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

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

                                   FORM 10-Q
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
     FOR THE QUARTER ENDED SEPTEMBER 30, 1997     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:  (510) 682-7707


          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                     None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         Common stock, $.02 par value


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

 
    As of September 30, 1997, the Registrant had 4,690,839 shares of common
stock outstanding.

                    This document is comprised of 102 pages

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

                                     INDEX
<TABLE> 
<S>                                                                                                             <C> 
PART I.     FINANCIAL INFORMATION

            ITEM 1.   Financial Statements:

                      Consolidated Balance Sheets, September 30, 1997 (unaudited) and
                      December 31, 1996 ......................................................................  1

                      Consolidated Statements of Operations for the nine months and quarters ended
                      September 30, 1997 and 1996 (unaudited).................................................  3

                      Consolidated Statements of Shareholders' Equity for the nine months ended September
                      30, 1997 (unaudited) and year ended December 31, 1996...................................  4

                      Consolidated Statements of Cash Flows for the nine months
                      ended September 30, 1997 and 1996 (unaudited)...........................................  5

                      Notes to Consolidated Financial Statements .............................................  7

            ITEM 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations .................................................... 10

PART II.    OTHER INFORMATION

            ITEM 1.   Legal Proceedings....................................................................... 17

            ITEM 2.   Changes in Securities................................................................... 17

            ITEM 3.   Defaults Upon Senior Securities......................................................... 17

            ITEM 4.   Submission of Matters to a Vote of Security Holders..................................... 17

            ITEM 5.   Other Information....................................................................... 17

            ITEM 6.   Exhibits and Reports on Form 8-K........................................................ 17
</TABLE>
<PAGE>
 
PART I - FINANCIAL INFORMATION


               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
                                                               September 30,    December 31,
                                                                    1997            1996   
                                                               -------------    ------------
                                                                (unaudited)                
<S>                                                            <C>              <C>        
ASSETS                                                                                     
Current Assets:                                                                            
  Cash and cash equivalents - corporate funds                   $  138,685     $   151,765 
  Cash and cash equivalents - brokerage                                                      
   fiduciary funds                                               1,421,142         977,086   
  Cash and cash equivalents - third-party 
   administration fiduciary funds                                2,764,983       3,580,793  
  Accounts receivable (less allowance                                                      
   for doubtful accounts of $40,882 and $32,438                                            
   in 1997 and 1996)                                               924,702       1,309,921 
  Prepaid expenses and other current assets                        275,466         244,086 
                                                                ----------     -----------  
Total current assets                                             5,524,978       6,263,651 
                                                                ----------     ----------- 
                                                                                           
Property and equipment                                           3,033,013       2,976,497 
Less accumulated depreciation and amortization                  (2,384,246)     (2,155,300)
                                                               -----------     ----------- 
                                                                   648,767         821,197 
                                                               -----------     ----------- 
                                                                                           
Other assets:                                                                              
 Goodwill, net                                                   1,828,953       1,903,729 
 Intangible assets, net                                          1,041,518       1,139,467 
 Deferred compensation                                             206,784         257,784 
 Other                                                             148,988         125,611 
                                                               -----------     -----------
                                                                 3,226,243       3,426,591 
                                                               -----------     -----------  
Total assets                                                   $ 9,399,988     $10,511,439 
                                                               -----------     -----------  

</TABLE>
  See accompanying notes.

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

<TABLE>
<CAPTION>
                                                                        September 30,    December 31,
                                                                            1997            1996   
                                                                       ---------------  ------------
                                                                         (unaudited)               
<S>                                                                    <C>              <C>        
LIABILITIES AND SHAREHOLDERS' EQUITY                                                               
Current Liabilities:                                                                               
  Cash and cash equivalents - third-party 
       administration fiduciary funds                                  $ 2,764,983      $ 3,580,793
    Net premiums payable - insurance companies                           2,082,779        2,037,749
    Accounts payable and accrued expenses                                  584,440          438,208
    Short-term borrowings                                                1,562,500        1,395,000
    Current portion of long-term debt                                      260,000          425,110
    Current portion of long-term liabilities                               766,734          604,398
                                                                       -----------      -----------
Total current liabilities                                                8,021,436        8,481,258
                                                                       -----------      -----------
                                                                                                   
Long-term liabilities                                                      505,821          773,930
                                                                       -----------      -----------
                                                                                                   
Long-term debt, including $220,000 in 1997 and 
    1996, owed to related parties                                           71,339          149,020
                                                                       -----------      ----------- 
                                                                         
Shareholders' equity:                                                    
  Preferred stock - $.02 par value; 2,000,000 shares                                                      
      authorized; none issued and outstanding                                                        
  Common stock - $.02 par value; 16,000,000 
      shares authorized; 4,690,839 and 4,362,837                                                          
      shares issued as of 9/30/97 and 12/31/96, 
      respectively                                                          93,817           87,256
  Additional paid-in capital                                             4,215,649        3,925,508
  Accumulated deficit                                                  (3,508,074)      (2,905,533)
                                                                       -----------      -----------
Total shareholders' equity                                                 801,392        1,107,231
                                                                       -----------      -----------
Total liabilities and shareholders' equity                             $ 9,399,988      $10,511,439
                                                                       -----------      -----------
</TABLE>
  See accompanying notes.

                                       2
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                   Nine Months                    Quarters
                                               Ended September 30,           Ended September 30,
                                            -------------------------     ------------------------- 
                                               1997           1996           1997           1996
<S>                                        <C>            <C>            <C>            <C>  
Revenues:
  Commissions, fees and other income        $6,944,887     $5,990,112     $2,922,912     $1,903,701
  Interest Income                               60,591         81,194         18,456         21,815
                                            ----------     ----------     ----------     ---------- 
Total revenue                                7,005,478      6,071,306      2,941,368      1,925,516
 
Operating expenses:
  Salaries, commissions and employee
    benefits                                 4,678,236      4,094,131      1,881,939      1,331,075
  Selling, general and administrative
    expenses                                 2,639,766      2,438,242      1,070,007        831,125
                                            ----------     ----------     ----------     ---------- 
                                             7,318,002      6,532,373      2,951,946      2,162,200
                                            ----------     ----------     ----------     ---------- 
                                              (312,524)      (461,067)       (10,578)      (236,684)
 
Other income (expense):
  Amortization of goodwill &
    intangible assets                         (172,725)      (282,061)       (53,429)       (95,160)
  Interest                                    (152,152)      (279,124)       (52,823)       (76,931)
  Other                                         39,330         53,509         24,028         16,065

                                            ----------     ----------     ----------     ---------- 
Total other income (expense)                  (285,547)      (507,676)       (82,224)      (156,026)
                                            ----------     ----------     ----------     ---------- 
 
Loss before income taxes                      (598,071)      (968,743)       (92,802)      (392,710)
 
Provision for income taxes                       4,470          4,800              -              -
                                            ----------     ----------     ----------     ---------- 
 
Net loss                                    $ (602,541)    $ (973,543)    $ ( 92,802)    $ (392,710)
                                            ----------     ----------     ----------     ---------- 
 
Net loss per common and
  common equivalent share                   $    (0.13)    $    (0.26)    $    (0.02)    $    (0.11)
                                            ----------     ----------     ----------     ---------- 
 
Weighted average number of
  common and common equivalent
  shares outstanding                         4,568,525      3,692,750      4,644,277      3,692,750
                                            ----------     ----------     ----------     ---------- 
 
</TABLE>
See accompanying notes

                                       3
<PAGE>
 
                       ANCHOR PACIFIC UNDERWRITERS, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
 
 
                                                                     Additional
                                                Common Stock          Paid-In       Accumulated
                                             Shares      Amount       Capital         Deficit         Total
                                        ----------------------------------------------------------------------
<S>                                        <C>          <C>         <C>            <C>             <C>
Balance at December 31,
      1995                                 3,674,501     $73,490     $2,989,275     $(1,499,733)   $ 1,563,032
   Stock issued for warrants
      exercised                                   36           1            107               -            108
   Debentures exchanged
       for stock                             644,444      12,889        857,111               -        870,000
    Shares issued for
       acquisitions                           43,928         879         79,120               -         79,999
   Canceled stock:
      Fractional shares                          (72)         (3)          (105)              -           (108)
   Net loss                                        -           -              -      (1,405,800)    (1,405,800)
                                        ----------------------------------------------------------------------
 
Balance at December 31,
      1996                                 4,362,837     $87,256     $3,925,508     $(2,905,533)   $ 1,107,231
   Stock issued for warrants
      exercised                                  567          11          1,691               -          1,702
   Stock issued for Private
      Offering                               327,778       6,557        288,443               -        295,000
    Canceled stock:
      Fractional shares                         (343)         (7)             7               -              -
    Net Loss                                       -           -              -        (602,541)      (602,541)
                                        ----------------------------------------------------------------------

Balance at September 30, 1997
 (Unaudited)                               4,690,839     $93,817     $4,215,649     $(3,508,074)   $   801,392
                                        ----------------------------------------------------------------------
</TABLE>
See accompanying notes

                                       4
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
 
                                                                                 Nine Months       
                                                                             Ended September 30,   
                                                                           ----------------------- 
                                                                             1997          1996    
<S>                                                                        <C>           <C>       
OPERATING ACTIVITIES                                                                               
Net loss                                                                   $(602,541)    $(973,543)
Adjustments to reconcile net loss to                                                               
 cash provided by (used in) operating activities:                                                              
      Depreciation and amortization                                          228,947       216,620 
      Amortization of goodwill, other intangibles                                                           
         and organization expenses                                           172,724       282,061                        
                                                                                                   
                                                                                                   
Changes in operating assets and                                                                    
 liabilities:                                                                                      
      Cash and cash equivalents -  brokerage                                (444,056)      195,680 
         fiduciary funds                                                                           
      Accounts receivable                                                    385,219       (70,971)
      Prepaid expenses and other current assets                              (19,372)       14,536 
      Other assets                                                           (23,377)       (1,673)
      Deferred compensation                                                   51,000       103,560 
      Net premiums payable - insurance companies                              45,030      (163,369)
      Accounts payable and accrued expenses                                  146,232       (42,828)
      Other liabilities                                                            -       (32,430)
                                                                           ---------     --------- 
                                                                                                   
Net cash used in operating activities                                        (60,194)     (472,357)
                                                                                                   
                                                                                                   
INVESTING ACTIVITIES                                                                               
Notes receivable, net                                                        (12,008)       (2,028)
Purchases of property and equipment                                          (56,516)      (72,691)
Purchases of customer list                                                         -      (314,999)
                                                                           ---------     --------- 
                                                                                                   
Net cash used in investing activities                                        (68,524)     (389,718) 
</TABLE>

                                       5
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
 
 
                                                                           Nine Months     
                                                                       Ended September 30, 
                                                                     ----------------------
                                                                        1997         1996  
<S>                                                                  <C>          <C>
FINANCING ACTIVITIES                                                                       
Common stock issued                                                    296,702            -
Debt:                                                                                      
   Borrowings                                                          185,000      325,000
   Repayment                                                          (366,064)    (202,819)
Net payments on amounts due on acquisitions                                  -      156,022
                                                                     ---------    ---------
Net cash provided by financing activities                              115,638      278,203
                                                                     ---------    --------- 
                                                                                           
Net decrease in cash and cash equivalents                              (13,080)    (583,872)
                                                                                
Cash and cash equivalents - corporate funds at                                                              
   beginning of period                                                 151,765      904,781                    
                                                                     ---------    --------- 
Cash and cash equivalents - corporate                                                      
 funds at end of period                                              $ 138,685    $ 320,909
                                                                     ---------    --------- 
                                                                                           
                                                                                           
SUPPLEMENTAL CASH FLOW INFORMATION                                                         
Cash paid during the period for:                                                           
   Interest                                                          $ 152,152    $ 279,124
                                                                     ---------    --------- 
   Income taxes                                                      $   8,526    $       -        
                                                                     ---------    --------- 
                                                                                           
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES                                                                                
Common stock - convertible debentures exercised                      $       -    $  15,000
                                                                     ---------    --------- 
</TABLE>
See accompanying notes

                                       6
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

                              SEPTEMBER 30, 1997


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

          The accompanying unaudited consolidated financial statements of Anchor
Pacific Underwriters, Inc. and its subsidiaries ("Anchor") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.  In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.  For further information, refer to the consolidated financial
statements and footnotes thereto included in Anchor's Form 10-K for the year
ended December 31, 1996.

          The financial statements have been prepared on the going concern
basis.  Anchor has reported a net loss during each of the past three fiscal
years.  On January 7, 1997, the $1,000,000 bank credit line which Anchor had
maintained expired.  Although Anchor was within the covenants of the bank credit
line on the renewal date and was current with all interest payments, the bank
notified Anchor that it would no longer continue to extend the line to Anchor,
under the same terms.  Anchor has been successful, as of October 24, 1997, in
replacing the $1,000,000 bank credit line with a new credit facility (the "New
Loan") provided by another bank.  The basic terms and conditions of this New
Loan are: (a) $1,600,000 term loan; (b) interest equal to the bank's prime rate
plus 2.5%; (c) five year term; (d) monthly principal payments in installments of
$26,666.67 (Not withstanding the foregoing, 75% of the Company's monthly EBITDA
shall be applied to principal to the extent such percentage of monthly EBITDA is
required to make the scheduled payment of principal.  To the extent that 75% of
monthly EBITDA falls short of the required principal payment, the difference
shall be added to the final payment.); and (e) a five year warrant to acquire
95,000 shares of Anchor common stock at a purchase price of $1.75 per share.  A
portion of the $1,600,000 proceeds from the New Loan was used to pay off
$975,000 outstanding under the $1,000,000 bank credit line.  Another portion of
the proceeds from the New Loan was used to retire and consolidate two unsecured
credit facilities the bank had extended Anchor.  The $445,000 outstanding
balance under the $450,000 bank unsecured credit line and the $142,500
outstanding balance under the $150,000 bank unsecured term loan were paid in
full on October 24, 1997.

          Anchor's business is not capital intensive and Anchor historically has
had sufficient capital to meet its operating needs.  Operating losses incurred
during the last three fiscal years, however, have required Anchor to seek
additional capital.  Consequently, Anchor is continuing to seek to raise an
additional $500,000 in equity from the members of the Board of Directors and
other qualified investors to supplement its working capital.  As of November 3,
1997, Anchor had raised $305,000, and had oral commitments for an additional
$100,000 in equity financings.  Under the terms of this financing Anchor is
issuing common stock at $0.90 per share along with a five year warrant to
purchase stock at $0.90 per share.

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

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

Recapitalization and Restatement
--------------------------------

          On January 6, 1995, Anchor merged with System Industries, Inc.
("System").  For accounting purposes, the merger was treated as a
recapitalization of Anchor with Anchor as the acquirer (reverse acquisition).
Upon consummation of this merger, shareholders and certain creditors of System
each received one share of Anchor common stock and one warrant to purchase one
share of Anchor common stock at a price of $3.00 for every 42.3291 shares of
issued and outstanding System common stock.  Warrants to purchase 194,886 shares
of 

                                       7
<PAGE>
 
common stock expired January 6, 1997, and unissued warrants to purchase
195,789 shares of common stock will expire one year after their issuance.  As a
result of the merger, Anchor became a public company.

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

          To date, acquisitions by Anchor have involved both relatively small
acquisitions of insurance brokerage and administration accounts, as well as
larger acquisitions of insurance brokerage companies, such as Putnam, Knudsen &
Wieking, Inc. ("PKW"), and third-party administrators, such as Benefit
Resources, Inc. ("BRI"). The results of operations from these acquisitions are
included in Anchor's consolidated financial statements from the date of
purchase. Anchor also expects to continue to expand its insurance brokerage and
administration businesses through internal growth. Anchor's third-party
administration services recently obtained commitments with respect to several
new business projects which are expected to increase revenues while avoiding
many of the costs associated with expansion achieved through the purchase of new
businesses.

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.

NOTE 4 - SUBORDINATED BRIDGE NOTES AND WARRANT
----------------------------------------------

          During 1996, Anchor raised $225,000 from five members of the Board of
Directors and other qualified investors through the issuance of 10% Subordinated
Bridge Notes with a Warrant to Purchase Shares of Anchor Common Stock ("Bridge
Notes").  The basic terms of the Bridge Notes were:  (a) 10% interest per annum,
paid in arrears; (b) one year term; (c) for every $10,000 of principal invested
the purchaser received a five year warrant to acquire 1,000 shares of Anchor
common stock at a purchase price of $1.75 per share; (d) "piggyback"
registration rights for three years; and (e) subordination provisions that
subordinate the Bridge Notes to Anchor's "Senior Debt" (as defined in the Bridge
Notes).  The Bridge Notes are equal in status to the Debentures (see Note 5
below) issued during 1995, which mature in 1997.

          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 (see Note 6 below), by exchanging
their Bridge Notes. The basic terms of these two alternatives were: (a) in lieu
of receiving warrants to acquire 1,000 shares of Anchor common stock at a
purchase price of $1.75 per share, for every $10,000 of principal invested, the
purchaser would receive warrants to acquire 2,000 shares of Anchor common stock
at a purchase price of $1.35 per share; or (b) participate in the 1997 Offering
by exchanging the Bridge Notes and receive in return (i) interest at the rate of
10% per annum up to the date of conversion; (ii) Anchor common stock in place of
the Bridge Notes at a price equal to $0.90 per share; and (iii) five year
warrants, 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 Note chose
alternative (a) above, and the remaining $45,000 chose alternative (b) above. As
of September 30, 1997, $170,000 remained outstanding under the terms of the
Bridge Notes.

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

          In 1995, Anchor issued $370,000 of 10% Convertible Subordinated
Debentures (the "Debentures") and a 10% Convertible Subordinated Debenture,
Series A ("Series A Debenture") for $600,000.  In December 1996, Guarantee Life
Insurance Company converted all $600,000 of the Series A Debenture it held into
444,444 shares of Anchor's common stock at $1.35 per share.  In addition,
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 saved Anchor approximately
$85,000 in interest payments, reduced outstanding indebtedness by $870,000 and,
in turn, increased shareholders' equity by $870,000. As of September  30, 1997,
$80,000 remained outstanding under the terms of the Debentures.  For further
information regarding the Series A Debenture and the Debentures, refer to
Anchor's Annual Report on Form 10-K for the year ended December 31, 1996.

                                       8
<PAGE>
 
NOTE 6 - 1997 OFFERING
----------------------

          During first quarter 1997, Anchor commenced raising additional funds
from members of the Board of Directors and other qualified investors through a
private offering which consisted of Anchor common stock along with warrants to
acquire shares of Anchor common stock (the "1997 Offering"). As of November 3,
1997, Anchor had raised $305,000 and had oral commitments for an additional
$100,000 in the 1997 Offering. Anchor intends to utilize a substantial portion
of the proceeds from the 1997 Offering to support current and future working
capital needs of Anchor. The basic terms of the 1997 Offering are: (a) 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. Purchasers of the 1997 Offering, as of November 3, 1997,
consisted of eight members of the Board of Directors and other qualified
investors.

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

          On May 5, 1997, Anchor entered into a $10,000 Note ("Note A") with a
member of the Board of Directors to supplement current working capital.  The
basic terms of Note A were: (a) 10% interest per annum, paid in arrears; and (b)
nine month term.  On August 21, 1997, Note A was repaid in full.

          On May 28, 1997, Anchor entered into a $50,000 Note ("Note B") with a
member of the Board of Directors to supplement current working capital.  The
basic terms of Note B were: (a) 10% interest per annum, paid in arrears; (b)
three month term; (c) a five year warrant to acquire 30,000 shares of Anchor
common stock at a purchase price of $0.90 per share; and (d) "piggyback"
registration rights for three years.  On September 19, 1997, Anchor entered into
a amendment to Note B as to the maturity date (b) above.  Under the terms of the
amendment the full principal, plus interest, will be due and payable in three
installments beginning September 15, 1997, in the amount of $15,000, plus
interest; on October 15, 1997, in the amount of $15,000, plus interest; with the
final installment on November 15, 1997 (the "Maturity Date") in the amount of
$20,000, plus interest.   As of November 3, 1997, the outstanding balance on
Note B was $20,000.

          On July 3, 1997, Anchor obtained a $150,000 bank unsecured term loan
for additional working capital in connection with a new business opportunity in
the Los Angeles Area.  This contract, effective July 1, 1997, grants
administrative and servicing responsibilities to Anchor's third-party
administration subsidiary, Harden & Company Insurance Services, Inc. ("Harden").
As of October 24, 1997, said loan was paid in full, as discussed below.

          As of  October 24, 1997, Anchor obtained a $1,600,000 bank term loan
(the "New Loan") from a bank for the primary purpose of replacing the $1,000,000
bank credit line that Anchor had maintained with another bank.  The remainder of
the proceeds were used to retire and consolidate two credit facilities the new
bank had extended Anchor.  The $445,000 outstanding balance under the $450,000
bank unsecured credit line and the $142,500 outstanding balance under the
$150,000 bank unsecured term loan were paid in full on October 24, 1997.  The
basic terms and conditions of this New Loan are: (i) interest equal to the
bank's prime rate plus 2.5%; (ii) five year term; (iii) monthly principal
payments in installments of $26,666.67; (Notwithstanding the foregoing, 75% of
the Company's monthly EBITDA shall be applied to principal to the extent such
percentage of monthly EBITDA is required to make the scheduled payment of
principal.  To the extent that 75% of monthly EBITDA falls short of the required
principal payment, the difference shall be added to the final payment.) and (iv)
a five year warrant to acquire 95,000 shares of Anchor common stock at a
purchase price of $1.75 per share.

                                       9
<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.
("Harden"), a third-party employee benefits administrator.  Anchor was
reorganized as a private California corporation in March 1987, and became a
public reporting Delaware corporation in January 1995.

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

        From 1990 through 1992, Anchor expanded its property and casualty
business by: (a) acquiring certain assets, including insurance brokerage
accounts, from four property and casualty brokerage firms; and (b) organizing
Anchor Pacific Premium Finance Company ("APPFCO"), to complement its property
and casualty business by providing premium financing to Anchor's clients.
Effective May 30, 1997, Anchor dissolved APPFCO as a result of its inactivity.
As part of its expansion strategy Anchor has made a series of acquisitions,
including the acquisitions of: Benefit Resources, Inc. ("BRI"), a third-party
employee benefits administrator located in Scottsdale, Arizona in August 1994;
Putnam, Knudsen & Wieking, Inc. ("PKW"), a property and casualty insurance
brokerage company located in Oakland, California in October 1994; certain third-
party administration accounts from Dutcher Insurance Agency, Inc. ("Dutcher"),
located in Stockton, California in February 1995; R. L. Ferguson Agency ("RLF"),
a property and casualty insurance brokerage company located in Walnut Creek,
California in March 1996; certain property and casualty accounts from Norman I.
Robins ("Robins"), in April 1996; and certain property accounts from John R.
McPherson ("McPherson"), in May 1996.  In July 1997, Harden took over a third-
party administration business, located in the Los Angeles Area, that was
previously serviced by an unrelated third party.  In connection with this
expansion Harden hired 34 employees previously employed by the prior
administrator.  Anchor will continue to look for opportunities to expand its
insurance brokerage and administration businesses.  In this regard, it has
recently obtained commitments for several new business projects which will
enable Anchor to substantially expand revenues through internal growth thereby
avoiding the costs associated with the actual purchase of new business and
related revenues.  Contracts for third-party administration services are
expected to generate a substantial increase in new revenues by the end of the
fourth quarter 1997.

RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

GENERAL

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

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

                                       10
<PAGE>
 
        Historically, inflation has impacted commission revenues by, among other
things, increasing property replacement costs and workers' compensation and
liability claims, thereby causing some clients to seek higher levels of
insurance coverage and, in turn,  pay higher premiums.  During the past several
years, the United States has experienced very low rates of inflation along with
gradual business expansion.  Consequently, inflation has had minimal impact on
insurance prices in the United States during the past several years.

        At times, client uncertainty concerning the scope and direction of
health care reform, may also affect Anchor's business.  Anchor believes that its
expertise in two areas frequently identified in health care reform proposals
(managed care and managed competition), combined with its strategy of targeting
middle market clients, leaves it well positioned to operate effectively in a
managed care and managed competition environment.  Anchor also believes that in
the current political environment, the United States will experience
incremental, rather than sudden comprehensive changes in health care
regulations.  It is not possible at this time, however,  to predict the effect
that any health care legislation will have on Anchor's business condition or
operations.  Anchor is unaware of any current regulatory proposals that could
have a material effect on its liquidity, capital resources or operations.
 
        Other outside factors may have a significant impact on Anchor's
operations.  For example, the insurance carrier which previously offered the
product that accounted for 51% of Harden and BRI's, and 27% of Anchor's, overall
third-party administration revenues in 1996 informed Harden and BRI in the third
quarter of 1996, that as a result of changes in its business strategy, it would
discontinue offering such an insurance product by the end of February 1997.

        Harden and BRI subsequently entered into a multi-year, exclusive
contract with an A- (Excellent) rated insurance carrier to underwrite the risk
and provide a replacement product for Anchor's third-party administration
services.  This contract became effective December 1, 1996.  The transition to
the new insurance carrier has been less disruptive for Harden and BRI's clients
than an earlier transition to a new carrier in late 1995 because the new
insurance carrier fully assumed all policies in California and a majority of
policies in Arizona thereby avoiding the loss of accounts which Harden and BRI
experienced earlier.  The impact on Harden and BRI's revenue has been minimal.

        The new replacement insurance carrier is a subsidiary of the largest HMO
in Nevada.  Management believes that the new insurance carrier will enable
Anchor to provide the small group medical insurance market with stronger managed
care products.  In addition, the replacement insurance carrier's business
strategy is to aggressively market group health products in a multi-state
distribution system through an exclusive multi-year contract with Harden and BRI
in California and Arizona.  The reaction of the Harden and BRI distributors
continues to be very favorable and the change has been widely accepted.  Harden
and BRI began to receive revenues from this new business in January 1997.  In
addition, effective July 1, 1997, the same insurance carrier purchased a
significant volume of business from another insurance carrier in California. The
new insurance carrier then entered into a contract with Harden to provide third-
party administration services to this business which has the potential to
substantially increase Harden's revenues.

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

REVENUES

        TOTAL REVENUES.  Total revenues for the nine months ended September 30,
1997, were $7,005,478, an increase of $934,172 or 15.4%, as compared to
$6,071,306 in revenues for the same period in 1996.  The increase in revenue in
this nine month period was primarily due to the increase in fee income derived
from third-party administration services generated from the new insurance
carrier as discussed above.

        Commissions and fees make up substantially all of Anchor's revenues.
The following table sets forth the percentages of Anchor's revenues attributable
to insurance brokerage services (for which commissions are generated), and
third-party administration, underwriting and risk analysis services (for which
fees are generated), for the nine months ended September 30, 1997, 1996 and
1995.  The percentage of Anchor's revenues attributable to premium finance
services are no longer included in the following table inasmuch as the premium
finance

                                       11
<PAGE>
 
services was dissolved effective as of May 30, 1997, due to its
inactivity.

<TABLE>
<CAPTION>
=========================================================== 
 NINE MONTHS ENDED SEPTEMBER 30,     1997    1996    1995
===========================================================
<S>                                  <C>     <C>     <C>
Insurance Brokerage Commissions       34%     44%     41%
----------------------------------------------------------- 
Third-Party Administration Fees       66%     56%     59%
---------------------------------------------------------- 
         Total                       100%    100%    100%
==========================================================
</TABLE>

          Harden and BRI have recently entered into a multi-year, exclusive
contract with a new insurance carrier.  Because this new relationship presents
new growth opportunities,  Anchor expects that the percentage of its revenues
that are derived from third-party administration services will continue to
increase during 1997.

          COMMISSIONS.  Commission revenues from insurance brokerage services
are reported net of sub-broker commissions and generally are recognized as of
the effective date of the insurance policy, except for commissions on
installment premiums which are recognized periodically as billed. Commissions
for the first nine months of 1997 were $2,346,711, a decrease of $256,131 or
9.8%, compared to $2,602,842 of commissions for the same period of 1996.  A net
loss of business at PKW accounted for all of the decrease.

          FEES.  Fees from Anchor's third-party administration (including
underwriting and risk analysis) services for the nine months ended September 30,
1997, were $4,598,086, an increase of $1,212,032 or 35.8%, as compared to
$3,386,054 in fees for the same period in 1996.  This increase in fee income is
the result of new business generated from projects associated with the new
insurance carrier, as discussed above, and administrative fees generated from
the release of new products.

          Fee revenues generated by Anchor in the third quarter of 1997 from
third-party administration services consist of revenues generated by Harden and
BRI.  Harden's third-party administration revenues are substantially derived
from: (a) an insurance product underwritten by one insurance carrier, which is
A- (Excellent); and (b) the administration of insurance programs underwritten by
various insurance carriers for a number of self-insured employers.  The
insurance product, described in (a) above, accounted for approximately 24% of
Harden's revenues (or approximately 11% of Anchor's total revenues) in the first
nine months of 1997, and revenues related to the administration of self-insured
programs, described in (b) above, accounted for approximately 48% of Harden's
revenues (or approximately 21% of Anchor's total revenues) in the first nine
months of 1997.  Self-insurance is a program in which a client assumes a
manageable portion of its insurance risks, usually (although not always) placing
the less predictable and larger loss exposure with an excess insurance carrier.
A significant portion of BRI's fee revenues generated from new clients relate to
an insurance product underwritten by the same A- (Excellent) rated insurance
carrier.
                                        
          INTEREST INCOME.  Interest income consists of interest earned on
insurance premiums and other funds held in fiduciary accounts and interest
earned on investments.  Interest income was $60,591 and $81,194 for the nine
months ended September 30, 1997 and 1996, respectively.


EXPENSES

          TOTAL EXPENSES.  Total operating expenses for the nine months ended
September 30, 1997, were $7,318,002, an increase of $785,629 or 12% as compared
to the operating expenses of $6,532,373 for the same period in 1996.  As
discussed below, the increase in total expenses resulted primarily from an
increase in selling, general and administration expenses and employee
compensation and benefits resulting from increased third-party administration
services business at both Harden and BRI.

          EMPLOYEE COMPENSATION AND BENEFITS.  Employee compensation and
benefits for the nine months ended September 30, 1997, were $4,678,236, an
increase of $584,105 or 14.3% as compared to $4,094,131 for the same period in
1996.  The increase related primarily to greater staffing needs required to
service new third-party administration projects at both Harden and BRI.

                                       12
<PAGE>
 
          SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $2,639,766 and $2,438,242 for the nine months ended
September 30, 1997 and 1996, respectively.  The $201,524 or 8.3% increase in
1997, as compared to 1996, resulted primarily from an increase in expenses as a
result of the increased third-party administration services business at both
Harden and BRI.  General and administrative expenses include rent, travel,
insurance, postage, telephone, supplies and other miscellaneous expenses.

          INTEREST EXPENSE.  Interest expense totaled $152,152 and $279,124, for
the nine months ended September 30, 1997 and 1996, respectively.  The decrease
in expense of $126,972 in the nine months ended September 30, 1997, as compared
to the same period in 1996, resulted from the termination of services of an
investment banker and the  conversions of the $600,000 Series A Debenture and
$270,000 of the Debentures.  Anchor will continue to see additional expense
savings in 1997 as a result of the conversions of the Debentures.   For further
details refer to Note 5, above.

          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 $172,725 and $282,061, for the nine months ended September 30, 1997 and
1996, respectively.  The decrease in amortization and other intangibles is a
result of goodwill being fully amortized at Harden as of December 31, 1996.

INCOME TAXES

          Anchor's expense for income taxes was $4,470 and $4,800 for the nine
month periods ended September 30, 1997 and 1996, respectively.   An analysis of
Anchor's provision for income taxes is presented in Note 9 of the Notes to
Consolidated Financial Statements in Anchor's Form 10-K for the year ending
December 31, 1996.

RESULTS OF OPERATIONS - QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996

REVENUES

          TOTAL REVENUES.  Total revenues for the three months ended September
30, 1997, were $2,941,368, an increase of $1,015,852 or 52.8%, as compared to
$1,925,516 of revenues for the same period in 1996.  The increase resulted
primarily from new business from third-party administration services at both
Harden and BRI. Anchor's revenues vary from quarter to quarter as result of the
timing of policy renewals and new/lost business production, whereas expenses are
fairly uniform throughout the year.

          COMMISSIONS.  Commission revenues for the three months ended September
30, 1997, were $719,156, a decrease of $132,817 or 15.6%, as compared to
$851,973 of commissions for the same period of 1996.  A net loss of business at
PKW accounted for all of the decrease.

          FEES.  Fees from Anchor's third-party administration (including
underwriting and analysis) services for the three months ended September 30,
1997, were $2,203,756, an increase  of $1,152,661 or 109.7% as compared to
$1,051,095 in fees for the same period in 1996.  The increase in fee income is
the result of new third-party administration services business generated from
projects associated with the new insurance carrier, as discussed above, and
administrative fees generated from the release of new products.

          INTEREST INCOME.  Interest income was $18,456 and $21,815 for the
three months ended September 30, 1997 and 1996, respectively.  The decrease in
interest income in the second quarter of 1997, as compared to 1996, resulted
primarily from a smaller amount of insurance premiums and other funds held in
fiduciary accounts.

EXPENSES

          TOTAL EXPENSES.  Total operating expenses for the three months ended
September 30, 1997 were $2,951,946, an increase of $789,746 or 36.5%, as
compared to operating expenses of $2,162,200 for the same period in 1996.  The
increase resulted primarily from the increase in employee compensation and
benefits, and general and administrative expenses as a result of the increased
third-party administration services business at both 

                                       13
<PAGE>
 
Harden and BRI.

          EMPLOYEE COMPENSATION AND BENEFITS.  Employee compensation and
benefits for the three months ended September 30, 1997 were $1,881,939, an
increase of $550,864 or 41.4%, as compared to $1,331,075, for the same period in
1996.  The increase related primarily to the addition to staff  to service new
business projects from Anchor's third-party administration services at Harden
and BRI.

          SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $1,070,007 and $831,125 for the three months ended
September 30, 1997 and 1996, respectively.  The $238,881 or 28.7%, increase in
the third quarter of 1997, as compared to the same period in 1996 resulted
primarily from an increase in expenses as a result of the increased third-party
administration services business at both Harden and BRI.  General and
administrative expenses include rent, travel, insurance, postage, telephone,
supplies and other miscellaneous expenses.

          INTEREST EXPENSE.  Interest expense was $52,823 and $76,931 for the
three months ended September 30, 1997 and 1996, respectively.  The decrease in
interest expense in 1997, as compared to 1996, resulted primarily from the
termination of services of an investment banker and the conversions of the
$600,000 Series A Debenture and $270,000 of the Debentures.  Anchor will
continue to see additional expense savings in 1997 as a result of the
conversions of the Debentures.  For further details refer to Note 5, above.

          AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES.  Goodwill represents
the excess of the cost of acquisitions over the fair value of net assets
acquired.  Other intangibles include covenants not to compete, customer lists
and other contractual rights.  Amortization of goodwill and other intangibles
was $53,429 and $95,160 for the three months ended September 30, 1997 and 1996,
respectively.  The decrease in amortization and other intangibles is a result of
goodwill being fully amortized at Harden as of December 31, 1996.

INCOME TAXES

          Anchor's minimum annual required tax payment due was reported during
the first quarter of 1997 and 1996.  Therefore, there was no income tax expense
reported for the three month periods ended September 30, 1997 and 1996.

LIQUIDITY AND CAPITAL RESOURCES

          Anchor's business is not capital intensive and Anchor historically has
had sufficient capital to meet its operating needs.  Anchor reported net cash
flows (used in) operations of $(60,194) for the nine months ended September 30,
1997, compared to net cash flows (used in) operations of $(472,357) for the nine
months ended September 30, 1996.  During 1997, Anchor met its operating and
capital needs from various sources, including borrowing under its existing
credit agreements and the use of proceeds received from the 1997 Offering.  See
Note 6, above.

          During 1996, Anchor raised $225,000 from five members of the Board of
Directors and other qualified investors through the issuance of 10% Subordinated
Bridge Notes with a Warrant to Purchase Shares of Anchor Common Stock ("Bridge
Notes").  The basic terms of the Bridge Notes were:  (a) 10% interest per annum,
paid in arrears; (b) one year term; (c) for every $10,000 of principal invested,
the purchaser received a warrant to acquire 1,000 shares of Anchor common stock
at a purchase price of $1.75 per share; (d) "piggyback" registration rights for
three years; and (e) subordination provisions that subordinate the Bridge Notes
to Anchor's "Senior Debt" (as defined in the Bridge Notes).  The Bridge Notes
are equal in status to the Debentures converted and not outstanding  issued
during 1995, which mature in 1997.

          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 (see Note 6 above), by exchanging
their Bridge Notes.  The basic terms of these two alternatives were:  (a) in
lieu of receiving a warrant to acquire 1,000 shares of Anchor common stock at a
purchase price of $1.75 per share, for every $10,000 of principal invested, the
purchaser would receive a warrant to acquire 2,000 shares of Anchor common stock
at a purchase price of $1.35 per share; or (b) participate in the 1997 Offering
by exchanging the Bridge Notes and receiving in return (i) interest at the rate
of 10% per annum up to the date of conversion; (ii) Anchor common 

                                       14
<PAGE>
 
stock in place of the Bridge Notes at a price equal to $0.90 per share; and
(iii) a five year warrant, equal to the number of shares issued in place of the
Bridge Notes, with the right to purchase Anchor's common stock at a purchase
price of $0.90 per share. The purchasers representing $180,000 of said Bridge
Note chose alternative (a) above, and the remaining $45,000 chose alternative
(b) above. As of September 30, 1997, $170,000 of the original $225,000 remained
outstanding.

          In 1995, Anchor issued $370,000 of 10% Convertible Subordinated
Debentures (the "Debentures"). 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 saved Anchor approximately $85,000 in interest payments, reduced
outstanding indebtedness by $870,000 and, in turn, increased shareholders'
equity by $870,000. As of September 30, 1997, $80,000 remained outstanding under
the terms of the Debentures. For further information regarding the Debentures,
refer to Anchor's Annual Report on Form 10-K for the year ended December 31,
1996.

          On December 17, 1996, Anchor entered into a Financial Advisory
Agreement ("Agreement") with The Private Financing Group ("TPFG"), to advise and
assist in planning, locating investors or funding sources, reviewing overall
business needs and promotion of the internal and external business goals of
Anchor. In particular, TPFG was to contact outside third party and institutional
funding sources concerning possible debt or equity financing opportunities.
Although Anchor had discussions with several potential investors concerning
possible financings, management concluded that the current financial condition
of Anchor made any financing proposal too costly. Consequently, the Board of
Directors determined that management should defer seeking outside financing
until Anchor's financial operating results sufficiently improve to enable it to
achieve a cost-effective private or public financing.

          The Agreement with TPFG provided for an advisory consulting fee of
$15,000 per month, plus reasonable expenses, commencing December 17, 1996 and
continuing for a nine month period.  Because the Board of Directors determined
that management should postpone seeking outside financing, in April 1997,
management exercised the cancellation provisions and terminated the Agreement
with TPFG.

          During first quarter 1997, Anchor commenced raising additional funds
from members of the Board of Directors and other qualified investors through a
private offering of Anchor common stock along with warrants to acquire shares of
Anchor common stock (the "1997 Offering").  As of November 3, 1997, Anchor had
raised $305,000 and had oral commitments for an additional $100,000 in the 1997
Offering.  Anchor has utilized a substantial portion of the proceeds from the
1997 Offering to support current working capital needs.  The basic terms of the
1997 Offering are: (a) 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.  Purchasers of the 1997 Offering, as of
November 3, 1997, consisted of eight members of the Board of Directors and other
qualified investors.

          Capital and certain acquisition related expenditures were $56,516 and
$387,690 for the nine months ended September 30, 1997, and 1996, respectively.
The largest 1997 expenditure involved computer equipment  purchased by Harden
and BRI during the second quarter.   During the first nine months of 1996, The
R.L. Ferguson Insurance Agency ("RLF") located in Walnut Creek, California and
certain property and casualty accounts maintained by Norman I. Robins ("Robins")
and John R. McPherson ("McPherson") were merged into Anchor's insurance
brokerage subsidiary, PKW, located in Concord, California.

          Short-term debt, current portion of long-term debt and current portion
of long-term liabilities at September 30, 1997, totaling in the aggregate
$2,589,234 (as compared to $2,424,508 at December 31, 1996) consisted of:  (a)
$975,000 outstanding under a $1,000,000 bank credit line maintained by Anchor;
(b) $445,000 outstanding under a $450,000 bank unsecured credit line with
another bank; (c) $142,500 outstanding under a $150,000 bank unsecured term loan
with the same bank which extended the $450,000 bank credit line; (d)
approximately $243,750 of future fixed payments under a consulting agreement
entered into with a company affiliated with the former shareholders of BRI;  (e)
$207,500 representing the current portion of obligations with regard to certain
real property leased by PKW prior to its acquisition by Anchor and relocation to
Anchor's executive offices; (f) $80,000 of Debentures; (g) $170,000 of Bridge
Notes; and (h) approximately $325,484 for 

                                       15
<PAGE>
 
certain other current liabilities.

          On January 7, 1997, the $1,000,000 bank credit line which Anchor had
maintained expired. Although Anchor was within the covenants of the bank credit
line on the renewal date and was current with all interest payments, the bank
notified Anchor that it would no longer continue to extend the line to Anchor,
under the same terms. Anchor has been successful, as of October 24, 1997, in
replacing the $1,000,000 bank credit line with a new credit facility (the "New
Loan") provided by another bank. The basic terms and conditions of this New Loan
are: (a) $1,600,000 term loan; (b) interest equal to the bank's prime rate plus
2.5%; (c) five year term; (d) monthly principal payments in installments of
$26,6666.67; (Not withstanding the foregoing, 75% of the Company's monthly
EBITDA shall be applied to principal to the extent such percentage of monthly
EBITDA is required to make the scheduled payment of principal. To the extent
that 75% of monthly EBITDA falls short of the required principal payment, the
difference shall be added to the final payment.); and (e) a five year warrant to
acquire 95,000 shares of Anchor common stock at a purchase price of $1.75 per
share. A portion of the $1,600,000 proceeds from the New Loan was used to pay
off $975,000 outstanding under the $1,000,000 bank credit line. Another portion
of the proceeds from the New Loan was used to retire and consolidate two credit
facilities the bank had extended Anchor. The $445,000 outstanding balance under
the $450,000 bank unsecured credit line and the $142,500 outstanding balance
under the $150,000 bank unsecured term loan were paid in full on October 24,
1997.

          At September 30, 1997, long-term liabilities, less the current portion
discussed above, totaled $577,160  (as compared to $922,950 at December 31,
1996), and primarily consisted of (a) approximately $122,000 representing the
long-term portion of obligations related to certain real property leased by PKW
prior to its acquisition by Anchor and relocation to Anchor's executive offices;
(b) approximately $317,500 representing deferred rent related to certain real
property currently leased by Anchor; and (c) approximately $137,660 for certain
other long-term liabilities.  In May 1995, PKW entered into a sublease with
respect to 82% of PKW's prior office space.  In December 1995, PKW entered into
a sublease with respect to an additional 10% of PKW's prior office space.  The
subleases expire on November 30, 1999, and each require PKW to provide a multi-
year rent subsidy.  The amounts classified as short and long-term liability with
respect to the PKW leases reflect such subsidy and are based upon the assumption
that the remaining 8% of such office space will be subleased.

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

STRATEGY

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

                                       16
<PAGE>
 
PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2.  CHANGES IN SECURITIES

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.  Exhibits

10.6a   Employment Agreement dated August 16, 1997, between Anchor and James R.
        Dunathan.

10.25   Central Plaza Office Lease dated July 14, 1997, between Harden and Zufu
        Properties, Co., Ltd. (regarding 3460 Wilshire Boulevard Tower, Suite
        407, Los Angeles, California).

10.25a  Addendum dated July 14, 1997, to Central Plaza Office Lease dated July
        14, 1997, between Harden and Zufu Properties, Co., Ltd. (regarding 3460
        Wilshire Boulevard Tower, Suite 407, Los Angeles, California).

10.26   Office Building Lease dated July 30, 1997, between BRI and T.W.
        Patterson Investors II/ The T. W. Patterson Building (regarding 2014
        Tulare Street, Suite 818, Fresno, California).

10.27   Business Loan Agreement dated as of September 30, 1997, between Anchor
        and Imperial Bank, and related documents.

27.0    Financial Data Schedule


B.  Reports on Form 8-K

None

                                       17
<PAGE>
 
                                  SIGNATURES


        Pursuant to the requirements of the Securities Exchange Act of 1934,
Anchor has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
 
                                   ANCHOR PACIFIC UNDERWRITERS, INC.
 
 
 
Date:  November 3 , 1997
       ------------------------    ---------------------------------
                                   James R. Dunathan
                                   President and Chief Executive Officer
 
 
 
Date:  November 3, 1997
       ------------------------    --------------------------------- 
                                   Earl Wiklund
                                   Senior Vice President and
                                   Chief Financial Officer
 

                                       18