<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, 1998     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 - 12,627,100 shares as of September 30, 1998.


<PAGE>   2


TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements..................................................3

Item 2.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations............................................14

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings....................................................19

Item 2.  Changes in Securities................................................19

Item 3.  Defaults Upon Senior Securities......................................19

Item 4.  Submission of Matters to a Vote of Security Holders..................19

Item 5.  Other Information....................................................19

Item 6.  Exhibits and Reports on Form 8-K.....................................19





                                       2

<PAGE>   3


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


                                                                      SEPTEMBER 30, 1998        DECEMBER 31,
ASSETS                                                                   (UNAUDITED)               1997
                                                                         -----------               ----
<S>                                                                      <C>                   <C>          
CURRENT ASSETS
         Cash and cash equivalents                                       $    68,600           $   252,400  
         Certificate of deposit                                            2,337,600                  --    
         Accounts receivable, net                                            770,000               581,600  
         Inventory                                                           922,500               536,100  
         Other current assets                                                182,000               120,900  
                                                                         -----------           -----------  
                                                                                                            
                  Total current assets                                     4,280,700             1,491,000  
                                                                         -----------           -----------  
                                                                                                            
                                                                                                            
INVESTMENTS                                                                                                 
         Partnership investment                                           14,784,200            11,951,800  
         Rental property                                                     108,800               113,200  
                                                                         -----------           -----------  
                                                                                                            
                  Total investments                                       14,893,000            12,065,000  
                                                                         -----------           -----------   
                                                                                                            
                                                                                                            
NET PROPERTY AND EQUIPMENT                                                 1,802,800               140,200  
                                                                         -----------           -----------    
                                                                                                            
                                                                                                            
OTHER ASSETS                                                                                                
         Aggregate inventory                                                 847,100               848,900  
         Goodwill and intangibles, net                                       665,900               677,300  
         Debt issuance costs and other                                       939,800               210,100  
                                                                         -----------           -----------   
                                                                                                            
                  Total other assets                                       2,452,800             1,736,300  
                                                                         -----------           -----------  
                                                                                                            
                                                                         $23,429,300           $15,432,500  
                                                                         ===========           ===========  
                                                                                               



</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



                                                                           SEPTEMBER 30, 1998        DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY                                            (UNAUDITED)              1997
                                                                                -----------              ----
<S>                                                                            <C>                   <C>
CURRENT LIABILITIES
         Current portion of long-term debt                                     $     27,800          $    925,000
         Notes payable                                                              619,000               140,000
         Accounts payable                                                           268,500               256,500
         Accrued expenses                                                           486,100               424,400
                                                                               ------------          ------------

                  Total current liabilities                                       1,401,400             1,745,900
                                                                               ------------          ------------


LONG-TERM DEBT, NET  OF CURRENT PORTION                                          11,071,100             4,031,100

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                                       91,200                94,500

SERIAL PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
(liquidation preference and redemption value $256,200 in 1998 and 1997
                                                                                    232,800               219,300

SHAREHOLDERS' EQUITY
         Serial preferred stock not subject to mandatory redemption
         (maximum liquidation preference, $24,921,400 in 1998 and 1997)           1,053,000             1,053,000
         Common stock, par value $.40, authorized 25,000,000
         shares issued and outstanding 12,627,100 shares                          5,041,300             4,963,700
         Additional paid in capital                                                 274,000               221,600
         Readjustment resulting from quasi-reorganization                        (1,670,600)           (1,670,600)
         Retained earnings                                                        5,935,100             4,774,000
                                                                               ------------          ------------

                  Total shareholders' equity                                     10,632,800             9,341,700
                                                                               ------------          ------------

                                                                               $ 23,429,300          $ 15,432,500
                                                                               ============          ============

</TABLE>







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



                                         5
<PAGE>   6
<TABLE>
<CAPTION>


                    REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
         THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (UNAUDITED)


                                                                  THREE MONTHS                       NINE MONTHS
                                                            1998              1997             1998               1997   
                                                            ----              ----             ----               ----
                                                                                 


<S>                                                     <C>               <C>               <C>                <C>       
NET SALES                                               $ 1,177,300       $ 1,039,800       $ 2,527,700        1 ,835,200


COSTS AND EXPENSES
         Cost of goods sold                                 802,800           719,700         1,678,200         1,217,800
         Selling and administrative                         559,700           483,200         1,501,900         1,206,400
         Other                                                5,700             5,000            13,100            18,300
                                                        -----------       -----------       -----------       -----------

INCOME (LOSS) FROM OPERATIONS                              (190,900)         (168,100)         (665,500)         (607,300)

INCOME FROM EQUITY INVESTMENT IN PARTNERSHIP                970,500           851,700         2,934,700         2,777,500

INTEREST INCOME                                              45,000             4,000            67,300            41,400

INTEREST EXPENSE                                           (270,600)         (211,700)       (1,079,200)         (594,800)
                                                        -----------       -----------       -----------       -----------
INCOME BEFORE INCOME TAX EXPENSE &
MINORITY INTEREST                                           554,000           475,900         1,257,300         1,616,800

INCOME TAX EXPENSE                                           23,400            22,200            49,500            33,300

MINORITY INTEREST                                               500              (800)            9,100            (3,800)
                                                        -----------       -----------       -----------       -----------

NET INCOME                                              $   530,100       $   454,500       $ 1,198,700       $ 1,587,300
                                                        ===========       ===========       ===========       ===========


NET INCOME APPLICABLE TO COMMON STOCK
(after accrued preferred stock dividends of $8,000;
$9,400; $24,100; and $38,400, respectively in 1998
and 1997, and preferred stock accretion of $4,500;
$8,100; $13,500; and $24,500, respectively
in 1998 and 1997.)
                                                        $   517,600       $   437,000         1,161,100       $ 1,524,400
                                                        ===========       ===========       ===========       ===========

NET INCOME PER SHARE
         Basic                                          $       .04       $       .04       $       .09       $       .13
                                                        ===========       ===========       ===========       ===========

         Fully diluted                                  $       .03       $       .03       $       .08       $       .11
                                                        ===========       ===========       ===========       ===========

</TABLE>


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






                                       6
<PAGE>   7
<TABLE>
<CAPTION>


                    REGENCY AFFILIATES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (UNAUDITED)




                                                                                     1998                  1997
                                                                                     ----                  ----


CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                             <C>                  <C>         
         Net income                                                             $  1,198,700         $  1,587,300
         Adjustments to reconcile net income to net cash used by operating
         activities:
               Minority interest                                                       9,100               (3,800)
               Stock issued for services                                             130,000              233,300
               Income from equity investment in partnership                       (2,934,700)          (2,777,500)
               Distribution of equity earnings from partnership                      102,300              102,800
               Interest amortization on long-term debt                               788,300              561,500
               Depreciation and amortization                                          68,600               65,600
         Changes in operating assets and liabilities:
               Accounts receivable                                                  (188,400)            (463,000)
               Inventories                                                          (386,300)             (34,800)
               Other current assets                                                  (61,100)            (187,700)
               Other assets                                                             --                (46,600)
               Accounts payable                                                       12,000               74,500
               Accrued expenses                                                       61,700              (92,500)
                                                                                ------------         ------------
               Net cash used by operating activities                              (1,199,800)            (980,900)
                                                                                ------------         ------------



CASH FLOWS FROM INVESTING ACTIVITIES
         Acquisition of business, net of $13,500 cash acquired                          --             (1,086,500)
         Acquisition of property                                                  (1,629,200)            (114,200)
         Purchase of certificate of deposit                                       (2,337,600)                --
         Other                                                                       (32,900)                --   
                                                                                ------------         ------------
         Net cash used by investing activities                                    (3,999,700)          (1,200,700)
                                                                                ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES
         Proceeds from short-term borrowings                                         619,000              345,000
         Payment of short-term borrowings                                           (140,000)                --
         Proceeds from issuance of long-term debt                                 10,709,700                 --
         Payment of long-term debt                                                (5,186,800)                --
         Debt issuance and offering costs                                           (949,700)             (28,500)
         Dividends paid                                                              (36,500)             (44,800)
                                                                                ------------         ------------
         Net cash provided by financing activities                                 5,015,700              271,700
                                                                                ------------         ------------
INCREASE (DECREASE) IN CASH                                                         (183,800)          (1,909,900)


 CASH-BEGINNING                                                                      252,400            2,303,700
                                                                                ------------         ------------
 CASH-ENDING                                                                    $     68,600         $    393,800
                                                                                ============         ============

</TABLE>

                                       7
<PAGE>   8
<TABLE>
<CAPTION>
                                                                                         1998                    1997
                                                                                         ----                    ----
<S>                                                                                     <C>                     <C>    
Supplemental disclosures of cash flow information: 
         Cash paid during the period for:
             Income taxes                                                               $ 65,500                $60,800
             Interest                                                                  1,561,000                 --
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.

         In 1998, the Company issued 187,000 shares of common stock for payment
         of services rendered by the Company's President.

</TABLE>
















         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 nine-month periods ended
          September 30, 1998 are not necessarily indicative of the results that
          may be expected for the year ended December 31, 1998. 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, 1997.

     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"),
          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 - Basic 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 period. 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, 1998:
<TABLE>
<S>                                          <C>     
          Raw materials and supplies          $337,400
          Work in process                      141,700
          Finished products                    443,400
                                               -------
                                              $922,500
                                              ========
</TABLE>




                                       9
<PAGE>   10


     E.   Aggregate Inventory - Aggregate inventory is stated at the 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 $406,900 at September 30, 1998. 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, 1998 was $14,784,200. The income from the Company's equity
     investment in the 




                                       10
<PAGE>   11
     partnership for the three months and the nine months ended September 30,
     1998 was $970,500 and $2,934,700, respectively.

     Summarized operating data for Security for the three months and nine months
     ended September 30, 1998, and September 30, 1997, is as follows:
<TABLE>
<CAPTION>


                                                            Three Months                                Nine Months
                                                            ------------                                -----------
                                                      1998                 1997                  1998                1997
                                                      ----                 ----                  ----                ----

<S>                                               <C>                  <C>                  <C>                  <C>       
Revenues                                          $3,290,100           $2,983,200           $9,861,900           $8,507,300
Operating Expenses                                   811,200              760,700            2,423,600            2,301,800
Depreciation and Amortization                        707,600              607,000            2,122,000            1,815,500
Interest Expense, Net                                749,700              719,000            2,226,800            1,466,400
                                                  ----------           ----------           ----------           ----------
                Net Income                        $1,021,600           $  896,500           $3,089,500           $2,923,600
                                                  ==========           ==========           ==========           ==========

</TABLE>

NOTE 3.  LONG-TERM DEBT

     On June 24, 1998, the Company refinanced the long-term debt previously
     outstanding with Southern Indiana Properties, Inc. ("SIPI") and entered
     into a Loan Agreement (the "Loan") with KBC Bank N.V. (KBC). Under the
     terms of the Loan Agreement, KBC advanced $9,383,320. The due date of the
     Loan is November 30, 2003 with interest at the rate of 7.5% compounded
     semi-annually on each June 1 and December 1, commencing June 1, 1998. The
     interest may be paid by the Company in cash on these semi-annual dates or
     the Company may elect to add the interest to the principal of the Loan then
     outstanding.

     The Loan is secured by all of the Company's interest in Security, including
     the Company's interest in all profits and distributions, other than the
     payment of management fees of $100,000 annually, and all of the Company's
     rights, powers, and remedies under the Security Land and Development
     Company Limited Partnership Agreement as amended and restated. At any time,
     the Company may prepay the entire principal balance of the Loan, plus
     accrued and unpaid interest, plus a Make-Whole Premium as defined in the
     Loan Agreement, if any.

     To facilitate the Loan from KBC, the Company purchased a residual value
     insurance policy through R.V.I. American Insurance Company (RVI) which
     secures the repayment of the outstanding principal and interest when due
     with a maximum liability of $14 million. Should RVI pay a claim under this
     policy they will be entitled to certain of the Company's rights with
     respect to the property of Security, including but not limited to the right
     to solicit bona fide, third party offers for the property and to accept
     such offers and bind the Partnership in order to recoup the amount paid.
     The costs related to this insurance in the amount of $745,000 along with
     legal fees and other costs associated with obtaining the Loan in the amount
     of $205,000 for a total of $950,000 have been capitalized and are shown as
     Debt Issue Costs. These Debt Issue Costs will be amortized over the life of
     the Loan using the effective interest rate method.






                                       11
<PAGE>   12


     As noted above, the KBC Loan proceeds were used to refinance the long-term
     debt outstanding under the SIPI Loan Agreement. The SIPI Loan Agreement
     provided that prepayment of the outstanding principal and regular and
     contingent interest amounting to 20%, prior to June 1999, would result in a
     prepayment penalty of 6%. The prepayment of the SIPI Loan also required the
     write off of the unamortized balance of debt issuance costs associated with
     the loan.

NOTE 4.  NOTES PAYABLE

     On March 25, 1998, RCI purchased a building of 126,000 square feet located
     near the current facility in Scranton, Pennsylvania. The purchase and the
     cost of equipping this facility were funded in part by a first mortgage
     term loan in the amount of $960,000 and a convertible line of credit in the
     amount of $410,000 from PNC Bank. As of September 30, 1998, no amounts were
     outstanding on the convertible line of credit. RCI also maintains a
     revolving line of credit with PNC Bank in the amount of $1,000,000 of which
     $619,000 was outstanding at September 30, 1998.

     The first mortgage term loan is payable in consecutive monthly installments
     over 10 years with a 20 year amortization. The convertible line of credit
     is available for 80% of the cost of construction improvements on the
     building for a 2 year period at which time the convertible line of credit
     becomes payable in consecutive monthly installments over 10 years with a 20
     year amortization. The interest rates on each of the first mortgage term
     loan, the convertible line of credit, and the revolving line of credit are
     at the PNC Bank prime rate minus one-half percent, which was 8 percent at
     September 30, 1998.

     RCI's real and personal property, equipment, accounts receivable,
     inventory, and other general intangibles are pledged as security for the
     loans. The loans are 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,
     1998.

     In April 1998, the Company obtained a $300,000 bridge loan from the Park
     Avenue Bank which matured 90 days from issuance and had an interest rate
     equal to the bank's prime rate. The bridge loan was collateralized by a
     certificate of deposit in the amount of $300,000 from Republic Management
     Co., Inc., a company affiliated with the Company's President. The bridge
     loan was repaid in full on July 3, 1998 with proceeds from the long-term
     borrowing discussed in Note 3.

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





                                       12
<PAGE>   13


     At September 30, 1998, the Company's net deferred tax asset, utilizing a
     34% effective tax rate, consisted of:
<TABLE>
                 <S>                                                  <C>    
                  Deferred tax assets:
                Investment partnership earnings                       $  1,921,000
                Net operating loss carryforwards                        12,197,000
                Alternative minimum tax credits                            321,000
                Total deferred tax assets before valuation            ------------
                allowance                                               14,439,000

                         Valuation allowance                           (14,439,000)
                                                                      ------------

                         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 $35,800,000. 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, 1998, the tax
     effect of net operating loss carryforwards reduced the current provision
     for federal income taxes by approximately $188,000 and $425,100,
     respectively. The Company provided $49,500 for taxes which relates to the
     alternative minimum tax.





                                       13

<PAGE>   14


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

         GENERAL

         Regency Affiliates, Inc. (the "Company") is the parent company of
         several subsidiary business operations as described below. The Company
         is committed to develop and/or monetize these business operations for
         the benefit of its shareholders and continues to commit both financial
         and personnel resources to an active merger and acquisition program in
         order to enhance future common stockholders' values. The Company's
         Common Stockholders' equity at September 30, 1998 was $10,632,800 as
         compared to $8,773,800 at September 30, 1997, an increase of
         $1,859,000 for the twelve months ending September 30, 1998.
         equity.

         LIQUIDITY AND CAPITAL RESOURCES.

         The investment in Security is estimated to provide the Company with
         management fees of approximately $100,000 per annum until 2003. In the
         quarter ending September 30, 1998, the Company's income from its equity
         investment in the Partnership was $970,500. These funds, however, are
         presently committed for the amortization of the outstanding principal
         balance on Security's real estate mortgage and, while the Company's
         equity investment has increased to $14,784,200, the partnership does
         not provide liquidity to the Company in excess of the $100,000 annual
         management fee. The Company has, however, been successful in obtaining
         financing with respect to this investment (see Note 3).

         On March 25, 1998, Rustic Crafts purchased a building of 126,000 square
         feet located near the current facility in Scranton, Pennsylvania.
         Management anticipates that the cost of acquiring and equipping this
         facility will approach $2 million, which will be funded in part by new
         borrowings from PNC Bank in the form of a first mortgage in the amount
         of $960,000 and a construction credit line in the amount of $410,000.
         This new facility will significantly increase the operating capacity
         and enable Rustic Crafts to service its current order backlog and
         enhance its customer base. Rustic Crafts has recently employed a new
         President who has substantial industry background and plans to increase
         its sales and distribution of both manufactured and imported products.
         Management anticipates that Rustic Crafts will provide significant cash
         distributions for use by the Company.

         On the date of acquisition of the new facility, a tenant was renting
         23,000 square feet of a separate part of this facility at a base rent
         of $17,400 per year plus an allocable share of the real estate taxes.
         The Company intends to maintain this tenant relationship on an ongoing
         basis. As of August 15, 1998, the Company rented an additional 28,000
         square feet at an annual minimum rent of $71,680 and will occupy the
         remainder of this facility by the end of the year.

         The Company experimented during 1997 for a one month period by
         installing aggregate crushing and marketing operations at the Groveland
         Mine in an informal joint venture with another company. The joint
         venture processed and marketed approximately 25,000 tons of aggregate
         rock. Based on this experiment, the Company is attempting to establish
         a permanent 



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<PAGE>   15

         infrastructure to commercialize the inventory of previously quarried
         and stockpiled aggregate at the Groveland Mine in conjunction with an
         experienced aggregate supply company. At this time there is no
         assurance that such commercialization will occur. The Company is also
         exploring opportunities to monetize this asset for the benefit of the
         Company's shareholders.

         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 recent Loan Agreement, or other loans. There can be no
         assurances that any such acquisitions or transactions will come to
         fruition. Although the Company is not obligated to disclose
         non-material agreements and/or non-binding Letters of Intent, the
         following is presented on the basis of full and adequate disclosure
         with the caution so as not to place any undue reliance on these
         forward-looking statements.

         Chancellor Group

         On January 31, 1998, NRDC entered into a non-binding Letter of Intent
         with the Chancellor Group, Inc. to transfer the stock of NRDC in
         exchange for $7 million face value preferred shares of the Chancellor
         Group, Inc. The preferred shares would carry a 7% dividend rate and be
         convertible at any time after 24 months from the date of issuance into
         the common stock of the Chancellor Group, Inc. The Chancellor Group,
         Inc. would have the option to redeem the preferred shares at any time
         prior to conversion at the stated face value. Management believes that
         it may be appropriate to distribute the stock of NRDC to the Regency
         shareholders prior to such an exchange of the NRDC stock for the
         preferred shares of the Chancellor Group, Inc. The Company has been
         notified by the Chancellor Group that they are continuing to make
         efforts toward obtaining the financing necessary to proceed with this
         transaction. While the non-binding Letter of Intent outlines the terms
         of an exchange of the NRDC stock for the preferred shares of the
         Chancellor Group, Inc., there can be no assurance that such an exchange
         would come to fruition or that, if a definitive agreement is reached,
         it will provide for the same or similar economic terms.

         Aggregate Sales Corp.

         On September 3, 1998, the Company entered into an agreement with
         Aggregate Sales Corp., a Florida corporation, under which Aggregate
         Sales Corp. is entitled to a one year period in which to establish an
         entity capable of all aspects necessary to commercialize the production
         of approximately 75 million tons of aggregate rock owned by the Company
         and located at the Groveland Mine near Iron Mountain, Michigan. This
         entity would provide the crushing, washing and earth moving equipment
         and any investment necessary to crush and process this aggregate rock
         to specific gradations for delivery to customers for use as railroad
         ballast, concrete and asphalt production, road building and similar
         uses. Aggregate Sales Corp. would pay the Company a royalty based on
         the amount of aggregate sold.

         On-Line Financial Services, Inc.

         On August 10, 1998, the Company entered into a non-binding Letter of
         Intent to acquire 30% of the outstanding common stock of On-Line
         Financial Services, Inc. in exchange for $50,000 and a $250,000 zero
         coupon non-recourse note bearing interest at 1% below the prime rate of
         Norwest Bank. The note is to be secured by 125,000 tons of aggregate
         rock owned by NRDC. The note and accrued and unpaid interest would be
         payable in five years unless earlier cancelled as a result of On-Line
         Financial Services, Inc. becoming publicly traded. The Company and
         On-Line Financial Services, Inc. are in the process of negotiating the
         terms of the definitive agreement with respect to this transaction. 


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<PAGE>   16

         On-Line Financial Services, Inc. is a mortgage broker in the Denver,
         Colorado market with a web site on the Internet used to market their
         services and to provide loan origination opportunities to third parties
         associated with the purchase and sale of residential real estate. The
         address of the web site is: www.mortgage-inc.com. The Company has
         recently adopted its own web site at: www.regencyaffiliates.com.

         Cruttenden Roth

         On August 17, 1998, the Company engaged Cruttenden Roth, Inc. to assist
         the Company with its acquisition program. The Company has agreed to pay
         Cruttenden Roth a fee of $25,000 payable over 12 months and a success
         fee if the Company acquires a business within the next two years. The 
         Company is analyzing the acquisition prospects introduced by 
         Cruttenden Roth.

         YEAR 2000 ISSUES 

         The Company has determined that there will be no material effect on
         the Company's business, results of operations or financial condition 
         as a  consequence of its Year 2000 issues, considering the Company's  
         efforts to avoid any such consequences.

         FORWARD LOOKING STATEMENTS

         This Report contains forward-looking statements which are made pursuant
         to the safe harbor provisions of the Securities Litigation Reform Act
         of 1995. Statements as to what the Company "believes," "intends",
         "expects" or "anticipates", and other similarly anticipatory
         expressions, are generally forward-looking and are made only as of the
         date of this Report. Readers of this Report are cautioned not to place
         undue reliance on such forward-looking statements, as they are subject
         to risks and uncertainties which could cause actual results to differ
         materially from those discussed in the forward-looking statements and
         from historical results of operations. 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)     The Company does not generate positive cash flow and,
                  historically, the Company has had limited operating activities
                  and substantially all of its efforts have 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 flows.

          (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, 1998, the Company was dependent upon the
                  investment in Security Land and Development Company Limited
                  Partnership, the operations of RCI, and its interest income
                  for a material portion of its cash flow and for a material
                  portion of its reportable income.

          (iv)    The investment activities of the Company do not, in and of
                  themselves, generate sufficient cash flow to cover its
                  corporate operating expenses and thus the Company must rely on
                  its cash reserves to fund these expenses.

           (v)    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 and therefore its financial position
                  and results of operations (see Note 2).

          (vi)     The failure of the Social Security Administration to renew
                   its lease of the Security West Buildings upon its expiration
                   on October 31, 2003, could have a materially adverse impact
                   upon the Company's investment in Security.



                                       16
<PAGE>   17

         (vii)    The Company has significant tax loss and tax 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).

         SUBSEQUENT EVENTS

         On November 5, 1998, the Company entered into a non-binding Letter of
         Intent to acquire the business operations of GuildMaster, Inc. in
         exchange for $300,000 of cash and $2,000,000 of convertible preferred
         stock with terms and conditions to be designated by the Board of
         Directors. GuildMaster, Inc. manufactures innovative and
         fashion-forward decorative accessories for the home, accent furniture,
         lamps, and wall decor in their facilities located in Springfield,
         Missouri. While the Letter of Intent outlines the terms of this
         transaction, there can be no assurance that such a transaction will be
         completed or that, if a definitive agreement is reached, it will
         provide for the same or similar economic terms.

         RESULTS OF OPERATIONS.

         The operations of Regency Affiliates, Inc. and its subsidiaries during
         the three months and nine months ended September 30, 1998, included the
         casual sales of aggregate, limited rental income and the sale of wood
         and cast marble decorative fireplaces, heater logs, and related
         accessories as well as an active merger and acquisition program with a
         view to enhance future company operations.

         Three Months Ending September 30, 1998 and 1997.
         ------------------------------------------------

         Sales of Rustic Crafts increased $123,000 or 13% in the third quarter
         of 1998 compared to the third quarter of 1997 as a result of an
         increase in the volume of units shipped. The backlog at September 30,
         1998, is $1,139,000 compared to $435,000, at September 30, 1997. Gross
         margin increased $54,400 from the previous year as a result of the
         increase in sales and a slight improvement in the gross margin
         percentage.

         Selling and administrative expense increased $76,500 over the preceding
         quarter reflecting higher costs associated with the Company's
         manufacturing operations.

         Income from the Company's equity investment in partnership increased
         $118,800 over the preceding quarter. The increase was due to increased
         rental income from additional renovated space offset by increased
         depreciation and net interest expense.

         Interest expense increased $58,900 in the third quarter of 1998
         compared to the similar quarter in 1997. The higher interest expense
         reflects the cost of the long-term debt incurred to acquire 

                                       17
<PAGE>   18

         a manufacturing facility, higher short-term borrowings and higher
         principal amounts from the refinancing of the SIPI loan. These
         increases were offset by significantly lower interest rates associated
         with the refinancing of the SIPI loan which is secured by the Company's
         investment in a partnership.

         Nine Months Ending September 30, 1998 and 1997.
         -----------------------------------------------

         Sales for Rustic Crafts increased $609,600 in the nine months ended
         September 30, 1998, compared to the same period in the prior year. The
         increase is due to the acquisition of Rustic Crafts in March 1997 and
         an increase in volumes shipped over the comparable period from a year
         ago. The gross margin percentage decreased from 33.4% in 1997 to 30.6%
         in 1998 primarily reflecting higher costs for direct labor.

         Selling and administrative expenses increased $295,500 in 1998 over
         1997, primarily as a result of increased expenses at Rustic Crafts for
         a nine month period in 1998 as compared to a six month period in 1997.

         Income from the Company's equity investment in partnership increased
         $157,200 in 1998 over 1997. The increase resulted from increased rental
         income from renovated space offset by higher depreciation and net
         interest expense.

         Interest expense increased $484,400 in 1998 over 1997. This increase in
         interest expense is due to i) a prepayment penalty and the write-off
         of debt issuance costs incurred in connection with SIPI loan which was
         refinanced in the second quarter of 1998; ii) interest cost associated
         with the debt financing issued in connection with the acquisition of a
         manufacturing facility, and iii) higher long-term debt resulting from
         the refinancing of the SIPI loan as discussed above. The effective
         interest rate on the new debt is significantly less than the effective
         rate of the SIPI loan.

         Net income decreased $464,200 in 1998 from the similar period in 1997.
         Higher gross margins and income from partnership was offset by 
         increased selling and administrative expenses and higher interest 
         expense.




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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, 1998.

ITEM 5.  OTHER INFORMATION.

                      None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

                  Exhibit 27        Financial Data Schedule







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<PAGE>   20


                                   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 13, 1998              By:   /s/ Douglas F. Long
---------------------              -------------------------------------------
   Date                               Douglas F. Long, Chief Financial Officer





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