% 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-CA, including the new PHA operation in Portland, Oregon.

          INTEREST EXPENSE. Interest expense was $62,691 and $52,823, for the
third quarter of 1998 and 1997, respectively. The increase in interest expense
of $9,868 in the third quarter of 1998, as compared to the same period in 1997,
was due to the increase in borrowings under the bank term loan.

          AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
goodwill and other intangibles was $53,783 and $53,429, for the third quarter of
1998 and 1997, respectively.

INCOME TAXES

          Anchor's minimum annual required tax payment due was reported during
the first quarter of 1998 and 1997. Therefore, there was no income tax expense
reported for the quarters ended September 30, 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 $474,075 for
the nine months ended September 30, 1998, compared to net cash flows (used in)
operations of $(60,194) 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.

          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 the
owner of the $600,000  

                                       12
<PAGE>
 
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
September 30, 1998, $40,000 of the Debentures had been repaid in full, and
$60,000 remained outstanding.

          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 September 30, 1998, $140,000 of the Bridge Notes remained outstanding (for
further information, refer to Note 4 above).

          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.

          At the end of the third quarter 1998, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series B (the
"Series B Debentures").  As of November 6, 1998, Anchor had raised $60,000 and
had oral commitments from investors to purchase an additional $115,000 of the
Series B Debentures.   Anchor intends to utilize a substantial portion of the
proceeds from the Series B Debentures to support current and future working
capital needs of Anchor.  The basic terms of the Series B Debentures are:  (a)
10% interest, payable semi-annually in arrears; (b) two year maturity; (c)
conversion price of $0.50 per share; (d) "piggyback" registration rights for
three years; (e) for each $5,000 of Series B Debentures acquired, an investor
receives a five year warrant to acquire 2,000 shares of Anchor common stock at
an exercise price of $0.50 per share; (f) subordination provisions that
subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the
Series B Debentures);  (g)  provisions that permit Anchor to redeem the Series B
Debentures at par at any time;  and (h) provisions that give each purchaser a
one-time right to cause Anchor to redeem all or a portion of their Series B
Debentures, at par, plus any outstanding interest, in the event Anchor sells
Putnam, Knudsen & Wieking, Inc. ("PKW") for an amount in excess of $2 million.
Purchasers of the Series B Debentures as of November 6, 1998, consisted of four
members of the Board of Directors.

          Capital and certain acquisition related expenditures were $242,739 and
$56,516 for the nine months ended September 30, 1998 and 1997, respectively.
The larger 1998 expenditures primarily involved the acquisition of furniture,
fixtures and computer equipment at the new PHA, Portland, Oregon location.
During the first nine months of 1997, 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, located in
Concord, California.

          Short-term debt, current portion of long-term debt and current portion
of long-term liabilities at September 30, 1998, totaling in the aggregate
$904,400 (as compared to $1,203,216 at December 31, 1997) consisted of: (a)
$198,000 representing the current portion of a $1,741,841.30 term bank loan; (b)
approximately $78,000 of future fixed payments under a consulting agreement
entered into with a company affiliated with the former shareholders of Harden-
AZ; (c) $143,852 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 Debentures; (e)
$140,000 of the Bridge Notes; (f) approximately $118,500 representing
obligations relating to the purchase of furniture, fixtures and computer
equipment at the PHA location; and (g) approximately $166,048 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 

                                       13
<PAGE>
 
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.
 
          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 the
current working capital needs of Anchor in connection with Harden Group's
expansion in Portland, Oregon.
 
          On March 9, 1998, a 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 term loan were:  (a)  monthly
interest payments equal to bank's prime rate, plus 2.5%; (b) a maturity date of
October 5, 2002; and (c) monthly principal payments in installments of
$33,125.28 beginning on April 5, 1998.  All other terms and conditions contained
in the term loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remained in place.
 
          On June 2, 1998, a new term loan in the amount of $1,741,841.30 was
entered into between Anchor and the bank which replaced the $1,821,890.33 term
loan.  The basic terms of this new term loan are:  (a) monthly interest payments
equal to bank's prime rate, plus 2.5%; (b) a maturity date of October 5, 2002;
(c) monthly principal payments in installments of $16,500.00 beginning on June
5, 1998; and (d) deletion of the provision which required 75% of Anchor's
monthly EBITDA to be applied to principal to the extent such percentage of
monthly EBITDA was required to make the scheduled payment of principal.  All
other terms and conditions of the term loan dated September 30, 1997, including
all amendments thereto and replacements therefor, remain operative.
 
          At September 30, 1998, long-term liabilities and long-term debt, less
the current portion discussed above, totaled $1,871,303 (as compared to
$1,836,132 at December 31, 1997), and primarily consisted of:  (a) $1,460,167
representing the long-term portion outstanding under a $1,741,841.30 term bank
loan maintained and further described above;  (b) approximately $322,577
representing deferred rent with regard to certain real property currently leased
by Anchor;  and (c) approximately $88,559 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 UPDATE

          Anchor's plan to achieve Year 2000 compliance in its electronic
information systems is proceeding on schedule. The corporate team that has been
created to coordinate the identification and implementation of the necessary
changes required to computer systems and applications is well underway. The
initial impact assessment is being completed and the Year 2000 Project began in
October 1998.

          Anchor's team is working to complete the implementation of a Year 2000
compliant computer system together with other programming efforts by September
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 not expected to be material to the company's financial
position.  The total cost of the Year 2000 Project is presently not expected to
exceed $250,000.

          Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of its key
business partners, vendors and other suppliers, Anchor is unable to determine at
this time whether the consequences of Year 2000 failures will have a material
impact on Anchor's
                                       14
<PAGE>
 
results of operations, liquidity or financial condition. Anchor believes that,
with the completion of its current Year 2000 Project, as scheduled, the
possibility of significant interruptions of normal operations should be
minimized.

          Readers are cautioned that forward-looking statements contained in the
above should be read in conjunction with Anchor's disclosures below under the
heading "Forward-Looking Information".

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.
 
          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,  Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations  and Year 2000 Update, 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 Group'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

          At the present time Anchor's business consists of two basic
operations: (i) third-party administration services (Harden Group); and (ii)
property and casualty insurance brokerage (PKW).

          During the last several years, Anchor's third-party administration
services have experienced steady expansion. Revenues derived from the operations
of Harden Group, as a percentage of Anchor's overall revenues, have grown from
56% at September 30, 1996 to 80% at September 30, 1998. Conversely, Anchor's
property and casualty insurance business has been subjected to considerable
competition pressures through much of the 1990's. During this period the
insurance industry has generally experienced over capacity which, in turn, has
negatively impacted both insurance premiums and brokerage commissions. The
financial results of PKW have reflected theses developments.

          In light of these external and internal trends, the Board of Directors
engaged an outside consultant to conduct a comprehensive review of Anchor's
operations with a particular focus on the status of PKW.  In June 1998, the
consultant reported the results of its review.  After considering the report,
the Board of Directors directed the consultant to solicit possible qualified
purchasers of PKW.  As of November 6, 1998, Anchor has received several
preliminary proposals to acquire PKW.  These proposals have only recently been
received and are subject to numerous contingencies.  Anchor is carefully
reviewing the proposals and expects to proceed with a process which will result
in the sale of PKW or substantially all of its assets.

                                       15
<PAGE>
 
          Anchor's current strategy is to focus on expanding Harden Group, its
third-party administration services division 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 intends to seek to manage its affairs to
achieve expansion through internal growth of its existing and new product lines.
Anchor also intends to consider acquisition and merger opportunities in the
third-party administration services business.

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

4.8  Form of 10% Convertible Subordinated Debenture, Series B.

4.8a Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
     Underwriters, Inc.

27.0 Financial Data Schedule

B. Reports on Form 8-K

None

                                       16
<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.


                                        ANCHOR PACIFIC UNDERWRITERS, INC.
 
 
 
 
Date:    November 6, 1998               /s/ James R. Dunathan
       --------------------            --------------------------------------
                                        James R. Dunathan
                                        President and Chief Executive Officer
 
 
 
Date:    November 6, 1998               /s/ Earl Wiklund
       --------------------            --------------------------------------
                                        Earl Wiklund
                                        Senior Vice President 
                                        and Chief Financial Officer

                                       17