<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 JUNE 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 June 30, 1997, the Registrant had 4,628,175 shares of common stock
outstanding.

                    This document is comprised of 32 pages.

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

                       ANCHOR PACIFIC UNDERWRITERS, INC.

                                     INDEX
<TABLE>
<S>                                                                            <C> 
PART I.   FINANCIAL INFORMATION
 
                 
          ITEM 1.   Financial Statements:
 
                    Consolidated Balance Sheets, June 30, 1997
                    (unaudited) and December 31, 1996...................       1
 
                    Consolidated Statements of Operations for the six
                    months and quarters ended June 30, 1997 and 1996
                    (unaudited).........................................       3
 
                    Consolidated Statements of Shareholders' Equity for
                    the six months ended June 30, 1997 (unaudited) and
                    year ended December 31, 1996........................       4
 
                    Consolidated Statements of Cash Flows for the six
                    months ended June 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....................      18
</TABLE> 
<PAGE>
 
                        PART I - FINANCIAL INFORMATION


              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
 
                                             June 30,     December 31,
                                               1997           1996
                                           -----------    ------------
<S>                                        <C>            <C>
                                           (unaudited)
 
ASSETS
Current Assets:
    Cash and cash equivalents -            
     corporate funds                        $   28,799     $   151,765 
    Cash and cash equivalents -
     brokerage fiduciary funds               1,275,310         977,086

    Cash and cash equivalents -
     third-party administration              
     fiduciary funds                         2,930,057       3,580,793
    Accounts receivable (less allowance
     for doubtful accounts of $41,200
     and $32,438 in 1997 and 1996)           1,187,374       1,309,921
    Prepaid expenses and other current     
     assets                                    263,301         244,086
                                            ----------     -----------
Total current assets                         5,684,841       6,263,651
 
 
Property and equipment                       2,981,145       2,976,497
Less accumulated depreciation and          
 amortization                               (2,306,896)     (2,155,300)
                                            ----------     -----------
                                               674,249         821,197
 
Other assets:
    Goodwill, net                            1,861,879       1,903,729
    Intangible assets, net                   1,062,020       1,139,467
    Deferred compensation                      206,784         257,784
    Other                                      144,757         125,611
                                            ----------     -----------
                                             3,275,440       3,426,591
                                            ----------     -----------
 
 
Total assets                                $9,634,530     $10,511,439
                                            ==========     ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                  June 30,      December 31, 
                                                    1997            1996     
                                                  --------     ------------- 
                                                 (unaudited)                 
<S>                                             <C>            <C>           
LIABILITIES AND SHAREHOLDERS' EQUITY                                         
Current Liabilities:                                                         
    Cash and cash equivalents -                                              
     third-party administration                                              
     fiduciary funds                            $ 2,930,057     $ 3,580,793  
    Net premiums payable - insurance                                         
     companies                                    2,170,443       2,037,749  
    Accounts payable and accrued                                             
     expenses                                       525,982         438,208  
    Short-term borrowings                         1,420,000       1,395,000  
    Current portion of long-term debt               290,000         425,110  
    Current portion of long-term                                             
     liabilities                                    799,174         604,398  
                                                -----------     -----------  
Total current liabilities                         8,135,656       8,481,258  
                                                -----------     -----------  
                                                                             
                                                                             
Long-term liabilities                               531,587         773,930  
                                                -----------     -----------  
                                                                             
                                                                             
Long-term debt, including $220,000 in                                        
    1997 and 1996, owed to related parties          129,793         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;                                           
     4,628,175 and 4,362,837 shares                                          
     issued as of 6/30/97 and                                                
     12/31/96,respectively                           92,565          87,256  
    Additional paid-in capital                    4,160,200       3,925,508  
    Accumulated deficit                          (3,415,271)     (2,905,533) 
                                                -----------     -----------  
Total shareholders' equity                          837,494       1,107,231  
                                                -----------     -----------  
Total liabilities and shareholders'                                          
 equity                                         $ 9,634,530     $10,511,439  
                                                ===========     ===========   
</TABLE>


See accompanying notes.

                                       2
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                   Six Months                     Quarters
                                                 Ended June 30,                Ended June 30,
                                            -------------------------     -------------------------
                                               1997           1996           1997           1996
<S>                                         <C>           <C>             <C>           <C> 
Revenues:
  Commissions, fees and other income        $4,021,975     $4,086,411     $2,016,721     $2,019,900
  Interest Income                               42,135         59,379         20,540         31,537
                                            ----------     ----------     ----------     ----------
Total revenue                                4,064,110      4,145,790      2,037,261      2,051,437
 
Operating expenses:
  Salaries, commissions and employee
    benefits                                 2,796,297      2,763,056      1,411,490      1,387,103
  Selling, general and administrative
    expenses                                 1,569,759      1,607,116        814,533        809,088
                                            ----------     ----------     ----------     ----------
                                             4,366,056      4,370,172      2,226,023      2,196,191
                                            ----------     ----------     ----------     ----------
                                              (301,946)      (224,382)      (188,762)      (144,754)
 
Other income (expense):
  Amortization of goodwill &
    intangible assets                         (119,296)      (186,902)       (56,768)       (95,162)
  Interest                                     (99,329)      (202,193)       (48,111)       (72,786)
  Other                                         15,303         37,444         11,959         15,997
                                            ----------     ----------     ----------     ----------
 
Total other income (expense)                  (203,322)      (351,651)       (92,920)      (151,951)
                                            ----------     ----------     ----------     ----------
 
Loss before income taxes                      (505,268)      (576,033)      (281,682)      (296,705)
 
Provision for income taxes                       4,470          4,800              -              -
                                            ----------     ----------     ----------     ----------
 
Net loss                                    $ (509,738)    $ (580,833)    $ (281,682)    $ (296,705)
                                            ==========     ==========     ==========     ==========
Net loss per common and
  common equivalent share                   $    (0.11)    $    (0.16)    $    (0.06)    $    (0.08)
                                            ==========     ==========     ==========     ==========
 
Weighted average number of
  common and common equivalent
  shares outstanding                         4,530,649      3,683,760      4,605,092      3,685,612
                                            ==========     ==========     ==========     ==========
</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          1,690               -          1,701
   Stock issued for Private
      Offering                      264,778       5,298        233,002               -        238,300
   Canceled stock:
      Fractional shares                  (7)          -              -               -              -
   Net Loss                               -           -              -        (509,738)      (509,738)
                                  -------------------------------------------------------------------
 
Balance at June 30, 1997
   (Unaudited)                    4,628,175     $92,565     $4,160,200      (3,415,271)   $   837,494
                                  -------------------------------------------------------------------
</TABLE>

See accompanying notes

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

<TABLE>
<CAPTION>
                                                  Six Months
                                                Ended June 30,
                                            -----------------------
                                              1997          1996
<S>                                         <C>           <C>
OPERATING ACTIVITIES
Net loss                                    $(509,738)    $(580,833)
Adjustments to reconcile net loss to
 cash provided by (used in) operating
 activities:
      Depreciation and amortization           151,597       141,897
      Amortization of goodwill, other
       intangibles and organization 
       expenses                               119,296       186,902
 
Changes in operating assets and
 liabilities:
      Cash and cash equivalents -
       brokerage fiduciary funds             (298,224)      343,421
      Accounts receivable                     122,547      (503,611)
      Prepaid expenses and other              
       current assets                          (9,749)      (42,189)         
      Other assets                            (19,146)       (1,673)
      Deferred compensation                    51,000       103,560
      Net premiums payable - insurance        
       companies                              132,694       122,287
      Accounts payable and accrued             
       expenses                                87,773        32,534
      Other liabilities                             -       (28,562)
                                            ---------     ---------
 
Net cash used in operating activities        (171,950)     (226,267)
 
 
INVESTING ACTIVITIES
Notes receivable, net                          (9,466)        2,098
Purchases of property and equipment            (4,648)      (61,350)
Purchases of customer list                          -      (260,000)
                                            ---------     ---------
 
Net cash used in investing activities         (14,114)     (319,252)
</TABLE>

                                       5
<PAGE>
 
              ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                           Six Months         
                                                         Ended June 30,       
                                                     ----------------------   
                                                        1997         1996     
<S>                                                  <C>          <C>         
FINANCING ACTIVITIES                                                          
Common stock issued                                    240,001            -   
Debt:                                                                         
   Borrowings                                           35,000            -   
   Repayment                                          (211,903)     (42,421)  
Net payments on amounts due on acquisitions                  -      156,022    
                                                      --------     --------   
Net cash provided by financing activities               63,098      113,601   
                                                      --------     --------   
                                                                              
                                                                              
Net decrease in cash and cash equivalents             (122,966)    (431,918)   
Cash and cash equivalents - corporate                                         
 funds at beginning of period                          151,765      904,781   
                                                     ---------     --------   
Cash and cash equivalents - corporate                                         
 funds at end of period                              $  28,799    $ 472,863   
                                                     =========    =========   
                                                                              
SUPPLEMENTAL CASH FLOW INFORMATION                                            
Cash paid during the period for:                                              
   Interest                                          $  99,329    $ 202,193   
                                                     =========    =========   
   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)

                                 JUNE 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 six month period ended June 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.
Anchor maintained a $1,000,000 credit line with a bank which expired on January
7, 1997, and has not been renewed. Anchor is continuing to negotiate with the
bank to retire or restructure the obligation either through a new credit
facility provided by another interested bank or in combination with funding from
investors.  The terms and conditions of this new credit facility are expected to
be finalized prior to the end of third quarter 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 currently seeking 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 August 4, 1997, Anchor had raised $260,000, and had oral
commitments for an additional $90,000 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.

   Management's plan is to strengthen Anchor's core health insurance and
property and casualty insurance businesses by:  (a) continuing to develop
specialized affiliated business units that target selected insurance market
segments defined by industry type, geographic location and consumer
demographics; (b) establishing 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.
As part of Anchor's strategy to create the premier regional publicly traded
insurance brokerage/administrator in the Western United States, it expects to
obtain additional momentum by using its status as a public company to attract
public or private financing.  Such funding would be available to Anchor for
future acquisitions, expanded marketing and consolidation of its insurance
operations.

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 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.

                                       7
<PAGE>
 
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 further expand internal revenue
growth 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 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 maturity; (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 and Series A
Debenture (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.

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 will save Anchor approximately
$85,000 in interest payments, reduce outstanding indebtedness by $870,000 and,
in turn, increase shareholders' equity by $870,000. 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 August 4,
1997, Anchor had received $260,000 from said investors and had oral commitments
for an additional $90,000 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
August 4, 1997, consist of six members of the Board of Directors and other
qualified investors.

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

   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 period of six months.  Because the Board of Directors has
determined that management should postpone seeking outside financing, in April
1997, management exercised the cancellation provisions and terminated the
Agreement with TPFG.

   On May 5, 1997, Anchor entered into a $10,000 Six Month Note ("Note A") with
a member of the Board of Directors to supplement current working capital needs.
The basic terms of Note A were: (A) 10% interest per annum, paid in arrears; and
(b) six month maturity.

   On May 28, 1997, Anchor entered into a $50,000 Three Month Note ("Note B")
with a member of the Board of Directors to supplement current working capital
needs.  The basic terms of Note B were: (a) 10% interest per annum, paid in
arrears; (b) three month maturity; (c) five year warrants 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 July 3, 1997, Anchor obtained a $150,000 unsecured term loan from a San
Francisco Bay Area Bank 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").

                                       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 third-party
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.  These contracts, secured by Anchor's third-party
administration services, are expected to generate an increase of over 50% in new
revenues by the end of the fourth quarter 1997.

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

GENERAL

     Anchor derives revenues from commissions and 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 over a
given period of time by the insurance carrier. 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 

                                       10
<PAGE>
 
property and casualty market and any loss of revenues that may result from
workers' compensation reform.

     Historically, inflation has impacted commission revenues by, among other
things, increasing property replacement costs and workers' compensation and
liability claims, thereby causing some clients to seek higher levels of
insurance coverage and, in turn, pay higher premiums. During the past several
years, the United States has experienced very low rates of inflation along with
gradual business expansion. Consequently, inflation has had minimal impact on
insurance 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
components.  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 service all of
the administration of this business at a favorable fee 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 six months ended June 30, 1997 were
$4,064,110, a decrease of $81,680 or 2.0%, as compared to $4,145,790 in revenues
for the same period in 1996.  The decrease resulted from the continuing soft
property and casualty market and the effects of open-rating in workers'
compensation. Anchor's revenues vary from quarter to quarter as a result of the
timing of policy renewals and net new/lost business production, whereas expenses
are fairly uniform throughout the year.

     Commissions and fees make up substantially all of Anchor's revenues.  The
following table sets forth the percentages of Anchor's revenues attributable to
insurance brokerage services (for which commissions are generated), and third-
party administration, underwriting and risk analysis services (for which fees
are generated),

                                       11
<PAGE>
 
for the six months ended June 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 services was
dissolved effective as of May 30, 1997, due to its inactivity.

<TABLE>
<CAPTION>
========================================================== 
    SIX MONTHS ENDED JUNE 30,         1997    1996    1995
----------------------------------------------------------
<S>                                   <C>     <C>     <C>
Insurance Brokerage Commissions        41%     43%     41%
----------------------------------------------------------
Third-Party Administration Fees        59%     57%     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 significantly increase
July 1, 1997.

     COMMISSIONS.  Commissions 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 six
months of 1997 were $1,627,555, a decrease of $123,314 or 7.0%, compared to
$1,750,869 of commissions for the same period of 1996.  The decrease is largely
due to the continuing soft property and casualty market and the effects of open-
rating in workers' compensation.

     Based on recent experience, management presently anticipates that
commission revenues generated from the sale of workers' compensation insurance,
which accounted for approximately 15% of commission revenues (or 7% of Anchor's
total revenues) in 1996, may decrease as a result of workers' compensation
reform in California.  Anchor believes, however, that revenues generated from
anticipated internal growth and continued diversification of its business will
substantially offset any loss of revenues that result from workers' compensation
reform.

     Fees.  Fees from Anchor's third-party administration (including
underwriting and risk analysis) services for the six months ended June 30, 1997
were $2,394,330, an increase of $59,371 or 2.5%, as compared to $2,334,959 in
fees for the same period in 1996.  This increase in fee income is the result of
new business generated from the new insurance carrier as discussed above.

     Fee revenues generated by Anchor in the second 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 31.7% of
Harden's revenues (or approximately 11.9% of Anchor's total revenues) in the
first six months of 1997, and revenues related to the administration of self-
insured programs, described in (b) above, accounted for approximately 59.2% of
Harden's revenues (or approximately 22.3% of Anchor's total revenues) in the
first six 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 $42,135 and $59,379 for the six months ended
June 30, 1997 and 1996, respectively.  The decrease in interest income in 1997,
as compared to 1996, was primarily caused by reduced insurance premiums and
other funds held in fiduciary accounts, which is directly related to business
lost due to the prior insurance carrier's underwriting requirements referred to
above.   Management anticipates that interest income will begin increasing as a
result of the increase in funds held in fiduciary accounts from new business.

                                       12
<PAGE>
 
EXPENSES

     TOTAL EXPENSES.  Total operating expenses for the six months ended June 30,
1997, were $4,366,056, a decrease of $4,116 or 0.1% as compared to the operating
expenses of $4,370,172 for the same period in 1996.  As discussed below, the
decrease in total expenses resulted primarily from a decrease in selling,
general and administrative expenses offset, in part, by the increase in employee
compensation and benefits.

     EMPLOYEE COMPENSATION AND BENEFITS.  Employee compensation and benefits for
the six months ended June 30, 1997, were $2,796,297, an increase of $33,241 or
1.2% as compared to $2,763,056 for the same period in 1996.  The increase
related primarily to anticipated staffing needs required to service new business
projects from Anchor's third-party administration services.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $1,569,759 and $1,607,116 for the six months ended
June 30, 1997 and 1996, respectively.  The $37,357 or 2.3% decrease in 1997, as
compared to 1996, resulted primarily from a decrease in legal and auditing fees.
General and administrative expenses include rent, travel, insurance, postage,
telephone, supplies and other miscellaneous expenses.

     INTEREST EXPENSE. Interest expense totaled $99,329 and $202,193, for the
six months ended June 30, 1997 and 1996, respectively. The decrease in expense
of $102,864 in the six months ended June 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 Series A Debenture and 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 $119,296
and $186,902, for the six months ended June 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 six month
periods ended June 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 JUNE 30, 1997 AND 1996

REVENUES

     TOTAL REVENUES.  Total revenues for the three months ended June 30, 1997,
were $2,037,261, a decrease of $14,176 or 0.7%, as compared to $2,051,437 of
revenues for the same period in 1996.  The decrease resulted primarily from the
continuing soft property and casualty market and the effects of open-rating in
workers' compensation.  Anchor's revenues vary from quarter to quarter as result
of the timing of policy renewals and new new/lost business production, whereas
expenses are fairly uniform throughout the year.

     COMMISSIONS.  Commissions for the three months ended June 30, 1997, were
$827,524, a decrease of $49,047 or 5.6%, as compared to $876,571 of commissions
for the same period of 1996.  The net loss of business at PKW accounted for
substantially all of the decrease.

     FEES.  Fees from Anchor's third-party administration (including
underwriting and analysis) services for the three months ended June 30, 1997,
were $1,189,240, an increase  of $46,467 or 4.1% as compared to $1,142,773 in
fees for the same period in 1996.  The increase in fee income is the result of
new business received from the new insurance carrier as discussed above.

     INTEREST INCOME.  Interest income was $20,540 and $31,537 for the three
months ended June 30, 1997

                                       13
<PAGE>
 
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 June
30, 1997 were $2,226,023, an increase of $29,832 or 1.4%, as compared to
operating expenses of $2,196,190 for the same period in 1996.  The increase
resulted primarily from the increase in employee compensation and benefits,
offset, in part, by a decrease in selling, general and administrative expenses.

     EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits for
the three months ended June 30, 1997 were $1,411,490, an increase of $24,387 or
1.8%, as compared to $1,387,103 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.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $814,533 and $809,087 for the three months ended
June 30, 1997 and 1996, respectively.  The $5,445 or 0.7%, increase in the
second quarter of 1997, as compared to the same period in 1996 resulted
primarily from reclassification of certain items previously classified as
employee compensation and benefits.  General and administrative expenses include
rent, travel, insurance, postage, telephone, supplies and other miscellaneous
expenses.

     INTEREST EXPENSE.  Interest expense was $48,111 and $72,786 for the three
months ended June 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 Series
A Debenture and 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 $56,768
and $95,162 for the three months ended June 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 June 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 $(171,950) for the six months ended June 30, 1997,
compared to net cash flows (used in) operations of $(226,267) for the six months
ended June 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 members of the Board of Directors and
other qualified investors derived from a private offering of Anchor common stock
along with warrants to acquire shares of Anchor common stock (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 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 maturity; (c) for every $10,000 of principal
invested, the purchaser received warrants 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 and Series A

                                       14
<PAGE>
 
Debenture (see Note 5 above) 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 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 receiving in return (i) interest at the rate
of 10% per annum up to the date of conversion; (ii) Anchor common stock in place
of the Bridge Notes at a 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.  The purchasers representing $180,000 of said Bridge Note chose
alternative (a) above, and the remaining $45,000 chose alternative (b) above.

       In 1995, Anchor issued $370,000 of Convertible Subordinated Debentures
(the "Debentures") and a 10% Convertible Subordinated Convertible Debenture,
Series A ("Series A Debenture") in the amount of $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 will save
Anchor approximately $85,000 in interest payments, reduce outstanding
indebtedness by $870,000 and, in turn, increase shareholders' equity by
$870,000. 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.

       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 period of six months.  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 August 4, 1997, Anchor had
received $260,000 from said investors and had oral commitments for an additional
$90,000 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 August 4, 1997, consisted of six members of the Board of
Directors and other qualified investors.

     Capital and certain acquisition related expenditures were $4,648 and
$319,252 for the six months ended June 30, 1997, and 1996, respectively.  The
largest 1997 expenditure involved computer equipment purchased by Harden during
the first quarter.   During the first six months of 1996, the R.L. Ferguson
Insurance Agency ("RLF") located in Walnut Creek, California and certain
property and casualty accounts from Norman I. Robins ("Robins") and from John R.
McPherson ("McPherson") were merged into Anchor's insurance brokerage
subsidiary, PKW, located in Concord, California.

                                       15
<PAGE>
 
     Short-term debt, current portion of long-term debt and current portion of
long-term liabilities at June 30, 1997, totaling in the aggregate $2,509,174 (as
compared to $2,424,508 at December 31, 1996) consisted of:  (a)  $975,000
outstanding under a $1,000,000 revolving line of credit maintained by Anchor
with a regional San Francisco Bay Area bank;  (b) $445,000 outstanding under a
$450,000 unsecured line of credit with another regional San Francisco Bay Area
bank;  (c) approximately $243,750 of future fixed payments under a consulting
agreement entered into with a company affiliated with the former shareholders of
BRI;  (d) $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; (e) $100,000 of Debentures; (f)
$180,000 of Bridge Notes; and (g) approximately $357,924 for certain other
current liabilities.

     On January 7, 1997, the $1,000,000 line of credit expired.  Although Anchor
was within the covenants of the line of credit on the renewal date, and is
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 is
continuing to negotiate with the bank to retire or restructure the obligation
either through a new credit facility provided by another interested bank or in
combination with funding from investors.  The terms and conditions of this
credit facility are expected to be finalized prior to the end of third quarter
1997.  The interest rate on the $1,000,000 line of credit is at the lending
bank's prime rate.

       In 1995, the bank that provided Anchor with the $1,000,000 line of credit
also provided Anchor with equipment financing loans of $125,000 and $62,000 for
equipment purchased with operating capital.  The proceeds from the $125,000
equipment financing loan were then used to reduce the outstanding balance on
said $1,000,000 line of credit.  The $450,000 unsecured line of credit with the
other regional San Francisco Bay area bank matures on October 20, 1997.  The
interest rate on the $450,000 line of credit is equal to the lending bank's
prime rate plus 1.5%.  On July 3, 1997, the bank that provided Anchor with the
$450,000 unsecured line of credit also provided Anchor an unsecured $150,000
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.   The interest rate on the $150,000 loan
which matures on July 2, 1999, is equal to the lending bank's prime rate plus
2%.

     At June 30, 1997, long-term liabilities, less the current portion discussed
above, totaled $661,380 (as compared to $922,950 at December 31, 1996), and
primarily consisted of (a) approximately $89,230 of future fixed payments under
the consulting agreement, mentioned above, with a company affiliated with the
former shareholders of BRI;  (b) approximately $153,000 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; (c)
approximately $296,500 representing deferred rent related to certain real
property currently leased by Anchor; and (d) approximately $122,650 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 strengthen its core health insurance 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) establishing 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.  As part of Anchor's strategy to create the premier regional
publicly traded insurance brokerage/administrator in the Western United States,
it expects to obtain additional momentum by using its status as a public company
to attract public or private financing.  Such funding would be available to
Anchor for future acquisitions, expanded marketing and consolidation of its
insurance operations.

                                       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

       Article fourth of Anchor's Certificate of Incorporation was amended to
(i) increase the authorized shares of Common Stock from 8,000,000 to 16,000,000
shares, and (ii) increase the authorized shares of Preferred Stock from 500,000
to 2,000,000 shares.

       The increase in the number of authorized shares of Common Stock and
Preferred Stock was approved at the May 13, 1997, Annual Meeting of Stockholders
to assure that an adequate supply of authorized and unissued shares of Common
Stock and preferred stock is available for general corporate needs, such as
raising additional equity capital, financing acquisitions with capital stock,
declaring stock splits or stock dividends, or using for future employee benefit
plans.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

       Pursuant to notice duly given, the Annual Meeting of Stockholders of
Anchor was held on May 13, 1997 at which time the number of shares represented
and voted in person or by proxy were: 3,492,625 by proxy, and 0 in person.  The
total number of shares present in person and by proxy equaled 81.20% of the
total shares issued and outstanding as of March 14, 1997, the record date of
said meeting, the stockholders approved the following proposals:

       The first proposal was the election of directors.  The following
directors, being all of the nominees as set forth in the proxy statement, were
elected to serve until the next annual meeting of stockholders and until their
successors are elected and have qualified:  James R. Dunathan, Earl Wiklund,
Audie J. Dudum, Steven A. Gonsalves, Lawrence A. Hayes, R. William MacCullough,
Donald B. Putnam, Michael R. Sanford, Gordon M. Silverstein and James P.
Wieking.

       The second proposal was the approval to amend Article Fourth of the
Company's Certificate of Incorporation to (i) increase the authorized shares of
Common Stock from 8,000,000 to 16,000,000 shares; and (ii) increase the
authorized shares of Preferred Stock from 500,000 to 2,000,000 shares.  Said
proposal received the following votes:  2,745,233 (63.82%) for; 40,537 against;
5,975 abstained; and 700,880 broker non-votes.

       The third proposal was the ratification of the appointment of independent
auditors, Odenberg, Ullakko, Muranishi & Co. ("Odenberg") to audit the financial
statements of Anchor for the fiscal year ended December 31, 1996.  Anchor had
dismissed the firm of Ernst & Young based solely on the fact that the engagement
of Odenberg would result in substantial cost savings.  Said proposal received
the following votes:  3,468,971 (80.65%) for; 21,932 against; and 1,722
abstained.

ITEM 5.  OTHER INFORMATION

None.

                                       17
<PAGE>
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.  Exhibits

10.24  Business Loan Agreement Dated as of July 3, 1997, between Anchor and
       Imperial Bank, and related documents.

27.0   Financial Data Schedule


B.  REPORTS ON FORM 8-K

None

                                       18
<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: August 4 , 1997          /s/ James R. Dunathan
     --------------------      -------------------------------------------------
                               James R. Dunathan
                               President and Chief Executive Officer
 
 
 
Date: August 4, 1997           /s/ Earl Wiklund
     --------------------      -------------------------------------------------
                               Earl Wiklund
                               Senior Vice President and Chief Financial Officer
 

                                       19