NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2001

The accompanying consolidated balance sheet as of September 30, 2001, consolidated statements of operations for the three months ended September 30, 2001 and 2000, consolidated statements of operations for the nine months ended September 30, 2001 and 2000, and consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000 have been prepared by Anchor Pacific Underwriters, Inc. (unless otherwise noted, "the Company," "Anchor Pacific," "Anchor," "we," "APU," "us," or "our," refers to Anchor Pacific Underwriters, Inc.) and have not been audited. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Sates of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements, in our opinion, include all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for all periods presented. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual Report on Form 10-K filed for the year ended December 31, 2000, which provides further information regarding our significant accounting policies and other financial and operating information. Interim operating results are not necessarily indicative of operating results for the full year or any other future period.

The consolidated financial statements include the accounts of APU and its wholly owned subsidiaries, Ward Benefits Administrators & Insurance Services, Inc. ("WBAIS"), formerly known as Harden & Company Insurance Services, Inc., Harden & Company of Arizona ("Harden-AZ") and Spectrum Managed Care of California, Inc. ("Spectrum CA"). Commencing in mid-2000 WBAIS and Harden-AZ operated under the common business name "Ward Benefits Administrators" (WBAIS and Harden-AZ may collectively be referred to as "WBA" or the "WBA companies"). All significant intercompany accounts and transactions have been eliminated.

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

During 1998, 1999 and 2000, the Company has incurred substantial operating losses and has used approximately $2,783,000 of cash in its operations. At September 30, 2001, the Company had negative working capital of $7,219,632 and a deficiency in assets of $6,110,872. The Company is in violation of the terms of substantially all of its debt. Over the last year, the Company has received financing from its majority shareholder, Ward North America Holding, Inc. ("WNAH"). Management has been notified by WNAH that it does not intend to provide any further financing in support of the Company's operations. Effective January 1, 2002, the Company discontinued the WBA companies' plan administration business (Note 9). The Company's consolidated financial statements have been reclassified to reflect the discontinuation of WBA's operations. Accordingly, the revenues and operating and other expenses of WBA have been reported as "Discontinued Operations."

Management is attempting to develop a plan to restructure Anchor's debt, raise additional working capital, and continue to operate Spectrum CA; the Company's managed care subsidiary (Note 4). The assets and business of Anchor and Spectrum CA are encumbered by collateral security interests granted for loans made by Anchor's commercial bank and Legion Insurance Company ("Legion"), both of which are in default. Neither Anchor nor Spectrum CA has capital resources sufficient to cure the loan defaults and, as a result, their assets could be subjected to foreclosure by either secured lender. Anchor and Spectrum CA also owe significant sums to other unsecured creditors and lenders, including the Novaeon, Inc. bankruptcy estate and WNAH and its subsidiaries including Ward North America, Inc. ("WNA"). In the event a secured creditor of Anchor or Spectrum CA commences legal action to collect its debt or enforce its security interests or the Company suffers an adverse outcome in its pending litigation, it is foreseeable that Anchor, and/or Spectrum CA would file for Chapter 11 bankruptcy protection to preserve their assets and ongoing operations.

In 2002, WBAIS plans to make a general assignment of its assets for the benefit of creditors to facilitate a workout of its debt under an arrangement that is similar to bankruptcy liquidation. The assignee under such an assignment is granted rights under state law similar to those of a federal bankruptcy trustee, including the right to take possession of a debtor's assets, recover avoidable transfers of property for the benefit of all creditors, pursue and compromise claims on behalf of the debtor, and administer the equitable distribution of the debtor's assets among its creditors.

The continuation of the Company as a going concern is dependent on the successful implementation of a refinancing plan and the retention of Spectrum CA's managed care operations. Any such refinancing plan will likely require Anchor's debt to be restructured or all or portions of it converted to Anchor equity securities. Any such plan will also likely require the Company to raise substantial additional working capital. There can be no assurance that such a plan will be developed and successfully implemented.

Continuing Operations

Revenue from continuing operations consists of service fees for managed care services performed by Spectrum CA telephonic medical case management and field medical case management. Such services are performed under various fee arrangements, including flat fees for specified procedures and on an hourly fee basis. Fee income is recognized when services are rendered.

Discontinued Operations

Third-party administrative services were provided through WBA. Revenue consisted primarily of fees charged for the administration of fully insured and self-insured health plans. Fee income was recognized when services were rendered.

The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments. SFAS No. 133, which is effective for the Company beginning January 1, 2001, requires that entities recognize all derivatives as either assets or liabilities on the balance sheet, and measure those instruments at fair value. The Company does not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of its foreign subsidiaries. The adoption of SFAS No. 133 did not have a material impact on the Company's consolidated results of operations, financial position, or cash flows.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." These Statements change the accounting for business combinations and goodwill. SFAS No.141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's consolidated results of operations, financial position, or cash flows. SFAS No. 142 changes the accounting for goodwill and certain intangible assets from an amortization method to an impairment-only approach. The Company has not yet determined whether the adoption of SFAS No. 142 will have a material impact on the Company's consolidated results of operations, financial position, or cash flows.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 will be adopted January 1, 2002. The Company has not yet determined whether the adoption of SFAS No. 144 will have a material impact on the Company's consolidated results of operations, financial position, or cash flows.

In January 2001, Anchor entered the managed care service business by purchasing substantially all of the assets and business of Novaeon, Inc. ("Novaeon" and the "Novaeon Assets") from Novaeon's Chapter 11 bankruptcy estate. Prior to its bankruptcy, Novaeon performed utilization review, peer review, pre-certification, medical bill review and both telephonic and field medical case management services on a national basis.

The purchase of the Novaeon Assets was consummated pursuant to an asset purchase agreement between the parties dated December 28, 2000 (the "Novaeon Asset Purchase Agreement"), the terms of which were approved by the Bankruptcy Court for the Eastern District of Pennsylvania (Bankruptcy No. 00-18821 BIF). The purchase price under the Novaeon Asset Purchase Agreement was payable at the closing by a cash down payment of $1,500,000 and delivery of Anchor's contingent promissory note in the principal amount of $3,500,000 (the "Novaeon Note") due on April 30, 2002. APU transferred the Novaeon assets to a newly created subsidiary, Spectrum CA. The terms of the Novaeon Note provide for the principal amount to be reduced on a dollar-for-dollar basis in the event the business operated by Anchor using the Novaeon Assets realizes less than $10,000,000 in revenue during the calendar year 2001. In no event, however, shall the principal amount of the Novaeon Note be reduced below $500,000. For the year ended December 31, 2001, Spectrum CA reported revenues of $4,673,678, resulting in reduction of the principal amount of the Novaeon Note to $500,000. Anchor accounted for the Novaeon acquisition using the purchase method of accounting. The tangible assets and goodwill recorded at acquisition were $1,477,000 and $547,000, respectively, taking into consideration the reduction in purchase price described above. Goodwill is being amortized over 10 years.

The Company is currently in negotiations with Novaeon to amend the payment date of the Novaeon Note into several payments over an extended period of time.

In order to finance the Novaeon acquisition and provide working capital for its new managed care service business, Anchor obtained a secured convertible loan from Legion in the amount of $2,000,000 (the "Legion Loan") due on December 31, 2001. Anchor used $1,500,000 of the Legion Loan proceeds for the required down payment. The balance of the proceeds was later transferred to Anchor to pay back part of the line of credit outstanding and short-term borrowings with WNAH. The note evidencing the Legion Loan (the "Legion Note") provided for its automatic redemption in exchange for the issuance of Anchor equity securities upon the completion by the Company of an equity offering by June 30, 2001 resulting in gross proceeds of at least $3,000,000. The repayment of the Legion Loan is secured by a security interest in favor of Legion encumbering all the Novaeon Assets pursuant to the terms of a Security Agreement between the parties dated January 12, 2001.

The Legion Loan was obtained through the cooperation and assistance of WNAH. As a condition of making the Legion Loan, Legion required WNAH to enter into a Note Purchase Agreement dated January 12, 2001 (the "Legion Note Purchase Agreement"). The Legion Note Purchase Agreement granted Legion the option to cause WNAH to purchase the Legion Note from Legion in the event Anchor failed to complete an equity offering by June 30, 2001. The consideration for the purchase of the Legion Note under the Legion Note Purchase Agreement is the issuance of WNAH common stock having an aggregate value of $2,000,000 (plus the sum of unpaid interest under the Legion Note) at an agreed value of $4 per share.

In conjunction with the Legion Note Purchase Agreement, Anchor and WNAH entered into an assignment and assumption agreement dated January 12, 2001 in which Anchor agreed that in the event that (i) Anchor failed to complete a $3,000,000 equity offering by June 30, 2001 and (ii) Legion exercised its option to cause WNAH to purchase the Legion Note under the Legion Note Purchase Agreement, WNAH, as the transferee holder of the Legion Note, would have the right to acquire all of the equity securities of Spectrum CA from Anchor in exchange for the cancellation and release of all Anchor's repayment obligations under the Legion Note and the assumption by WNAH of all Anchor's repayment obligations to Novaeon's bankruptcy estate under the Novaeon Note.

Anchor was unable to complete a $3,000,000 equity offering or repay the Legion Note by June 30, 2001 as contemplated at the time of the Novaeon acquisition. The Legion Note was subsequently amended by the parties to extend the maturity date to December 31, 2001. The Legion Note Purchase Agreement was also

amended by Legion and WNAH to extend its term to coincide with the amended maturity date under the Legion Note. The term of the amended Legion Note Purchase Agreement lapsed on December 31, 2001. The Legion Note has not been repaid by Anchor. Anchor has had discussions with Legion regarding the extension or amendment of the Legion Note. There can be no assurance that amended terms favorable to Anchor will result from these efforts.

Legion was placed into Rehabilitation by court order under Pennsylvania insurance law on April 1, 2002. As of that date, the Pennsylvania Insurance Commissioner assumed possession and control of all Legion's assets and business to protect the interests of Legion's policyholders. Anchor is seeking to conduct negotiations with the Pennsylvania Insurance Commissioner regarding an extension of the Legion Note's maturity and the amendment of other terms.

The following table presents the unaudited pro forma results from continuing operations assuming we had acquired Novaeon at the beginning of fiscal 2001. Novaeon experienced a substantial change in business in 2000 as result of its bankruptcy; therefore, the revenue and operating results from 2000 are not comparable to Spectrum CA's operating results in 2001. This information may not necessarily be indicative of our future combined results.

                                            Pro forma Results    Pro forma Results for
                                           for the Three Month      the Nine Month
                                               Period Ended          Period Ended
                                            September 30, 2001    September 30, 2001
                                                   2001                  2001
                                           -------------------   ---------------------
Revenues from continuing operations             $1,048,482           $ 3,611,063
                                           ===================   =====================
Loss from continuing operations                 $  (94,079)          $  (478,156)
                                           ===================   =====================
Basic and diluted loss per share from
continuing operations                           $    (0.02)          $     (0.10)
                                           ===================   =====================

On September 30, 1999, the Company entered into a term loan ("Secured Bank Loan") of $931,485 with a bank, combining the balances owing on an existing term loan and a $250,000 bank loan. The basic terms of the Secured Bank Loan are (a) monthly interest payments equal to bank's prime rate, plus 2.5% (b) a maturity date of October 7, 2002 and (c) monthly principal payments in installments of $16,500 which began on November 7, 1999. The Secured Bank Loan is secured by certain receivables, property and equipment, and other assets. The loan agreement with the bank contains certain restrictive covenants that, among other things, require Anchor to maintain certain levels of net worth and cash flow (as defined), and prohibits the payment of dividends. Anchor was not in compliance with these covenants at September 30, 2001. All amounts have been classified as current liabilities. The total amount due as of September 30, 2001 was $551,986.

The balance of the Secured Bank Loan was subsequently reduced to $377,986 as of March 31, 2002 through additional principal payments required by Comerica Bank (the "Bank") as consideration under that certain Forbearance Agreement and Amendment to Promissory Note and Conditional Consent to Subsidiary Transactions dated January 2, 2002 executed between Anchor and the Bank (the "Forbearance Agreement"). The Forbearance Agreement amended the repayment terms of the Secured Bank Loan making it payable in monthly amortized installments of principal in the amount of $20,000, plus applicable interest for that month, with a balloon payment of $257,986 due on October 5, 2002. The Forbearance Agreement also evidenced the Bank's forbearance of Anchor's financial covenant defaults under the Secured Bank Loan until January 31, 2002 and the Bank's consent to the cessation and wind down of WBAIS's business. As a condition of its forbearance, the Bank sought and obtained the execution and delivery of an Unconditional Guaranty of the Secured Bank Loan by WNAH. The repayment of the Secured Bank Loan is further secured by a blanket security interest in favor of the Bank encumbering the assets of Anchor and its subsidiaries.

Series B Convertible Debentures

During 1998, Anchor raised $215,000 from five members of the Board of Directors and other qualified investors by offering 10% Convertible Subordinated Debentures Series B (the "Series B Debentures"). 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 (f) subordination provisions that subordinate the Series B Debentures to Anchor's "Senior Debt" (as defined in the Series B Debentures). In early 1999, Anchor raised an additional $50,000 and redeemed one debenture for $15,000. On March 15, 2000, Anchor redeemed $130,000 of the Series B Debentures. In late 2000, Anchor redeemed $45,000 of the outstanding Series B Debentures. At September 30, 2001, Anchor was in default on the outstanding balance of $75,000 in Series B debentures, which has been classified as current in the accompanying balance sheet as of September 30, 2001.

Series D Convertible Debentures

During 1999, Anchor raised $244,000 from other qualified investors by offering 10% Convertible Subordinated Debentures, Series D (the "Series D Debentures"). The basic terms of the Series D 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 D Debentures acquired, an investor received a five year warrant to acquire 3,000 shares of Anchor common stock at an exercise price of $0.50 per share and (f) subordination provisions that subordinates the Series D Debentures to Anchor's "Senior Debt" (as defined). At September 30, 2001, Anchor was in default on the entire $244,000 in Series D Debentures, which have been classified as current in the accompanying balance sheet as of September 30, 2001.

Series E Convertible Debentures

In late 1999, Anchor raised $400,000 from WNAH by offering 10% Convertible Subordinated Debentures, Series E (the "Series E Debentures"). The basic terms of the Series E 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 E Debentures acquired, WNAH received a five year warrant to acquire 3,000 shares of Anchor common stock at an exercise price of $0.50 per share and (f) subordination provisions that subordinates the Series E Debentures to Anchor's "Senior Debt" (as defined). The Series E Debentures are superior to all other debentures of the Company, including without limitation those Series B and D debentures, and shall constitute "Senior Debt" for purposes of those debentures. During 2000, Anchor raised an additional $100,000 from WNAH through the Series E offering, subject to the terms and provisions described above, bringing the total outstanding Series E debentures to $500,000. At September 30, 2001, Anchor was in default on the entire $500,000 in Series E Debentures, which have been classified as current in the accompanying balance sheet as of September 30, 2001.

A $1,000,000 convertible loan facility (the "Convertible Loan") was made available immediately following the closing of the purchase of the Series A Preferred shares by WNAH. The Convertible Loan is convertible, at WNAH's option, into Series A Preferred shares, which are further convertible into a number of shares of common stock. These shares of common stock, when added to the shares of common stock issued or issuable pursuant to the Series E Debentures (not including the warrants accompanying the Series E Debentures) and other shares of Series A Preferred issued to WNAH, would constitute 73.5% of Anchor's common stock on a fully-diluted basis following such conversion, assuming the maximum amount of $1,000,000 was borrowed and converted by Anchor pursuant to the Convertible Loan. Anchor was in default on the balance of $999,000, which has been classified as current in the accompanying balance sheet as of September 30, 2001.

Basic net loss per common share is presented in conformity with SFAS No. 128, "Earnings per Share," for all periods presented. Basic net loss per share is computed using the weighted-average number of outstanding shares of common stock.

Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, rights to purchase common stock under outstanding options, warrants, and conversion rights, potential common shares from options and warrants to purchase common stock using the treasury method and from convertible debt and equity securities using the as-if converted basis. All common shares issuable under outstanding vested options, warrants, and conversion rights, have been excluded from the computation of diluted net loss per share for 2001 and 2000 because the effect would have been anti-dilutive.

The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted loss per share:

                                                        Three Month Period Ended       Nine Month Period Ended
                                                               September 30                  September 30
                                                                (unaudited)                   (unaudited)
                                                       ---------------------------  --------------------------------
                                                           2001           2000           2001              2000
                                                       ------------   ------------  --------------    --------------
Loss from continuing operations                        $   (94,079)   $   (69,560)  $    (452,695)    $    (184,489)
Loss from discontinued operations                         (460,533)      (333,814)     (1,517,850)       (1,238,880)
                                                       ------------   ------------  --------------    --------------
Net loss                                               $  (554,612)   $  (403,374)  $  (1,970,545)    $  (1,423,369)
                                                       ============   ============  ==============    ==============
Basic and diluted loss from continuing operations
    per share                                          $     (0.02)   $     (0.02)  $       (0.10)    $       (0.04)
Basic and diluted loss from discontinued
    operations per share                                     (0.10)         (0.07)          (0.32)            (0.26)
                                                       ------------   ------------  --------------    --------------

Basic and diluted net loss per share                   $     (0.12)   $     (0.09)  $       (0.42)    $       (0.30)
                                                       ============   ============  ==============    ==============
Weighted-average number of shares outstanding:           4,709,922      4,710,042       4,709,922         4,710,042
                                                       ============   ============  ==============    ==============

Revenue losses from terminating and non-renewing accounts of the WBA companies accelerated rapidly after 2000 and management was unable to reduce operating costs sufficiently to mitigate declining revenue. The WBA companies' clients continued to be generally dissatisfied with WBA's limited data reporting capabilities and inability to provide system features available to them from other vendors such as direct internet access to plan and benefits information for employers, covered employees and medical providers. Ongoing efforts by Anchor's management and Board of Directors to secure additional equity and/or debt capital were unsuccessful. In June 2001, Anchor's Board of Directors determined it was doubtful that sufficient working capital could be obtained to address the WBA companies' rising debt and complete the turn-around of their employee benefits plan administration business.

In late 2001, management determined WBAIS could not remain in business and service its customers beyond the first quarter of 2002 without an infusion of substantial additional working capital. WBAIS determined it was unlikely that sufficient working would be available to it in that time frame, if ever. Management concluded that WBAIS would have no choice but to abandon its service contract obligations and cease operations if an acceptable alternative was not found. In order to avoid the imminent breach of its remaining service agreements and preserve the value of its business for the benefit of the company and its creditors, and its parent shareholder, WBAIS entered into an agreement with Loomis Benefits West, Inc. ("LBW") dated January 1, 2002 (the "Commission Arrangement").

The Commission Arrangement provides for WBAIS and its affiliates to introduce benefit plan administration customers to LBW for a ten-year period commencing on January 1, 2002. In exchange for the referrals and the prospect of ongoing referrals, LBW agreed to pay WBA: (a) monthly "Base Revenue Commissions" equal to 4% of LBW's "Base Gross Revenue" during 2002 - 2003 and 6% of LBW's Base Gross Revenue during 2004 - 2011; and (b) quarterly "Business Development Consideration" in the amount of 10% of LBW's "Gross Revenue" derived from "Referred Customers" during 2002 - 2011. "Gross Revenue" under the Commission Arrangement means commissions and administration fees earned by LBW on a cash basis less brokerage fees and commissions payable to other brokers, refunds, rebates, credits, etc. "Base Gross Revenue" is defined as "Gross Revenue" less "Gross Revenue" derived by LBW from "Referred Customers". "Referred Customers" are defined as LBW customers that were not previously customers of WBAIS and that become customers of LBW after January 1, 2002 through the direct or indirect referral of WBAIS or an affiliate.

The Commission Arrangement also requires WBAIS to indemnify LBW and its affiliates from future claims brought by its creditors and other claimants for claims relating to or arising from obligations or acts of WBAIS. In addition to the Commission Arrangement, WBAIS agreed to sell LBW a portion of its furniture located in its

Portland, Oregon office and LBW agreed to reimburse WBAIS for certain employee compensation and benefits expenses paid by WBAIS in December 2001 and January 2002.

In 2002, the WBAIS plans to make a general assignment of assets for the benefit of creditors to facilitate a workout of debt under an arrangement that is similar to bankruptcy liquidation. The assignee under such an assignment is granted rights under state law similar to those of a federal bankruptcy trustee, including the right to take possession of a debtor's assets, recover avoidable transfers of property for the benefit of all creditors, pursue and compromise claims on behalf of the debtor, and administer the equitable distribution of the debtor's assets among its creditors.

Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the Company's Consolidated Financial Statements have been reclassified to reflect the discontinuing of WBA's operations. Accordingly, revenues and operating and other expenses of WBA have been segregated in the Consolidated Statements of Operations as Discontinued Operations.

For the three and nine months ended September 30, 2001 and 2000, respectively, the following is summarized financial information for the discontinued operations:

                                                Three Month Period Ended         Nine Month Period Ended
                                                      September 30                     September 30
                                                  2001           2000             2001              2000
                                             -------------   -------------   --------------   -------------
Service revenues                             $  1,014,227    $  2,151,792    $   4,061,386    $  6,888,802
                                             =============   =============   ==============   =============

Loss from operations of discontinued
business                                     $   (460,533)   $   (333,814)   $  (1,057,963)   $ (1,238,880)
Loss on disposal of discontinued
operations during phase-out period                      -               -         (459,887)              -
                                             -------------   -------------   --------------   -------------

Loss from discontinued operations (after
applicable income taxes of $0 and $0)        $   (460,533)   $   (333,814)   $  (1,517,850)   $ (1,238,880)
                                             =============   =============   ==============   =============

Loss on disposal of discontinued business during phase out period includes estimated costs associated with the wind down of WBA and estimated referral fees from LBW. The costs include future office lease and operating lease obligations of approximately $428,000, fixed asset write-downs of $42,000 and other operating costs of approximately $40,000. The referral fees included in the loss are estimated at $50,000 for 2002.

Anchor

On May 15, 2002 Anchor and its majority shareholder, WNAH, settled litigation pending before the Superior Court of Contra Costa, California, Case Number COO-03258, with two of Anchor's former executive officers and its former auditing firm. The litigation arose from various actions and events occurring in 1999 and 2000. Certain bifurcated claims ordered to arbitration by the court had previously resulted in a September 2001 arbitration award against Anchor in the approximate amount of $304,000 in favor of its former chief executive officer. Under the terms of a global settlement, Anchor and WNAH jointly agreed to pay Anchor's former chief executive officer the sum of $365,000 with $240,000 of such amount being provided by their employee practices liability insurer. All causes of action plead against all corporate and individual defendants and cross-defendants were dismissed with prejudice under the settlement with no admission of fault or liability by any party

Management is not aware of any other litigation to which Anchor is currently a party or to which any property of Anchor is subject, which might materially adversely affect the financial condition or results of operations of Anchor.

The WBA Companies
Harden-AZ and WBAIS are defendants in a number of lawsuits seeking damages for alleged professional

negligence or breach of contract in the performance of their employee benefit plan administration services. These matters are of a nature and type that typically arise from time to time in the normal course of business, and, except for claims that are strictly contractual in nature, are covered under professional liability policies effective during the years in which the alleged acts or omissions occurred. Although the pending professional negligence and employee liability claims against the WBA companies are, for the most part, covered by insurance, management is concerned that available cash resources in the future will be insufficient to satisfy the deductible payment obligations under the affected insurance policies, resulting in the termination of the policies by the insurers for breach of the insurance contracts. There can be no assurance that the companies will be able to maintain their insurance coverage in the future.

WBAIS is a defendant in an administrative proceeding before the Oregon Bureau of Labor and Industries filed on March 1, 2001. The claimant in the matter was an employee of WBAIS that was involuntarily terminated in October 2000 for excessive absenteeism. The claimant alleges the termination was in violation of the federal Family Medical Leave Act, the Oregon Family Medical Leave Act and the Americans with Disabilities Act. The claim is covered under Anchor's blanket employee practices liability insurance policy and its potential liability for defense and indemnity costs is limited to the policy's per claim deductible of $50,000.

The WBA companies anticipate that trade creditors will initiate considerable additional litigation in 2002 and beyond due to the companies' significant trade debt balances. Both companies lack sufficient cash resources to satisfy these trade debts and any lawsuit filed against the companies will further adversely affect their ability to satisfy creditor claims.

Spectrum CA
Management is not aware of any lawsuits to which Spectrum CA is currently a party or to which any property of Spectrum CA is subject which might materially adversely affect its financial condition or results of operations.