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 quarterly period ended September 30, 1998

Commission File Number:  1-8967

                      ATLANTIC GULF COMMUNITIES CORPORATION
             (Exact name of Registrant as specified in its charter)

Delaware                                    59-0720444
--------                                    ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

2601 South Bayshore Drive                   
Miami, Florida                              33133-5461
--------------                              ----------
(Address of principal executive offices)    (Zip Code)

                  Registrant's telephone number: (305) 859-4000
                                                 --------------

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.

                                               [X]   Yes   [ ]  No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

There are 11,769,418  shares of the Registrant's  Common Stock outstanding as of
November 11, 1998.
<PAGE>

                  SPECIAL NOTE ABOUT FORWARD LOOKING STATEMENTS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM
10-Q  FOR THE  QUARTERLY  PERIOD  ENDED  SEPTEMBER  30,  1998,  CERTAIN  MATTERS
DISCUSSED  HEREIN  CONTAIN  FORWARD  LOOKING  STATEMENTS  BASED ON  MANAGEMENT'S
EXPECTATIONS  REGARDING,  AND  EVALUATIONS  OF CURRENT  INFORMATION  ABOUT,  THE
COMPANY'S  BUSINESS  THAT INVOLVE  RISKS AND  UNCERTAINTIES,  AND ARE SUBJECT TO
FACTORS THAT COULD CAUSE ACTUAL  FUTURE  RESULTS TO DIFFER,  BOTH  ADVERSELY AND
MATERIALLY, FROM CURRENTLY ANTICIPATED RESULTS,  INCLUDING,  WITHOUT LIMITATION,
THE EFFECT OF ECONOMIC AND MARKET  CONDITIONS;  THE CYCLICAL  NATURE OF THE REAL
ESTATE  MARKET IN FLORIDA,  TEXAS,  COLORADO AND OTHER  SOUTHEAST  U.S.  PRIMARY
MARKETS;  THE INDUSTRY AND INDUSTRY SEGMENT CONDITIONS AND DIRECTIONS;  INTEREST
RATES;  THE  AVAILABILITY  AND COST OF FINANCING  REAL ESTATE  ACQUISITIONS  AND
DEVELOPMENTS;   THE  SALEABILITY  OF  PREDECESSOR  ASSETS;  CONSTRUCTION  COSTS;
WEATHER; THE AVAILABILITY OF HIGH QUALITY REAL ESTATE PARCELS IN PRIMARY FLORIDA
AND OTHER  U.S.  MARKETS;  THE  AVAILABILITY  AND COST OF  MATERIALS  AND LABOR;
CONSUMER PREFERENCES AND TASTES;  ENVIRONMENTAL ISSUES; GOVERNMENTAL REGULATION;
COMPETITIVE  PRESSURES;  THE COMPANY'S OWN DEBT AND EQUITY STRUCTURE AND RELATED
FINANCING CONTINGENCIES AND RESTRICTIONS;  MANAGEMENT LIMITATIONS; THE COMPANY'S
ABILITY TO CLOSE  FINANCINGS OF NEW REAL ESTATE AT PARTICULAR  TIMES RELATIVE TO
THE COMPANY'S CASH FLOW NEEDS AT SUCH TIMES; THE COMPANY'S  ABILITY TO REFINANCE
EXISTING  INDEBTEDNESS;  LEGISLATION;  RESOLUTION OF PENDING LITIGATION IN WHICH
THE COMPANY IS A DEFENDANT; THE SUCCESS OR LACK THEREOF OF THE COMPANY'S CURRENT
DEVELOPMENT  PROJECTS;  AND THE  COMPANY'S  ABILITY TO SATISFY  ALL OF  NASDAQ'S
CONDITIONS  FOR  CONTINUED  LISTING OF THE  COMPANY'S  SECURITIES  ON THE NASDAQ
NATIONAL MARKET.


<PAGE>


                                       TABLE OF CONTENTS
                                       -----------------
<TABLE>
<CAPTION>

                                                                                          Page
                                                                                           No.
                                                                                          ----
<S>            <C>                                                                        <C>
PART I.  -   FINANCIAL INFORMATION

     Item 1.      Financial Statements

                  Consolidated Balance Sheets as of September 30, 1998 and
                       December 31, 1997                                                     1

                  Consolidated Statements of Operations for 
                       the Three and Nine Months Ended September 30, 1998 and 1997           2

                  Consolidated Statements of Cash Flows 
                       for the Nine Months Ended September 30, 1998 and 1997                 3

                  Notes to Consolidated Financial Statements                                 4

     Item 2.      Management's Discussion and Analysis of Financial
                       Condition and Results of Operations                                   7

PART II.  -  OTHER INFORMATION

     Item 5.      Other Information                                                         28

     Item 6.      Exhibits and Reports on Form 8-K                                          29

SIGNATURES                                                                                  30
</TABLE>

<PAGE>
PART I. - FINANCIAL INFORMATION

Item 1.   Financial Statements
          --------------------

<TABLE>
<CAPTION>
                               ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES
                                            Consolidated Balance Sheets
                                      September 30, 1998 and December 31, 1997
                                 (in thousands, except share amounts and par value)

                                                                                           September 30, December 31,
                                                                                               1998          1997
                                                                                           ------------- ------------
     Assets                                                                                 (unaudited)
     ------
<S>                                                                                          <C>          <C>      
Cash and cash equivalents                                                                    $   5,622    $   9,188
Restricted cash and cash equivalents                                                             1,124        1,713
Contracts receivable, net                                                                        4,526        6,336
Mortgages, notes and other receivables, net                                                     32,499       34,910
Land and residential inventory                                                                 152,626      130,506
Property, plant and equipment, net                                                               6,015        1,754
Other assets, net                                                                               18,133       18,664
                                                                                             ---------    ---------
Total assets                                                                                 $ 220,545    $ 203,071
                                                                                             =========    =========
     Liabilities and Stockholders' (Deficit) Equity
     ----------------------------------------------
Accounts payable and accrued liabilities                                                     $  14,949    $  13,615
Other liabilities                                                                                8,251       10,046
Notes, mortgages and capital leases                                                            146,690      132,408
                                                                                             ---------    ---------
Total liabilities                                                                              169,890      156,069
                                                                                             ---------    ---------
Redeemable Preferred Stock
     Series A, 20%, $.01 par value,  2,500,000 shares authorized; 2,500,000 shares
     issued,  having a liquidation  preference of $31,149,  as of September 30, 1998;
     2,326,500 shares issued, having a liquidation preference of $25,254, as of
     December 31, 1997                                                                          28,640       22,378

     Series B, 20%, $.01 par value;  2,000,000 shares authorized; 2,000,000 shares
     issued, having a liquidation  preference of $24,665 as of September 30, 1998 and
     a liquidation preference of $21,307 as of December 31, 1997                                23,052       19,306
                                                                                             ---------    ---------
                                                                                                51,692       41,684
                                                                                             ---------    ---------
Stockholders' (deficit) equity
     Common stock, $.10 par value, 70,000,000 shares authorized; 11,915,349 and
     11,607,526 shares issued as of September 30, 1998, and December 31, 1997, respectively      1,192        1,161

     Contributed capital                                                                       121,094      128,930

     Accumulated deficit                                                                      (117,598)    (119,052)

     Accumulated other comprehensive loss                                                       (5,712)      (5,712)

     Treasury stock, at cost, 126,547 and 86,277 shares as of
     September 30, 1998, and December 31, 1997, respectively                                       (13)          (9)
                                                                                             ---------    ---------
Total stockholders' (deficit) equity                                                            (1,037)       5,318
                                                                                             ---------    ---------
Total liabilities and stockholders' (deficit) equity                                         $ 220,545    $ 203,071
                                                                                             =========    =========
</TABLE>
See accompanying notes to consolidated financial statements.

                                                         1
<PAGE>

<TABLE>
<CAPTION>
                             ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES
                                      Consolidated Statements of Operations
                             Three and Nine Months Ended September 30, 1998 and 1997
                                      (in thousands, except per share data)
                                                   (unaudited)

                                                                     Three Months Ended       Nine Months Ended
                                                                       September 30,            September 30,
                                                                    --------------------    --------------------
Revenues:                                                             1998        1997        1998        1997
                                                                    --------    --------    --------    --------
<S>                                                                    <C>           <C>      <C>            <C>
  Real estate sales:
    Core Homesite                                                   $  2,858    $  2,970    $  8,005    $ 11,438
    Core Tract                                                         3,520         135      35,561         725
    Core Residential                                                       -         826           -      10,021
    Predecessor Homesite                                                 647       2,007       2,578       5,621
    Predecessor Tract                                                  2,943       4,674      16,699      16,790
    Other Operations                                                       -           -           -          76
                                                                    --------    --------    --------    --------
   Total real estate sales                                             9,968      10,612      62,843      44,671

  Other operating revenues                                             1,507         632       2,922       2,077
  Interest income                                                      1,201       1,182       3,720       4,299
  Other income                                                         1,243           -       2,924           -
                                                                    --------    --------    --------    --------
    Total revenues                                                    13,919      12,426      72,409      51,047
                                                                    --------    --------    --------    --------
Costs and expenses:
  Cost of real estate sales:
    Core Homesite                                                      2,419       2,573       6,826      10,609
    Core Tract                                                           841         106      26,272         590
    Core Residential                                                       -       3,890           -      12,200
    Predecessor Homesite                                                 528       1,735       2,286       4,955
    Predecessor Tract                                                  2,568       4,265      15,967      15,474
    Other Operations                                                       -           -           -          88
                                                                    --------    --------    --------    --------
   Total cost of real estate sales                                     6,356      12,569      51,351      43,916
  Selling expense                                                      1,491       1,930       4,711       5,948
  Other operating expense                                                399         337       1,165         965
  Other real estate costs                                              2,871       3,742       6,947       9,544
  General and administrative expense                                   2,385       2,078       6,427       6,734
  Depreciation                                                           172         171         510         524
  Cost of borrowing, net of amounts capitalized                        1,215       2,389       4,246      11,123
  Other expense                                                           96         268         567         730
                                                                    --------    --------    --------    --------
    Total costs and expenses                                          14,985      23,484      75,924      79,484
                                                                    --------    --------    --------    --------
Operating loss                                                        (1,066)    (11,058)     (3,515)    (28,437)
                                                                    --------    --------    --------    --------
Other income (expense):
  Reorganization items                                                 4,401         442       5,183       2,236
  Miscellaneous                                                            2        (185)       (214)       (546)
                                                                    --------    --------    --------    --------
Total other income                                                     4,403         257       4,969       1,690
                                                                    --------    --------    --------    --------
Net income (loss)                                                      3,337     (10,801)      1,454     (26,747)
                                                                    ========    ========    ========    ========
Less:
  Accrued preferred stock dividends                                    2,658       1,319       7,518       1,381
  Accretion of preferred stock to redemption amount                      338         182         992         190
                                                                    --------    --------    --------    --------
                                                                       2,996       1,501       8,510       1,571
                                                                    --------    --------    --------    --------
Net income (loss) applicable to common stock                        $    341    $(12,302)   $ (7,056)   $(28,318)
                                                                    ========    ========    ========    ========
Basic and diluted earnings per common share:
  Net income (loss) per common share                                $    .03    $  (1.07)   $   (.61)   $  (2.73)
                                                                    ========    ========    ========    ========
Weighted average common shares outstanding                            11,729      11,512      11,597      10,372
                                                                    ========    ========    ========    ========

See accompanying notes to consolidated financial statements.
</TABLE>

                                                       2
<PAGE>

<TABLE>
<CAPTION>
                             ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES
                                     Consolidated Statements of Cash Flows
                                 Nine Months Ended September 30, 1998 and 1997
                                           (in thousands of dollars)
                                                  (unaudited)

                                                                                          Nine Months Ended
                                                                                             September 30,
                                                                                        ----------------------
                                                                                           1998         1997
                                                                                        ---------    ---------
<S>                                                                                     <C>          <C>       
Cash flows from operating activities:
  Net income (loss)                                                                     $   1,454    $ (26,747)
  Adjustments  to  reconcile  net income  (loss) to net cash 
    used in  operating activities:
      Depreciation and amortization                                                         3,478        4,047
      Other income                                                                           (577)      (1,568)
      Reorganization items                                                                     45          562
      Land acquisitions                                                                   (22,125)     (19,745)
      Other net changes in assets and liabilities:
        Restricted cash                                                                       589        4,049
        Receivables                                                                         3,996       19,446
        Land and residential inventory                                                          5       20,704
        Other assets                                                                       (2,052)      (3,944)
        Accounts payable and accrued liabilities                                            1,402       (4,124)
        Other liabilities                                                                  (1,027)      (4,686)
                                                                                        ---------    ---------
          Net cash used in operating activities                                           (14,812)     (12,006)
                                                                                        ---------    ---------

Cash flows from investing activities:
  Additions to property, plant and equipment, net                                          (4,771)        (277)
  Funds withdrawn from utility trust accounts                                                   -       12,109
                                                                                        ---------    ---------
          Net cash (used in) provided by investing activities                              (4,771)      11,832
                                                                                        ---------    ---------

Cash flows from financing activities:
  Borrowings under credit agreements                                                       64,854       78,670
  Repayments under credit agreements                                                      (50,572)    (120,932)
  Principal payments on other liabilities                                                       -       (2,498)
  Proceeds from issuance of common stock                                                        -       10,000
  Proceeds from issuance of preferred stock                                                 1,735       29,965
                                                                                        ---------    ---------
          Net cash provided by (used in) financing activities                              16,017       (4,795)
                                                                                        ---------    ---------

Decrease in cash and cash equivalents                                                      (3,566)      (4,969)
Cash and cash equivalents at beginning of period                                            9,188        7,050
                                                                                        ---------    ---------
Cash and cash equivalents at end of period                                              $   5,622    $   2,081
                                                                                        =========    =========

Supplemental cash flow information:
  Interest payments, net of amounts capitalized                                         $   3,951    $   6,634
                                                                                        =========    =========
  Reorganization item payments                                                          $      45    $   1,743
                                                                                        =========    =========

See accompanying notes to consolidated financial statements.
</TABLE>

                                                       3
<PAGE>

             ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                               September 30, 1998
                                   (unaudited)

(1)      The September 30, 1998  financial  statements are unaudited and subject
         to year-end adjustments. In management's opinion, the interim financial
         statements  reflect all adjustments,  principally  consisting of normal
         recurring accruals,  necessary for a fair presentation of the financial
         position and results of operations. Results for interim periods are not
         necessarily  indicative  of results  for the full year.  For a complete
         description  of  the  Company's  accounting  policies,  see  "Notes  to
         Consolidated  Financial  Statements"  included in the Company's  Annual
         Report on Form 10-K for the year ended December 31, 1997, as amended by
         that certain Amendment to Form 10-K on Form 10-K/A-1, as filed with the
         Securities  and  Exchange  Commission  (the "SEC")  ("1997 Form 10-K").
         Certain prior year amounts have been  reclassified  to conform with the
         1998 presentation.

(2)      Net income (loss) per share of Company common stock ("Common Stock") is
         computed by (a) deducting  accrued  preferred  stock  dividends and the
         accretion  of  preferred  stock to  redemption  amount  from net income
         (loss) to determine  net income  (loss)  applicable to common stock and
         (b) then dividing net income  (loss)  applicable to common stock by the
         weighted  average number of shares of Common Stock  outstanding  during
         the  periods.  The effect of any  outstanding  warrants  and options to
         purchase common stock on the per share  computation  was  anti-dilutive
         during the periods.

(3)      The Company  capitalizes  interest  primarily on land  inventory  being
         developed  for sale which is  subsequently  charged to income  when the
         related  asset  is  sold.   Capitalized  interest  was  $3,199,000  and
         $8,595,000  for the three and nine months  ended  September  30,  1998,
         respectively,  and  $2,067,000  and  $4,789,000  for the three and nine
         months ended September 30, 1997, respectively.

(4)      Revenue from the sale of  residential  units other than Regency  Island
         ("Regency")  condominium  units is recognized when the earnings process
         is  complete.  Revenue  from the sale of Regency  condominium  units is
         recognized using the percentage-of-completion method. Earned revenue is
         based on the  percentage of costs  incurred to date to total  estimated
         costs to be incurred.  This  percentage is then applied to the expected
         revenue associated with units that have been sold to date. Revenue from
         the sale of land is recognized when all the criteria for sales pursuant
         to SFAS66 have been met.

(5)      Due  to the  establishment  of  reserves,  the  Company  did  not  have
         Available  Cash,  as  defined  in the  Company's  Cash Flow  Notes,  at
         September  30,  1998,  to make any  interest  payments on the Cash Flow
         Notes for the nine months ended  September 30, 1998.  In addition,  the
         Company did not have  Available  Cash to make any interest  payments on
         the Cash Flow Notes for the twelve  months  ended  December  31,  1997.
         Interest  on the Cash  Flow  Notes  is  noncumulative.  Therefore,  the
         Company has not recorded interest expense associated with the Cash Flow
         Notes during the nine months  ended  September  30, 1998 and 1997.  See
         PART I.  FINANCIAL  INFORMATION,  ITEM 2.  MANAGEMENT'S  DISCUSSION AND
         ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY
         AND CAPITAL  RESOURCES  to the Form 10-Q for the fiscal  quarter  ended
         September  30,  1998 (the  "Third  Quarter  1998 Form  10-Q")  for more
         information concerning the Cash Flow Notes.

(6)      Pursuant to the Company's 1996 Non-Employee  Directors' Stock Plan, the
         Company issued to its Non-Employee Directors (a) 8,330 shares of Common
         Stock at a price of $4.50 per share for the

                                        4
<PAGE>

             ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                               September 30, 1998
                                   (unaudited)

         first  quarter of 1998,  (b) 6,209 shares of Common Stock at a price of
         $3.625 per share for the second  quarter of 1998 and (c) 10,908  shares
         of Common  Stock at a price of $2.0625 per share for the third  quarter
         of 1998.

(7)      The  Company  and  AP-AGC,  LLC,  an  affiliate  of Apollo  Real Estate
         Advisors,  L.P.  ("Apollo"),  are  parties to that  certain  Investment
         Agreement, as amended (the "Investment Agreement," which closed in June
         1997), pursuant to which Apollo agreed,  subject to certain conditions,
         to acquire  2.5  million  shares of 20% Series A  Redeemable  Preferred
         Stock (the  "Series A Preferred  Stock") from the Company at a purchase
         price of $9.88 per share,  and  warrants  to  purchase  up to 5 million
         shares of Common Stock (the "Investor  Warrants"),  at a purchase price
         of $.06 per share, for an aggregate  purchase price of $25 million (the
         "Apollo  Transaction").  As of December 31, 1997,  Apollo had purchased
         2,326,475  shares of Series A Preferred Stock and Investor  Warrants to
         acquire  4,652,950  shares of Common Stock,  for an aggregate  purchase
         price of  approximately  $23.3  million.  On  March  31,  1998,  Apollo
         purchased the remaining  173,525 shares of Series A Preferred Stock and
         Investor  Warrants to acquire  347,050  shares of Common Stock,  for an
         aggregate purchase price of approximately $1.7 million.

(8)      Redeemable  preferred stock consisted of the following at September 30,
         1998 and December 31, 1997 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                     September 30, December 31,
                                                                         1998          1997
                                                                     ------------- ------------
<S>                                                                    <C>           <C>     
         Series A
         --------
         Gross proceeds                                                $ 25,000      $ 23,265
         Accrued dividends                                                6,149         1,989
                                                                       --------      --------
         Liquidation Preference amount                                   31,149        25,254
         Less issue costs                                                (3,100)       (2,885)
         Less warrants purchased                                           (300)         (279)
         Plus accretion of preferred stock to redemption amount             891           288
                                                                       --------       --------
                                                                         28,640        22,378
                                                                       --------      --------

         Series B
         --------
         Gross proceeds                                                  20,000        20,000
         Accrued dividends                                                4,665         1,307
                                                                       --------      --------
         Liquidation Preference amount                                   24,665        21,307
         Less issue costs                                                (1,900)       (1,900)
         Less warrants purchased                                           (240)         (240)
         Plus accretion of preferred stock to redemption amount             527           139
                                                                       --------      --------
                                                                         23,052        19,306
                                                                       --------      --------
         Total redeemable preferred stock                              $ 51,692      $ 41,684
                                                                       ========      ========
</TABLE>

                                              5
<PAGE>


             ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                               September 30, 1998
                                   (unaudited)

(9)      As of January 1, 1998, the Company  adopted  Statement  130,  REPORTING
         COMPREHENSIVE  INCOME.  Statement  130  establishes  new  rules for the
         reporting  and  display of  comprehensive  income  and its  components;
         however,  the adoption of this Statement had no impact on the Company's
         net loss or  shareholders'  equity.  Statement 130 requires  unrealized
         gains or losses on the Company's minimum pension liability adjustments,
         which prior to  adoption  were  reported  separately  in  shareholders'
         equity  to be  included  in  other  comprehensive  income.  Prior  year
         financial   statements  have  been   reclassified  to  conform  to  the
         requirements of Statement 130.

         During the first  nine  months of 1998 and 1997,  comprehensive  income
         consisted only of the net losses for those periods.

                                        6
<PAGE>

PART I. -  FINANCIAL INFORMATION

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

UNLESS THE  CONTEXT  CLEARLY  INDICATES  OTHERWISE,  ALL  REFERENCES  TO (1) THE
"COMPANY"  INCLUDE  ATLANTIC  GULF  COMMUNITIES  CORPORATION  AND ITS DIRECT AND
INDIRECT  WHOLLY-OWNED  SUBSIDIARIES,  (2)  "ATLANTIC  GULF"  REFERS  SOLELY  TO
ATLANTIC  GULF  COMMUNITIES   CORPORATION  AND  (3)  "PREDECESSOR   COMPANY"  OR
"PREDECESSOR"  REFER  TO  GENERAL  DEVELOPMENT   CORPORATION,   ATLANTIC  GULF'S
IMMEDIATE PREDECESSOR.

Current Business
----------------

         The Company is a Florida-based, planned community development and asset
management company.

         The Company's principal business (its "Core Business") consists of:

         o        the acquisition, development and sale of residential homesites
                  ("Homesites") to home builders and commercial,  industrial and
                  retail land  ("Tracts")  in primary or  oceanfront  markets in
                  Florida and other  selected  primary  markets in the southeast
                  (the  "Southeast")  United  States   (collectively,   "Primary
                  Markets"),  as well as in one project in Texas and one project
                  in Colorado

         o        the  construction  and sale of selected  vertical  residential
                  products,  including oceanfront condominium units and an urban
                  luxury apartment tower ("Vertical Development"); and

         o        environmental services.

         The Company is also engaged in:

         o        the orderly  disposition  of scattered  Predecessor  Homesites
                  (i.e., homesites inherited from the Company's Predecessor) and
                  Predecessor    Tracts    (i.e.,    commercial,     industrial,
                  institutional, residential, and agricultural acreage inherited
                  from  the   Company's   Predecessor)   in  secondary   markets
                  (collectively, the "Predecessor Assets"); and

         o        portfolio  management  of mortgages  and contract  receivables
                  related to the Predecessor Assets.

The continuing  disposition of Predecessor  Assets is a run-off  business and is
not part of the Company's Core Business.

         The Company's Core Business is comprised of four primary functions:

         o        business development;

         o        planning;

         o        community development; and

         o        residential construction.


                                        7
<PAGE>

See PART I., ITEM 1.  BUSINESS in the  Company's  Annual Report on Form 10-K for
the year ended  December 31, 1997, as amended by that certain  Amendment to Form
10-K on Form 10-K/A-1, as filed with the Securities and Exchange Commission (the
"SEC")  ("1997  Form  10-K")  and  PART  I.  FINANCIAL   INFORMATION,   ITEM  2.
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS in the Company's Quarterly Report on Form 10-Q, as filed with the SEC
(the "First  Quarter 1998 Form 10-Q"),  for a more detailed  description  of the
Company's current business.

Business Plan
-------------

         Atlantic Gulf's business plan is to:

         o        Execute and grow its Core Business,  principally  the sales of
                  new Homesites and Tracts, throughout its Primary Markets.

         o        Capitalize on special opportunities in Vertical Development.

         o        Complete the orderly disposition of its remaining  Predecessor
                  Assets.

         In  furtherance  of its plan,  (1) since  1992,  the  Company  has sold
approximately   83,000  acres  of  Predecessor  Tracts  and  11,000  Predecessor
Homesites, and substantially reduced the corporate debt and deferred liabilities
which it  inherited  from its  Predecessor  and (2) since 1994,  the Company has
acquired  interests in 18 new projects in nine Primary  Markets  (plus Texas and
Colorado) in five states.

         The Company has  successfully  transitioned  itself from a land company
holding principally Predecessor Assets in 1994 to a leading provider to builders
of developed Homesites in planned communities in Primary Markets in 1998.

         From 1994  through  1996,  the Company  acquired  interests in new Core
Business  assets both  directly  and, in some cases,  indirectly,  through joint
venture,   limited   partnership   or  similar   structures   and   arrangements
(collectively,   "JV   Projects").   The  Company  used  these   structures  and
arrangements  because its debt  amortization  schedules  imposed  severe capital
constraints  on new  business  growth.  The  Company  did not have  the  capital
resources during this period to acquire direct ownership interests in all of its
new projects.

         In 1997 and the first quarter of fiscal year 1998,  the Company  closed
three major equity transactions,  raising an aggregate of $55 million (the "1997
Equity  Transactions").  See  PART I.,  ITEM 1.  BUSINESS  SIGNIFICANT  BUSINESS
DEVELOPMENTS  in the 1997  Form  10-K and PART II.  OTHER  INFORMATION,  ITEM 2.
CHANGES IN SECURITIES  in the First Quarter 1998 Form 10-Q for more  information
concerning  the 1997 Equity  Transactions.  The Company  used the funds from the
1997 Equity Transactions and other funds to acquire direct ownership interest in
all of its new Core Business projects in 1997.

         The Company's  strategy to grow the Homesite segment of its business is
being  accomplished in two stages.  In the first stage,  the Company built sales
volume,  principally through JV Projects.  Now, in the second stage, the Company
is replacing  sold  inventory with new projects,  acquired  principally  through
direct ownership.

                                        8

<PAGE>

         As of September  30, 1998,  the Company  owned,  directly or through JV
Projects, interests in the following Core Business Homesite projects:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Units     Units
                         Type of                              Year                                               Closed-    Under
   Project              Ownership       Location            Acquired          Scope of Project (3)               to-Date  Contract
   -------              ---------       --------            --------          --------------------               -------  --------
----------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>       <C>                     <C>         <C>                                      <C>       <C>
West Meadows                D (1)     Tampa Bay, FL           1995        1,316 single-family Homesites            408       158
----------------------------------------------------------------------------------------------------------------------------------
Saxon Woods                 D         Orlando, FL             1997        408 single-family Homesites               17       101
----------------------------------------------------------------------------------------------------------------------------------
Lakeside Estates            D         Orlando, FL             1994-1995   1,379 single-family Homesites            820       131
----------------------------------------------------------------------------------------------------------------------------------
West Bay Club               D         Naples, FL              1995-1997   520 single-family Homesites                -        12
----------------------------------------------------------------------------------------------------------------------------------
The Trails of West Frisco   D         Dallas, TX              1997        1,643 single-family Homesites              -       415
----------------------------------------------------------------------------------------------------------------------------------
Sunset Lakes                JV (2)    Broward County, FL      1994        1,512 single-family Homesites and
                                                                          255 multi-family units                   485       622
----------------------------------------------------------------------------------------------------------------------------------
Country Lakes               JV        Broward County, FL      1995        1,116 single-family Homesites and          
                                                                          1,930 multi-family units               1,955         -
----------------------------------------------------------------------------------------------------------------------------------
Falcon Trace                JV        Orlando, FL             1996        871 single-family Homesites              169       263
---------------------------------------------------------------------------------------------------------------------------------
Cary Glen                   JV        Raleigh/Durham, NC      1996        917 single-family Homesites  and 249
                                                                          multi-family units                         -         -
----------------------------------------------------------------------------------------------------------------------------------
Aspen Springs Ranch         D         Glenwood Springs, CO    1998        352 single-family Homesites  and 200
                                                                          timeshare quarter units                    -         -
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) "D" means direct ownership.
(2) "JV" means joint venture.
(3) Varying  from  project  to  project,  unsold  units  are  developed,   under
    development or to be developed in the future.

         As of September  30, 1998,  the Company  owned,  directly or through JV
Projects, interests in the following Core Business Tracts:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Acres     Acres
                         Type of                              Year                                               Closed-    Under
   Project              Ownership      Location             Acquired          Scope of Project (3)               to-Date  Contract
   -------              ---------      --------             --------          --------------------               -------  --------
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>      <C>                        <C>         <C>                                      <C>       <C>  
West Meadows               D (1)    Tampa Bay, FL             1997        76 commercial/industrial acres           50         -
----------------------------------------------------------------------------------------------------------------------------------
Regency Island             D        Hutchinson Island, FL     1994        4 commercial acres                        -         -
----------------------------------------------------------------------------------------------------------------------------------
Country Lakes              JV (2)   Broward County, FL        1995        140 commercial/industrial acres           -         -
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) "D" means direct ownership.
(2) "JV" means joint venture.

                                                                 9

<PAGE>

         As of September  30, 1998,  the Company  owned,  directly or through JV
Projects, interests in the following vertical residential products:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                Units     Units
                         Type of                             Year                                               Closed-   Under
   Project              Ownership        Location           Acquired         Scope of Project (3)               to-Date  Contract
   -------              ---------        --------           --------         --------------------               -------  --------
----------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>       <C>                     <C>         <C>                                      <C>       <C>
Riverwalk Tower             D (1)     Fort Lauderdale, FL     1997        373 high-rise apartments                 -         -
----------------------------------------------------------------------------------------------------------------------------------
West Bay Club               D         Naples, FL              1995-1997   578 high-rise residential units          -         -
----------------------------------------------------------------------------------------------------------------------------------
Jupiter Ocean Grande        JV (2)    Jupiter, FL             1995        138 condominium units                    -         -
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) "D" means direct ownership.
(2) "JV" means joint venture.

         As of  September  30,  1998,  the Company  owned  approximately  16,000
Predecessor  Homesites and approximately  9,000 acres of Predecessor Tracts in 8
communities.

         See  PART  I.,  ITEM 1.  BUSINESS  in the  1997  Form  10-K,  PART I. -
FINANCIAL INFORMATION, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS in the First Quarter 1998 Form 10-Q and PART
I.  FINANCIAL  INFORMATION,  ITEM 2.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF
FINANCIAL  CONDITION AND RESULTS OF OPERATIONS to this Quarterly  Report on Form
10-Q for more information concerning the Company's business.

                                       10

<PAGE>
RESULTS OF OPERATIONS

         COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

         The Company's results of operations for the nine months ended September
30, 1998 and 1997 are summarized by line of business, as follows:

<TABLE>
<CAPTION>
                                        COMBINING RESULTS OF OPERATIONS BY LINE OF BUSINESS

                                               Nine Months Ended September 30, 1998

                                                     (in thousands of dollars)
                                                            (unaudited)

                                                Core                  Predecessor
                                      ----------------------------  ----------------
                                      Homesite  Tract  Residential  Homesite  Tract    Other     Business    Administrative
                                       Sales    Sales     Sales      Sales    Sales  Operations Development      & Other     Total
                                      ----------------------------------------------------------------------------------------------
<S>                                    <C>     <C>       <C>         <C>     <C>      <C>         <C>           <C>        <C>
Revenues:
   Real estate sales                  $ 8,005  $35,561   $           $2,578  $16,699  $           $             $          $ 62,843
   Other operating revenues             1,296                           209             1,417                                 2,922
   Interest income                        236                                           2,572                        912      3,720
   Other income                         2,924                                                                                 2,924
                                      ----------------------------------------------------------------------------------------------
Total revenues                         12,461   35,561        -       2,787   16,699    3,989            -           912     72,409
                                      ----------------------------------------------------------------------------------------------
Costs and expenses:
   Cost of real estate sales            6,826   26,272                2,286   15,967                                         51,351
   Selling expense                      1,338      890                  668    1,815                                          4,711
   Other operating expense                                                              1,165                                 1,165
   Other real estate costs                657        6       18         491      765       26        1,966         3,018      6,947
   General and administrative expense                                                                              6,427      6,427
   Depreciation                            22                            13       56       64                        355        510
   Cost of borrowing, net                                                               1,530                      2,716      4,246
   Other expense                          225               342                                                                 567
                                      ----------------------------------------------------------------------------------------------
Total costs and expenses                9,068   27,168      360       3,458   18,603    2,785        1,966        12,516     75,924
                                      ----------------------------------------------------------------------------------------------

Operating income (loss)                 3,393    8,393     (360)       (671)  (1,904)   1,204       (1,966)      (11,604)    (3,515)
                                      ----------------------------------------------------------------------------------------------
Other income (expense):
   Reorganization items                                                                 4,573                        610      5,183
   Miscellaneous                                                                                                    (214)      (214)
                                      ----------------------------------------------------------------------------------------------
Total other income (expense)                -        -        -           -        -    4,573            -           396      4,969
                                      ----------------------------------------------------------------------------------------------

Net income (loss)                       3,393    8,393     (360)       (671)  (1,904)   5,777       (1,966)      (11,208)     1,454
                                      ----------------------------------------------------------------------------------------------

Less:
  Accrued preferred stock dividends                                                                                7,518      7,518
  Accretion of preferred stock to
     redemption amount                                                                                               992        992
                                      ----------------------------------------------------------------------------------------------
                                            -        -        -           -        -        -            -         8,510      8,510
                                      ----------------------------------------------------------------------------------------------
Net income (loss) applicable to
    common stock                      $ 3,393  $ 8,393   $ (360)     $ (671) $(1,904) $ 5,777     $ (1,966)     $(19,718)  $ (7,056)
                                      ==============================================================================================

</TABLE>
                                                                 11
<PAGE>

<TABLE>
<CAPTION>

                                         COMBINING RESULTS OF OPERATIONS BY LINE OF BUSINESS

                                                Nine Months Ended September 30, 1997

                                                      (in thousands of dollars)
                                                             (unaudited)

                                               Core                 Predecessor
                                     --------------------------  ------------------
                                     Homesite Tract Residential  Homesite   Tract     Other     Business   Administrative
                                       Sales  Sales    Sales       Sales    Sales   Operations Development     & Other      Total
                                     -----------------------------------------------------------------------------------------------
<S>                                  <C>      <C>     <C>        <C>       <C>        <C>        <C>           <C>        <C>   
Revenues:
   Real estate sales                 $ 11,438 $  725  $10,021    $  5,621  $16,790    $    76    $             $          $ 44,671
   Other operating revenues               511                                           1,566                                2,077
   Interest income                        222                                           3,367                       710      4,299
                                     -----------------------------------------------------------------------------------------------
Total revenues                         12,171    725   10,021       5,621   16,790      5,009           -           710     51,047
                                     -----------------------------------------------------------------------------------------------
Costs and expenses:                  
   Cost of real estate sales           10,609    590   12,200       4,955   15,474         88                               43,916
   Selling expense                        508     14      532       2,584    2,302                      8                    5,948
   Other operating expense                                                                965                                  965
   Other real estate costs                732             440         502    1,118        533       2,000         4,219      9,544
   General and administrative expense                                                                             6,734      6,734
   Depreciation                            10               2           5       46         90                       371        524
   Cost of borrowing, net                                                               1,789                     9,334     11,123
   Other expense                          265             465                                                                  730
                                     -----------------------------------------------------------------------------------------------
Total costs and expenses               12,124    604   13,639       8,046   18,940      3,465       2,008        20,658     79,484
                                     -----------------------------------------------------------------------------------------------

Operating income (loss)                    47    121   (3,618)     (2,425)  (2,150)     1,544      (2,008)      (19,948)   (28,437)
                                     -----------------------------------------------------------------------------------------------

Other income (expense):
   Reorganization items                                                                   798                     1,438      2,236
   Miscellaneous                                                                          (96)                     (450)      (546)
                                     -----------------------------------------------------------------------------------------------
Total other income (expense)                -      -        -           -        -        702           -           988      1,690
                                     -----------------------------------------------------------------------------------------------

Net income (loss)                          47    121   (3,618)     (2,425)  (2,150)     2,246      (2,008)      (18,960)   (26,747)
                                     -----------------------------------------------------------------------------------------------

Less:
  Accrued preferred stock dividends                                                                               1,381      1,381
  Accretion of preferred stock
    to redemption amount                                                                                            190        190
                                     -----------------------------------------------------------------------------------------------
                                            -      -        -           -        -          -           -         1,571      1,571
                                     -----------------------------------------------------------------------------------------------
Net income (loss) applicable to
    common stock                     $     47 $  121  $(3,618)   $ (2,425) $(2,150)   $ 2,246    $ (2,008)     $(20,531)  $(28,318)
                                     ===============================================================================================
</TABLE>

         During the first nine months of 1998,  the Company  reported net income
of $1.4 million  compared to a net loss of ($26.7) million during the first nine
months of 1997. After certain  non-cash  charges  applicable to preferred stock,
the Company  reported a net loss  applicable  to common stock of ($7.1)  million
compared to a net loss  applicable to common stock of ($28.3) million during the
first nine months of 1997.  The loss decreased by $21.2 million during the first
nine months of 1998  compared to the first nine months of 1997  primarily due to
(1) a 41% increase in real estate  revenues in 1998  generating a $13.9  million
gross margin increase,  (2) a $3.3 million increase in other income in 1998, (3)
a $4.1  million  reduction  in selling  expenses,  other real  estate  costs and
general and  administrative  expenses in 1998 and (4) a $6.9 million decrease in
borrowing costs in 1998,  offset by a $6.9 million increase in accrued preferred
stock dividends

                                       12
<PAGE>

and accretion of preferred  stock in 1998. As discussed  below,  the increase in
real estate  revenues in 1998 was  primarily due to $31.8 million of Tract sales
in the second quarter of 1998,  consisting of (a) a $24.8 million sale of Dave's
Creek, a 1,372 acre project near Atlanta,  Georgia ("Dave's  Creek"),  and (b) a
$7.0 million sale of 0.9 commercial  acres out of the 2.8-acre  Riverwalk  Tower
site in Ft. Lauderdale, Florida.

Core Business
-------------

         The results of operations of the Core Business are set forth below.

         CORE  HOMESITE  SALES.  Net income from  Homesite  sales  improved $2.6
million in the first nine  months of 1998  compared  to the first nine months of
1997 primarily due to a $2.9 million increase in other income from joint venture
Homesite  operations and net gains from the  assignment of real estate  purchase
contracts.

         Consolidated  revenues  from  Homesite  sales  (excluding  revenues and
income from joint venture  Homesite  operations)  decreased  $3.4 million in the
first nine months of 1998  compared  to the first nine months of 1997  primarily
due to a $4.5 million sale in June 1997 of the final 102 lots in Windsor  Palms,
partially  offset  by a $1.8  million  increase  in sales in West  Meadows.  The
following  table  summarizes  consolidated  Homesite sales activity for the nine
months ended September 30 (in thousands of dollars):

<TABLE>
<CAPTION>
                                     1998                        1997
                        -----------------------------  -----------------------------
                        Number of            Average   Number of           Average
                           lots    Revenue sales price   lots    Revenue sales price
                        ---------  ------- ----------- --------- ------- -----------
<S>                          <C>     <C>       <C>        <C>     <C>      <C> 
West Meadows                 202   $ 5,089   $ 25.2        65   $ 2,312     $35.5
Lakeside Estates             110     2,336     21.2       228     3,842      16.9
Saxon Woods                   17       432     25.4         -         -         -
Windsor Palms                  -         -        -       102     4,514      44.3
Sabal Trace                    4       148     37.0        12       447      37.2
Sanctuary                      -         -        -        19       323      17.0
                          ------   -------   ------   -------   -------     -----
                             333   $ 8,005   $ 24.0       426   $11,438     $26.8
                          ======   =======   ======   =======   =======     =====
</TABLE>

         The average  sales price in West  Meadows  decreased  in the first nine
months of 1998  compared  to the first nine months of 1997 due to a bulk sale of
82 small, unfinished lots for $840,000 in the first quarter of 1998. The average
sales  price in  Lakeside  Estates  increased  for the first nine months of 1998
compared  to the  first  nine  months  of 1997 due to a bulk sale of 82 lots for
$890,000 in the third quarter of 1997.

         Other operating  revenues included $451,000 in the first nine months of
1998 and $179,000 in the first nine months of 1997 representing  management fees
earned in connection with the Sunset Lakes JV Project.  Other operating revenues
in the first nine months of 1997 also  included a $332,000  management  fee from
the Country  Lakes JV Project.  The Country  Lakes JV Project  sold 95 acres for
$9.5 million during the first nine months of 1997.

         Other income of $2.9 million in the first nine months of 1998  included
$1.8  million of income from the  Company's  65%  interest  in profits  from the
Sunset Lakes JV Project.  During the first nine months of 1998, the Sunset Lakes
JV Project sold 230 Homesites and a 29-acre tract designed for 255  multi-family
units for approximately $21.3 million.  Other income in the first nine months of
1998 also included net gains totaling $1.1 million on assignments of real estate
purchase agreements for two residential projects located in the Orlando, Florida
area.

                                       13

<PAGE>

         As of September 30, 1998, the Company had under contract  approximately
(1) 817  Homesites  for  approximately  $28.3  million with 21  homebuilders  in
Lakeside  Estates,  West Meadows,  The Trails of West Frisco and Saxon Woods and
(2) 885 JV Project Homesites for approximately $41.0 million with 8 homebuilders
in Sunset  Lakes and Falcon  Trace.  As of September  30, 1997,  the Company had
under  contract  approximately  93 Homesites for  approximately  $2.6 million in
Lakeside Estates, West Meadows and Sanctuary.

         The  consolidated  Homesite sales gross margin  percentage was 14.7% in
the first nine months of 1998 compared to 7.2% in the first nine months of 1997.
Although the gross margin percentage  increased in the first nine months of 1998
compared to the first nine months of 1997,  it is lower than the targeted  gross
margin  of  approximately  20% for  this  line of  business  principally  due to
reductions in the gross margin percentages at Lakeside Estates and West Meadows,
due to increases in the estimated costs to complete these projects.  The Company
anticipates  that the impact of these  reductions  will  decrease  on a relative
basis as additional  consolidated  Homesite  projects (i.e.,  The Trails of West
Frisco,  West Bay Club and Aspen  Springs  Ranch)  come on line  during the last
quarter of 1998 and in 1999.  The lower than targeted  gross margin in the first
nine months of 1997 was  principally  attributable  to the sale of the final 102
Windsor Palms lots for $4.5 million,  generating a (11%) gross margin. This sale
was  necessitated  by the  Company's  need for liquidity to meet a June 30, 1997
corporate debt payment.

         Homesite selling expense increased $830,000 in the first nine months of
1998 (despite a decrease in revenues)  compared to the first nine months of 1997
primarily due to presales  advertising and marketing  costs  associated with the
West Bay Club project.

         CORE TRACT SALES. Net income from Tract sales increased $8.3 million in
the first nine  months of 1998  compared to the first nine months of 1997 due to
an increase in Tract sales revenues.

         Tract sales revenues  increased  $34.8 million in the first nine months
of 1998  compared  to the first nine months of 1997 due  primarily  to two large
Tract sales in 1998. In April 1998, the Company sold and closed Dave's Creek for
$24.8  million.  Additional  sales proceeds of $2.5 million were received in the
third  quarter  of 1998 after the  Company  received  an Army Corp of  Engineers
permit.  This increased the total  revenues from the sale to $27.3 million,  and
the gross margin from 6.6% to  approximately  15.2%.  In June 1998,  the Company
sold a 0.9  acre  office/hotel  parcel  for 7.0  million  which  was part of the
2.8-acre  Riverwalk Tower site. This sale generated a gross margin of 70.4%. The
balance of the  Riverwalk  Tower  site is being  developed  by the  Company as a
luxury high-rise apartment tower.

         As of September 30, 1998, the Company's  Joint Venture  Projects had no
pending Tract sales under contract.

         Tract sales selling expense increased $876,000 in the first nine months
of 1998  compared  to the  first  nine  months  of 1997 due to  increased  sales
activities.

         CORE RESIDENTIAL  SALES. Net operating  results from Residential  sales
decreased  $3.3  million in the first nine months of 1998  compared to the first
nine  months of 1997 due to the absence of revenues  and  profits  from  Regency
Island which closed sales of all units as of December 31, 1997.

         During  1993,  the Company  entered the luxury  oceanfront  condominium
market  through the  acquisition  of the  Regency  Island  project.  The Company
completed construction and sold out Regency Island in 1997. In 1995, the Company
acquired the Jupiter Ocean Grande condominium JV Project.  The Company has a 50%
interest in this JV Project  and  anticipates  commencing  presales on the first
building in Jupiter Ocean Grande in the 1998-1999  selling  season.  The Company
also anticipates commencing presales

                                       14

<PAGE>

of its West Bay  Club  high-rise  residential  units  in the  1998-1999  selling
season.  In 1999, the Company intends to begin  construction of Riverwalk Tower,
its first luxury apartment tower.

         The following table summarizes  Residential sales activity for the nine
months ended September 30 (in thousands of dollars):

                                                       1998              1997
                                                    ---------          ---------
Condominium sales - Regency Island:

   First Building                                   $       -          $   1,620
   Second Building                                          -              8,401
                                                    ---------          ---------
Total condominium sales                             $       -          $  10,021
                                                    =========          =========

         The revenues and profits  associated  with Regency Island were recorded
using the percentage of completion  method. The project consisted of two 72-unit
buildings,  all of which  were sold and  closed as of  December  31,  1997.  The
revenues  of $1.6  million  from the first  building in the first nine months of
1997 represented  revenue earned from the closing of five units. As of September
30, 1997, all 72 units in the first building were sold and closed.  The revenues
of approximately $8.4 million in the second building in the first nine months of
1997 resulted from (1) an increase in the completion  percentage  from 79% as of
December 31, 1996 to 100% as of September 30, 1997, and (2) 13 additional  units
sold  during the first  nine  months of 1997 for a total of 69 units sold in the
second building as of September 30, 1997. As of September 30, 1997, 68 of the 72
units in the second building had closed.

         The gross margin for Residential - condominiums sales in the first nine
months of 1997 was (21.7%)  principally  due to an  unanticipated  $2.8  million
accrual in August 1997 for an arbitration award granted to the Company's general
contractor  related  to the first  buiding in Regency  Island  Dunes.  The final
overall gross margin for the Regency Island project was 12.1%.

         Residential  selling expense and real estate overhead  decreased from a
total of $532 in the first nine months of 1997 to $0 in the first nine months of
1998 due to the close out of Regency Island in 1997.

         Residential other expenses of $342,000 in the first nine months of 1998
and $465,000 in the first nine months of 1997  constitute the Company's share of
the net loss from the Jupiter  Ocean Grande JV Project.  The loss  resulted from
pre-sales advertising and other selling and overhead costs.

Predecessor Business
--------------------

         The results of  operations  of the  Predecessor  Business are set forth
below.

         PREDECESSOR  HOMESITE  SALES.  Net operating  results from  Predecessor
Homesite  sales  improved $1.8 million in the first nine months of 1998 compared
to the first  nine  months of 1997 due to a $1.9  million  decrease  in  selling
expenses.

                                       15
<PAGE>

         Revenues from Predecessor  Homesite sales decreased $3.0 million in the
first nine months of 1998 compared to the first nine months of 1997 due to (1) a
46% decrease in the number of Predecessor  Homesites sold and (2) a 15% decrease
in the average sales price for  Predecessor  Homesites sold. The following table
summarizes  Predecessor  Homesite  sales  activity  for the  nine  months  ended
September 30 (in thousands of dollars):

<TABLE>
<CAPTION>
                                     1998                         1997
                        -----------------------------  -----------------------------
                        Number of            Average   Number of           Average
                           lots    Revenue sales price   lots    Revenue sales price
                        ---------  ------- ----------- --------- ------- -----------
<S>                          <C>     <C>       <C>        <C>     <C>      <C> 

Scattered sales              278   $ 1,437    $ 5.2       551    $ 3,298   $  6.0
Bulk sales                   447     1,141      2.6       801      2,323      2.9
                          ------   -------   ------   -------    -------   ------
                             725   $ 2,578   $  3.6     1,352    $ 5,621   $  4.2
                          ======   =======   ======   =======    =======   ======
</TABLE>

         Revenues from  Predecessor  Homesite  scattered  sales decreased in the
first nine months of 1998  compared  to the first nine months of 1997  primarily
due to a $1.0  million  decrease  in sales  in the  Company's  Cumberland  Cove,
Tennessee,  project  ("Cumberland  Cove").  Sales in  Cumberland  Cove  declined
because the project began winding down during 1997,  and the Company  closed its
on-site sales office in September  1997.  The decline in the average sales price
of Predecessor Homesite scattered sales is also principally due to the reduction
in sales in Cumberland Cove, the Company's highest priced  Predecessor  Homesite
product.

         As of September 30, 1998, the Company had under contract  approximately
54 Predecessor Homesites for $226,000. As of September 30, 1997, the Company had
under  contract  1,518  Predecessor  Homesites  for  $2.8  million.  Predecessor
Homesite sales often vary  significantly  from period to period depending on the
timing and size of bulk sales.

         The  Predecessor  Homesite sales gross margin  percentage  increased to
11.8% in the first nine  months of 1998 from  11.3% in the first nine  months of
1997 principally due to the overall community sales mix.

         Predecessor  Homesite selling expense  decreased $1.9 million or 74% in
the first nine  months of 1998  compared to the first nine months of 1997 due to
(1) a $1.4 million  reduction in selling  expenses at Cumberland Cove due to the
closing of the on-site sales operation in September 1997 and (2) the decrease in
revenues.  Predecessor  Homesite  selling  expense  decreased as a percentage of
revenue  from 46% in the first  nine  months  of 1997 to 26% in the  first  nine
months of 1998 primarily due to the reduction in selling  expenses at Cumberland
Cove.

         PREDECESSOR  TRACT  SALES.  The net loss from  Predecessor  Tract sales
improved  $246,000 in the first nine  months of 1998  compared to the first nine
months of 1997  principally due to reduced selling expense and other real estate
costs partially offset by a decline in the gross profit.

         Revenues from  Predecessor  Tract sales decreased  $91,000 in the first
nine months of 1998  compared to the first nine months of 1997.  Tract sales and
corresponding  revenues from such sales often vary  significantly from period to
period depending on the timing and size of individual sales. As of September 30,
1998, there were pending  Predecessor Tract sales contracts or letters of intent
totaling  approximately $4.3 million,  which, subject to certain  contingencies,
are  anticipated to close in 1998. As of September 30, 1997,  there were pending
Predecessor  Tract sales contracts or letters of intent  totaling  approximately
$14.4 million.

                                       16
<PAGE>

         The following table  summarizes  Predecessor  Tract sales gross margins
for the nine months ended September 30:
<TABLE>
<CAPTION>

                                               1998                             1997
                                   ----------------------------      ---------------------------
                                      Targeted       Actual             Targeted      Actual
                                      Margins        Margins            Margins       Margins
                                      -------        -------            -------       -------
<S>                                      <C>           <C>                 <C>         <C>   
Port LaBelle agricultural acreage        0%            3.3%                0%          (5.2)%
Other Predecessor Tract acreage          0%            6.1%               5-10%        10.5%
</TABLE>

         The targeted  gross margin is break even for Port LaBelle  agricultural
acreage because management  determined the Port LaBelle agricultural property is
not an integral part of the Company's  long-term business strategy.  In order to
accelerate the disposal of this property,  the sales value for this property was
adjusted in 1992 from "retail" to "wholesale",  which reduced the targeted gross
margin for this property. During the first nine months of 1998, the Company sold
10,313  acres of Port LaBelle  agricultural  property  for  approximately  $10.1
million.  As of September 30, 1998, the Company had approximately 4,700 acres of
Port LaBelle agricultural property remaining in inventory.

         The  targeted  gross  margin for other  Predecessor  Tract  acreage was
reduced to break even in 1998 in accordance with the Company's  business plan to
accelerate the liquidation of Predecessor  Assets.  The actual gross margins for
other  Predecessor Tract acreage in 1998 and 1997 generally reflect the targeted
gross margins.

         Predecessor Tract selling expense decreased  $487,000 in the first nine
months of 1998  compared  to the first nine  months of 1997 and  decreased  as a
percentage  of revenues  from 14% in the first nine months of 1997 to 11% in the
first nine months of 1998  primarily  because of a decrease in indirect  selling
expenses  resulting  from the  discontinuation  of the Company's  in-house sales
operation in January 1998.

         Predecessor Tract sales other real estate costs decreased  $353,000,  a
32% decrease, in the first nine months of 1998 compared to the first nine months
of 1997  primarily due to the  discontinuation  of the Company's  in-house sales
operation in January 1998.

Other Operations
----------------

         Net income from other operations increased by $3.4 million in the first
nine months of 1998 compared to the first nine months of 1997 primarily due to a
$3.8 million utility trust payout in September 1998.

         Other  operations  interest income declined  $795,000 in the first nine
months of 1998  compared to the first nine  months of 1997 due to lower  average
balances  of  Predecessor  Homesite  Contracts  Receivable  and  land  mortgages
receivable in 1998.

         Other operations other real estate costs declined $507,000 in the first
nine months of 1998 compared to the first nine months of 1997 due to the Company
closing its offices in its Predecessor communities in December 1997.

         Other income -  reorganization  items of $4.6 million in the first nine
months of 1998  consists  of (1) a $3.8  million  utility  trust  payout and (2)
amortization of $799,000 of the Company's utility connections

                                       17

<PAGE>

reserve.  The amortization of the Company's utility  connections reserve for the
first nine months of 1997 was $798,000.

Business Development
--------------------

         Total  business  development  expenditures  decreased by $42,000 in the
first nine months of 1998 compared to the first nine months of 1997  principally
due to a decline in costs associated with the pursuit of business  opportunities
in Primary Markets.

Administrative & Other
----------------------

         The  net  loss  from  administrative  and  other  activities  decreased
$813,000 in the first nine  months of 1998  compared to the first nine months of
1997 principally due to a $1.2 million decrease in other real estate costs and a
$6.6 million decrease in borrowing  costs,  offset by a $6.9 million increase in
accrued  preferred  stock dividends and accretion of preferred  stock,  which is
included only in the calculation of net income applicable to common stock.

         Interest  income  increased  $202,000  in the first nine months of 1998
compared  to the first  nine  months of 1997  primarily  due to an  increase  in
short-term investment interest income.

         Other real estate costs decreased $1.2 million in the first nine months
of 1998  compared to the first nine months of 1997  primarily due to a reduction
of land  inventory not under  development  (which  corresponds to sales activity
during the intervening period).

         General and administrative expenses declined $307,000 in the first nine
months of 1998  compared  to the first  nine  months  of 1997  primarily  due to
declines in personnel and legal expenses.

         Cost of borrowing, net of capitalized interest,  decreased $6.6 million
in the first nine months of 1998 compared to the first nine months of 1997. This
was offset by a $6.9 million  increase in Preferred Stock accrued  dividends and
accretions as the Company reduced their reliance on debt  financing.  During the
nine  months  ended  September  30,  1998 and 1997,  the  Company did not accrue
interest  on its Cash Flow Notes (see  Liquidity  and Capital  Resources  below)
because of the absence of Available  Cash (see  LIQUIDITY AND CAPITAL  RESOURCES
below) during the periods.

         Other income -  reorganization  items consisted of gains of $610,000 in
the first nine months of 1998 and $1.4  million in the first nine months of 1997
resulting from the resolution of certain reorganization items.

         Other expense -  miscellaneous  of $214,000 in the first nine months of
1998 and $546,000 in the first nine months of 1997 consisted of various  reserve
adjustments and settlements.

         During the nine months ended September 30, 1998, the Company recorded a
$7.5 million accrual for preferred stock dividends  associated with its Series A
and Series B  Preferred  Stock  ("the  Preferred  Stock").  See PART I., ITEM 1.
BUSINESS - SIGNIFICANT BUSINESS  DEVELOPMENTS in the 1997 Form 10-K and PART II.
OTHER INFORMATION,  ITEM 2. CHANGES IN SECURITIES in the First Quarter 1998 Form
10-Q for more information concerning the 1997 Equity Transactions.  In addition,
the  Company  accreted  $992,000  of the  value  of its  Preferred  Stock to the
redemption  amount in the first nine months of 1998. The total of  approximately
$8.5 million of accrued  Preferred Stock dividends and Preferred Stock accretion
was charged to contributed capital.

                                       18

<PAGE>


        COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

         The  comparison  of the three months ended  September 30, 1998 and 1997
should be read in  conjunction  with the  comparison  of the nine  months  ended
September 30, 1998 and 1997 for a more  comprehensive  discussion of the results
of  operations.  The Company's  results of operations for the three months ended
September 30, 1998 and 1997 are summarized by line of business, as follows:

<TABLE>
<CAPTION>
                                         COMBINING RESULTS OF OPERATIONS BY LINE OF BUSINESS

                                                Three Months Ended September 30, 1998

                                                      (in thousands of dollars)
                                                             (unaudited)

                                                 Core               Predecessor
                                      --------------------------- ----------------
                                      Homesite  Tract Residential Homesite Tract      Other      Business   Administrative
                                       Sales    Sales    Sales     Sales   Sales    Operations  Development     & Other      Total
                                      ----------------------------------------------------------------------------------------------
<S>                                   <C>      <C>        <C>             <C>         <C>        <C>            <C>        <C>    
Revenues:
   Real estate sales                  $ 2,858  $ 3,520    $       $  647  $ 2,943     $          $              $          $  9,968
   Other operating revenues             1,000                        209                 298                                  1,507
   Interest income                         86                                            810                         305      1,201
   Other income                         1,243                                                                                 1,243
                                      ----------------------------------------------------------------------------------------------
Total revenues                          5,187    3,520        -      856    2,943      1,108            -            305     13,919
                                      ----------------------------------------------------------------------------------------------
Costs and expenses:
   Cost of real estate sales            2,419      841               528    2,568                                             6,356
   Selling expense                        663       90               232      506                                             1,491
   Other operating expense                                                               399                                    399
   Other real estate costs                154        6       18      250      443         15        1,274            711      2,871
   General and administrative expense                                                                              2,385      2,385
   Depreciation                            13                                  19         22                         118        172
   Cost of borrowing, net                                                                445                         770      1,215
   Other expense                                             96                                                                  96
                                      ----------------------------------------------------------------------------------------------
Total costs and expenses                3,249      937      114    1,010    3,536        881        1,274          3,984     14,985
                                      ----------------------------------------------------------------------------------------------

Operating income (loss)                 1,938    2,583     (114)    (154)    (593)       227       (1,274)        (3,679)    (1,066)
                                      ----------------------------------------------------------------------------------------------
Other income (expense):
   Reorganization items                                                                4,039                         362      4,401
   Miscellaneous                                                                                                       2          2
                                      ----------------------------------------------------------------------------------------------
Total other income (expense)                -        -        -        -        -      4,039             -           364      4,403
                                      ----------------------------------------------------------------------------------------------

Net income (loss)                       1,938    2,583     (114)    (154)    (593)     4,266       (1,274)        (3,315)     3,337
                                      ----------------------------------------------------------------------------------------------

Less:
  Accrued preferred stock dividends                                                                                2,658      2,658
  Accretion of preferred stock to
     redemption amount                                                                                               338        338
                                      ----------------------------------------------------------------------------------------------
                                                                                                                   2,996      2,996
                                      ----------------------------------------------------------------------------------------------
Net income (loss) applicable to
    common stock                      $ 1,938  $ 2,583    $(114)  $ (154) $  (593)    $4,266     $ (1,274)      $ (6,311)  $    341
                                      ==============================================================================================
</TABLE>
                                                                 19

<PAGE>

<TABLE>
<CAPTION>

                                         COMBINING RESULTS OF OPERATIONS BY LINE OF BUSINESS

                                                Three Months Ended September 30, 1997

                                                      (in thousands of dollars)
                                                             (unaudited)

                                                Core                 Predecessor
                                      ---------------------------  -----------------
                                      Homesite  Tract Residential  Homesite  Tract     Other     Business   Administrative
                                       Sales    Sales    Sales      Sales    Sales   Operations Development     & Other     Total
                                      ---------------------------------------------------------------------------------------------
Revenues:
<S>                                   <C>       <C>    <C>         <C>       <C>       <C>         <C>          <C>       <C>     
   Real estate sales                  $ 2,970   $ 135  $    826    $ 2,007  $ 4,674    $           $            $         $ 10,612
   Other operating revenues               110                                             522                                  632
   Interest income                                                                        941                       241      1,182
                                      ---------------------------------------------------------------------------------------------
Total revenues                          3,080     135       826      2,007    4,674     1,463           -           241     12,426
                                      ---------------------------------------------------------------------------------------------
Costs and expenses:
   Cost of real estate sales            2,573     106     3,890      1,735    4,265                                         12,569
   Selling expense                         78      (2)      293        898      687                   (24)                   1,930
   Other operating expense                                                                337                                  337
   Other real estate costs                242               302        342      419       185         653         1,599      3,742
   General and administrative expense                                                                             2,078      2,078
   Depreciation                             6                            2       15        28                       120        171
   Cost of borrowing, net                                                                 684                     1,705      2,389
   Other expense                          208                60                                                                268
                                      ---------------------------------------------------------------------------------------------
Total costs and expenses                3,107     104     4,545      2,977    5,386     1,234         629         5,502     23,484
                                      ---------------------------------------------------------------------------------------------

Operating income (loss)                   (27)     31    (3,719)      (970)    (712)      229        (629)       (5,261)   (11,058)
                                      ---------------------------------------------------------------------------------------------
Other income (expense):
   Reorganization items                                                                   266                       176        442
   Miscellaneous                                                                                                   (185)      (185)
                                      ---------------------------------------------------------------------------------------------
Total other income (expense)                -       -         -          -        -       266           -            (9)       257
                                      ---------------------------------------------------------------------------------------------

Net income (loss)                         (27)     31    (3,719)      (970)    (712)      495        (629)       (5,270)   (10,801)
                                      ---------------------------------------------------------------------------------------------

Less:
  Accrued preferred stock dividends                                                                               1,319      1,319
  Accretion of preferred stock
    to redemption amount                                                                                            182        182
                                      ---------------------------------------------------------------------------------------------
                                            -       -         -          -        -         -           -         1,501      1,501
                                      ---------------------------------------------------------------------------------------------
Net income (loss) applicable to
    common stock                      $   (27)  $  31  $ (3,719)   $  (970) $  (712)   $  495      $ (629)      $(6,771)  $(12,302)
                                      =============================================================================================
</TABLE>

         During the third  quarter of 1998,  the Company  reported net income of
$3.3 million compared to a net loss of $10.8 million during the third quarter of
1997. After certain non-cash charges  applicable to preferred stock, the Company
reported net income  applicable  to common  stock of $341,000  compared to a net
loss  applicable to common stock of ($12.3)  million during the third quarter of
1997.  Results of operations  improved by $12.6 million during the third quarter
of  1998  compared  to the  third  quarter  of 1997  primarily  due to (1) a 12%
increase in real estate revenues generating a $7.6 million gross margin increase
in 1998,  (2) a $1.2 million  increase in other income  during 1998,  (3) a $4.0
million increase in Reorganization related items

                                       20
<PAGE>

and (4) a $1.2 million decrease in borrowing costs in 1998,  partially offset by
a $1.5 million  increase in accrued  preferred  stock dividends and accretion of
preferred stock.

Core Business
-------------

         The results of operations of the Core Business are set forth below.

         CORE  HOMESITE  SALES.  Net income from  Homesite  sales  improved $2.1
million  in the third  quarter  of 1998  compared  to the third  quarter of 1997
primarily  due to a $1.2  million  increase in other  income from joint  venture
Homesite operations and a $890,000 increase in other operating revenues.

         Consolidated  revenues  from  Homesite  sales  (excluding  revenues and
income from joint venture Homesite  operations)  decreased $112,000 in the third
quarter of 1998  compared to the third  quarter of 1997  primarily due to a bulk
sale in  Lakeside  Estates in the third  quarter of 1997.  The  following  table
summarizes  consolidated  Homesite  sales  activity  for the three  months ended
September 30 (in thousands of dollars):

<TABLE>
<CAPTION>
                                     1998                        1997
                        -----------------------------  -----------------------------
                        Number of            Average   Number of           Average
                           lots    Revenue sales price   lots    Revenue sales price
                        ---------  ------- ----------- --------- ------- -----------
<S>                          <C>     <C>       <C>        <C>     <C>      <C> 
West Meadows                  55     1,951     35.5        24      1,021     42.5
Lakeside Estates              38       815     21.5       125      1,751     14.0
Saxon Woods                    2        55     27.5         -          -        -
Windsor Palms                  -         -        -         -          -        -
Sabal Trace                    1        37     37.0         4        147     36.8
Sanctuary                      -         -        -         3         51     17.0
                          ------   -------   ------   -------    -------   ------
                              96   $ 2,858   $ 29.8       156    $ 2,970   $ 19.0
                          ======   =======   ======   =======    =======   ======
</TABLE>

         The average  sales price in Lakeside  Estates  increased  for the third
quarter of 1998  compared to the third  quarter of 1997 due to a bulk sale of 82
lots for $890,000 in the third quarter of 1997.

         Other operating revenues included $155,000 in the third quarter of 1998
and $100,000 in the third quarter of 1997 representing management fees earned in
connection  with the Sunset Lakes JV Project.  Other  operating  revenues in the
third  quarter of 1997 also included a $10,000  management  fee from the Country
Lakes JV Project.

         Other income of $1.2 million in the third quarter of 1998 included $1.2
million of income from the Company's 65% profits interest in the Sunset Lakes JV
Project.  During the third  quarter of 1998 the Sunset  Lakes JV Project sold 43
Homesites  and  a  10-acre  tract  designed  for  commercial   development   for
approximately  $5.8  million.  Other  income in the third  quarter  of 1998 also
included  a  $876,000  net  gain  on an  assignment  of a real  estate  purchase
agreement for a residential project located in the Orlando, Florida area.

         The consolidated  Homesite sales gross margin percentage was 15% in the
third quarter of 1998 compared to 13% in the third quarter of 1997. Although the
gross margin  percentage  increased in the third quarter of 1998 compared to the
third  quarter  of  1997,  it  is  lower  than  the  targeted  gross  margin  of
approximately 20% for this line of business principally due to reductions in the
gross margin percentages at Lakeside Estates and West Meadows,  due to increases
in the estimated costs to complete these projects.  The Company anticipates that
the impact of these reductions will decrease on a relative basis as additional

                                       21

<PAGE>

consolidated  Homesite projects (i.e., The Trails of West Frisco,  West Bay Club
and Aspen  Springs  Ranch) come on line  during the last  quarter of 1998 and in
1999.

         Homesite  selling  expense  increased  $935,000 in the third quarter of
1998 (despite a decrease in revenues) primarily due to presales  advertising and
marketing costs associated with the West Bay Club project.

         CORE TRACT SALES. Net income from Tract sales increased $2.6 million in
the third quarter of 1998 compared to the third quarter of 1997 primarily due to
additional  sales proceeds  received in connection with the prior sale of Dave's
Creek.

         Tract sales  revenues  increased  $3.4 million in the third  quarter of
1998  compared  to the third  quarter of 1997  primarily  due to the  receipt of
additional  sales proceeds on the sale in second quarter of 1998 of Dave's Creek
of $2.5 million  after the Company  received an Army Corp of  Engineers  permit.
This  increased  the total  revenues from the sale to $27.3  million.  The gross
margin on this sale increased to approximately 15.2% from 6.6%.

         CORE RESIDENTIAL  SALES. Net operating  results from Residential  sales
increased  $3.6  million  in the third  quarter  of 1998  compared  to the third
quarter of 1997 due to adjustments made in the third quarter of 1997 to increase
the estimated costs associated with Regency Island.

         The revenues  and profits  associated  with  Regency  Island sales were
recorded using the percentage of completion method. The project consisted of two
72-unit  buildings,  all of which were sold and closed as of December  31, 1997.
The revenues of $826,000 in the third quarter of 1997 were  associated  with the
sale of one unit in each  building  during the third quarter of 1997 for a total
of 69 units under contract in the second building as of September 30, 1997.

         The gross margin for Residential - condominiums in the third quarter of
1997 was a ($3.0)  million  principally  due to an  unanticipated  $2.8  million
accrual in August 1997 for an arbitration award granted to the Company's general
contractor related to the first building in Regency Island Dunes.

         Residential  selling  expenses  and real  estate  overhead  costs  were
$293,000 in the third quarter of 1998 due to the close out of Regency  Island in
1997.

         Residential  sales other  expenses  of $96,000 in the third  quarter of
1998 and $60,000 in the third quarter of 1997  constitute the Company's share of
the net loss of the Jupiter  Ocean  Grande JV Project.  The loss  resulted  from
pre-sales advertising and other selling and overhead costs.

Predecessor Business
--------------------

         The results of  operations  of the  Predecessor  Business are set forth
below.

         PREDECESSOR  HOMESITE  SALES.  Net operating  results from  Predecessor
Homesite  sales  improved  $816,000 in the third quarter of 1998 compared to the
third quarter of 1997 primarily due to a $666,000  decrease in selling  expenses
and a $92,000 decrease in other real estate costs.

                                       22
<PAGE>

         Revenues from Predecessor  Homesite sales decreased $1.4 million in the
third  quarter  of 1998  compared  to the  third  quarter  of 1997  due to a 69%
decrease  in the number of  Predecessor  Homesites  sold.  The  following  table
summarizes  Predecessor  Homesite  sales  activity  for the three  months  ended
September 30 (in thousands of dollars):


<TABLE>
<CAPTION>
                                     1998                        1997
                        -----------------------------  -----------------------------
                        Number of            Average   Number of           Average
                           lots    Revenue sales price   lots    Revenue sales price
                        ---------  ------- ----------- --------- ------- -----------
<S>                          <C>     <C>       <C>        <C>     <C>      <C> 
Scattered sales               84       529      6.3       185      1,140      6.2
Bulk sales                    65       118      1.8       295        867      2.9
                          ------   -------   ------   -------    -------   ------
                             149   $   647   $  4.3       480    $ 2,007   $  4.2
                          ======   =======   ======   =======    =======   ======
</TABLE>

         Revenues from  Predecessor  Homesite  scattered  sales decreased in the
third quarter of 1998  compared to the third quarter of 1997  primarily due to a
$391,000  decrease in sales in the Company's  Cumberland Cove project.  Sales in
Cumberland  Cove  decreased  because the project began winding down during 1997,
and the Company closed its on-site sales operation in September 1997.

         The Predecessor  Homesite sales gross margin percentage  increased from
14% in the third quarter of 1997 to 18% in the third  quarter of 1998  primarily
due to the sales  composition.  Bulk  sales,  which  have a lower  gross  profit
declined  from 61% of total unit  sales for the third  quarter of 1997 to 44% in
the third quarter of 1998.

         Predecessor  Homesite selling expense decreased  $666,000 or 74% in the
third  quarter  of 1998  compared  to the  third  quarter  of 1997  due to (1) a
reduction in selling costs at Cumberland  Cove due to the closing of the on-site
sales operation in September 1997 and (2) the decrease in revenues.  Predecessor
Homesite  selling  expense  decreased as  percentage  of revenue from 44% in the
third quarter of 1997 to 35% in the third  quarter of 1998  primarily due to the
reduction in selling costs at Cumberland Cove.

         Predecessor  Homesite other real estate costs decreased  $92,000 in the
third  quarter of 1998  compared to the third  quarter of 1997  primarily due to
lower property taxes associated with the reduced land inventory.

         PREDECESSOR  TRACT  SALES.  The net loss from  Predecessor  Tract sales
decreased $119,000 in the third quarter of 1998 compared to the third quarter of
1997 primarily due to a decrease in selling expenses.

         Revenues from  Predecessor  Tract sales  decreased  $1.7 million in the
third  quarter of 1998  compared to the third  quarter of 1997.  Tract sales and
corresponding  revenues from such sales often vary  significantly from period to
period depending on the timing and size of individual sales.

         The following table  summarizes  Predecessor  Tract sales gross margins
for the three months ended September 30:
<TABLE>
<CAPTION>

                                                  1998                             1997
                                      ----------------------------      ---------------------------
                                        Targeted        Actual            Targeted        Actual
                                         Margins        Margins            Margins       Margins
                                         -------        -------            -------       -------
<S>                                         <C>          <C>                  <C>             
Port LaBelle agricultural acreage           0%           51.8%                0%            --
Other Predecessor Tract acreage             0%            9.5%              5-10%          9.1%
</TABLE>

                                               23
<PAGE>

         During the third  quarter of 1998,  the  Company  sold 64 acres of Port
LaBelle  agricultural  property for  approximately  $224,000  generating a gross
margin of 52% which is  significantly  higher than the  targeted  gross  margin.
However,  due to the small  size of the sale,  the  actual  gross  margin is not
indicative of anticipated future gross margins.

         The  targeted  gross  margin for other  Predecessor  Tract  acreage was
reduced to break even in 1998 in accordance with the Company's  business plan to
accelerate the  liquidation of Predecessor  Assets.  The actual gross margin for
other Predecessor Tract acreage in the third quarter of 1998 and 1997 was within
the targeted gross margin.

         Predecessor  Tract  selling  expense  decreased  $181,000  in the third
quarter  of 1998  compared  to the  third  quarter  of 1997 but  increased  as a
percentage of revenues from 15% in the third quarter of 1997 to 17% in the third
quarter of 1998  primarily  due to  significantly  reduced  sales volume for the
quarter.

Other Operations
----------------

         Net income from other  operations  increased  $3.8 million in the third
quarter of 1998  compared  to the third  quarter  of 1997 due to a $3.8  million
utility trust payout.

         Other operations interest income declined $131,000 in the third quarter
of 1998 compared to the third  quarter of 1997 due to lower average  balances of
Predecessor Homesite Contracts Receivable and land mortgages receivable in 1998.

         Other operations other real estate costs declined $170,000 in the third
quarter of 1998 compared to the third quarter of 1997 due to the Company closing
its offices in its Predecessor communities in December 1997.

         Other  income -  reorganization  items  of $4.0  million  in the  third
quarter of 1998  consists of (1) a $3.8  million  utility  trust  payout and (2)
amortization of $265,000 of the Company's utility connections reserve. The third
quarter 1997  amortization  of the  Company's  utility  connections  reserve was
$266,000.

Business Development
--------------------

         Total business development  expenditures  increased $1.3 million in the
third quarter of 1998 compared to the third quarter of 1997  primarily due to an
increase  in costs  associated  with the pursuit of  business  opportunities  in
Primary Markets.

Administrative & Other
----------------------

         The  net  loss  from  administrative  and  other  activities  decreased
$460,000  in the third  quarter of 1998  compared  to the third  quarter of 1997
principally  due to an $888,000  decrease in other real estate  costs and a $1.2
million decrease in borrowing costs partially  offset by a $373,000  increase in
other  income -  reorganization  items and a $1.5  million  increase  in accrued
preferred  stock  dividends  and  accretion  of  preferred  stock  which is only
included in the calculation of net income applicable to common stock.

         Interest income increased $64,000 in the third quarter of 1998 compared
to the  third  quarter  of  1997  primarily  due to an  increase  in  short-term
investment income.

         Other real estate costs  decreased by $888,000 in the third  quarter of
1998  compared to the third quarter of 1997  primarily  due to reduced  property
taxes.

                                       24
<PAGE>

         General and  administrative  expenses  increased  $307,000 in the third
quarter  of 1998  compared  to the third  quarter of 1997  primarily  due to the
timing of financial mailings and other expenses.

         Cost of borrowing,  net of capitalized interest,  decreased $935,000 in
the third quarter of 1998 compared to the third quarter of 1997. This was offset
by a $1.5 million  increase in Preferred Stock accrued  dividends and accretions
as the Company reduced its reliance on debt  financing.  During the three months
ended  September 30, 1998 and 1997,  the Company did not accrue  interest on its
Cash Flow Notes because of the absence of Available Cash during the periods.

         Other  income -  reorganization  items  of $4.4  million  in the  third
quarter of 1998 and  $442,000 in the third  quarter of 1997  consisted  of gains
resulting from the resolution of certain reorganization items.

         Other income  (expense) - miscellaneous  of $2,000 in the third quarter
of 1998 and other income  miscellaneous of $185,000 in the third quarter of 1997
consisted of various reserve adjustments and settlements.

         During the three months ended September 30, 1998, the Company  recorded
a $2.7  million  accrual  for  preferred  stock  dividends  associated  with its
Preferred Stock. In addition,  the Company accreted $338,000 of the value of its
Preferred Stock to the redemption amount in the third quarter of 1998.

LIQUIDITY AND CAPITAL RESOURCES

         As of  September  30, 1998,  the  Company's  cash and cash  equivalents
totaled  approximately  $5.6 million.  The Company also had restricted  cash and
cash equivalents of $1.1 million,  which consisted  primarily of (1) escrows for
the sale and development of real estate  properties,  (2) funds held in trust to
pay certain  bankruptcy  claims and (3) various other escrow accounts.  Cash and
cash equivalents decreased by $3.6 million during the first nine months of 1998.
The decrease  consists of (a) $14.8  million used in operating  activities,  (b)
$4.7 million  used in investing  activities  and (c) $16.0  million  provided by
financing activities.

         Cash used in operating  activities during the first nine months of 1998
consisted of net cash generated  through real estate sales and other operations,
offset,  in part,  by  various  expenditures  including  approximately  (1) $4.0
million of interest  payments,  (2) $4.2 million of property tax  payments,  (3)
$17.8 million of construction and development expenditures and (4) $22.1 million
of land acquisition costs.

         Cash used in financing  activities during the first nine months of 1998
consisted of  approximately  $4.4 million for the  construction of West Bay Club
amenities  and  $237,000  for Year  2000  compliant  computer  applications  and
equipment.

         Cash provided by financing  activities  included (1) borrowings of $4.7
million  under  the  Company's   working  capital  facility   ("Working  Capital
Facility")  with Foothill,  (2) net borrowings of $38.4 million from new project
financings and (3)  approximately  $1.7 million of proceeds from the issuance of
Series A Preferred  Stock and related  warrants.  These  proceeds were partially
offset  by (a) $13.3  million  of  principal  payments  that  fully  repaid  the
Company's  term  loan  (the  "Term  Loan")  with  Foothill  Capital  Corporation
("Foothill"),  (b) $7.6 million of net principal  payments that fully repaid the
Company's reducing revolving loan (the "Reducing Revolving Loan") with Foothill,
(c) net principal  payments of $5.5 million  associated  with the  financings of
mortgage  receivables  and  Predecessor  Homesite  Contract  Receivables and (d)
approximately  $1.7  million  of  principal  payments  on  the  Working  Capital
Facility.

         On June 26, 1998,  the Company  repaid the entire  remaining  principal
balance of $3,686,648 under its Reducing  Revolving Facility with funds drawn on
its Working Capital Facility.

                                       25

<PAGE>

         On June 30, 1998,  the Company  repaid the entire  remaining  principal
balance of $13,333,333 under its Term Loan with (i) $2,333,333 of funds drawn on
its Working Capital Facility and (ii) $11,000,000 of funds borrowed from AGC-SP,
Inc., a wholly-owned  special purpose  subsidiary of the Company ("AP Sub") (the
"SP Sub Loan," which is described below).

         The Reducing  Revolving Loan  terminated on June 26, 1998, and the Term
Loan terminated on June 30, 1998.

         On June 30, 1998,  the Company and  Foothill  entered into that certain
Third  Amendment to Second  Amended and Restated  Revolving  Loan Agreement (the
"Third  Amendment"),  pursuant  to which  Foothill  agreed to (1)  increase  the
Working Capital Facility from $20 million to $25 million, (2) permit the Company
to enter into the SP Sub Loan and (3) modify the Borrowing  Base for the Working
Capital Facility to limit it to $25 million through August 1,1998  (declining to
$23  million in August,  $20 million  through  September,  $17  million  through
October,  $12.5 million through November and $0 on December 1, 1998,  coinciding
with the scheduled maturity date of the facility) and to provide for accelerated
mandatory  Borrowing Base reductions  aggregating $5 million upon certain events
on or before September 30, 1998.  Amounts  outstanding under the Working Capital
Facility bear interest at a rate equal to the variable interest rate, per annum,
announced  by Northwest  Bank of  Minnesota,  N.A.,  as its "base rate" plus two
percentage  points.  As of  September  30, 1998,  the Company had $19.9  million
outstanding under the Working Capital Facility.

         On  September  30,  1998,  the Company and  Foothill  entered into that
certain Fourth Amendment to Second Amended and Restated Revolving Loan Agreement
(the  "Fourth  Amendment"),  pursuant to which  Foothill  agreed to maintain the
Borrowing Base at $20 million through October 31, 1998.

         The Company's material debt repayment  obligations for the remainder of
1998 consist of (1) a $39.6 million payment on its Unsecured 13% Cash Flow Notes
due on December  31, 1998 (the "13% Cash Flow  Notes"),  which will fully retire
these  obligations and (2) the balance of its Working Capital  Facility which is
due in  full on  December  1,  1998  (collectively,  the  Company's  "1998  Debt
Obligations").

         The Company does not currently have sufficient  liquid funds to satisfy
all of its 1998 Debt Obligations.  However,  management believes that, through a
combination  of  sources,  it will be able to  obtain  the  funds  necessary  to
continue to implement  its business  plan and, at the same time,  satisfy all of
its  1998  Debt  Obligations  as  they  become  due.  The  Company  is in  final
negotiations  with (1) Foothill to obtain a new  two-year $40 million  revolving
line of  credit,  a portion of the  proceeds  of which will be used to repay the
existing Working Capital Facility and (2) another senior institutional lender to
obtain $25 million of senior subordinated financing (the "New Debt Facilities").
Management  has obtained  written term sheets from both lenders and  anticipates
that it will be successful in closing the New Debt Facilities  before the end of
1998.  Closing of the New Debt  Facilities  is  contingent  on standard  closing
conditions  for facilities of these types.  Several of these closing  conditions
are within the lenders' sole discretion. Accordingly, there can be no assurances
that  the New Debt  Facilities  will  close  until  all such  time as all of the
closing conditions are satisfied or waived by the lenders.

         The  Company's  ongoing  business  plan is to continue to monetize  its
Predecessor   Assets  and  to  reduce  corporate  debt.  The  Company  has  made
substantial progress in this regard. It sold $55.6 million of Predecessor Assets
in 1996,  $41.2  million in 1997 and $19.5  million in the first nine  months of
1998.  As of  September  30, 1998,  the Company had $4.5 million of  Predecessor
Assets under  contract or letter of intent,  consisting of $2.1 million cash and
$2.4 million of mortgage notes. The  transactions  under contract are subject to
customary closing conditions including,  in certain cases, financing conditions.
Transactions  subject to a letter of intent are  subject to further  negotiation
and  documentation.  While the Company  expects to close these  transactions  in
1998,  there  can be no  assurance  that  any  particular  transaction  will  be
consummated.

                                       26

<PAGE>

         The Company monetized mortgage and note receivables  generated from the
sale of Predecessor  Assets. The Company raised  approximately  $19.8 million of
cash,  and  received  certain  residual  interests,  in 1997  from  the  sale or
financing  of  mortgages  and  other  receivables  from the sale of  Predecessor
Assets.  These cash proceeds,  along with the net cash proceeds from Predecessor
Asset sales, were used to reduce corporate debt and fund ongoing operations.

         On March 31, 1998,  AP-AGC LLC ("Apollo")  purchased  173,525 shares of
Series A Preferred  Stock and Investor  Warrants to purchase  347,050  shares of
common stock,  for an aggregate  purchase price of  $1,735,248,  pursuant to the
terms of that certain Amended and Restated  Investment  Agreement by and between
the  Company  and  Apollo  (the  "Investment  Agreement").  See  Note (7) to the
Company's  Consolidated  Financial Statements included in its First Quarter 1998
Form 10-Q, PART I., ITEM 1. BUSINESS - SIGNIFICANT BUSINESS  DEVELOPMENTS in the
1997 Form 10-K and ITEM 13.  CERTAIN  RELATIONSHIPS  AND RELATED  TRANSACTIONS -
STOCK PURCHASES BY APOLLO  PURSUANT TO THE TERMS OF THE INVESTMENT  AGREEMENT in
the 1997 Form 10-K/A-1 for more  information  concerning  Apollo's  purchases of
Series A Preferred Stock and Investor Warrants.  Apollo has now purchased all of
the Series A Preferred  Stock and Investor  Warrants  covered by the  Investment
Agreement.

         As required by the Company's  Agreements with Apollo, the proceeds from
the sale of the Series A Preferred  Stock have been, and will be, used primarily
to acquire  and  develop  properties  through SP Sub and its  subsidiaries.  The
Company's  repurchase  and  redemption  obligations  in  respect of the Series A
Preferred  Stock (but not the  Series B  Preferred  Stock) are  secured by (1) a
junior  lien  on  substantially  all  of  the  assets  of the  Company  and  its
subsidiaries, except for SP Sub's capital stock and its assets, and (2) a senior
lien on SP Sub's capital stock and its assets. As discussed above, in June 1998,
with  Apollo's  consent,  the Company  and SP Sub entered  into the SP Sub Loan,
pursuant to which the Company borrowed $11.5 million from SP Sub to pay down the
Term Loan and Reducing  Revolving  Loan. See the discussion of the use of SP Sub
Loan above.

         The Company must apply any Available  Cash (as defined in the governing
documents)  to (1) the payment of interest due on the  Company's  13%  Unsecured
Cash Flow Notes due December 31, 1998 ("Cash Flow Notes") and (2)  repayments of
principal on its Cash Flow Notes. Due to the  establishment of certain reserves,
the Company had $0 of Available  Cash as of the nine months ended  September 30,
1998 and the twelve months ended December 31, 1997,  respectively.  Accordingly,
the  Company  did not accrue  interest  on its Cash Flow  Notes  during the nine
months ended  September 30, 1998 and the twelve months ended  December 31, 1997,
respectively.  Also,  the  Company  does not  anticipate  that it will  have any
Available Cash during the remainder of 1998.

YEAR 2000 COMPLIANCE
--------------------

         Until  recently,  many computer  programs were written using two digits
rather than four digits to define the applicable year in the twentieth  century.
Such  software may  recognize a date using "00" as the year 1900 rather than the
year 2000. Utilizing both internal and external resources, the Company is in the
process of defining,  assessing and  converting or replacing  various  programs,
hardware  and  instrumentation  systems to make them Year 2000  compatible.  The
Company's   Year  2000  project  is  comprised  of  two  components  -  business
applications and equipment.  The business applications component consists of the
Company's  business  computer  systems,  as  well  as the  computer  systems  of
third-party  suppliers or customers,  whose Year 2000 problems could potentially
impact  the  Company.   Equipment  exposures  consist  of  computers,   personal
computers,  system  servers,  telephone  equipment  and other  related  computer
equipment  whose Year 2000 problems  could also impact the Company.  The Company
has  identified  and  completed  the  upgrading or  replacement  of all critical
hardware and software systems . Remaining noncritical  applications and hardware
replacements will be performed in the normal course of business throughout 1999.
Total remaining expenses are not expected to exceed $20,000 in 1999.

                                       27
<PAGE>

PART II. - OTHER INFORMATION

Item 5.    Other Information
           -----------------

(1)      NASDAQ Listing
         --------------

         On May 19, 1998, the NASDAQ Stock Market, Inc. ("NASDAQ"), informed the
Company,  in writing,  that it was no longer in compliance with the net tangible
assets/market  capitalization/net  income continued  listing  requirement of the
NASDAQ  National  Market  system (the  "NNM"),  and,  unless the  Company  could
demonstrate  that  it  would  promptly  regain   compliance  with  such  listing
requirement,  the  Company's  common  stock would be  de-listed  from the NNM. A
hearing  on this  matter  was held in front of  NASDAQ on August  20,  1998.  On
October 28,  1998,  NASDAQ  informed the Company that it would stay the proposed
de-listing  of the Company's  securities  until  December 10, 1998,  pending the
successful  completion  by the  Company of  certain  (1)  capital  restructuring
transactions  and (2) other operating  transactions to increase its Net Tangible
Assets (as  defined by NASDAQ)  to at least $14  million.  While the  Company is
working  diligently to complete  these  transactions,  there can be no assurance
that the  Company  will in fact be able to meet all of  NASDAQ's  conditions  on
NASDAQ's  timetable.  If all of its  conditions  are  timely  met,  NASDAQ  will
terminate  its  de-listing  proceeding.  If the  Company  does  not  meet all of
NASDAQ's conditions on NASDAQ's timetable,  NASDAQ has informed the Company that
its securities will be de-listed.

(2)      Warrant Reset
         -------------

         As part  of the  1997  Equity  Transactions,  the  Company  issued  (1)
warrants  to Apollo to acquire up to  5,000,000  shares of Common  Stock and (2)
warrants  to the  purchasers  of the Series B  Preferred  Stock to acquire up to
4,000,000 shares of Common Stock  (collectively,  the "Warrants").  The Warrants
have an exercise price of $5.75 per share (the "Exercise  Price").  The Exercise
Price is subject to a potential downward  adjustment by March 31, 1999, pursuant
to a formula in the event the Company's  actual operating cash flow from certain
business lines is less than the targeted  cumulative  operating cash flow (i.e.,
$62.443  million)  from such business  lines on a cumulative  basis for 1997 and
1998 (the  "Warrant  Reset").  No Warrant Reset will be made if, on December 31,
1998,  and on an average  basis during the three  months  ending on December 31,
1998,  the average  closing  price for the Common  Stock is greater  than $9.75,
subject to certain adjustments.

         Management has reviewed the Warrant Reset calculation  through the date
hereof. At this time, based on the information currently available to it and the
projections  for the remainder of 1998, the likely range of any Warrant Reset is
a downward adjustment of $0.50 to $1.50 in the exercise price per Warrant share.
This range is subject to fourth  quarter  events,  many of which are outside the
control of the Company.  Accordingly,  there can be no assurance that the actual
Warrant Reset will not exceed $1.50 per share.

                                       28

<PAGE>

Item 6.   Exhibits and Reports On Form 8-K
          --------------------------------

(a)  Exhibits required by Item 601 of Regulation S-K

          (10.4)   Fourth  Amendment to Second  Amended and  Restated  Revolving
                   Loan Agreement , dated as of September 30, 1998, by and among
                   Atlantic Gulf  Communities  Corporation  (as  Borrower),  the
                   Financial  Institutions listed on the signature pages thereto
                   (as Lenders) and Foothill  Capital  Corporation (as Agent and
                   Collateral Agent).

          (21)     Subsidiaries of the Company.

          (27)     Financial Data Schedule.

(b)  Reports on Form 8-K

          None


                                       29

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                           ATLANTIC GULF COMMUNITIES CORPORATION




Date: November 12, 1998                     /s/ THOMAS W. JEFFREY           
      -----------------                     -------------------------------
                                                Thomas W. Jeffrey
                                                Executive Vice President
                                                and Chief Financial Officer






Date: November 12, 1998                     /s/ PAULA J. COOK                 
      -----------------                     ----------------------------------
                                                Paula J. Cook
                                                Vice President and Controller
                                                (Principal Accounting Officer)

                                       30