<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q


                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 NO.      1-4766
                         -----------------                    ------------



                            REGENCY AFFILIATES, INC.
                            ------------------------
             (Exact Name Of Registrant As Specified In Its Charter)

              Delaware                                         72-0888772
              --------                                         ----------
     (State or other jurisdiction of                         (IRS Employer
     incorporation or organization)                       Identification Number)

     729 South Federal Highway, Ste. 307, Stuart, Florida         34994
     ----------------------------------------------------         -----
     (Address of principal executive offices)                   (Zip Code)

     10842 Old Mill Road 5B, Omaha, Nebraska                      68154
     ---------------------------------------                      -----
     (Address of administrative offices)                        (Zip Code)

<TABLE>
<CAPTION>
<S>                                                                         <C> 
Registrant's Telephone Number (executive office) including Area Code:        (561) 220-7662
                                                                     ----------------------
Registrant's Telephone Number (administrative office) including Area Code:  (402) 330-8750
                                                                           ----------------
</TABLE>

     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 for 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.

                                Yes X           No
                                   ---            ---

     Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of the latest practicable date.

$.40 Par Value Common Stock-    12,255,800        shares as of June 30, 1997 .
                             ---------------------                            

                                        1


<PAGE>   2



<TABLE>
<CAPTION>

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

<S>               <C>                                                                                            <C>
Item 1.           Financial Statements............................................................................3

Item 2.           Management's  Discussion  and  Analysis  of  Financial Condition and Results of
                  Operations.....................................................................................15

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>


                                        2


<PAGE>   3



REGENCY AFFILIATES, INC.

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

         The following pages contain the information required by Part I, Item 1.

                                        3


<PAGE>   4


<TABLE>
<CAPTION>

                    REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS

                                             JUNE 30, 1997      DECEMBER 31,
                                             -------------      ------------
ASSETS                                        (UNAUDITED)          1996

<S>                                         <C>                 <C>        
CURRENT ASSETS
 Cash and cash equivalents                  $   442,500         $ 2,303,700
 Accounts receivable                            445,300             - 0 -
 Inventories                                    641,200             - 0 -
 Other current assets                           308,000               4,400
                                            -----------         -----------

         Total current assets                 1,837,000           2,308,100
                                            -----------         -----------

INVESTMENTS
 Partnership investment                      10,056,600           8,233,700
 Rental property                                118,900              50,900
                                            -----------         -----------

         Total investments                   10,175,500           8,284,600
                                            -----------         -----------


PROPERTY AND EQUIPMENT
 Machinery and equipment                         28,900              - 0 -
 Leasehold improvements                          73,200              - 0 -
 Other                                           35,900              - 0 -
                                            -----------         -----------
                                                138,000
         Less accumulated depreciation           15,000              - 0 -
                                            -----------         -----------

         Net property and equipment             123,000              - 0 -
                                            -----------         -----------

OTHER ASSETS
 Aggregate inventory                            850,000             850,000
 Goodwill and intangibles, net                  666,700              - 0 -
 Other                                          191,300             124,000
                                            -----------         -----------

         Total other assets                   1,708,000             974,000
                                            -----------         -----------

                                            $13,843,500         $11,566,700
                                            -----------         ===========
</TABLE>








   The accompanying notes are an integral part of these financial statements.

                                        4


<PAGE>   5



<TABLE>
<CAPTION>

                   REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                                                                       JUNE 30, 1997          DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY                                                     (UNAUDITED)              1996
<S>                                                                                <C>                    <C>             

CURRENT LIABILITIES
 Notes Payable                                                                     $         335,000      $            ---
 Accounts payable                                                                            249,500                 79,900
 Accrued expenses                                                                             68,700                 58,200
                                                                                      --------------         --------------

             Total current liabilities                                                       653,200                138,100
                                                                                      --------------         --------------
LONG-TERM DEBT                                                                             4,567,800              4,199,900

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                                                98,100                101,100

SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value $350,400
and $504,400 in 1997 and 1996, respectively)                                                 266,900                401,100

SHAREHOLDERS' EQUITY
 Serial preferred stock not subject to mandatory redemption (maximum 
 liquidation preference, $24,921,400 and $24,903,400 in 1997 and
 1996, respectively)                                                                       1,053,000              1,053,000

 Common stock, par value $.40, authorized 25,000,000 shares issued
 and outstanding 12,255,800 and 11,399,900 shares in 1997 and 1996,
 respectively  (net of 22,460 treasury shares)                                             4,892,000              4,549,600

 Additional paid in capital                                                                  241,500                140,000

 Readjustment resulting from quasi-reorganization at December 31,
 1987                                                                                    (1,670,600)            (1,670,600)

 Retained earnings                                                                         3,741,600              2,654,500
                                                                                      --------------         --------------

         Total shareholders' equity                                                        8,257,500              6,726,500
                                                                                      --------------         --------------

                                                                                   $      13,843,500      $      11,566,700
                                                                                       =============           ============

</TABLE>









   The accompanying notes are an integral part of these financial statements.

                                        5


<PAGE>   6



                  REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
           THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
                                 (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           Three Months                   Six Months
                                                                           ------------                   ----------
                                                                        1997          1996           1997           1996
                                                                    -----------    -----------    -----------    -----------

<S>                                                                 <C>            <C>            <C>            <C>      
NET SALES                                                           $   678,400    $      --      $   795,400    $      --

COSTS AND EXPENSES
 Cost of goods sold                                                     432,600           --          498,100           --
 Selling and administrative                                             575,000         96,000        714,800        267,200
 Other                                                                      500           --           21,700           --
                                                                    -----------    -----------    -----------    -----------

INCOME (LOSS) FROM OPERATIONS                                          (329,700)       (96,000)      (439,200)      (267,200)

INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP                                                           1,072,300      1,051,200      1,925,700      1,709,600

INTEREST INCOME                                                          12,200           --           37,500           --

INTEREST EXPENSE                                                       (194,100)       (22,500)      (383,100)       (30,200)
                                                                    -----------    -----------    -----------    -----------

INCOME BEFORE INCOME TAX EXPENSE &
MINORITY INTEREST                                                       560,700        932,700      1,140,900      1,412,200

INCOME TAX EXPENSE                                                         --          139,700         11,100        159,700

MINORITY INTEREST                                                         1,400          1,200          3,000          2,400
                                                                    -----------    -----------    -----------    -----------

NET INCOME                                                          $   562,100    $   794,200    $ 1,132,800    $ 1,254,900
                                                                    ===========    ===========    ===========    ===========

NET INCOME APPLICABLE TO COMMON
STOCK (after accrued preferred stock dividends of
$13,500; $15,800; $29,300; and $31,600,
respectively in 1997 and 1996, and preferred stock
accretion of $8,100; $7,000; $16,200; and $14,000,                  
respectively in 1997 and 1996.)                                     $   540,500    $   771,400    $ 1,087,800    $ 1,209,300
                                                                    ===========    ===========    ===========    ===========
                               

NET INCOME PER SHARE
   Primary                                                          $       .05    $       .07    $       .09    $       .11
                                                                    ===========    ===========    ===========    ===========
   Fully diluted                                                    $       .04    $       .06    $       .08    $       .09
                                                                    ===========    ===========    ===========    ===========
</TABLE>

     The accompany notes are an integral part of these financial statements.

                                        6


<PAGE>   7



                  REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                   SIX MONTHS ENDED JUNE 30, 1997 AND 1996
                                 (UNAUDITED)

<TABLE>
<CAPTION>

                                                                             1997                 1996
                                                                             ----                 ----

<S>                                                                       <C>                 <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
 Net Income                                                               $ 1,132,800         $ 1,254,900
 Adjustments to reconcile net income to net cash used by operating
 activities:
   Minority interest                                                           (3,000)             (2,400)
   Stock issued for services                                                  233,300              93,300
   Income from equity investment in partnership                            (1,925,700)         (1,709,600)
   Distribution of equity earnings from partnership                           102,800             103,200
   Interest amortization on long-term debt                                    367,900              12,000
   Depreciation and amortization                                               40,600                --
   Changes in operating assets and liabilities:
    Accounts receivable                                                      (191,000)               --
     Inventories                                                             (154,200)               --
     Other current assets                                                    (283,200)            (18,400)
     Other assets                                                             (49,300)                400
     Accounts payable                                                          19,400             (30,500)
     Accrued expenses                                                        (253,100)            192,200
                                                                          -----------         -----------
        Net cash used by operating activities                                (962,700)           (104,900)
                                                                          -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES
 Acquisition of business, net of $13,500 cash acquired                     (1,086,500)               --
 Acquisition of property                                                      (89,200)               --
                                                                          -----------         -----------
      Net cash used by investing activities                                (1,175,700)               --
                                                                          -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from short-term borrowings                                        335,000                --
   Proceeds from issuance of long-term debt                                      --             3,500,000
   Debt issuance and offering costs                                           (28,500)           (455,300)
   Dividends paid                                                             (29,300)            (15,800)
                                                                          -----------         -----------
     Net cash provided by financing activities                                277,200           3,028,900
                                                                          -----------         -----------

INCREASE (DECREASE) IN CASH                                                (1,861,200)          2,924,000
                         
CASH-BEGINNING                                                              2,303,700              39,700
                                                                          -----------         -----------
CASH-ENDING                                                               $   442,500         $ 2,963,700
                                                                          ===========         ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        7


<PAGE>   8



<TABLE>
<CAPTION>
                                                                                1997                1996
                                                                             ---------            --------
<S>                                                                            <C>                   <C>
Supplemental disclosures of cash flow information:
 Cash paid during the period for:
     Income taxes                                                             $ 30,000              - 0 -
Supplemental disclosure of noncash investing and financing
activities:
 In 1997, the Company issued 100,000 shares of common stock in 
 connection with the acquisition of the assets of Rustic Crafts Co.,
 Inc.

 In 1997, 1,505 shares of Series E preferred stock were converted 
 into 289,300 shares of the Company's common stock.
</TABLE>




           The balance of this page has been intentionally left blank.













   The accompany notes are an integral part of these financial statements.


                                        8


<PAGE>   9



                    REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.     Basis of Presentation and Summary of Significant Accounting
            Policies

      A.    Basis of Presentation - The accompanying unaudited condensed
            consolidated financial statements 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 of the
            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 and six-month
            periods ended June 30, 1997 are not necessarily indicative of the
            results that may be expected for the year ended December 31, 1997.
            For further information, refer to the consolidated financial
            statements and footnotes thereto included in the Registrant Company
            and Subsidiaries' annual report on Form 10-K for the year ended
            December 31, 1996.

      B.    Principles of Consolidation - The consolidated financial statements
            include the accounts of Regency Affiliates, Inc. (the "Company"),
            its wholly-owned subsidiary, Rustic Crafts International, Inc.
            ("RCI") (see Note 6), and its 80% owned subsidiaries National
            Resource Development Corporation ("NRDC"), Transcontinental Drilling
            Company ("Drilling") and RegTransco, Inc. ("RTI"). All significant
            intercompany balances and transactions have been eliminated in
            consolidation.

      C.    Earnings Per Share - Primary earnings per share are computed by
            dividing net income attributable to common shareholders (net income
            less preferred stock dividend requirements and periodic accretion)
            by the weighted average number of common and dilutive equivalent
            shares outstanding during the year. Fully diluted earnings per share
            computations assume the conversion of Series E, Series B, and Junior
            Series D preferred stock during the period that the preferred stock
            issues were outstanding. If the result of these assumed conversions
            is dilutive, the dividend requirements and periodic accretion for
            the preferred stock issues are reduced.

      D.    Inventory - Inventories are stated at the lower of cost or market.
            Cost is determined using the first-in, first-out method. Inventories
            were comprised of the following at June 30, 1997:

<TABLE>
<CAPTION>
<S>                                                         <C>        
            Raw materials and supplies                      $   146,700
            Work in process                                      44,200
            Finished products                                   450,300
                                                             ----------
                                                            $   641,200
</TABLE>



                                        9


<PAGE>   10



      E.    Aggregate Inventory - Aggregate inventory is stated at lower of cost
            or market. Liens have been attached to the aggregate by the holders
            of certain zero coupon bonds, having a face value of $542,200 and a
            carrying valuing of $367,900 at June 30, 1997. The Company is also
            subject to a royalty agreement which requires the payment of certain
            royalties to a previous owner of the aggregate upon sales of the
            aggregate.

      F.    Income Taxes - The Company utilizes Statement of Financial
            Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
            Taxes," which requires an asset and liability approach to financial
            accounting and reporting for income taxes. The difference between
            the financial statement and tax basis of assets and liabilities is
            determined annually. Deferred income tax assets and liabilities are
            computed for those temporary differences that have future tax
            consequences using the current enacted tax laws and rates that apply
            to the periods in which they are expected to affect taxable income.
            In some situations SFAS 109 permits the recognition of expected
            benefits of utilizing net operating loss and tax credit
            carryforwards. Valuation allowances are established based on
            management's estimate, if necessary. Income tax expense is the
            current tax payable or refundable for the period plus or minus the
            net change in the deferred tax assets and liabilities.

NOTE 2.     INVESTMENT IN PARTNERSHIP

         In November 1994, the Company purchased a limited partnership interest
         in Security Land and Development Company Limited Partnership
         ("Security"), which owns and operates an office complex. The Company
         has limited voting rights and is entitled to be allocated 95% of the
         profit and loss of the partnership until October 31, 2003 (the lease
         termination date of the sole tenant of the office complex) and 50%
         thereafter. The Company is to receive certain limited cash flow after
         debt service, and a contingent equity build-up depending upon the value
         of the project upon termination of the lease. The Company is also
         entitled to receive certain management fees relating to the
         partnership.

         Security was organized to own and operate a building of approximately
         717,000 net square feet consisting of a two-story office building and a
         connected six-story office tower. The building was purchased by
         Security in 1986 and is located on approximately 34.3 acres of land
         which is also owned by Security. The building has been occupied by the
         United States Social Security Administration's Office of Disability and
         International Operations for approximately 22 years under leases
         between the United States of America, acting by and through the General
         Services Administration ("GSA"). Effective November 1, 1994, Security
         and the GSA entered into a nine-year lease (the "Lease") for 100% of
         the building. Security has received an opinion of the Assistant General
         Counsel to the GSA that lease payments are not subject to annual
         appropriation by the United States Congress and the obligations to make
         such payments are unconditional general obligations of the United
         States Government.

         The Company accounts for the investment in partnership on the equity
         method, whereby the carrying value of the investment is increased or
         decreased by the Company's allocable share of income or loss. The
         investment in partnership included in the Consolidated Balance Sheet at
         June 30, 1997 was $10,056,600. The income from the Company's equity
         investment in the

                                       10


<PAGE>   11



         partnership for the three-months and the six months ended June 30, 1997
         was $1,072,300 and $1,925,700, respectively.

         Summarized operating data for Security for the three months and six
         months ended June 30, 1997, and June 30, 1996, is as follows:

<TABLE>
<CAPTION>

                                            Three Months                   Six Months
                                            ------------                   ----------
                                        1997           1996           1997            1996
                                        ----           ----           ----            ----
<S>                                  <C>            <C>            <C>            <C>       
        Revenues                     $2,788,500     $2,797,100     $5,524,100     $5,632,500
        Operating Expenses              743,600        767,400      1,541,100      1,556,000
        Depreciation and
        Amortization                    623,000        483,200      1,208,600        945,200
        Interest Expense, Net           293,000        440,000        747,400      1,331,700
                                     ----------     ----------     ----------     ----------

        Net Income                   $1,128,900     $1,106,500     $2,027,000     $1,799,600
                                     ==========     ==========     ==========     ==========
</TABLE>


NOTE 3.        LONG-TERM DEBT

         The Company entered into a Credit Agreement (the "Agreement") in 1996
         with an initial principal amount of $3,500,000. The Agreement provides
         that semi-annual Regular Interest at 14% and Contingent Interest at an
         additional 6% may be added to the principal outstanding balance.
         Long-term debt was increased by $175,300 and $347,800 for the three
         months and six months ended June 30, 1997, respectively, as a result of
         the accrual of Regular and Contingent Interest.

NOTE 4.        SHORT-TERM BORROWINGS.

         In May 1997, RCI entered into a Loan Agreement with a bank which
         provides for a line of credit with a maximum loan amount of $1,000,000.
         Interest is payable monthly, computed at a variable rate of 0.5% over
         the bank's prime lending rate; such rate is currently 9%. The principal
         balance of the loan is payable at maturity in May 1998.

         RCI's accounts receivable, inventory, and other general intangibles are
         pledged as security for the loan. The loan is also guaranteed by
         Regency Affiliates, Inc., the parent company. The security agreement
         requires RCI to maintain certain financial ratios. RCI was in
         compliance with such ratios at June 30, 1997. At June 30, 1997 the
         amount outstanding under the Loan Agreement was $335,000.

NOTE 5.        INCOME TAXES

         As indicated in Note 1, the Company utilizes SFAS 109, "Accounting for
         Income Taxes". The deferred taxes are the result of long-term temporary
         differences between financial reporting and tax reporting for earnings
         from the Company's partnership investment in Security Land and

                                       11


<PAGE>   12



         Development Company Limited Partnership related to depreciation and
         amortization and the recognition of income tax carryforward items.

         At June 30, 1997, the Company's net deferred tax asset, utilizing a 34%
         effective tax rate, consists of:

<TABLE>
<CAPTION>

<S>                                                                         <C>           
            Deferred tax assets:
                  Investment partnership earnings                           $    2,016,000
                  Net operating loss carryforwards                              12,200,000
                  Alternative minimum tax credits                                  250,000
                                                                             -------------

            Total deferred tax assets before valuation
                  allowance                                                     14,466,000

            Valuation allowance                                               (14,466,000)
                                                                             -------------

                  Net deferred tax asset                                   $        -0-
                                                                            ==============
</TABLE>

         The valuation allowance was established to reduce the net deferred tax
         asset to the amount that will more likely than not be realized. This
         reduction is necessary due to uncertainty of the Company's ability to
         utilize the net operating loss and tax credit carryforwards before they
         expire.

         For regular federal income tax purposes, the Company has remaining net
         operating loss carryforwards of approximately $39,200,000. These losses
         can be carried forward to offset future taxable income and, if not
         utilized, will expire in varying amounts beginning in the year 2000.

         For the three months and six months ended June 30, 1997, the tax effect
         of net operating loss carryforwards reduced the current provision for
         federal income taxes by approximately $270,000 and $425,000,
         respectively. The Company provided $11,100 for taxes which relates to
         the alternative minimum tax.

NOTE 6.       ACQUISITION

         In March 1997, the Company, through RCI, a newly formed subsidiary,
         acquired all of the operating assets including cash, accounts
         receivable, inventory, property and equipment and intangibles of Rustic
         Crafts Co., Inc. ("Rustic"). The business of RCI involves the
         manufacture of wood and cast marble decorative electric fireplaces and
         heater logs and related accessories. The Company paid $1,100,000 in
         cash and issued 100,000 shares of the Company's common stock and
         assumed Rustic's trade accounts payable, bank debt and certain other
         accrued liabilities. Total liabilities assumed were $413,600. The
         transaction was accounted for using the purchase method. The
         transaction resulted in goodwill and intangibles of $678,000. Such
         goodwill is being amortized on a straight-line basis over a fifteen
         year period.

                                       12


<PAGE>   13



         The cash purchase price was provided by funds obtained under the
         Agreement (see Note 3). The Company advanced $201,000 to retire the
         bank debt of Rustic, subsequent to the purchase.

         The following unaudited pro forma consolidated results of operations
         assume the purchase of Rustic's assets by RCI occurred at the beginning
         of 1996:

<TABLE>
<CAPTION>

                                                                 Six Months Ended

                                                           June 30, 1997       June 30, 1996
                                                           -------------       -------------

<S>                                                        <C>                 <C>
            Net sales                                      $ 1,059,400         $    842,600
            Net income                                       1,286,500            1,241,000
            Net income applicable to common stock            1,241,000            1,218,200
            Net income per common share
                     Primary                               $      0.11           $     0.10
                     Fully Diluted                         $      0.09           $     0.08
</TABLE>

NOTE 7.       MANDATORY PREFERRED STOCK

         During the six months ended June 30, 1997, 1,505 shares of Series E
         Preferred Stock were converted into 289,300 shares of common stock at a
         price equal to 88% of the prior 90-day average bid price of the common
         stock on the day of conversion.

NOTE 8.       CONTINGENCIES, RISKS AND UNCERTAINTIES

         The Company is subject to numerous contingencies, risks and
         uncertainties including, but not limited to the following, that could
         have a severe impact on the Company:

          (i)  Prior to the acquisition by RCI, the Company did not generate
               positive cash flow and, historically, the Company has had limited
               operating activities and its efforts have primarily been devoted
               to acquiring or developing profitable operations. The Company's
               ability to continue in existence is partly dependent upon its
               ability to attain satisfactory levels of operating cash flow.

          (ii) The Company currently lacks the necessary infrastructure at the
               site of the Groveland Mine to permit the Company to make more
               than casual sales of the aggregate.

          (iii) As of June 30, 1997, the Company was dependent upon the
               investment in Security Land and Development Company Limited
               Partnership for a material portion of its reportable income.

          (iv) An unsecured default in the Lease or sudden catastrophe to the
               Security office complex from uninsured acts of God or war could
               have a materially adverse impact upon the Company's investment in
               Security Land and Development Company Limited Partnership and
               therefore its financial position and results of operations (see
               Note 2).

                                       13


<PAGE>   14



          (v)  The Company has significant tax loss and credit carryforwards and
               no assurance can be provided that the Internal Revenue Service
               would not attempt to limit or disallow altogether the Company's
               use, retroactively and/or prospectively, of such carryforwards,
               due to ownership changes or any other reason. The disallowance of
               the utilization of the Company's net operating loss would
               severely impact the Company's financial position and results of
               operations due to the significant amounts of taxable income
               (generated by the Company's investment in Security) that has in
               the past been, and is expected in the future to be, offset by the
               Company's net operating loss carryforwards (see Note 5).

Note 9.   Employment of Chief Executive Officer

        In June 1997, the Company issued 466,700 shares of common stock at a
value of $233,300 to Statesman Group, Inc. ("Statesman"). Statesman owned 23.6%
of the Company's outstanding common stock prior to the issuance of these   
shares. The shares were issued to Statesman in order to secure the release of
Mr. William Ponsoldt, Sr. to serve as President and Chief Executive Officer of  
the Company.
              




           The balance of this page has been intentionally left blank







                                       14


<PAGE>   15



ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

     The Company may, from time to time, issue forward looking statements,
including, but not limited to the statements of future economic performance
contained in Item 2 of this Report, or elsewhere herein. Such forward looking
statements, whether contained in this report on Form 10-Q, or elsewhere, are
subject to the following factors that could cause actual results to differ
materially from those contained in the forward looking statements:

     (i)    The Company currently lacks the necessary infrastructure at the
            site of the Groveland Mine to make more than casual sales of the
            aggregate.

     (ii)   As of June 30, 1997, the Company was dependent upon the investment
            in Security Land and Development Company Limited Partnership for a
            material portion of its reportable income.

     (iii)  An unsecured default in the Lease or sudden catastrophe to the
            Security West Building from uninsured acts of God or war could
            have a materially adverse impact upon the Company's investment in
            Security Land and Development Company Limited Partnership.

     Liquidity and Capital Resources.

     The investment in Security Land and Development Company Limited Partnership
is estimated to provide the Company with management fees of approximately
$100,000 per annum until 2003. In the six months ended June 30, 1997, the
Company's income from its equity investment in the Partnership was $1,925,700.

     The Company acquired substantially all the assets and assumed certain
liabilities of Rustic Crafts Co., Inc. ("Rustic") in March 1997, through a new
wholly-owned Delaware corporation, Rustic Crafts International, Inc. ("RCI").   
RCI is presently generating approximately $3,000,000 of annual sales. Assuming
that sales and expenses of RCI continue during 1997 at the same rates as are
presently being experienced, the Company projects that RCI will generate
positive cash flow of approximately $350,000 per year, before interest, taxes,
and principal payments.

     The Company is continuing to explore opportunities for the acquisition of
companies with operations that will provide additional liquidity and cash flow.
The Company anticipates that such acquisitions would be financed by borrowings
secured by the assets acquired and by the proceeds of its existing Credit
Agreement, or other loans. There can be no assurances that any such acquisitions
or transactions will come to fruition.

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<PAGE>   16



         Results of Operations.

     In March of 1997, the Company's wholly-owned subsidiary, RCI, acquired
the assets of Rustic. Accordingly, the Company's results for the three months
and six months ending June 30, 1997, include the results of operations of
RCI for the period between March 1, 1997, and June 30, 1997.

     Three Months Ended June 30, 1997 Compared To Three Months Ended June 30,
     ------------------------------------------------------------------------
     1996.
     ----

     Net sales increased $678,400 due to the acquisition of RCI; cost of goods
sold relates to these sales. Selling and administrative expenses increased
$479,000 as a result of $169,600 of costs associated with RCI and an increase of
$309,400 in corporate expenses. Corporate expenses in this quarter include
$273,700 of costs associated with the employment of a chief executive officer
and office expenses resulting from the start up of an executive office.

     Net income from the Company's equity investment in partnership increased
$21,100. Interest expense increased $171,600 as a result of the Credit Agreement
entered into in June 1996. Interest accrued is added to the principal amount of
the debt on a semi-annual basis.

     Income tax expense decreased significantly as a result of the provision in
1996 for under accrual of prior years income taxes. No provision was made in the
second quarter of 1997 as accruals for 1996 were in excess of actual tax
liability.

     Net income decreased $92,100 reflecting higher selling and administrative
costs and interest expense which offset the net operating income from RCI and
the reduced income taxes.

     Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
     --------------------------------------------------------------------------

     Net sales increased $795,400 and cost of goods sold increased $498,100
reflecting the acquisition of RCI in March 1997. Selling and administrative
expenses increased $447,600 of which $216,800 was due to the acquisition of
RCI. The remaining increase was due to an increase in corporate expenses
resulting from costs associated with the employment of a Chief Executive
Officer, the start up of an executive office, higher legal fees, and increased
insurance costs.

     Net income from the investment in partnership increased $216,100 largely as
a result of a decrease in net interest expense of $584,100 offset by an increase
in depreciation. The partnership is currently renovating and remodeling office
space as required by its lease agreement.

     Interest expense increased $352,900 as a result of the Credit Agreement
entered into in June 1996.

     Income tax expense decreased $148,600 as a result of provisions for prior
year taxes made in 1996.

     Net income decreased $122,100 reflecting net operating income from RCI and
lower income taxes offset by higher corporate administrative costs and higher
interest expense.

                                       16


<PAGE>   17



PART II -- OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS.

There are no legal proceedings pending against the Company or any of its
subsidiaries which management believes would have a material impact upon the
operations or assets of the Company.

ITEM 2.      CHANGES IN SECURITIES.

None.

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

There have been no defaults in the payment of principal or interest with respect
to any senior indebtedness of Regency Affiliates, Inc.

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

No matters were submitted to the vote of security holders during the reporting
period ending June 30, 1997.

ITEM 5.      OTHER INFORMATION.

None.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

Report on Form 8-K dated June 13, 1997.
Exhibit 27 - Financial Data Schedule.

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<PAGE>   18


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

              _____________REGENCY AFFILIATES, INC._______________

                                  (Registrant)

       August 19, 1997                By: /s/ William R. Ponsoldt, Sr.
------------------------------            -------------------------------------
             Date                          William R. Ponsoldt, Sr., President





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