<PAGE>
                                       
                   U.S. SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549
                                       
                                 Form 10-QSB
                                       
  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                                       
              For the quarterly period ended November 30, 1998 
                                       
  [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT 
                                       
                        For the transition period from
                            __________to __________
                                       
                     Commission File No.   1-4766   
                                        ------------
                                       
                                       
                         GATEWAY ENERGY CORPORATION                     
       -----------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)
                                       

                 Delaware                             44-0651207      
     -------------------------------    ------------------------------------
     (State or other jurisdiction of    (IRS Employer Identification Number)
      incorporation or organization)

                        500 Dallas Street, Suite 2615
                              Houston, TX  77002
                   (Address of principal executive offices)

     Issuer's telephone number :  (713) 336-0844


     Check whether the issuer (1) has filed all reports required to be filed 
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for 
such shorter period that the registrant was required to file such reports), 
and (2) has been subject to such filing requirements for the past 90 days.  
Yes __X__  No _____
                                       
                   APPLICABLE ONLY TO CORPORATE ISSUERS

     As of January 12, 1999, the Issuer had 15,242,532 shares of its common 
stock outstanding.
     
Transitional Small Business Disclosure Format:  Yes _____ No __X__ 

<PAGE>
                                       
                                 FORM 10-QSB

                                   PART  I

ITEM  1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                         Page
<S>                                                                      <C>
          Unaudited Consolidated Balance Sheet
          as of November 30, 1998.                                         10

          Unaudited Consolidated Statements of Operations for
          the three months and nine months ended November 30, 1998,
          and November 30, 1997.                                           11

          Unaudited Consolidated Statements of Cash Flows for
          the nine months ended November 30, 1998,
          and November 30, 1997.                                           12

          Notes to Consolidated Financial Statements                       13
</TABLE>

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

     The following management's discussion and analysis contains trend 
analysis and other forward-looking statements within the meaning of Section 
27A of the Securities Act of 1933, as amended, and Section 21E of the 
Securities Exchange Act of 1934, as amended.  Actual results could differ 
materially from those projected in the forward-looking statements throughout 
this document as a result of the risk factors set forth below in the section 
entitled FACTORS AFFECTING FUTURE RESULTS and elsewhere in this document.

RESULTS OF OPERATIONS

     Comparisons between fiscal 1999 and fiscal 1998 are significantly 
affected by two major transactions.  First, in September 1997, the Company 
reached agreement with Shoreham Pipeline Company ("Shoreham") to dissolve all 
of the joint ventures between the parties.  The Company transferred its 
interests, ranging from 60% to 80%, in six joint ventures to Shoreham.  The 
Company acquired Shoreham's interests, ranging from 5% to 20%, in nine joint 
ventures. The Company also acquired Shoreham's 20% minority interest in 
Gateway Offshore Pipeline Company and transferred an offshore system to 
Shoreham.

     Second, in September 1997, the Company sold its limited partnership 
interest in Castex LP and other oil and gas producing properties.  The 
proceeds received from the above transactions have been used to retire lines 
of credit, fund capital expenditures and invest in a certificate of deposit.

                                       2
<PAGE>

     The Henry Hub Index price for gas delivered in southern Louisiana 
averaged $1.94 in the third quarter of fiscal 1999, compared with $2.11 in 
the prior quarter and $2.81 in the same quarter of the prior year.  Natural 
gas prices have remained firm in spite of the downward pressure on oil 
prices.  Natural gas producers continue to exploit new drilling opportunities.

THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO NOVEMBER 30, 1997

     The following table sets forth information for the three months ended 
November 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                  1998              1997
                                                  ----              ----
<S>                                            <C>               <C>
      Operating revenues                       $1,983,845        $2,480,377
      Operating margins                           441,344           198,077
      Depreciation and amortization               185,693           124,300
      General and administrative                1,135,401           449,400
      Other income (expense)                      (63,197)          441,923
      Net income (loss)                          (950,572)           62,700
</TABLE>

     Operating revenues declined $496,532 in the third quarter of fiscal 1999 
from the same quarter of the prior year.  The impact of the decline in sales 
prices was partially offset by the startup of Gateway Energy Marketing, 
increased revenues from the Company's offshore operations, and by 
enhancements made during the current period to certain pipeline system 
facilities and marketing arrangements.

     Operating margins, that is revenues less the cost of gas and operating 
expenses, increased $243,267 in fiscal 1999 over the same quarter of the 
prior year.  In fiscal 1999, the Company continues to focus on enhancing the 
profitability of its existing systems by reviewing and renegotiating 
marketing contracts, when appropriate, and controlling operating and 
maintenance costs through internal, rather than third-party, management.

     General and administrative expenses increased $686,001 in the third 
quarter of fiscal 1999 compared to the same quarter of the prior year.  As 
more fully described in Note 5 to the accompanying financial statements, the 
Company and Shoreham resolved certain legal disputes through mediation in 
November 1998. The resolution of these disputes resulted in $466,470 of 
charges for the write-off of amounts receivable from Shoreham, plus $76,538 
in related legal fees.

     As a result of the dissolution of the joint ventures with Shoreham in 
September 1997, the Company also hired management and support staff who 
manage its operations from the office in Houston. This change in strategy 
added significant general and administrative costs, reflecting costs of 
additional personnel, office rent and telecommunications, legal fees and 
other office costs.  However, the Company expects to continue to improve the 
profitability of its current properties and is actively seeking to acquire or 
invest in new properties.

     During the third quarter of fiscal 1999 the Company moved its corporate 
headquarters to Houston, Texas, and maintained both the Houston and Omaha 
offices and staff for the entire third quarter in order to provide a smooth 
transition.  Accordingly, the current quarter general and administrative 
expense includes approximately $72,653 in nonrecurring costs.  Going 

                                       3
<PAGE>

forward, general and administrative expenses are expected to be approximately 
the same as before the move, excluding the costs of the Shoreham mediation 
settlement and other nonrecurring costs. 
     
     Other income (expense) for the third quarter decreased $505,120 from the 
same period of the prior year.  The fiscal 1998 total includes gain on the 
sale of certain partnership and joint venture properties of $308,700, plus 
equity in Castex LP earnings of $127,223.  Interest income also declined 
between the two periods, reflecting the lower current period certificate of 
deposit balance, and a $34,451 write-off of interest income previously 
recognized on the Shoreham note receivable.

     The increase in net loss for the quarter of $1,013,272 mainly reflects: 
(i) the effects of the fiscal 1999 mediation settlement with Shoreham and 
related legal and other costs; (ii) the fiscal 1998 sale of certain joint 
venture and partnership interests, and; (iii) higher general and 
administrative expenses, and; (iv) substantial costs incurred to rehabilitate 
several systems. The impact of the items listed above was partially offset by 
enhancements to pipeline systems and renegotiated marketing arrangements.

NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO NOVEMBER 30, 1997

     The following table sets forth information for the nine months ended 
November 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                 1998              1997
                                                 ----              ----
                                                                (Restated)
<S>                                           <C>               <C>
      Operating revenues                      $6,063,652        $8,957,740
      Operating margins                        1,322,652         1,387,840
      Depreciation and amortization              548,812           579,600
      General and administrative               2,380,031         1,070,600
      Other income (expense)                    (110,731)          158,360
      Net loss                                (1,729,819)         (122,400)
</TABLE>

     Operating revenues declined $2,894,088 in the nine months ended November 
30, 1998 from the same period of the prior year.  Sales attributable to the 
Company's interests in properties conveyed to Shoreham accounted for 
$3,369,076 of the revenues in the fiscal 1998 period, and oil and gas 
production revenues were $102,742.  These decreases were partially offset by 
the startup of Gateway Energy Marketing, by higher volumes at Fort Cobb and 
increased revenues from offshore operations.

     Operating margins, that is revenues less cost of gas and operating 
expenses, decreased $65,188 in the first nine months of fiscal 1999 compared 
to the same period of the prior year.  Operating margins from the joint 
ventures conveyed to Shoreham and the oil and gas properties totaled $876,989 
in the fiscal 1998 period.  That shortfall was partially made up by increased 
volumes at Fort Cobb, increased offshore activity and the startup of Gateway 
Energy Marketing.  In fiscal 1999 the Company has primarily focused on 
enhancing the profitability of its existing systems.

                                       4
<PAGE>

     General and administrative expenses increased $1,309,431 in the nine 
months ended November 30, 1998 compared to the same period of the prior year, 
and include $466,470 of charges for the write-off of amounts receivable from 
Shoreham, plus $80,140 in related legal fees from the Shoreham mediation 
settlement in November 1998.

     As a result of the dissolution of the joint ventures with Shoreham in 
September 1997, the Company also hired management and support staff who 
manage its operations from the office in Houston. This change in strategy 
added significant general and administrative costs, reflecting costs of 
additional personnel, office rent and telecommunications, legal fees and 
other office costs.  However, the Company expects to continue to improve the 
profitability of its current properties and is actively seeking to acquire or 
invest in new properties.

     During the nine months ended November 30, 1998, the Company moved its 
corporate headquarters to Houston, Texas, and maintained both the Houston and 
Omaha offices and staff for the entire third quarter in order to provide a 
smooth transition.  Accordingly, general and administrative expense for the 
nine-month period includes $197,653 in nonrecurring costs, exclusive of the 
Shoreham costs, which includes the costs of maintaining both offices, 
employee severance and other moving costs.  Going forward, general and 
administrative expenses are expected to be approximately the same as before 
the move, excluding the costs of the Shoreham mediation settlement and other 
nonrecurring costs. 
     
     Other income (expense) for the nine months ended November 30, 1998 
decreased $269,091 from the same period of the prior year.  The fiscal 1998 
total includes gain on the sale of certain partnership and joint venture 
properties of $308,700, plus equity in Castex LP earnings of $307,260.  Other 
income (expense) for the current period includes $34,451 for the write-off of 
interest income previously recognized on the Shoreham note receivable, and 
the fiscal 1998 total includes a $306,800 charge related to changes in 
certain of the Company's convertible promissory notes, which is discussed 
more fully in Note 7.

     The increase in the net loss for the nine months ended November 30, 1998 
of $1,607,418 mainly reflects: (i) the fiscal 1998 sale of certain joint 
venture and partnership interests; (ii) the effects of the fiscal 1999 
mediation settlement with Shoreham and related legal and other costs, and; 
(iii) higher general and administrative expenses required to effectively 
manage and enhance the Company's properties and seek out additional 
investment opportunities.  The impact of the items listed above was partially 
offset by enhancements to pipeline systems, renegotiated marketing 
arrangements, increased volumes at Fort Cobb, by increased offshore activity 
and the startup of Gateway Energy Marketing.

LIQUIDITY AND CAPITAL RESOURCES

     The Company substantially improved its financial condition with the 
completion of the Recapitalization in the first quarter of fiscal 1998.  
Monthly cash requirements of approximately $175,000 for preferred dividends 
were eliminated and total debt service reduced to $22,000 per month.  The 
Company's long-term debt to total capitalization is approximately 10% at 
November 30, 1998 which should provide opportunity for the Company to utilize 
conventional long-term financing to fund acquisitions or construction 
opportunities.

                                       5
<PAGE>

     The Company experienced a deficit in cash flow from operating activities 
of $850,363 during the first nine months of fiscal 1999, but has cash and 
cash equivalents plus a certificate of deposit totaling $1,864,236 as of 
November 30, 1998.  Additionally, the Company has in place an operating line 
of credit with a bank for maximum borrowings of up to $500,000.  As of 
November 30, 1998 the amount available under this operating line was 
$103,455.  The outstanding balance was repaid during the first week of 
December with proceeds from the mediation settlement.

     Absent acquisitions, the Company will continue to fund its operations 
through internally generated funds and available cash and the certificate of 
deposit.  The company believes its cash flows from operations and available 
cash and the certificate of deposit will be sufficient to fund its ongoing 
operations for the foreseeable future.  Any significant property acquisitions 
will require outside project financing.

FACTORS AFFECTING FUTURE RESULTS

     One of the principal objectives of the Recapitalization was to 
facilitate access to reasonably priced capital to enable the Company to 
enhance stockholder value through the execution of certain strategies. These 
strategies include, among other things: (i) focusing on gathering, 
processing, transporting and marketing of natural gas; (ii) expanding the 
Company's asset base in core geographic areas; (iii) developing a niche that 
will create demand for our services, and; (iv) acquiring or constructing 
properties in one or more new core areas.
     
     The Company must provide services to its customers, primarily producers, 
at a competitive price. Therefore, in order to be successful the Company must 
contain its costs in line with industry competitors. The Company's access to 
reasonably priced long-term capital will have a significant effect on its 
ability to acquire additional properties to increase operating margins 
sufficiently to cover its fixed overhead costs. The Company believes that the 
Recapitalization, cash reserves and experienced operating management will 
allow the Company to access capital and find properties which can provide 
attractive returns. However, there can be no assurance that the Company will 
be successful in this endeavor. 

     The Company's ability to generate long-term value for the common 
stockholder is dependent upon the enhancement of its core assets and the 
successful acquisition of additional midstream assets. There are many 
companies participating in the midstream segment of the natural gas industry, 
many with resources greater than the Company. Greater competition for 
profitable operations can increase prices and make it more difficult to 
acquire assets at reasonable multiples of cash flow. 

     The Company believes that it will be able to compete in this environment 
and will be able to find attractive investments which compliment its existing 
properties; however, it is not possible to predict competition or the effect 
this will have on the Company's operations. 

     The Company's operations are also significantly affected by factors 
which are outside the control of the Company. Gas gathering and processing is 
dependent on throughput volume. Throughput on the Company's systems is 
dependent on natural gas production which is significantly affected by 
natural gas prices as prices affect the willingness of producers to invest 
the required capital to obtain geological and geophysical information, drill 
development or 

                                       6
<PAGE>

exploratory wells, and to rework or maximize production on existing wells. 
Natural gas prices have recently stabilized at levels which should provide 
adequate incentive to producers; however, there is no assurance that such 
prices will remain at current levels, and that producers will continue to 
react positively to the current prices. 

     The Company's revenues, particularly in its retail operations, are also 
affected by weather. Much of the retail demand is for crop irrigation and 
drying. Heavy precipitation in the growing season and hot, dry weather in the 
fall can significantly reduce demand for natural gas. 

YEAR 2000 ISSUES

     The Year 2000 issue refers to the inability of computers, software or 
embedded microchips to reliably recognize, process and retain dates 
subsequent to December 31, 1999.  The Company is assessing its risks of 
business disruption from the Year 2000 issue and has determined the following:

     -    The Company's systems are not now fully compliant, but are currently
          being updated and will be made fully compliant before March 31, 1999.

     -    The costs to address remaining Year 2000 issues are nominal.

     -    The assessment of the risk to the Company due to the lack of
          preparedness of its business partners is being performed through the
          use of Year 2000 preparedness surveys.  This evaluation is still in
          progress.

The Company does not believe that its state of preparedness, or that of its
business partners, will have a material effect on its operations.













                                       7
<PAGE>

                                    Part II

ITEM 1.        LEGAL PROCEEDINGS

               None

ITEM 2.        CHANGES IN SECURITIES

               None

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

               None

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

               None

ITEM 5.        OTHER INFORMATION

               None

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K.

               a)  Exhibits:

               11   Statement re Computation of Per Share Earnings. *     

               21   Subsidiaries*

               27   Financial Data Schedule.*

               b)   Reports on Form 8-K:

                    November 24, 1998 - Mediation Settlement with Shoreham
                    Pipeline Company

--------------------------------------
* Included in SEC 10-QSB filing only
     
                                       8
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

                                       GATEWAY ENERGY CORPORATION



                                               /s/ Scott D. Heflin 
                                       -------------------------------------
                                       Chief Financial Officer and Treasurer


      January 14, 1999     
---------------------------
(Date)






                                       9
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998
(unaudited)

<TABLE>
<CAPTION>
<S>                                                                <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                        $   848,335 
  Certificate of deposit                                             1,015,901 
  Trade accounts receivable                                          1,175,231 
  Note receivable, current portion                                      91,667 
  Inventories                                                           84,218 
  Prepaid expenses and other assets                                    322,194 
                                                                   ----------- 
      Total current assets                                           3,537,546
                                                                   ----------- 

PROPERTY AND EQUIPMENT, AT COST
  Gas gathering, processing and transportation                      10,364,013 
  Equipment and office furniture                                       670,100
                                                                   ----------- 
                                                                    11,034,113 
  Less accumulated depreciation and amortization                    (2,442,491)
                                                                   ----------- 
                                                                     8,591,622 
                                                                   ----------- 
OTHER ASSETS
  Note receivable, less current portion                                308,333 
  Other                                                                382,431 
                                                                   ----------- 
                                                                       690,764 
                                                                   ----------- 
                                                                   $12,819,932 
                                                                   ----------- 
                                                                   ----------- 
LIABILITIES AND STOCKHOLDERS' EQUITY    

CURRENT LIABILITIES
  Notes payable                                                    $   396,545 
  Current maturities of long-term debt                                 129,184 
  Accounts payable                                                   1,029,561 
  Accrued expenses and other liabilities                               341,762 
                                                                   ----------- 
      Total current liabilities                                      1,897,052 
                                                                   ----------- 
Long-term Debt, less current maturities                              1,075,085 
                                                                   ----------- 
STOCKHOLDERS' EQUITY
  Common stock - $0.25 par value; 17,500,000 shares
    authorized; 15,242,532 shares issued and outstanding             3,810,633 
  Additional paid-in capital                                        15,969,925 
  Accumulated deficit                                               (9,932,763)
                                                                   ----------- 
                                                                     9,847,795 
                                                                   ----------- 
                                                                   $12,819,932 
                                                                   ----------- 
                                                                   ----------- 
</TABLE>

          The accompanying notes are an integral part of this statement.

                                       10
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED           NINE MONTHS ENDED
                                                   NOVEMBER 30,                  NOVEMBER 30,
                                             -------------------------   -------------------------
                                                1998          1997           1998          1997
                                             ----------    ----------    -----------    ----------  
<S>                                          <C>           <C>           <C>            <C>
OPERATING REVENUES:                                                                     (Restated)   
  Natural gas sales                          $1,589,893    $2,306,800    $ 5,087,566    $8,083,400   
  Transportation and processing                 307,160       147,200        835,928       498,500   
  Other                                          86,792        26,377        140,158       375,840   
                                             ----------    ----------    -----------    ----------  
                                              1,983,845     2,480,377      6,063,652     8,957,740   
                                             ----------    ----------    -----------    ----------  
OPERATING COSTS AND EXPENSES:
  Cost of natural gas purchased               1,159,828     1,811,700      3,767,489     5,783,700   
  Operation and maintenance                     382,673       470,600        973,511     1,786,200   
  Depreciation and amortization                 185,693       124,300        548,812       579,600   
  General and administrative                  1,135,401       449,400      2,380,031     1,070,600   
                                             ----------    ----------    -----------    ----------  
                                              2,863,595     2,856,000      7,669,843     9,220,100   
                                             ----------    ----------    -----------    ----------  
OPERATING LOSS                                 (879,750)     (375,623)    (1,606,191)     (262,360)  

OTHER INCOME (EXPENSE)
  Equity in earnings of partnership                -          127,223           -          307,260   
  Interest and other income                      16,793        96,600        125,037       105,700   
  Interest expense                              (92,382)      (87,700)      (256,157)     (572,700)  
  Other                                          12,392        (2,900)        20,389         9,400   
  Gain (loss) on disposal of assets                -          308,700           -          308,700   
                                             ----------    ----------    -----------    ----------  
                                                (63,197)      441,923       (110,731)      158,360   
                                             ----------    ----------    -----------    ----------  
EARNINGS (LOSS) BEFORE INCOME 
  TAXES                                        (942,947)       66,300     (1,716,922)     (104,000)   

    Income taxes                                  7,625         3,600         12,897        18,400   
                                             ----------    ----------    -----------    ----------  
  NET EARNINGS (loss)                        $ (950,572)   $   62,700    $(1,729,819)   $ (122,400)  
                                             ----------    ----------    -----------    ----------  
                                             ----------    ----------    -----------    ----------  
BASIC AND DILUTED EARNINGS (LOSS) 
   PER COMMON SHARE                          $    (0.06)   $     0.01    $     (0.12)   $    (0.01)  
                                             ----------    ----------    -----------    ----------  
                                             ----------    ----------    -----------    ----------  
</TABLE>

          The accompanying notes are an integral part of these statements.

                                       11
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED NOVEMBER 30, 
                                                                   ------------------------------
                                                                         1998            1997
                                                                         ----            ----
                                                                                      (Restated)
<S>                                                                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                           $(1,729,819)    $ (122,400)
  Adjustments to reconcile net loss                                                            
     to net cash provided by operating activities-                                             
  Equity in undistributed earnings of partnership                              -       (383,900)
  Distributions from partnerships                                              -         83,700
  Depreciation, depletion and amortization                               548,812        579,600
  (Gain) on disposal of assets                                                 -       (308,700)
  Non-cash expenses                                                      601,721        370,200
  Other                                                                   (8,005)           400
  Increase (decrease) in cash and cash
    equivalents resulting from changes in-
    Trade accounts receivable                                           (295,731)     1,032,300
    Inventories                                                           37,481        (34,100)
    Prepaid expenses and other current assets                            (75,146)      (185,500)
    Accounts payable                                                     (27,738)      (836,600)
    Accrued expenses and other liabilities                                98,062         98,200
                                                                     -----------     ----------
         Net cash provided by (used in) operating activities            (850,363)       293,200
                                                                     -----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                 (695,871)      (305,200)
   Net proceeds from sale of properties                                    5,400      3,618,300
   Acquisition of business                                               (44,000)             -
   Collection of notes receivable                                      1,373,030              -
   Net decrease in certificate of deposit                              1,734,099              -
   Other                                                                      -         (65,000)
                                                                     -----------     ----------
         Net cash provided by investing activities                     2,372,658      3,248,100
                                                                     -----------     ----------

CASH FLOWS FROM FINANCING ACTIVITIES:                                           
  Proceeds from borrowings                                             1,250,810      1,524,000
  Payments on borrowings                                              (2,417,070)    (1,908,200)
  Issuance of common stock                                                52,500              -
  Other                                                                        -        (16,700)
                                                                     -----------     ----------
         Net cash (used in) financing activities                      (1,113,760)      (400,900)
                                                                     -----------     ----------

Net change in cash and cash equivalents                                  408,535      3,140,400
Cash and cash equivalents at beginning of period                         439,800        329,500
                                                                     -----------     ----------
Cash and cash equivalents at end of period                           $   848,335     $3,469,900
                                                                     -----------     ----------
                                                                     -----------     ----------
</TABLE>
                                       
       The accompanying notes are an integral part of these statements.
                                      12

<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     (1)  Principles of Consolidation and Nature of Business

     The accompanying consolidated financial statements have been prepared by 
the Company, without audit.  In the opinion of management, such financial 
statements reflect all adjustments necessary for a fair presentation of the 
financial position and results of operations in accordance with generally 
accepted accounting principles. The financial statements should be read in 
conjunction with the financial statements and the Notes thereto included in 
the Company's Annual Report on Form 10-KSB for the year ended February 28, 
1998. Certain minor reclassifications to the November 30, 1997 statements 
have been made to conform with the November 30, 1998 presentation. The 
Company also restated the Statement of Operations and Statement of Cash Flows 
for the nine-month period ended November 30, 1997 (see also Note 7).

     The consolidated financial statements include the accounts of Gateway 
Energy Corporation ("GEC"), and all of its wholly owned subsidiaries and 
joint venture investments.  The Company's investments in its joint ventures 
are accounted for using the proportional consolidation method.  All 
significant intercompany transactions have been eliminated in consolidation.

     The Company purchases, develops, owns, and operates natural gas 
gathering and pipeline systems and processing plants and related facilities 
in the Gulf Coast and Southwestern states of Texas, Oklahoma and Louisiana, 
and in offshore Texas state waters.  The Company also operates a natural gas 
distribution company in Oklahoma.

     (2)  Earnings Per Common Share

          In 1997, the Financial Accounting Standards Board ("FASB") issued 
SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is computed by 
dividing the net earnings or loss by the weighted average number of common 
shares outstanding during the period.  Diluted earnings per share is computed 
by dividing net earnings or loss by the weighted average number of common 
shares outstanding after giving effect to all potentially dilutive common 
shares that were outstanding during the period.  Potential dilutive common 
shares are not included in the computation of diluted earnings per share if 
they are anti-dilutive.  For the three-month and nine-month periods ended 
November 30, 1998 and 1997, the diluted loss per common share is the same as 
basic since the effect of potentially dilutive common shares arising from 
convertible debt and outstanding stock options and warrants was anti-dilutive.

     The weighted average number of common shares outstanding used in the 
computation of basic and diluted earnings per share for the three-month 
periods ended November 30, 1998 and 1997 and the nine-month periods ended 
November 30, 1998 and 1997 were 15,020,114, 14,396,700, 14,710,396 and 
14,212,300, respectively.

                                       13
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

     (3)  Notes Payable

     Notes payable at November 30, 1998 consisted of the balance outstanding 
under the Company's operating line of credit of $396,545.  The line of credit 
provides for maximum available borrowings of $500,000 through February 27, 
1999. Interest is payable monthly at 6.4% per annum and principal is due on 
demand, or if no demand is made, at maturity.  The line is collateralized by 
the Company's certificate of deposit.

     (4)  Long-term Debt

     Long-term debt at November 30, 1998 consists of the following:

<TABLE>
<S>                                                  <C>
               Subordinated notes                    $1,026,366
               Note payable to PCI                      177,903
                                                     ----------
                                                      1,204,269
               Less current maturities                  129,184
                                                     ----------
                                                     $1,075,085
                                                     ----------
                                                     ----------
</TABLE>

     (5)  Convertible Promissory Notes Exchange

     The original conversion privileges of substantially all of the 
convertible promissory notes allowed noteholders to convert into common stock 
of the Company at a pre-reverse stock split price of $0.40 per share.  The 
promissory notes inadvertently did not contain the customary anti-dilution 
language to  effect a change in the conversion price in the case of stock 
splits, stock dividends or other capitalization changes.  In 1997, certain 
noteholders tendered their promissory notes for conversion at $0.40 per 
share.  In lieu of conversion, the Company and the noteholders agreed to:  
(i) a one year extension on the notes, and; (ii) a thirty-day window for 
conversion in the event the Company called the promissory notes as 
consideration for the noteholders not converting their notes at that time.
     
     The Company and the Noteholders disagreed as to the proper conversion 
price per share after giving effect to the one for twenty-five reverse split.
     
     In October 1998, the Company and the noteholders reached an agreement 
whereby the Company exchanged outstanding convertible promissory notes, with 
principal and accrued interest through October 15, 1998 totaling $600,474, 
for cash of $537,974 and 460,000 shares of common stock.  In addition, 
certain noteholders agreed to cancel a Subscription Agreement with attached 
Stock Purchase Rights and to reduce warrants issued to the noteholders from 
200,000 to 40,000.  The value of the cash and common stock was equal to the 
fair market value of the convertible promissory notes at the date of 
exchange; therefore no charges are included in the statement of operations 
for this exchange.

                                       14
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
     
     
     (6)  Note Receivable
     
     In September 1997, the Company entered into a Settlement Agreement with 
Shoreham Pipeline Company ("Shoreham") to dissolve all of the joint ventures 
between the Company and Shoreham and to settle litigation between the 
parties. The Settlement Agreement provided that the Company would receive 
$540,000 in cash, a note receivable of $2,160,000 and Shoreham's minority 
interest in certain joint ventures in exchange for the Company's interest in 
other joint ventures.  The note receivable was without collateral and was due 
in twenty-four monthly installments beginning December 1, 1997.  Shoreham was 
to complete the final accounting for all the joint ventures for June, July 
and August 1997 and make cash distributions as appropriate.
          
     The Company performed an audit of the final cash distributions from 
Shoreham in April 1998 and believed that cash distributions to the Company 
for June, July and August 1997 were substantially understated.  The Company 
initiated legal proceedings to collect the remaining distributions to which 
it was entitled.  Shoreham counterclaimed for monetary damages for certain 
matters also associated with the Settlement Agreement.  Beginning July 1, 
1998, Shoreham defaulted on the scheduled payments required under the 
Settlement Agreement.  
     
     During October and November 1998 the companies entered into mediation to 
settle their disputes and avoid costly litigation.  On November 24, 1998, the 
Company and Shoreham reached an agreement under which the Company received:  
(i) cash of $725,000; (ii) a note from Shoreham for $400,000, collateralized 
with certain properties currently owned by Shoreham, and; (iii) the release 
of a net profits interest in the Company's Shipwreck system.  The Company 
received the first installment on this note receivable during January 1999.

     General and administrative expenses for the three-month and the 
nine-month periods ended November 30, 1998 include $466,470 of charges for 
the write-off of amounts receivable from Shoreham, plus related legal fees 
for the three-month and nine-month periods of $76,538 and $80,140, 
respectively. Interest expense for both periods includes $34,451 for the 
write-off of interest income previously recognized on the Shoreham note 
receivable.
     
     (7)   Restatement of November 30, 1997 Financial Statements

     The financial statements as of November 30, 1997, and for the nine-month 
period then ended have been restated to reflect an adjustment for the cost of 
amending certain convertible promissory notes effective August 22, 1997.  The 
adjustment increased interest expense by $306,800 and reduced earnings per 
share by $0.02 for the nine-month period ended November 30, 1997.

     As more fully described in Note 5, certain convertible promissory notes 
did not contain the customary anti-dilution language. In the fourth quarter 
of fiscal 1998, pursuant to the agreement reached in August 1997, the Company 
recognized a charge to interest expense that reflected the difference between 
the $0.40 per share conversion price and the market value of the Company's 
common stock in August 1997.

                                       15
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
     
     (8)  Acquisitions
     
     Effective July 1, 1998, the Company acquired all of the outstanding 
stock of Abtech Resources, Inc. ("Abtech") for $44,000 in cash and 285,000 
shares of common stock.  The majority of Abtech's outstanding stock was owned 
by the Company's current chief executive officer.
     
     The acquisition was accounted for as a purchase and the purchase price 
was allocated to Abtech's principal asset.  Abtech's principal asset is a 
License Agreement between Abtech and a company which owns a patented process 
for the rejection of nitrogen from natural gas.  The License Agreement gives 
the Company the exclusive right to utilize this rejection process for 
conventional natural gas in the Permian Basin and for all coalbed methane or 
landfill gas in the continental United States.
     
     The Company is required to pay a license fee based upon throughput 
through each processing unit so long as there are any unexpired patents 
covering the rejection technology.  The Company must have installed or have 
commitments to install processing units with a stated minimum capacity as of 
December 31, 2002, to maintain the exclusive rights to the process.
     
     (9)  Supplemental Disclosures of Cash Flow Information

     Cash paid during the periods is as follows:

<TABLE>
<CAPTION>
                                              Nine months ended November 30, 
                                              ------------------------------
                                                   1998            1997
                                                   ----            ----
<S>                                           <C>                <C>
     Interest                                     $95,899        $125,400
     Income taxes                                  35,126          94,500
</TABLE>

     In July 1998, the Company issued 48,000 shares of common stock to its 
directors as part of their annual compensation.

     In August 1998, the Company paid $44,000 cash and issued 285,000 shares 
of common stock to acquire Abtech Resources, Inc.

     In October 1998, the Company paid cash totaling $537,974 and issued 
460,000 shares of common stock in exchange for the retirement of certain 
convertible promissory notes, plus accrued interest, and other consideration. 
See Note 5.

                                       16