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

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

                               ________________


                                   FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    FOR THE QUARTER ENDED MARCH 31, 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  March 31, 1997, the Registrant had 4,535,954 shares of common stock
outstanding.


                     This document is comprised of 21 pages

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

                                     INDEX
<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION
<S>                                                                                   <C>
         ITEM 1. Financial Statements:

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

                 Consolidated Statements of Operations for the three months ended
                 March 31, 1997 and 1996 (unaudited)................................   3

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


                 Consolidated Statements of Cash Flows for the three months ended
                 March 31, 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>
                                                   March 31,     December 31,
                                                     1997            1996
                                                  -----------    ------------
                                                  (unaudited)
<S>                                               <C>            <C>
ASSETS
Current Assets:
 Cash and cash equivalents - corporate funds       $    57,745    $   151,765
 Cash and cash equivalents - brokerage
   fiduciary funds                                   1,182,243        977,086
 Cash and cash equivalents - third-party
   administration fiduciary funds                    3,544,477      3,580,793
 Accounts receivable (less allowance for
   doubtful accounts of $38,200 and $32,438
   in 1997 and 1996)                                 1,033,834      1,309,921
 Prepaid expenses and other current assets             217,959        244,086
                                                   -----------    -----------
Total current assets                                 6,036,258      6,263,651


Property and equipment                               2,979,961      2,976,497
Less accumulated depreciation and amortization      (2,231,631)    (2,155,300)
                                                   -----------    -----------
                                                       748,330        821,197

Other assets:
 Goodwill, net                                       1,878,975      1,903,729
 Intangible assets, net                              1,101,692      1,139,467
 Deferred compensation                                 206,784        257,784
 Other                                                 123,417        125,611
                                                   -----------    -----------
                                                     3,310,868      3,426,591
                                                   -----------    -----------

Total assets                                       $10,095,456    $10,511,439
                                                   ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                   March 31,     December 31,
                                                     1997            1996
                                                  -----------    ------------
                                                  (unaudited)
<S>                                               <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
    Cash and cash equivalents - third-party        
      administration fiduciary funds               $ 3,544,477    $ 3,580,793
    Net premiums payable - insurance companies       1,877,086      2,037,749
    Accounts payable and accrued expenses              361,125        438,208
    Short-term borrowings                            1,420,000      1,395,000
    Current portion of long-term debt                  335,000        425,110
    Current portion of long-term liabilities           768,539        604,398
                                                   -----------    -----------
Total current liabilities                            8,306,227      8,481,258
                                                   -----------    -----------

Long-term liabilities                                  552,026        773,930
                                                   -----------    -----------

Long-term debt, including $220,000 in
 1997 and 1996, owed to related parties                201,026        149,020
                                                   -----------    -----------

Shareholders' equity:
    Preferred stock - $.02 par value;
      500,000 shares authorized; none issued
      and outstanding
    Common stock  - $.02 par value; 8,000,000
      shares authorized; 4,535,954 and
      4,362,837 shares issued as of 3/31/97 
      and 12/31/96, respectively                        90,719         87,256
    Additional paid-in capital                       4,079,047      3,925,508
    Accumulated deficit                             (3,133,589)    (2,905,533)
                                                   -----------    -----------
Total shareholders' equity                           1,036,177      1,107,231
                                                   -----------    -----------
Total liabilities and shareholders' equity         $10,095,456    $10,511,439
                                                   ===========    ===========
</TABLE>

See accompanying notes.

                                       2
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                            Three Months
                                                           Ended March 31,
                                                      -------------------------
                                                          1997          1996
                                                      (unaudited)   (unaudited)
<S>                                                   <C>           <C>
Revenues:
    Commissions, fees and other income                 $2,005,254    $2,066,511
    Interest income                                        21,595        27,842
                                                       ----------    ----------
Total revenue                                           2,026,849     2,094,353
                                                       ----------    ----------

Operating expenses:
    Salaries, commissions and employee benefits         1,384,807     1,375,953
    Selling, general and administrative expenses          755,227       798,029
                                                       ----------    ----------
Total operating expenses                                2,140,034     2,173,982
                                                       ----------    ----------
                                                         (113,185)      (79,629)

Other income (expense):
    Amortization of goodwill and intangible assets        (62,529)      (91,740)
    Interest                                              (51,218)     (129,407)
    Other                                                   3,346        21,447
                                                       ----------    ----------
Total other income (expense)                             (110,401)     (199,700)
                                                       ----------    ----------

Income (loss) before income taxes                        (223,586)     (279,329)

Income tax expense                                          4,470         4,800
                                                       ----------    ----------

Net loss                                               $ (228,056)   $ (284,129)
                                                       ==========    ==========

Net loss per common share                                  $(.05)         $(.08)
                                                       ==========    ==========

Weighted average number of common
    shares outstanding                                  4,456,205     3,681,908
                                                       ==========    ==========
</TABLE>
See accompanying notes

                                       3
<PAGE>
 
                       ANCHOR PACIFIC UNDERWRITERS, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                        Additional     Retained
                                                    Common Stock         Paid-In       Earnings
                                                  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         12         1,690              -         1,702
   Stock issued for Private Offering              172,553      3,451       151,849              -       155,300
   Canceled stock:
      Fractional shares                                (3)         -             -              -             -
    Net Loss                                            -          -             -       (228,056)     (228,056)
                                              -----------------------------------------------------------------

Balance at March 31, 1997 (Unaudited)           4,535,954    $90,719    $4,079,047    $(3,133,589)  $ 1,036,177
                                              =================================================================
</TABLE>

See accompanying notes

                                       4
<PAGE>
 
               ANCHOR PACIFIC UNDERWRITERS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                              Three Months
                                                             Ended March 31,
                                                        -----------------------
                                                           1997         1996
                                                        (unaudited)  (unaudited)

OPERATING ACTIVITIES
<S>                                                     <C>          <C>
Net loss                                                 $(228,056)   $(284,129)
Adjustments to reconcile net loss to cash provided
   by (used in) operating activities:
      Depreciation and amortization                         76,331       69,579
      Amortization of goodwill, other intangibles
         and organization expenses                          62,529       91,740

Changes in operating assets and liabilities,
   net of effect of purchases of subsidiaries:
      Cash and cash equivalents - brokerage               
         fiduciary funds                                  (205,157)     261,788
      Accounts receivable                                  276,087     (576,043)
      Prepaid expenses and other current assets              7,536        1,802
      Other assets                                           2,194       (3,022)
      Deferred compensation                                 51,000      (73,656)
      Net premiums payable - insurance companies          (160,663)     342,945
      Accounts payable and accrued expenses                (77,083)      30,209
      Other liabilities                                          -      (22,865)
                                                         ---------    ---------

Net cash (used in) operating activities                   (195,282)    (161,652)

INVESTING ACTIVITIES
Notes receivable, net                                       18,591       (4,872)
Purchases of property and equipment                         (3,464)     (40,921)
Purchases of customer list                                       -     (260,000)
                                                         ---------    ---------

Net cash provided by (used in) investing activities         15,127     (305,793)
</TABLE>

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

<TABLE>
<CAPTION>
                                                              Three Months
                                                             Ended March 31,
                                                        -----------------------
                                                           1997         1996
                                                        (unaudited)  (unaudited)
<S>                                                       <C>          <C>
FINANCING ACTIVITIES
Common stock issued:
    1997 Offering                                          155,300            -
    Warrants                                                 1,702            -
Debt:
   Borrowings                                               35,000            -
   Repayment                                              (105,867)    (102,860)
Net payments on amounts due on acquisitions                      -      156,022 
                                                         ---------    ---------
Net cash provided by financing beginning of period          86,135       53,162
                                                         ---------    ---------

Net decrease in cash                                       (94,020)    (414,283)
Cash and cash equivalents - corporate
 funds at beginning of period                              151,765      904,781
                                                         ---------    ---------
Cash and cash equivalents - corporate
 funds at end of period                                  $  57,745    $ 490,498
                                                         =========    =========

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
   Interest                                              $  51,218    $ 129,407
                                                         =========    =========
   Income taxes                                          $   4,470    $       -
                                                         =========    =========

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)

                                 MARCH 31, 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 three month period ended March 31, 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 the past three years. The increase in net
loss from 1995 to 1996 relates primarily to business lost due to new
underwriting requirements imposed by a new insurance carrier. In addition,
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 restructure a new credit facility; or, as an alternative, move the
credit facility to another interested bank (depending upon the terms and
conditions); or, lastly, use proceeds from investors to satisfy, or reduce, the
obligation and convert the remaining balance to a longer term note. The terms
and conditions of this new credit facility are expected to be finalized prior to
the end of second quarter 1997. Anchor's business is not capital intensive and
Anchor historically has had sufficient capital to meet its operating needs.
However, Anchor is currently seeking to raise an additional $500,000 in equity
from the members of the Boards of Directors and other qualified investors to
supplement working capital. As of May 2, 1997, Anchor had raised $203,300, and
had oral commitments for an additional $145,000 in equity financings. Under the
terms of this financing Anchor will issue common stock at $0.90 per share and 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 regularly considers acquisition and merger opportunities and other
business expansion alternatives.  As part of Anchor's long-term 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 used by Anchor for future acquisitions, expanded marketing and
consolidation of its insurance operations.

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 expects to continue to expand its insurance brokerage and
administration businesses and currently is engaged in several new business
projects which are expected to substantially expand gross income through
internal growth thereby avoiding the costs associated with typical purchase
contracts.

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), except that the Bridge Notes are equal in status to the Debentures and
Series A Debenture (see Note 5 below) issued during 1995, which become due 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 1,000 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 2,000 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.  As of May 2, 1997, 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, 1995.

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

     During first quarter 1997, Anchor began 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 May 2, 1997, Anchor had
received $203,300 from said investors and had oral commitments for an additional
$145,000 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) 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) five
year warrants; (d) "piggyback" registration rights for three years; and (e)
anti-dilution protection for stock splits, stock dividends, recapitalizations
and reorganizations.  Purchasers of the 1997 Offering, as of May 2, 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, balance sheet analysis, locating investors, joint ventures, merger
partners, 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 has
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 commencing December 17, 1996, and continuing for a period of six
months, plus reasonable expenses.  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.

                                       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.
Anchor continued its expansion strategy by acquiring 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. Anchor expects to
continue to expand its insurance brokerage and administration businesses and
currently is engaged in several new business projects which will substantially
expand gross income through internal growth thereby avoiding the costs
associated with typical purchase contracts.

RESULTS OF OPERATIONS -- QUARTERS ENDED MARCH 31, 1997 AND 1996

GENERAL

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

       Fluctuations in premiums charged by insurance companies may materially
affect commission revenues.  During the last eight 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 resulting in reduced
commissions generated by the sale of related insurance products.  Although some
sources in the insurance industry have predicted future premium increases, the
likelihood of rate increases in the near future remains uncertain.  Anchor
believes that revenues generated from anticipated future growth and continued
diversification of its business will offset weaknesses in the property and
casualty market and any loss of revenues that may result from workers'
compensation reform.

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

                                       10
<PAGE>
 
       Other factors, such as client uncertainty about the effect of health care
reform, could also affect Anchor's business.  Anchor believes that its expertise
in two areas frequently identified in health care reform proposals (managed care
and managed competition), combined with its strategy of serving 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.

       Anchor has taken steps to strengthen the sales management at both PKW and
BRI by hiring seasoned sales and marketing executives to take over marketing
responsibilities.  Product development and new product sales continue to be a
top priority, as does geographical diversification into other states and
marketing territories.  Marketing for new business coinciding with the release
of new products by Harden and BRI began in  1996.  Market reaction to these
changes has been encouraging and the increase in new revenue is beginning to
match prior periods of production.  Furthermore, Harden and BRI have been
successful in securing an alternative insurance carrier to strengthen and
broaden their product offerings in the small group market, as well as facilitate
geographic diversification.  This new insurance carrier has negotiated a multi-
year, exclusive contract with Harden and BRI which management believes will
enhance sales opportunities in California and Arizona.  Initial market reaction
to this change continues to be very favorable.  Harden and BRI began to receive
revenues from this new business in January 1997.

REVENUES

       TOTAL REVENUES.  Total revenues for the three months ended March 31, 1997
were $2,026,849, a decrease of $67,504 or 3.2%, as compared to 1996 first
quarter revenues of $2,094,353.  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), for the three months ended March 31, 1997, 1996 and 1995.  Also
included is the percentage of revenues generated from premium finance
activities.

<TABLE>
<CAPTION>
=====================================================
     QUARTER ENDED MARCH 31,       1997   1996   1995
-----------------------------------------------------
<S>                                <C>    <C>    <C>
Insurance Brokerage Commissions      40%    42%    41%
-----------------------------------------------------
Third-Party Administration Fees      60%    58%    58%
-----------------------------------------------------
Premium Financing                     0%     0%     1%
-----------------------------------------------------
     Total                          100%   100%   100%
=====================================================
</TABLE>

       As discussed below, Harden and BRI have recently been successful in
securing a multi-year, exclusive contract with a new insurance carrier.  Because
this new relationship presents substantial growth opportunities,  Anchor expects
to experience an increase in the percentage of its revenues that are derived
from third-party administration activities.

                                       11
<PAGE>
 
       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 quarter
of 1997 were $800,031, a decrease of $74,267 or 8.5%, compared to $874,298 of
commissions for the first quarter 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 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 three months ended March 31,
1997 were $1,205,090, a increase of $12,904, or 1.1%, as compared to $1,192,186
in fees for the same period in 1996.  This increase in fee income is the result
of new business received from the new insurance carrier as further discussed
below.

       Fee revenues generated by Anchor in the first quarter of 1997 from third-
party administration services consist of revenues generated by Harden and BRI.
A significant portion of BRI's fee revenues generated from new clients relate to
an insurance product underwritten by one insurance carrier, which is an A-
(Excellent) rated carrier.

       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 46% of
Harden's revenues (or approximately 18% of Anchor's total revenues) in 1996, and
revenues related to the administration of self-insured programs, described in
(b) above, accounted for approximately 52% of Harden's revenues (or
approximately 21% of Anchor's total revenues) in 1996.  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.

       The insurance carrier which offered the product that accounted for 51% of
Harden and BRI's and 27% of Anchor's 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.

       As of October 31, 1996, Harden obtained a commitment from an A-
(Excellent) rated insurance carrier to underwrite the risk and provide a
replacement product 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 replacement
insurance carrier is fully assuming 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 is expected to be
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.  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.  Harden and BRI began to receive revenues from this new business in
January 1997.

                                       12
<PAGE>
 
       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 $21,595 and $27,842 for the three
months ended March 31, 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.

EXPENSES

       TOTAL EXPENSES.  Total operating expenses for the three months ended
March 31, 1997, were $2,140,034, a decrease of $33,948 or 1.6% as compared to
the operating expenses of $2,173,982 for the same period in 1996.  As discussed
below, the decrease in total expenses resulted from a decrease in selling,
general and administrative expenses offset, in part, by the increase in employee
compensation and benefits.

     Anchor continues to monitor expenses closely as Harden and BRI transition
from one carrier to another for their major indemnity product.  Anchor is
monitoring staffing needs as well as outside professional services.  Management
expects to achieve further cost reductions and greater productivity in
connection with the termination of an outside vendor supplying systems support.

       EMPLOYEE COMPENSATION AND BENEFITS.  Employee compensation and benefits
for the three months ended March 31, 1997, were $1,384,807, a increase of $8,854
or 0.6% as compared to $1,375,953 for the same period in 1996.  During 1996,
Anchor took steps to strengthen the sales management at both PKW and BRI by
hiring seasoned sales and marketing executives to take over marketing
responsibilities resulting in an increase in employee compensation and benefits.

       SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $755,227 and $793,029 for the three months ended
March 31, 1997 and 1996, respectively.  The $37,802, or 4.8%, 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 $51,218 and $129,407, for the
three months ended March 31, 1997 and 1996, respectively.  The decrease in
expense of $78,189 in the first quarter 1997, as compared to the same period in
1996, resulted from the termination of services of an investment banker relating
to the prior proposed issuance of Series A Convertible Preferred Stock and the
initial conversions of the Series A Debenture and 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 $62,529
and $91,740, for the three months ended March 31, 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 three
month periods ended March 31, 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.

                                       13
<PAGE>
 
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 $(195,282) for the three months ended March 31,
1997, compared to net cash flows (used in) operations of $(161,652) for the
three months ended March 31, 1996.  During 1996, Anchor met its operating and
capital needs from various sources, including borrowing under its existing
credit agreements and the proceeds from the sale of Bridge Notes, as further
discussed below.     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 working capital. Liquidity would be impaired if cash
flow from operations were reduced or if existing credit lines and proceeds from
other debt financing were insufficient.

       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 1,000 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), except that the Bridge Notes are equal in status to the Debentures and
Series A Debenture (see Note 5 above) issued during 1995, which become due 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 1,000 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 2,000 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.  As of May 2, 1997, 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, 1995.

       On December 17, 1996, Anchor entered into a Financial Advisory Agreement
("Agreement") with The Private Financing Group ("TPFG"), to advise and assist in
planning, balance sheet analysis, locating investors, joint ventures, merger
partners, 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 has
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 commencing December 17, 1996, and continuing for a period of
six months, plus reasonable expenses.  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.

                                       14
<PAGE>
 
       During first quarter 1997, Anchor began 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 May 2, 1997, Anchor had
received $203,300 from said investors and had oral commitments for an additional
$145,000 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) 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) five year warrants; (d) "piggyback"
registration rights for three years; and (e) anti-dilution protection for stock
splits, stock dividends, recapitalizations and reorganizations.  Purchasers of
the 1997 Offering, as of May 2, 1997, consist of six members of the Board of
Directors and other qualified investors.

     Capital and certain acquisition related expenditures were $3,464 and
$300,921 for the three months ended March 31, 1997, and 1996, respectively.
Computer equipment was purchased by Harden during the first quarter of 1997.
The R.L. Ferguson Insurance Agency ("RLF") located in Walnut Creek, California
was acquired and merged into Anchor's insurance brokerage subsidiary, PKW,
located in Concord, California, during the first quarter of 1996.

     Short-term debt, current portion of long-term debt and current portion of
long-term liabilities at March 31, 1997, totaling in the aggregate $2,523,539
(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)
$225,000 of Bridge Notes ($45,000 of which was converted to stock in April
1997); and (g) approximately $327,289 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.   However,
Anchor is continuing to negotiate with the bank to restructure a new credit
facility; or, as an alternative, move the credit facility to another interested
bank (depending upon the terms and conditions); or, lastly, use proceeds from
investors to satisfy, or reduce, the obligation and convert the remaining
balance to a longer term note.  The terms and conditions of this credit facility
are expected to be finalized prior to the end of second 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%.
 
     At March 31, 1997, long-term liabilities, less the current portion
discussed above, totaled $753,052 (as compared to $922,950 at December 31,
1996), and primarily consisted of (a) approximately $140,250 of future fixed
payments under the consulting agreement, mentioned above, with a company
affiliated with the former shareholders of BRI; (b) approximately $178,650
representing the long-term 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; (c) approximately $291,300 representing deferred
rent with regard to certain real property currently leased by Anchor; and 
(d) approximately $142,852 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.

                                       15
<PAGE>
 
       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 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

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

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:    May  2, 1997          /s/ James R. Dunathan
      -----------------      ---------------------------------------------------
                               James R. Dunathan
                               President and Chief Executive Officer
 
 
 
Date:    May 2, 1997           /s/ Earl Wiklund
      -----------------      ---------------------------------------------------
                               Earl Wiklund
                               Senior Vice President and Chief Financial Officer
 
 

                                       18