<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, 1999         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, 1999, the Registrant had 4,710,057 shares of common stock
outstanding.

                    This document is comprised of 18 pages

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

                                     INDEX

<TABLE>
<CAPTION>
<S>                                                                                    <C>        
PART I.   FINANCIAL INFORMATION
 
          ITEM 1.   Financial Statements:
          
          
                    Consolidated Balance Sheets, March 31, 1999 (unaudited) and
                    December 31, 1998...........................................        1
                    
                    Consolidated Statements of Operations (unaudited) for the
                    three                                                               3
                    months ended March 31, 1999 and 1998........................
                    
                    Consolidated Statements of Shareholders' Equity (Deficit)
                    for the three months ended March 31, 1999 (unaudited) and
                    year ended December 31, 1998................................        4
                    
                    Consolidated Statements of Cash Flows (unaudited ) for the
                    three                                                               5
                    months ended March 31, 1999 and 1998........................
                    
                    Notes to Consolidated Financial Statements..................        6

          ITEM 2.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations.........................        9
 
 
PART II.  OTHER INFORMATION
 
          ITEM 1.   Legal Proceedings...........................................       15
                    
          ITEM 2.   Changes in Securities.......................................       15
                    
          ITEM 3.   Defaults Upon Senior Securities.............................       15
                    
          ITEM 4.   Submission of Matters to a Vote of Security Holders.........       15
                    
          ITEM 5.   Other Information...........................................       15
                    
          ITEM 6.   Exhibits and Reports on Form 8-K............................       15
</TABLE>
<PAGE>
 
PART I - FINANCIAL INFORMATION


              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              March 31,              December 31,
                                                                 1999                    1998
                                                        -------------------     -------------------
                                                             (unaudited)     
<S>                                                     <C>                     <C>
ASSETS                                                                       
Current Assets:                                                              
 Cash and cash equivalents - corporate funds            $           224,778     $           138,139
 Cash and cash equivalents - third-party                                     
   administration fiduciary funds                                 3,717,461               3,517,772
 Realizable value of net assets sold                                      -               2,054,995
 Accounts receivable (less allowance for                                     
   doubtful accounts of $41,952 in                                           
   1999 and 1998, respectively)                                     434,099                 527,827
 Prepaid expenses and other current assets                          205,802                 191,749
                                                        -------------------     ------------------- 
Total current assets                                              4,582,140               6,430,482
                                                        -------------------     ------------------- 
                                                                             
Property and equipment                                            2,688,118               2,561,111
Accumulated depreciation and amortization                        (2,067,918)             (2,010,633)
                                                        -------------------     -------------------
                                                                    620,200                 550,478
Other assets:                                                                
 Intangible assets, net                                             577,403                 593,933
 Other                                                               83,192                  80,431
                                                        -------------------     ------------------- 
                                                                    660,595                 674,364
                                                        -------------------     -------------------
                                                                             
Total assets                                            $         5,862,935     $         7,655,324
                                                        ===================     ===================
</TABLE>

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

<TABLE> 
<CAPTION> 
                                                                  March 31,               December 31,
                                                                     1999                     1998
                                                            -------------------      --------------------
                                                                 (unaudited)
<S>                                                         <C>                      <C> 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
    Cash and cash equivalents - third-party
         administration fiduciary funds                     $         3,717,461      $          3,517,772
    Accounts payable                                                    563,561                   619,798
    Accrued expenses                                                    334,016                   613,256
    Short-term debt                                                           -                   200,000
    Current portion of long-term debt                                   426,193                 1,242,950
    Current portion of long-term liabilities                            399,175                   451,068
                                                            -------------------      -------------------- 
Total current liabilities                                             5,440,406                 6,644,844
                                                            -------------------      -------------------- 
 

Long-term liabilities                                                   417,859                   453,226
                                                            -------------------      --------------------
 
 
Long-term debt, including $315,000 and $480,000 in
 1999 and 1998, respectively, owed to related                           
 parties                                                                861,341                   858,342
                                                            -------------------      --------------------
 
  
Shareholders' equity (deficit):
    Preferred stock - $.02 par value; 2,000,000
     shares
      authorized; none issued and outstanding
    Common stock  - $.02 par value; 16,000,000
      shares authorized; 4,710,057 shares issued as                      
      of 3/31/99 and 12/31/98                                            94,201                    94,201
    Additional paid-in capital                                        4,232,265                 4,232,265
    Accumulated deficit                                              (5,183,137)               (4,627,554)
                                                            -------------------      -------------------- 
Total shareholders' equity (deficit)                                   (856,671)                 (301,088)
                                                            -------------------      --------------------
Total liabilities and shareholders' equity (deficit)        $         5,862,935      $          7,655,324
                                                            ====================     =====================
</TABLE>

    See accompanying notes.

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

<TABLE>
<CAPTION>
                                                                                    Three Months
                                                                                   Ended March 31,
                                                            ---------------------------------------------------------
                                                                        1999                            1998
<S>                                                         <C>                              <C>
Revenues:
    Administrative fees and other income                    $               2,467,645        $              3,386,653
    Interest income                                                             6,237                           3,766
                                                            -------------------------        ------------------------
Total revenue                                                               2,473,882                       3,390,419
                                                            -------------------------        ------------------------
 
Operating expenses:
    Salaries, commissions and employee benefits                             1,915,220                       2,105,540
    Selling, general and administrative expenses                            1,097,948                       1,220,113
                                                            -------------------------        ------------------------
Total operating expenses                                                    3,013,168                       3,325,653
                                                            -------------------------        ------------------------
 
                                                                             (539,286)                         64,766
                                                            -------------------------        ------------------------
 
 
Other income (expense):
    Amortization of goodwill and intangible assets                            (16,530)                        (11,267)
    Interest                                                                  (34,819)                        (65,646)
    Other                                                                      39,922                           4,764
                                                            -------------------------        ------------------------
Total other income (expense)                                                  (11,427)                        (72,149)
                                                            -------------------------        ------------------------ 
 
Loss before income taxes                                                     (550,713)                         (7,383)
 
Benefit (provision) for income taxes                                           (4,870)                         20,180
                                                            -------------------------        ------------------------
 
Income (loss) from continuing operations                                     (555,583)                         12,797
                                                            -------------------------        ------------------------
 
Discontinued operations:
     Income from discontinued operations, net of
          Income taxes                                                              -                          39,601
                                                            -------------------------        ------------------------
Income from discontinued operations                                                 -                          39,601
                                                            -------------------------        ------------------------
 
Net income (loss)                                           $                (555,583)       $                 52,398
                                                            =========================        ========================
 
Net income (loss) per share:
     Loss from continuing operations                        $                   (0.12)       $                      -
     Income from discontinued operations                                            -                            0.01
                                                            -------------------------        ------------------------ 
 
Basic and diluted income (loss) per common share            $                   (0.12)       $                   0.01
                                                            -------------------------        ------------------------
 
Weighted average number of common shares
    outstanding                                                             4,710,057                       4,710,060
                                                            -------------------------        ------------------------
</TABLE>

    See accompanying notes

                                       3
<PAGE>
 
                       ANCHOR PACIFIC UNDERWRITERS, INC.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                                Additional        
                                       Common Stock               Paid-In         Accumulated
                                  Shares          Amount          Capital          (Deficit)            Total
                            ---------------------------------------------------------------------------------------
<S>                         <C>                 <C>             <C>               <C>                <C>
Balance at December 31,
      1997                         4,690,839    $     93,817    $  4,215,649      $  (3,852,224)     $     457,242
 
   Stock issued for services
      rendered                        18,888             378          16,622                  -             17,000
   Canceled stock -
      Fractional shares                  330               6              (6)                 -                  -
 
    Net loss                               -               -               -           (775,330)          (775,330)
                            ---------------------------------------------------------------------------------------
 
 
Balance at December 31,
      1998                         4,710,057    $     94,201    $  4,232,265      $  (4,627,554)     $    (301,088)
 
    Net Loss                               -               -               -           (555,583)          (555,583)
                            ---------------------------------------------------------------------------------------
 
Balance at March 31, 1999
   (Unaudited)                     4,710,057    $     94,201    $  4,232,265      $  (5,183,137)     $    (856,671)
                            =======================================================================================
</TABLE>

See accompanying notes

                                       4
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 Three Months
                                                                                Ended March 31,
                                                             --------------------------------------------------
                                                                       1999                         1998
<S>                                                          <C>                         <C>
CONTINUING OPERATIONS ACTIVITIES:
Net income (loss)                                            $             (555,583)     $               52,398
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
      Depreciation and amortization                                          57,283                      69,317
      Amortization of goodwill, other intangibles
       and organization expenses                                             16,530                      11,267
      Stock issued for services                                                   -                      17,000
Changes in operating assets and liabilities, net
  of effect of purchases of subsidiaries:
      Accounts receivable                                                    93,728                     (28,988)
      Prepaid expenses and other current assets                             (14,056)                     71,192
      Other assets                                                           (2,759)                    (24,232)
      Accounts payable and accrued expenses                                (445,484)                      5,056
                                                             -----------------------     -----------------------
Net cash provided by (used in) operating activities                        (850,341)                    173,010
                                                             -----------------------     -----------------------
 
INVESTMENT ACTIVITIES:
Purchases of property and equipment                                        (127,005)                    (19,291)
Net proceeds from sale of assets                                          2,165,003                           -
                                                             -----------------------     -----------------------
Net cash provided by (used in) investing activities                       2,037,998                     (19,291)
                                                             -----------------------     -----------------------
 
 
FINANCING ACTIVITIES:
Borrowings on long-term debt                                                 86,639                     200,000
Repayment on long-term debt and liabilities                              (1,186,018)                   (227,975)
                                                             -----------------------     -----------------------
Net cash (used in) financing activities                                  (1,101,018)                    (27,975)
                                                             -----------------------     -----------------------
 
Net increase in cash                                                         85,000                     125,744
Cash and cash equivalents-corporate funds at
   beginning of period                                                      138,139                      44,384
                                                             -----------------------     -----------------------
Cash and cash equivalents-corporate funds at
   end of period                                             $              224,778      $              170,128
                                                             -----------------------     -----------------------
 
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
     Interest                                                $               34,819      $               64,646
                                                             -----------------------     -----------------------
     Income taxes                                            $                4,870      $                6,220
                                                             -----------------------     -----------------------
</TABLE>

See accompanying notes

                                       5
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                MARCH 31, 1999

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, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998.

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

          Prior years' balances have been reclassified to conform with the
current year presentation of discontinued operations.

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.

NOTE 2 - DISCONTINUED OPERATIONS
--------------------------------

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

          During the period from 1990 through 1996, Anchor further expanded its
property and casualty business by acquiring certain assets, including insurance
brokerage accounts. In 1994 Anchor acquired a property and casualty insurance
brokerage company, Putnam, Knudsen & Wieking, Inc. ("PKW"). Shortly thereafter
it consolidated all of its property and casualty insurance brokerage business
under PKW. After evaluating trends in the insurance industry in mid-1998, the
Board of Directors of Anchor decided to sell its property and casualty business
and to focus on its third-party administration business. Anchor then engaged an
independent investment banker to solicit possible purchasers. After reviewing
seven acquisition proposals, Anchor sold substantially all the assets of PKW to
an unrelated third party for approximately $2,250,000 in cash, effective
December 31, 1998. The proceeds derived from the asset sale were largely used to
reduce debt and to make additional financial resources available for working
capital needs and third-party administration opportunities.
 
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 - 10% CONVERTIBLE SUBORDINATED DEBENTURES
------------------------------------------------

          In 1995, Anchor issued $370,000 of 10% Convertible Subordinated
Debentures (the "Debentures"). Subsequently, investors holding $270,000 of the
Debentures, including seven members of the Board of Directors, converted their
debentures into 200,000 shares of Anchor's common stock at $1.35 per share.
These conversions reduced Anchor's outstanding indebtedness by $270,000 and, in
turn, increased shareholders' equity by $270,000. As of March 31, 1999, $40,000
of the Debentures had been repaid in full, and $60,000 remained outstanding.

NOTE 5 - 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 purchase 1,000 shares of Anchor
common stock at a purchase price of $1.75 per share; (d) "piggyback"
registration rights for three years; and (e) subordination provisions that
subordinate the Bridge Notes to Anchor's "Senior Debt" (as defined in the Bridge
Notes).
 
          In February 1997, Anchor offered the purchasers of said Bridge Notes
an opportunity to either change the terms of the warrants underlying the Bridge
Notes or to participate in the 1997 Offering (discussed below), by exchanging
the Bridge Notes. The basic terms of the 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 March 31, 1999, $80,000 of the Bridge Notes
remained outstanding.

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

          During 1997, Anchor raised $305,000 from seven members of the Board of
Directors and other qualified investors through a private offering of Anchor
common stock along with warrants to acquire shares of Anchor common stock (the
"1997 Offering"). 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"). At the close of said offering on January 25, 1999,
Anchor had raised $495,000, $200,000 from its primary bank lender and the
remaining $295,000 from five members of the Board of Directors and other
qualified investors. Anchor has utilized a substantial portion of the proceeds
from the Series B Debentures to support current working capital needs. The basic
terms of the Series B Debentures were: (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 received a five year warrant to acquire 2,000
shares of Anchor common stock at an exercise price of $0.50 per share; and (f)
subordination provisions that subordinate the Series B Debentures to Anchor's
"Senior Debt" (as defined in the Series B Debentures). The Series B Debentures
contained a provision that permit Anchor to redeem all or a portion of their
Series B Debentures, at par, plus any outstanding interest, in the event Anchor
sold PKW for an amount in excess of $2 million. Anchor sold PKW for $2,250,000
cash, effective December 31, 1998. As of March 31, 1999, Anchor has repurchased
$230,000 of

                                       7
<PAGE>
 
the Series B Debentures including $200,000 repurchased from its primary lender.

NOTE 8 - 10% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES C
----------------------------------------------------------

          At the end of the first quarter 1999, Anchor commenced raising
additional funds from members of the Board of Directors and other qualified
investors by offering 10% Convertible Subordinated Debentures, Series C (the
"Series C Debentures"). As of March 31, 1998, Anchor had raised $50,000 and had
oral commitments from investors to purchase an additional $100,000 of Series C
Debentures. Anchor intends to utilize a substantial portion of the proceeds from
the Series C Debentures to support current and future working capital needs of
Anchor. The basic terms of the Series C Debentures are: (a) 10% interest,
payable semi-annually in arrears; (b) two year maturity; (c) conversion price of
$0.60 per share; (d) "Piggyback" registration rights for three years; (e) for
each $5,000 of Series C Debentures acquired, an investor receives a five year
warrant to acquire 2,000 shares of Anchor common stock at an exercise price of
$0.60 per share; and (f) subordination provisions that subordinate the Series C
Debentures to Anchor's "Senior Debt" (as defined in the Series C Debentures).

NOTE 9 - COMMITMENTS
--------------------

          On September 30, 1997, Anchor obtained a $1,600,000 bank loan. The
basic terms and conditions of this loan were: (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 (notwithstanding the foregoing
payment provisions, 75% of Anchor's monthly EBITDA were to be applied to
principal payments to the extent such percentage of monthly EBITDA was required
to make the scheduled payment of principal. To the extent that 75% of monthly
EBITDA fell short of the required principal payment, the difference was to 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
current working capital needs of Anchor in connection with Harden's expansion in
Portland, Oregon.

          On March 9, 1998, a term loan in the amount of $1,821,890 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) maturity date of October 5,
2002; and (c) monthly principal payments in installments of $33,125 beginning
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 was
entered into between Anchor and the bank which replaced the $1,821,890 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;
and (c) monthly principal payments in installments of $16,500 beginning on June
5, 1998. The provision which required 75% of Anchor's monthly EBITDA to be
applied to principal payments was deleted. All other terms and conditions of the
term loan dated September 30, 1997, including all amendments thereto and
replacements therefor, remain operative.
 
          Effective December 31, 1998, based on a strategic decision to focus on
its third-party administration business, a purchase agreement was entered into
between PKW, Anchor and Talbot Agency of California, Inc. ("Talbot") whereby
Talbot acquired certain of PKW assets, including insurance brokerage accounts.
Consideration for said purchase was $2,250,000 cash which was paid at the time
of the closing on January 15, 1999, based on a purchase price of 4.5 times
EBITA. The proceeds of the sale have been used by Anchor to reduce debt and to
direct additional resources to third-party administration opportunities.
<PAGE>
 
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 & Company Insurance Services, Inc., a
third-party employee benefits administrator ("Harden"), from Alex Brown
Financial Group. Anchor was reorganized as a private California corporation in
March 1987, and reincorporated in January 1995, as a Delaware corporation in
connection with a merger with System Industries, Inc. ("System"). As a result of
the merger, Anchor became a public company.
 
          Since its inception, Anchor has expanded its insurance and third-party
administration service capabilities through internal growth as well as a series
of acquisitions. As part of its expansion strategy in 1994, Anchor acquired
Benefit Resources, Inc. ("BRI") a third-party employee benefits administration
business located in Scottsdale, Arizona. In 1998, Anchor caused BRI to change
its name to Harden & Company of Arizona, ('Harden-AZ"). In 1995, certain third-
party administration accounts were acquired by Harden-CA from Dutcher Insurance
Agency, Inc. ("Dutcher"), located in Stockton, California. In July 1997, Harden-
CA took over a third-party administration business, located in Los Angeles,
California, that was previously serviced by an unrelated third party. As a
result of declining revenues on the Los Angeles business due to carrier rate
increases, the Los Angeles office was closed at the end of February 1999, with
the remaining business now being serviced from the Concord, California office.
 
          Effective January 1, 1998, Anchor and Harden-CA entered into an
agreement to acquire the third-party administration business of Pacific Heritage
Administrators ("PHA"), a firm based in Portland, Oregon. This contract allowed
Harden Group to expand its marketing and servicing territory in Oregon,
Washington, Idaho and Nevada and substantially enhanced the Harden Group's
revenues in 1998.

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

          Under Harden Group identity, 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 throughout the Western States from six
offices located in Concord and Fresno, California; Scottsdale, Arizona;
Portland, Oregon; and Las Vegas and Reno, Nevada. Anchor continues to look for
opportunities to expand its third-party administration services in the Western
United States.

GENERAL

CONTINUING OPERATIONS

          THIRD-PARTY CLAIMS ADMINISTRATION AND EMPLOYEE BENEFITS CONSULTING

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

                                       9
<PAGE>
 
          During the past year, Anchor has sought to take steps to strengthen
Harden Group's management and sales and marketing staff by hiring additional
seasoned executives. Product development and new product sales continue to be a
high priority, as does geographical diversification into other marketing
territories in the western states.

DISCONTINUED OPERATIONS

          INSURANCE BROKERAGE

          Anchor first entered the insurance brokerage business in 1990 through
an acquisition. Thereafter it grew its insurance brokerage business primarily
through acquisitions, the largest being PKW. Following the 1994 acquisition of
PKW, Anchor consolidated all of its property and casualty insurance brokerage
business into PKW. This segment of Anchor's business focused on property and
casualty (both commercial and personal lines), health, life and disability, as
well as workers' compensation. PKW acted as an agent on behalf of insurers and
other intermediaries in soliciting, negotiating and effecting contracts of
insurance, and as a broker in procuring insurance contracts on behalf of
insureds.

          As an insurance agent and broker, PKW derived its income from the sale
of insurance products and services and the receipt of commissions generated
therefrom. Effective as of December 31, 1998, Anchor sold certain assets,
including all of the insurance brokerage accounts of PKW, for approximately
$2,250,000 in cash. The proceeds derived from the PKW asset sale were largely
used to reduce debt and to make additional financial resources available for
working capital needs and third-party administration opportunities.

RESULTS OF CONTINUING OPERATIONS -- QUARTERS ENDED MARCH 31, 1999 AND 1998

RECLASSIFICATIONS

          The prior years' balances detailed below have been reclassified to
conform with the current year presentation of discontinued operations.

REVENUES

          TOTAL REVENUES.  Total revenues for the first quarter of 1999, were
$2,473,882, a decrease of $916,537 or (27.0)%, as compared to 1998 first quarter
revenues of $3,390,419. The decrease in revenue in this three month period was
primarily due to the declining revenues in Harden Group's Los Angeles office as
a result of carrier rate increases. 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.

          FEES.  Fees from Harden Group (including underwriting and risk
analysis) services for the first quarter of 1999, were $2,467,645, a decrease of
$919,008 or (27.1)%, as compared to $3,386,653 in fees for the same period in
1998. This decrease in fee income is the direct result of declining revenue
generated from Harden Group's Los Angeles office.

          Fee revenues generated by Anchor in the first quarter of 1999 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. 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.

          INTEREST INCOME.  Interest income consists of interest earned on funds
held in fiduciary accounts and interest earned on investments. Interest income
was $6,237 and $3,766 for the three months ended March 31, 1999 and 1998,
respectively.

                                      10
<PAGE>
 
EXPENSES

          TOTAL EXPENSES.  Total operating expenses for the first quarter of
1999, were $3,013,168, a decrease of $312,485 or (9.4)% as compared to operating
expenses of $3,325,653 for the same period in 1998. As discussed below, the
decrease in total expenses resulted primarily from a decrease in selling,
general and administration expenses and employee compensation and benefits
resulting from the decrease of third-party administration services business at
Harden Group's Los Angeles office.

          EMPLOYEE COMPENSATION AND BENEFITS.  Employee compensation and
benefits for the first quarter of 1999, were $1,915,220, a decrease of $190,320
or (9.0)% as compared to $2,105,540 for the same period in 1998. The decrease
related primarily to the closure of Harden Group's Los Angeles office.

          SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $1,097,948 and $1,220,113 for the quarters ended
March 31, 1999 and 1998, respectively. The $122,165 or (10.0)% decrease in 1999,
as compared to 1998, resulted primarily from a closure of Harden Group's Los
Angeles office. General and administrative expenses include rent, travel,
insurance, postage, telephone, supplies and other miscellaneous expenses.

          INTEREST EXPENSE.  Interest expense was $34,819 and $65,646, for the
first quarter of 1999 and 1998, respectively. The decrease in interest expense
of $30,827 in the first quarter of 1999, as compared to the same period in 1998,
was due to the decrease in borrowings under the bank term 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
$16,530 and $11,267, for the first quarter of 1999 and 1998, respectively. The
increase in amortization and other intangibles is a result of increased
intangibles at Harden-AZ.

INCOME TAXES

          Anchor's expense for income taxes was $4,870 for the first quarter of
1999 as compared to a benefit for income taxes of $20,180 for the first quarter
of 1998.

LIQUIDITY AND CAPITAL RESOURCES

          Anchor reported net cash flows (used in) by operations of $(850,341)
for the first quarter ended March 31, 1999, compared to net cash flows provided
by operations of $173,010 for the same period in 1998. During 1999, Anchor
repaid $800,000 of the existing line of credit and met its operating and capital
needs from various sources, including the use of proceeds received from the sale
of PKW and the use of proceeds received from the sale of Series C Debentures.

          Capital and certain acquisition related expenditures were $127,005 and
$19,291 for the three months ended March 1999 and 1998, respectively.  The 1999
expenditures primarily involved expenditures related to software development and
implementation to update the eligibility and claims processing system.
 
          Short-term borrowings, current portion of long-term debt and current
portion of long-term liabilities at March 31, 1999, totaling in the aggregate
$825,368 (as compared to $1,894,018 at December 31, 1998), consisted of: (a)
$198,000 representing the current portion of a term bank loan further described
in footnote 9 to the Financial Statements, above; (b) approximately $104,484 of
future fixed payments under a consulting agreement entered into with a company
affiliated with the former shareholders of Harden-AZ; (c) $66,983 representing
the current portion of obligations with regard to certain real property leased
by PKW prior its acquisition by Anchor and relocation to Anchor's executive
offices; (d) $60,000 of the Debentures; (e) $80,000 of the Bridge Notes; (f)
approximately $71,100 representing obligations relating to the purchase of
furniture, fixtures and computer equipment at the PHA location; and (g)
approximately $244,801 for certain other current liabilities.

                                      11
<PAGE>
 
          At March 31, 1999, long-term liabilities and long-term debt, less the
current portion discussed above, totaled $1,279,200 (as compared to $1,311,568
at December 31, 1998), and primarily consisted of: (a) $546,341 representing the
long-term portion outstanding under a term bank loan further described in
footnote 9 to the Financial Statements, above; (b) approximately $333,013
representing deferred rent with regard to certain real property currently leased
by Anchor; (c) $265,000 of Series B Debentures; (d) $50,000 of Series C
Debentures; and (e) approximately $84,846 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 the 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. Following the sale of PKW, Anchor has assumed
these remaining obligations which expire on November 30, 1999.

          Reference is made to footnotes 4 through 9 to the Financial Statements
included in this Form 10-Q for further information on Anchor's fund raising
activities and borrowings from its primary bank lender.

          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. A team has been created to
coordinate the identification and implementation of the necessary changes
required for computer systems and applications. Anchor has hired an outside
computer consultant, OASYS Networks, Inc. ("OASYS"), to assist in the management
of the Year 2000 project. OASYS will be providing a Limited-Scope Assessment
which is expected to provide a detailed analysis of all networked "objects" and
compliance information on all installed applications that are not specific to
the insurance industry, and will be limited to the PC, PC Network, and
associated peripherals environment. During the course of this assessment, which
is expected to be completed by end of the third quarter 1999. OASYS will:

          1.   Develop an assessment project plan and a schedule to be approved
               by Anchor.

          2.   Prepare a comprehensive inventory of network environment
               (Hardware). In connection with preparing such inventory, OASYS
               will identify and asset tag all equipment, record serial numbers,
               identify installed devices and identify BIOS manufacture and
               version information.

          3.   Integrate Anchor's existing Year 2000 data into the OASYS reports
               and procedures, where applicable.

          4.   Conduct a comprehensive inventory of network environment
               (Software/Firmware).

          5.   Test all functional computer hardware for Year 2000 and leap year
               compliance, where applicable.

          6.   Collect compliance statements from vendors for non-testable
               hardware equipment (modems, routers, etc.). Cross-reference
               compliance data with Anchor's existing data, where applicable.

          7.   Research and report compliance data on all COTS (Common Off The
               Shelf) applications.

          8.   Build a project binder to track compliance statements and
               document all testing of hardware objects.

          9.   Interview key personnel to identify various dependencies and
               interface risks that are not immediately apparent through the
               physical inventory process.

          10.  Confer with Anchor's team to prioritize issues and create a
               Mission Critical listing of all hardware, software, dependencies
               and interfaces.

          11.  Provide a database to Anchor which will be used to identify and
               track all new hardware objects introduced into the environment.

          12.  Prepare a closing Risk Analysis report.

          In addition, the OASYS team began providing Year 2000 Inbound and
Outbound Compliance Communications on April 1, 1999. Inbound Year 2000
Compliance Communications involve requests from outside parties (such as
venders, suppliers, etc.) for information and status on Anchor's Year 2000
compliance. Once received, OASYS is expected to respond, document, track and
service such requests with periodic summaries being reported to Anchor's team.
Outbound Year 2000 Compliance Communications are requests

                                      12
<PAGE>
 
initiated by Anchor seeking the status of another entities' Year 2000
compliance. These requests are being initiated, documented and tracked by OASYS.

          Anchor's team is also focused on obtaining mainframe Year 2000
compliance at its three principal offices located in Concord, California,
Scottsdale, Arizona and Portland, Oregon. The status of the effort for each
office is described below.

            HARDEN-CA (CONCORD, CA):
            ------------------------

            Hardware:             Current operating system is under review;
                                  scheduled compliance by the end of third
                                  quarter 1999.
            Software:             Both the billing and claims systems are being
                                  upgraded; scheduled compliance by the end of
                                  third quarter 1999.
            Conversion:           Converting the entire system to the Resource
                                  Information Management System, version 2.7
                                  ("RIMS"), which is Year 2000 compliant.
                                  Conversion scheduled for completion by mid-
                                  year 2000.

            HARDEN-AZ (SCOTTSDALE, AZ):
            ---------------------------
 
            Hardware:             Current operating system is Year 2000
                                  compliant.
            Software:             Currently on RIMS, 2.7 which is Year 2000
                                  compliant.
            Upgrades:             Recently upgraded software and hardware.
 
            HARDEN-PHA (PORTLAND, OR):
            --------------------------
 
            Hardware:             Current operating system is under review;
                                  scheduled compliance by the end of third
                                  quarter 1999.
            Software:             Claims system is currently Year 2000
                                  compliant. Billing system is being upgraded,
                                  scheduled compliance by the end of second
                                  quarter 1999.
            Conversion:           Converting entire system to RIMS, which is
                                  Year 2000 compliant. Conversion scheduled for
                                  completion by year-end 2000.

          Anchor's team is working to complete programming efforts for the Year
2000 related projects by September 30, 1999, with final certification testing
occurring during 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 estimated total cost of the
Year 2000 Project is expected to not exceed $250,000.

          The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect Anchor's results
of operations, liquidity and financial condition. 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 results of operations,
liquidity or financial condition. Anchor believes that, with the completion of
the Project as currently scheduled, the possibility of significant interruptions
of normal operations should be reduced.

          Readers are cautioned that forward-looking statements contained in the
Year 2000 Update should be read in conjunction with Anchor's disclosures below
under the head "Forward-Looking Information".

                                      13
<PAGE>
 
          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 Annual Report. Statements in this Quarterly
Report, particularly in the Notes to 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
new insurance carriers 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
health insurance markets; and unanticipated regulatory changes.

STRATEGY

          Until recently, Anchor's business has consisted 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
57% at December 31, 1996 to 80% at December 31, 1998. Conversely, Anchor's
property and casualty insurance business has been subjected to considerable
competitive 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 these developments.

          In light of these external and internal trends, the Board of Directors
made a strategic decision to sell PKW, the property and casualty insurance
brokerage operation. This transaction was completed, effective December 31,
1998.

          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 additional acquisition and merger opportunities
in the third-party administration services business.

                                      14
<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

4.9       Form of 10% Convertible Subordinated Debenture, Series C.

4.9a      Form of Warrant to Purchase Shares of Common Stock of Anchor Pacific
          Underwriters, Inc.

10.2a     Sublease dated as of January 1, 1999, between Anchor and Talbot Agency
          of California, Inc. (regarding 1800 Sutter Street, Suite 500, Concord,
          California).

10.34     Office Lease dated January 29, 1999 between Harden and Columbia
          Square, L.L.C. (regarding 111 SW Columbia, Suite 600, Portland,
          Oregon).

27.0      Financial Data Schedule

B.  Reports on Form 8-K

None

                                      15
<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:   May 10, 1999          /s/ James R. Dunathan
       ----------------       --------------------------------------------------
                              James R. Dunathan
                              President and Chief Executive Officer
                             
                             
Date:   May 10, 1999          /s/ Earl Wiklund
       ----------------       --------------------------------------------------
                              Earl Wiklund
                              Senior Vice President and Chief Financial Officer

                                      16