<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   September 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)

Registrant's Telephone Number (executive office) including 
   Area Code:   (561)   220-7662
Registrant's Telephone Number (administrative office) including 
   Area Code:   (402)   330-8750

         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-     12,404,800      shares as of October 31, 1997.
                             ------------------

                                        1

<PAGE>   2




TABLE OF CONTENTS

<TABLE>
<CAPTION>
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



                    REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                            SEPTEMBER 30,
                                            -------------
                                                1997          DECEMBER 31,
                                                ----              1996    
ASSETS                                       (UNAUDITED)          ----
<S>                                          <C>               <C>        
CURRENT ASSETS
 Cash and cash equivalents                   $   393,800       $ 2,303,700
 Accounts receivable                             717,400             - 0 -
 Inventories                                     521,800             - 0 -
 Other current assets                            212,400             4,400
                                             -----------       -----------

         Total current assets                  1,845,400         2,308,100
                                             -----------       -----------

INVESTMENTS
 Partnership investment                       10,908,300         8,233,700
 Rental property                                 118,900            50,900
                                             -----------       -----------

         Total investments                    11,027,200         8,284,600
                                             -----------       -----------



PROPERTY AND EQUIPMENT
 Machinery and equipment                          46,600             - 0 -
 Leasehold improvements                           73,200             - 0 -
 Other                                            43,100             - 0 -
                                             -----------       -----------
                                                 162,900             - 0 -
         Less accumulated depreciation            26,200             - 0 -
                                             -----------       -----------

         Net property and equipment              136,700             - 0 -
                                             -----------       -----------

OTHER ASSETS
 Aggregate inventory                             850,000           850,000
 Goodwill and intangibles, net                   655,400             - 0 -
 Other                                           185,700           124,000
                                             -----------       -----------

         Total other assets                    1,169,100           974,000
                                             -----------       -----------

                                             $14,700,400       $11,566,700
                                             -----------       ===========
</TABLE>




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


                                        4

<PAGE>   5




                    REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      SEPTEMBER 30,
                                                                                      -------------
                                                                                           1997            DECEMBER 31,
                                                                                           ----                1996
LIABILITIES AND SHAREHOLDERS' EQUITY                                                   (UNAUDITED)             ----
CURRENT LIABILITIES
<S>                                                                                    <C>                 <C>               
 Notes payable                                                                         $    345,000        $        ---
 Accounts payable                                                                           304,600              79,900
 Accrued expenses                                                                           222,900              58,200
                                                                                       ------------        ------------

             Total current liabilities                                                      872,500             138,100
                                                                                       ------------        ------------
LONG-TERM DEBT                                                                            4,761,400           4,199,900
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                                               97,300             101,100
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value $350,400
and $504,400 in 1997 and 1996, respectively)                                                195,400             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 12,404,800 and 11,399,900 shares in 1997 and 1996,
 respectively  (net of 22,460 treasury shares)                                            4,951,600           4,549,600

 Additional paid in capital                                                                 261,500             140,000

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

 Retained earnings                                                                        4,178,300           2,654,500
                                                                                       ------------        ------------

         Total shareholders' equity                                                       8,773,800           6,726,500
                                                                                       ------------        ------------

                                                                                       $ 14,700,400        $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                   Three Months                            Nine Months
                                                                   ------------                            -----------
                                                              1997               1996               1997               1996
                                                              ----               ----               ----               ----
<S>                                                       <C>                <C>                <C>                <C>        
NET SALES                                                 $ 1,039,800        $     1,200        $ 1,835,200        $     1,200

COSTS AND EXPENSES
 Cost of goods sold                                           719,700                ---          1,217,800                ---
 Selling and administrative                                   483,200            146,700          1,206,400            413,900
 Other                                                          5,000                ---             18,300                ---
                                                          -----------        -----------        -----------        -----------

INCOME (LOSS) FROM OPERATIONS                                (168,100)          (145,500)         (607,300)          (412,700)

INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP                                                   851,700          1,001,600          2,777,500          2,711,200

INTEREST INCOME                                                 4,000                ---             41,400                ---

INTEREST EXPENSE                                             (211,700)          (169,600)          (594,800)          (199,900)
                                                          -----------        -----------        -----------        -----------

INCOME BEFORE INCOME TAX EXPENSE &
MINORITY INTEREST                                             475,900            686,500          1,616,800          2,098,600

INCOME TAX EXPENSE                                            (22,200)           (16,900)           (33,300)          (176,500)

MINORITY INTEREST                                                 800              1,100              3,800              3,500
                                                          -----------        -----------        -----------        -----------

NET INCOME                                                $   454,500        $   670,700        $ 1,587,300        $ 1,925,600
                                                          ===========        ===========        ===========        ===========

NET INCOME APPLICABLE TO COMMON
STOCK (after accrued preferred stock dividends of
$9,400; $15,800; $38,400; and $47,400, respectively
in 1997 and 1996, and preferred stock accretion of
$8,100; $10,000; $24,500; and $24,000, respectively       $    437,000       $   644,900        $ 1,660,400        $ 1,854,200
in 1997 and 1996.)                                        ============       ===========        ===========        ===========

NET INCOME PER SHARE
   Primary                                                $       .04        $       .06        $       .13        $       .16
                                                          ===========        ===========        ===========        ===========
   Fully diluted                                          $       .03        $       .05        $       .11        $       .13
                                                          ===========        ===========        ===========        ===========
</TABLE>



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


                                        6

<PAGE>   7



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



<TABLE>
<CAPTION>
                                                                             1997               1996
                                                                             ----               ----

<S>                                                                      <C>                <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
 Net Income                                                              $ 1,587,300        $ 1,925,600
 Adjustments to reconcile net income to net cash used by operating
 activities:
   Minority interest                                                          (3,800)            (3,500)
   Stock issued for services                                                 233,300             93,300
   Income from equity investment in partnership                           (2,777,500)        (2,711,200)
   Distribution of equity earnings from partnership                          102,800            103,200
   Interest amortization on long-term debt                                   561,500            227,200
   Depreciation and amortization                                              65,600                ---
   Changes in operating assets and liabilities:
    Accounts receivable                                                     (463,000)               ---
     Inventories                                                             (34,800)               ---
     Other current assets                                                   (187,700)           (14,100)
     Other assets                                                            (46,600)             5,400
     Accounts payable                                                         74,500            (22,600)
     Accrued expenses                                                        (92,500)           (81,200)
                                                                         -----------        -----------
        Net cash used by operating activities                               (980,900)          (477,900)
                                                                         -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES
 Acquisition of business, net of $13,500 cash acquired                    (1,086,500)               ---
 Acquisition of property                                                    (114,200)           (51,000)
                                                                         -----------        -----------
      Net cash used by investing activities                               (1,200,700)           (51,000)
                                                                         -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from short-term borrowings                                       345,000                ---
   Proceeds from issuance of long-term debt                                      ---          3,500,000
   Debt issuance and offering costs                                          (28,500)          (457,900)
   Dividends paid                                                            (44,800)           (31,600)
                                                                         -----------        -----------
     Net cash provided by financing activities                               271,700          3,010,500
                                                                         -----------        -----------

INCREASE (DECREASE) IN CASH                                               (1,909,900)         2,481,600
CASH-BEGINNING                                                             2,303,700             39,700
                                                                         -----------        -----------
CASH-ENDING                                                              $   393,800        $ 2,521,300
                                                                         ===========        ===========
</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                                                                     $    60,800            229,700
     Interest                                                                                 -0-              8,500
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, 2,301 shares of Series E preferred stock were converted into 438,300
 shares of the Company's common stock.
</TABLE>



           The balance of this page has been intentionally left blank.












   The accompanying 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 nine-month
                  periods ended September 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
                  September 30, 1997.

<TABLE>
<S>                                                               <C>        
                  Raw materials and supplies                      $   154,200
                  Work in process                                      73,600
                  Finished products                                   294,000
                                                                   ----------
                                                                  $   521,800
                                                                  ===========
</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 $375,700 at
                  September 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
         September 30, 1997 was $10,908,300. The income from the Company's
         equity investment in

                                       10

<PAGE>   11



         the partnership for the three-months and the nine months ended
         September 30, 1997 was $851,700 and $2,777,500, respectively.

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


<TABLE>
<CAPTION>
                                                       Three Months                                Nine Months
                                                       ------------                                -----------
                                                 1997                 1996                 1997                  1996
                                                 ----                 ----                 ----                  ----
<S>                                        <C>                   <C>                   <C>                  <C>         
Revenues                                   $    2,983,200        $   3,040,600        $   8,507,300         $  8,673,100
Operating Expenses                                760,700              754,600            2,301,800            2,310,600
Depreciation and
Amortization                                      607,000              541,100            1,815,500            1,486,300
Interest Expense, Net                             719,000              690,500            1,466,400            2,022,300
                                            -------------       --------------        -------------          -----------

         Net Income                        $      896,500        $   1,054,400        $   2,923,600         $  2,853,900
                                            =============         ============         ============          ===========
</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 $190,200 and $538,000 for the three
         months and nine months ended September 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 September 30, 1997. At September 30,
         1997 the amount outstanding under the Loan Agreement was $345,000.

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

<TABLE>
<CAPTION>
            Deferred tax assets:
<S>                                                                                         <C>           
                  Investment partnership earnings                                           $    2,075,000
                  Net operating loss carryforwards                                              11,846,000
                  Alternative minimum tax credits                                                  250,000
                                                                                            --------------

            Total deferred tax assets before valuation
                  allowance                                                                     14,171,000

            Valuation allowance                                                                (14,171,000)

                  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 $38,173,000. 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 nine months ended September 30, 1997, the tax
         effect of net operating loss carryforwards reduced the current
         provision for federal income taxes by approximately $200,000 and
         $600,000, respectively. The Company provided $33,300 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>
                                                                                  Nine Months Ended
                                                                        Sept. 30, 1997            Sept. 30, 1996
                                                                        --------------            --------------

<S>                                                                        <C>                       <C>        
                  Net sales                                                $ 2,299,300               $ 1,618,200
                  Net income                                                 1,601,000                 1,879,000
                  Net income applicable to common stock                      1,538,100                 1,807,600
                  Net income per common share
                           Primary                                         $      0.13               $      0.16
                           Fully Diluted                                   $      0.11               $      0.13
</TABLE>

NOTE 7.           MANDATORY PREFERRED STOCK

         During the nine months ended September 30, 1997, 2,301 shares of Series
         E Preferred Stock were converted into 438,300 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 September 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.

          By agreement dated June 3, 1997 (the "Statesman Agreement"), the
          Company issued 466,700 shares of common stock at a value of $233,300
          to Statesman Group, Inc. ("Statesman"). Statesman owned 23% 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.

          Mr. Ponsoldt's Employment Agreement provides for Base Compensation,
          plus certain additional salary based on a formula tied to increases in
          the Company's net worth. The additional salary is equal to twenty
          percent (20%) of the sum of the Company's increase in quarterly Common
          Stock Net Worth, as defined, from June 3, 1997, the date of the
          Employment Agreement. Common Stock Net Worth includes common stock,
          additional paid-in capital, readjustment from quasi-reorganization and
          retained earnings. A provision of $136,000 has been made in the Third
          quarter for this increased salary as a result of the increase in
          Common Stock Net Worth since January 3, 1997.

          Under the Statesman Agreement, the Company agreed to issue common
          stock warrants to Statesman which entitle the holders to purchase up
          to 6,100,000 shares of the common stock of the Company at $0.69 per
          share. The warrants can be exercised through June 3, 1007 and the
          Company has agreed to issue its common stock upon exercise of the
          warrants in exchange for a note from Statesman.

          Statesman and the Company have discussed making clarifications to the
          Statesman Agreement with regard to the vesting of Statesman's
          warrants. The parties have agreed in principle to these items, but
          the agreement remains subject to the drafting of definitive language.
          The proposed clarifications would generally limit vesting of the
          warrants, based on the Company's attainment of certain performance
          standards which would be proposed by the Board of Directors, and
          subject to approval by the Company's shareholders. However, all of
          the warrants would become immediately vested upon the occurrence of
          certain events, such as an attempt by a hostile group to acquire a
          significant block of the Company's stock, the merger or consolidation
          of the Company, or the commencement of litigation attempting to
          interfere with the issuance or exercise of the warrants.

          Pending resolution of these items, the Company has determined that 
          its is not reasonably possible to estimate the fair value of the
          warrants and accordingly no cost associated with the warrants has
          reduced net earnings nor earnings per share consistent with the
          provisions of SFAS No. 123.













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<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 September 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 nine months ended September
30, 1997, the Company's income from its equity investment in the Partnership was
$2,777,500.

         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 $3,300,000 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 $400,000 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.



                                       15

<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 nine months
ending September 30, 1997, include the results of operations of RCI for the
period between March 1, 1997, and September 30, 1997.

         Three Months Ended September 30, 1997 Compared to Three Months Ended
         --------------------------------------------------------------------
September 30, 1996.
-------------------

         Net sales increased $1,038,600 due to the acquisition of RCI; cost of
goods sold relates to these sales. Selling and administrative expenses increased
$336,500 as a result of $157,200 of costs associated with RCI and an increase of
$179,300 in corporate expenses, which includes additional salary of $136,000
for the period.

         Net income from the Company's equity investment in partnership
decreased $149,900. Interest expense increased $42,100 as a result of adding
accrued interest to the principal owing under the Credit Agreement and interest
on working capital loans.

         Income tax expense decreased significantly as a result of the provision
in 1996 for under accrual of prior years income taxes.

         Net income decreased $216,200 reflecting higher selling and
administrative costs, higher interest expense, and lower net income from
partnership, which offset the net operating income from RCI and the reduced
income taxes.

         Nine Months Ended September 30, 1997 Compared to Nine Months Ended
         ------------------------------------------------------------------
September 30, 1996.
-------------------

         Net sales increased $1,834,000 and cost of goods sold increased
$1,217,800 reflecting the acquisition of RCI in March 1997. Selling and
administrative expenses increased $792,500, of which $395,700 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, including $136,000 of additional salary, the start up of an 
executive office, higher legal fees, and increased insurance costs.

         Net income from the investment in partnership increased $66,300 largely
as a result of a decrease in net interest expense of $555,900 offset by an
increase in depreciation. The partnership is currently renovating and remodeling
office space as required by its lease agreement.

         Interest expense increased $394,900 as a result of the Credit Agreement
entered into in June 1996.

         Income tax expense decreased $143,200 as a result of provisions for
prior year taxes made in 1996.

         Net income decreased $383,300 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 September 30, 1997.

ITEM 5.           OTHER INFORMATION.

None.

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

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)






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







                                       18