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 September 30, 2006

       [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                         For the transition period from
                                        to
                             ----------    ----------

                           Commission File No. 0-6404


                           GATEWAY ENERGY CORPORATION
         ---------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


          Delaware                                         44-0651207
 ------------------------------                  ------------------------------
(State or other jurisdiction of                 (I.R.S. Employer Identification
 incorporation or organization)                              Number)


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

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

     Check whether the issuer (1) 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
                                                                      ---   ---

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes    No X
                                   ---   ---

As of November 2, 2006, the Issuer had 17,130,937 shares of its common stock
outstanding.

Transitional Small Business Disclosure Format:  Yes    No X
                                                   ---   ---

<PAGE>


                                   FORM 10-QSB

                                     Part I
                                     ------

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


          Unaudited Consolidated Balance Sheet
              as of September 30, 2006                                        3

          Unaudited Consolidated Statements of Operations
              for the three months and nine months ended
              September 30, 2006 and September 30, 2005                       4

          Unaudited Consolidated Statements of Cash Flows
              for the nine months ended September 30, 2006
              and September 30, 2005                                          5

          Notes to Unaudited Consolidated Financial Statements                7


                                       2

<PAGE>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2006
(Unaudited)



ASSETS
Current Assets
   Cash and cash equivalents ...................................   $    720,055
   Restricted cash .............................................         54,642
   Trade accounts receivable ...................................      1,028,537
   Inventories, at average cost ................................         47,361
   Prepaid expenses and other assets ...........................        185,345
                                                                   ------------
        Total current assets ...................................      2,035,940
                                                                   ------------

Property and Equipment, at cost
   Gas gathering, processing and transportation ................     10,182,420
   Office furniture and other equipment ........................        838,404
                                                                   ------------
                                                                     11,020,824
   Less accumulated depreciation and amortization ..............     (4,954,494)
                                                                   ------------
                                                                      6,066,330
                                                                   ------------
Other Assets
   AET license, net of accumulated amortization of $200,137 ....        220,913
   Other .......................................................        132,980
                                                                   ------------
                                                                        353,893
                                                                   ------------
        Total assets ...........................................   $  8,456,163
                                                                   ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Accounts payable ............................................   $    747,303
   Accrued expenses and other liabilities ......................        191,612
   Note payable ................................................         69,978
   Current maturities of long-term debt ........................        188,894
   Current maturities of capital lease .........................         13,279
                                                                   ------------
        Total current liabilities ..............................      1,211,066
                                                                   ------------

Future asset retirement obligations ............................        362,098
Long-term debt, less current maturities ........................        135,580
Long-term capital lease, less current maturities ...............         52,120
Minority interest payable ......................................        844,523

Commitments and contingencies ..................................           --

Stockholders' Equity
   Preferred stock - $1.00 par value; 10,000 shares authorized;
      no shares issued and outstanding .........................           --
   Common stock - $0.25 par value; 35,000,000 shares authorized;
      17,130,937 shares issued and outstanding .................      4,282,732
   Additional paid-in capital ..................................     16,152,316
   Accumulated deficit .........................................    (14,584,272)
                                                                   ------------
        Total stockholders' equity .............................      5,850,776
                                                                   ------------
        Total liabilities and stockholders' equity .............   $  8,456,163
                                                                   ============


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

                                       3

<PAGE>
<TABLE>
<CAPTION>


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




                                                             Three Months Ended               Nine Months Ended
                                                                September 30,                   September 30,
                                                        ----------------------------    ----------------------------
                                                            2006            2005            2006            2005
                                                        ------------    ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>             <C>
Operating revenues
    Sales of natural gas ............................   $  1,808,300    $  2,197,260    $  6,003,023    $  5,755,261
    Transportation of natural gas and liquids .......        476,582         431,123       1,359,312       1,018,919
    Treating and other ..............................         42,899          43,241         132,477         130,824
                                                        ------------    ------------    ------------    ------------
                                                           2,327,781       2,671,624       7,494,812       6,905,004
                                                        ------------    ------------    ------------    ------------
Operating costs and expenses
    Cost of natural gas purchased ...................      1,532,212       1,793,549       5,028,527       4,781,687
    Operation and maintenance .......................        272,389         244,149         824,714         677,993
    Depreciation and amortization ...................        131,698         135,100         392,089         414,634
    Accretion expense ...............................          6,155           5,743          18,466          17,232
    General and administrative ......................        417,161         723,656       1,134,165       1,372,876
                                                        ------------    ------------    ------------    ------------
                                                           2,359,615       2,902,197       7,397,961       7,264,422
                                                        ------------    ------------    ------------    ------------
Operating income (loss) .............................        (31,834)       (230,573)         96,851        (359,418)

Other income (expense)
    Interest income .................................          7,060             577          20,580           1,121
    Interest expense ................................        (15,385)        (15,585)        (39,599)        (70,632)
    Other income (expense), net .....................         49,718         (25,011)         48,328
                                                                                                              (9,741)
    Minority interest ...............................        (26,418)         (6,782)        (65,874)         (6,782)
                                                        ------------    ------------    ------------    ------------
                                                              14,975         (46,801)        (36,565)        (86,034)
                                                        ------------    ------------    ------------    ------------
Income (loss) from continuing operations before
    income taxes and discontinued operations ........        (16,859)       (277,374)         60,286        (445,452)
Income tax expense ..................................           --              --              --              --
                                                        ------------    ------------    ------------    ------------
Income (loss) from continuing operations ............        (16,859)       (277,374)         60,286        (445,452)


Discontinued operations, net of taxes
    Income from discontinued operations, net of taxes           --            26,027            --           314,694

     Gain on disposal of discontinued operations, net
      of  taxes .....................................           --         1,705,257            --         1,705,257
                                                        ------------    ------------    ------------    ------------

Net income (loss) ...................................   $    (16,859)   $  1,453,910    $     60,286    $  1,574,499
                                                        ============    ============    ============    ============

Basic and diluted earnings (loss) per share
    Continuing operations ...........................   $       --      $      (0.02    $       --      $      (0.03)
    Discontinued operations .........................           --              0.10            --              0.12
                                                        ------------    ------------    ------------    ------------

    Net income ......................................   $       --      $       0.08    $       --      $       0.09
                                                        ============    ============    ============    ============

Weighted average number of common shares outstanding
    Basic ...........................................     17,130,937      16,920,854      17,130,937      16,718,425
    Diluted .........................................     17,130,937      16,920,854      17,168,282      16,718,425


                      The accompanying notes are an integral part of these financial statements

                                                         4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


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



                                                                                     Nine Months
                                                                                 Ended September 30,
                                                                              --------------------------
                                                                                  2006           2005
                                                                              --------------------------
                                                                                               Revised

<S>                                                                           <C>            <C>
Cash flows from operating activities - continuing operations (Revised)
Continuing operations:
   Net income (loss) from continuing operations ...........................   $    60,286    $  (445,452)
   Adjustments to reconcile net income (loss) from continuing operations to
   net cash provided by operating activities:
      Depreciation and amortization .......................................       392,089        361,687
      Common stock issued for director's fees .............................          --           30,000
      Litigation settlement ...............................................          --          110,883
      Minority interest ...................................................        65,874          6,782
      Stock option compensation expense ...................................        13,172          6,940
      Accretion expense ...................................................        18,466         17,232
      Amortization of deferred loan cost ..................................        17,295           --
      Net gain on sale of property ........................................        (1,504)          --
      Change in operating assets and liabilities:
         Trade accounts receivable ........................................       431,722       (322,392)
         Inventories, at average cost .....................................        (5,063)           264
         Prepaid expenses and other assets ................................      (196,595)        (4,324)
         Accounts payable .................................................      (489,241)       277,828
         Accrued expenses and other liabilities ...........................       (84,354)       138,994
                                                                              -----------    -----------
              Net cash provided by operating activities ...................       222,147        178,442
                                                                              -----------    -----------

Cash flows from investing activities - continuing operations
      Capital expenditures ................................................      (125,592)       (25,299)
      Proceeds from sale of property ......................................         2,200           --
      Other assets ........................................................          --           (4,954)
                                                                              -----------    -----------
              Net cash used in investing activities .......................      (123,392)       (30,253)
                                                                              -----------    -----------

Cash flows from financing activities - continuing operations
      Payments on borrowings ..............................................      (274,994)      (625,448)
      Proceeds from borrowings ............................................       167,978           --
      Proceeds from exercise of stock options .............................          --           13,684
      Proceeds from issuance of common stock ..............................          --           60,000
      Restricted cash for letter of credit, net ...........................        (2,101)          --
      Deferred financing costs ............................................       (52,410)          --
      Distributions to minority partner ...................................       (82,978)          --
                                                                              -----------    -----------
              Net cash used in financing activities .......................      (244,505)      (551,764)
                                                                              -----------    -----------

Net decrease in cash and cash equivalents from continuing operations ......      (145,750)      (403,575)

Discontinued operations:
   Net cash provided by discontinued operating activities .................          --          535,067
   Net cash provided by discontinued investing activities .................          --        1,825,000
   Net cash used in discontinued financing activities .....................          --       (1,190,658)
                                                                              -----------    -----------

Net increase in cash and cash equivalents from discontinued operations ....          --        1,169,409

Cash and cash equivalents at beginning of period ..........................       865,805        176,292
                                                                              -----------    -----------
Cash and cash equivalents at end of period ................................   $   720,055    $   942,126
                                                                              ===========    ===========

Supplemental Disclosures of Cash Flow Information:
      Cash paid for interest ..............................................   $    38,379    $   166,445
                                                                              ===========    ===========

Supplemental Disclosure of  Non Cash Transaction:
      Note payable rolled into a new vehicle note .........................   $    13,622    $      --
                                                                              ===========    ===========


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

                                                    5
</TABLE>

<PAGE>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
September 30, 2006

(1)      Nature of Business

         Gateway Energy Corporation (the "Company," or "Gateway"), a Delaware
corporation, was incorporated in 1960 and entered its current business in 1992.
The Company's common stock is traded in the over-the-counter market on the
bulletin board section under the symbol GNRG. Gateway conducts all of its
business through its wholly owned subsidiary companies, Gateway Pipeline
Company, Gateway Offshore Pipeline Company, Gateway Energy Marketing Company,
Fort Cobb Fuel Authority, L.L.C. and Gateway Processing Company. Gateway-ADAC
Pipeline, L.L.C. which is majority owned (67%) by Gateway Pipeline Company, was
formed in September 2005. Access to the Company's annual report on Form 10-KSB,
quarterly reports on Form 10-QSB, the Company's Code of Ethics, and current
reports on Form 8-K is available at the Company's website,
www.gatewayenergy.com.

         In the following discussion, "Mcf" refers to thousand cubic feet of
natural gas; "Mmcf" refers to million cubic feet of natural gas; "Bbl" refers to
barrel of liquid hydrocarbons of approximately 42 U.S. gallons; "Btu" refers to
British thermal unit, a common measure of the energy content of natural gas;
"MMBtu" refers to one million British thermal units. "Mcfe" refers to thousand
cubic feet equivalent. Liquid hydrocarbons are converted to Mcf equivalents
using the ratio of 1.0 barrel of liquid hydrocarbons to 6.0 Mcf of natural gas.

(2)      Summary of Significant Accounting Policies

         A summary of the significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows. Certain reclassifications have been made to the prior period statements
to be consistent with the current presentation.

Principles of Consolidation

         The Company consolidates the financial statements of its majority owned
and wholly owned subsidiaries which includes the accounts of Gateway Energy
Corporation and its wholly owned subsidiary companies, Gateway Pipeline Company,
Gateway Offshore Pipeline Company, Gateway Energy Marketing Company, Fort Cobb
Fuel Authority, L.L.C., Gateway Processing Company, and Gateway-ADAC Pipeline,
L.L.C., of which the Company has a 67% ownership. The portion not owned by the
Company is recorded as minority interest. All significant intercompany
transactions have been eliminated in consolidation. The financial statements for
2005 have been adjusted to give effect to the disposition of the Madisonville
pipeline facilities as a discontinued operation (see Note 4). The corresponding
notes to the financial statements, where appropriate, have been adjusted to
correspond to this presentation.

         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 U.S. generally
accepted accounting principles. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles have been omitted pursuant to rules and
regulations of the Securities and Exchange Commission. 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 December 31, 2005.

Reclassifications

         Certain reclassifications have been made to the September 30, 2005
financial statements to conform to the current period presentation. These
reclassifications had no effect on the total assets, liabilities, stockholders'
equity or net income (loss) for the nine months ended September 30, 2005

Revenue Recognition Policy

         Revenues from the sales of natural gas are generated under back-to-back
purchase and sales contracts. Revenues from the sales of natural gas are
recognized at the redelivery point, which is the point at which title to the
natural gas transfers to the purchaser. Transportation revenues are generated
under contracts which have a stated fee per unit of production (Mcf, MMBtu, or
Bbl) gathered or transported. Transportation revenues onshore are recognized at
the redelivery point, which is the point at which another party takes physical
custody of the natural gas or liquid hydrocarbons. Transportation revenues
offshore are recognized at the Company's receipt point.

                                       6

<PAGE>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006

Property and Equipment

         Property and equipment is stated at cost, plus capitalized interest
costs on major projects during their construction period. Additions and
improvements that add to the productive capacity or extend the useful life of an
asset are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. For the nine months ended September 30, 2006, property and
equipment included $100,000 of equipment financed under a capital lease, net of
$11,111 of accumulated amortization. Depreciation and amortization is provided
using the straight-line method over estimated useful lives ranging from 6 to 30
years for pipeline systems, gas plant and processing equipment, and from 2 to 10
years for office furniture and other equipment. Upon disposition or retirement
of pipeline components or gas plant components, any gain or loss is charged or
credited to accumulated depreciation. When entire pipeline systems, gas plants
or other property and equipment are retired or sold, any resulting gain or loss
is credited to or charged against operations.

         For the three and nine months ended September 30, 2006 and 2005,
depreciation expense was $124,883 and $370,558 and $127,923 and $393,103,
respectively.

         Property, plant and equipment and identifiable intangible assets are
reviewed for impairment, in accordance with Financial Accounting Standards Board
("FASB") Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the sum of the expected
discounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets. There have been no
impairments of long-lived assets required during the nine months ended September
30, 2006.

         The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 143 "Accounting for Asset Retirement Obligations"(discussed below)
during the year ended December 31, 2003, and accordingly provides for the future
asset retirement obligations related to the Shipwreck offshore production
platform because, eventually, law or regulation will require its abandonment.
The present value of the estimated future asset retirement obligation, as of the
date of acquisition, was capitalized to gas gathering, processing and
transportation equipment. The present value of the estimated future asset
retirement obligation, as of the balance sheet date, is presented as a
noncurrent liability. Until the platform is ultimately sold or retired, the
Company will recognize (i) depreciation expense on the additional capitalized
costs; (ii) accretion expense as the present value of the future asset
retirement obligation increases with the passage of time, and (iii) the impact,
if any, of changes in estimates of the liability. The following table sets forth
a reconciliation of the beginning and ending aggregate carrying amount of asset
retirement obligations for the nine months ended September 30, 2006 and 2005:

                                      Nine Months Ended September 30,
                                       -----------------------------
                                          2006              2005
                                       -----------       -----------
              Beginning balance        $   343,632       $   320,657
              Accretion                     18,466            17,232
              Ending balance           $   362,098       $    37,889

Cash Equivalents

         For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with original maturities
of three months or less to be cash equivalents.

         Cash flows from operating, investing and financing activities
attributable to the disposition of Madisonville operations have been revised and
disclosed separately for the nine months ended September 30, 2005, which in
prior periods were reported on a combined basis as a single amount.

Restricted Cash

         Restricted cash is related to the collateral for the Letter of Credit
to secure the note payable due our former Chief Executive Officer of the
Company.

                                       7

<PAGE>
<TABLE>
<CAPTION>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


Income Taxes

         The Company has no current tax provision for the three and nine months
ended September 30, 2006 and 2005 because the Company used net operating loss
carry-forwards to offset pretax financial income, if any, and has concluded that
the tax benefits related to remaining net operating loss carryforwards may not
be realized in future periods and are therefore fully reserved in the
accompanying financial statements. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have been
included in the financial statements or income tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates expected to apply when these differences
reverse. Deferred tax assets are reduced by a valuation allowance when it is
more likely than not that they will not be realized. The deferred tax provision
is the result of changes in deferred tax assets and liabilities.


Earnings Per Share

         Basic earnings per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income or loss by the
weighted average number of shares outstanding, after giving effect to
potentially dilutive common share equivalents outstanding during the period.
Potentially dilutive common share equivalents are not included in the
computation of diluted earnings per share if they are anti-dilutive. For the
three and nine months ended September 30, 2005, the diluted loss per common
share from continuing operations was the same as basic loss per share since the
effect of 28,631 and 137, 427, respectively, potentially dilutive common shares
arising from outstanding stock options and warrants was anti-dilutive.
Additionally, there were 99,123 potentially dilutive common shares arising from
outstanding stock options and warrants for the three months ended September 30,
2006 that have been excluded because they were anti-dilutive. Earnings per
common share were computed as follows:

                                                      Three Months Ended              Nine Months Ended
                                                         September 30,                   September 30,
                                                 ----------------------------    ---------------------------
                                                     2006            2005            2006           2005
                                                 ------------    ------------    ------------   ------------
<S>                                              <C>             <C>             <C>            <C>
Weighted average number of common shares
    outstanding ..............................     17,130,937      16,920,854      17,130,937     16,718,425
Effect of dilutive securities ................         99,123          28,631          37,345        137,427
                                                 ------------    ------------    ------------   ------------
Weighted average dilutive common shares
    outstanding ..............................     17,230,060      16,949,485      17,168,282     16,855,852
                                                 ============    ============    ============   ============

Income (loss) from continuing operations .....   $    (16,859)   $   (277,374)   $     60,286   $   (445,452)
Income from discontinued operations, net of
    taxes ....................................           --         1,731,284            --        2,019,951
                                                 ------------    ------------    ------------   ------------
Net income (loss) ............................   $    (16,859)   $  1,453,910    $     60,286   $  1,574,499
                                                 ============    ============    ============   ============

Basic and diluted earnings per common share: .
     Continuing operations ...................   $       --      $      (0.02)   $       --     $      (0.03)
     Discontinued operations .................           --              0.10            --             0.12
                                                 ------------    ------------    ------------   ------------
     Net income ..............................   $       --      $       0.08    $       --     $       0.09
                                                 ============    ============    ============   ============



Accounting Pronouncements and Recent Regulatory Developments

         In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109" ("FIN
48"), which clarifies the accounting for uncertainty in tax positions taken or
expected to be taken in a tax return, including issues relating to financial
statement recognition and measurement. FIN 48 provides that the tax effects from
an uncertain tax position can be recognized in the financial statements only if
the position is "more-likely-than-not" of being sustained if the position were
to be challenged by a taxing authority. The assessment of the tax position is
based solely on the technical merits of the position, without regard to the
likelihood that the tax position may be challenged. If an uncertain tax position
meets the "more-likely-than-not" threshold, the largest amount of tax benefit
that is greater than 50 percent likely of being recognized upon ultimate

                                       8
</TABLE>

<PAGE>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


settlement with the taxing authority, is recorded. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating the impact
of adopting FIN 48 on our financial statements.

         In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements (" SFAS No. 157") defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and requires
enhanced disclosures about fair value measurements. It does not require any new
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. We are currently evaluating the impact adoption may
have on the consolidated financial statements of the Company.

Use of Estimates

         The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management's significant estimates include depreciation of
long-lived assets, amortization of deferred loan costs, valuation of the ARO
liability, and valuation of stock based transactions. Actual results could
differ from those estimates.

(3)      Stock Based Compensation Plans

         We have two types of share-based compensation plans, one covers
employees and the other covers our Board of Directors, both of which are similar
in nature.

         Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No.123R") utilizing the modified prospective approach. Prior to
the adoption of SFAS No. 123R, we accounted for stock option grants in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees" (the intrinsic value method), and accordingly,
recognized no compensation expense for employee stock option grants. The options
generally vest ratably over three years and expire between five and ten years.

         Under the modified prospective approach, SFAS No. 123R applies to new
awards and to awards that were outstanding on January 1, 2006 as well as those
that are subsequently modified, repurchased or cancelled. Under the modified
prospective approach, compensation cost recognized for the three and nine months
ended September 30, 2006 includes compensation cost for all share-based awards
granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS No. 123, and compensation cost for all share-based awards granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123R. Prior periods were not restated
to reflect the impact of adopting the new standard.

         As a result of SFAS No. 123R, compensation cost related to
non-qualified stock options recognized for the three and nine months ended
September 30, 2006 was $8,736 and $13,172, respectively. We view all awards of
stock based compensation as a single award with an expected life equal to the
average expected life of component awards and amortize the award on a
straight-line basis over the life of the award.

         For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period.

                                       9

<PAGE>
<TABLE>
<CAPTION>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


         The following table illustrates the effect on net income per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to its stock-based employee
compensation for the three and nine months ended September 30, 2005:

                                                                  Three Months       Nine Months
                                                                 Ended September   Ended September
                                                                       30,               30,
                                                                      2005              2005
                                                                   -----------       -----------
              <S>                                                  <C>               <C>
              Net income- as reported ..........................   $ 1,453,910       $ 1,574,499
              Add (deduct) stock based compensation expense
               recognized, net of taxes .......................          6,940             6,940
              Deduct stock-based employee compensation expense
               determined under fair value based
               method for all awards, net of taxes ..........           (1,125)           (3,850)
                                                                   -----------       -----------
              Net income- pro forma ............................   $ 1,459,725       $ 1,577,589
                                                                   ===========       ===========

              Basic and diluted net income per share - as
               reported .......................................    $      0.09       $      0.09
              Basic and diluted net income per share - pro forma   $      0.09       $      0.09

         We receive a tax deduction for certain stock option exercises during
the period the options are exercised, generally for the excess of the price at
which the stock is sold over the exercise price of the options. During the three
and nine months ended September 30, 2006, there were no stock options exercised.
In addition, we receive an additional tax deduction when restricted stock vests
at a higher value than the value used to recognize compensation expense at the
date of grant. We record this deduction as a tax asset when it is cash tax
savings to us with a corresponding amount recorded as additional paid in
capital.

         The fair value of each option award is estimated on the date of grant
using the Black-Scholes option-pricing model. Expected volatility is based on
the annualized historical stock prices to derive an expected term. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
treasury yield curve in effect at the time of grant. The Company uses the
Black-Scholes option pricing model to compute the fair value of stock options
which requires the Company to make the following assumptions:

     o    The risk-free interest rate is based on the five year Treasury bond at
          date of grant.

     o    The dividend yield on the Company's common stock is assumed to be zero
          since the Company does not pay dividends and has no current plans to
          do so in the future.

     o    The market price volatility of the Company's common stock is based on
          daily, historical prices for the last three years.

     o    The term of the grants is based on the simplified method as described
          in Staff Accounting Bulletin No. 107.

         In addition, the Company estimates a forfeiture rate at the inception
of the option grant based on historical data and adjusts this prospectively as
new information regarding forfeitures becomes available.

         The following weighted-average assumptions were used in deteriming the
fair value of stock options granted during the nine months ended September 30,
2006, using the Black-Sholes model. There were no options granted during the
nine months ended September 30, 2005.

                                                       2006
                                                    -----------
              Risk-free interest rate..............    4.81%
              Dividend yield.......................      --%
              Expected volatility..................      83%
                 Option life (years)...............     5.00

                                       10
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


         The expected term has been calculated using the Securities and Exchange
Commission Staff's shortcut approach from Staff Accounting Bulletin No. 107. We
have analyzed historical volitility and based on an analysis of all relevant
factors use a three-year period to estimate expected volatility of our stock
option grants.

         At September 30, 2006, there was $43,127 of total unrecognized
compensation cost related to non-vested stock option awards which is expected to
be recognized over a weighted-average period of three years.

         The following table represents stock option activity for the nine
months ended September 30, 2006:

                                                                                      Weighted          Intrinsic
                                                                   Weighted            Average           Value of
                                                                    Average          Contractual      Options as of
                                                                   Exercise           Terms (in       September 30,
                                                 Shares              Price             years)              2006
                                             ----------------    --------------     --------------    ---------------
<S>                                              <C>                 <C>                <C>               <C>
Options outstanding, beginning of period..       527,416             $0.46              3.98
Options granted...........................       210,000              0.37              4.90
Options exercised or canceled.............       (33,333)             0.41              5.38
                                                --------
Options outstanding, end of period........       704,083             $0.44              3.63               $ -
                                                ========
Options exercisable, end of period........       500,750             $0.47              3.20               $ -
                                                ========

         The weighted-average grant-date fair value of options granted during
2006 was $0.18 for the three and nine months ended September 30, 2006.

(4)      Acquisitions and Divestitures

         Effective July 27, 2005, Gateway Pipeline Company and Gateway
Processing Company, wholly owned subsidiaries of the Company, sold the four-inch
gathering line and three-inch injection line as well as the Processing Agreement
contained in the First Amended and Restated Master Agreement dated February 5,
2003, all of which was part of the Company's Madisonville Pipeline Facility to a
third party buyer for approximately $2.7 million. The Company retained the
ten-inch sales line connected to the Madisonville Pipeline Facility and became a
transporter of gas from the Madisonville Plant to the sales point. Due to the
sale of these facilities, the operations of the Madisonville Pipeline Facility
have been reported as discontinued operations. Accordingly, prior period
financial statement amounts have been adjusted to give effect to this
disposition as a discontinued operation.

(5)      Debt

Note Payable

         Fort Cobb's revolving credit agreement provides for maximum available
borrowings of up to $250,000 through September 16, 2007. Principal outstanding
under the agreement accrues interest at a variable rate, based on the bank's
prime rate index plus 1.25%, with a minimum rate of 8%. The interest rate at
September 30, 2006 was 9.5%. The balance under the agreement is due upon demand,
or if no demand is made, at maturity, and is renewable annually. Costs of
obtaining this debt were capitalized as deferred loan costs and are being
charged to interest expense ratably over the maturity period of the note. Fort
Cobb uses the proceeds from time to time for general working capital purposes.
The agreement, along with the Fort Cobb Term Note discussed below, is
collateralized with the assets of Fort Cobb and guaranteed by the Company. The
Company had $180,022 of available borrowings under this agreement as of
September 30, 2006.

                                       11
</TABLE>

<PAGE>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


Long-term Debt

         Long-term debt at September 30, 2006 consisted of the following:

                  Term note - Fort Cobb                   $  243,440
                  Term note - Fort Cobb vehicles              38,351
                  Trade note payable                          42,683
                                                          ----------
                                                             324,474
                  Less current maturities                   (188,894)
                                                          ----------
                                                          $  135,580
                                                          ==========

Term Note - Fort Cobb

         Effective June 1, 2001, Fort Cobb borrowed $750,000 from a bank.
Principal outstanding under the note accrues interest at a variable rate, based
on the bank's prime rate index plus 1.25%, with a minimum rate of 8%. The
interest rate at September 30, 2006 was 9.5%. The note requires monthly
principal and interest payments of approximately $13,000, with the balance under
the note due June 1, 2008. Costs of obtaining this debt are being charged to
interest expense ratably over the term of the note. Fort Cobb used the proceeds
to refinance its previous borrowings from the Company, and the Company used the
proceeds for general corporate purposes.

Term Note - Fort Cobb Vehicles

         Effective March 2003, Fort Cobb borrowed $57,900 from a bank to buy
three replacement service vehicles. The note requires monthly principal and
interest payments of $1,387, including interest at 6.99%, and matures on March
25, 2007. On June 21, 2006, Fort Cobb purchased and financed a new vehicle. In
doing this, Fort Cobb rolled the remaining balance of the March 2003 loan, which
was $13,622, into a new note. This note requires monthly principal and interest
payments of $1,331, including interest at 7.49%, and matures on May 25, 2009.

Trade Note Payable

         Effective in October 2005, in connection with the Settlement and
Release Agreement with Michael Fadden, the Company's former Chief Executive
Officer and President, the Company executed a trade note for $96,000, bearing no
interest, payable in twenty-four monthly installments of $4,000. The note is
secured by a letter of credit. Interest expense is being recognized over the
life of the note at an imputed rate of 10%; accordingly, the obligation was
initially recorded at its present value of $86,683 in the accompanying balance
sheet. The balance at September 30, 2006 was $42,683.

Letters of Credit

         As of September 30, 2006, the Company had outstanding letters of credit
for gas purchases totaling $1,202,000.

(6)      Commitments and Contingencies

         We are involved in litigation from time to time in the ordinary course
of our business. We do not believe that the outcome of any such pending or
threatened litigation will have a material adverse effect on our financial
condition or results of operations. However, as is inherent in legal proceedings
where issues may be decided by finders of fact, there is a risk that
unpredictable decisions adverse to the Company could be reached.

 (7)     Segment Disclosures

         All of the Company's operations are in the domestic U.S., including the
Gulf of Mexico in Texas and federal waters. The Company's management reviews and
evaluates separately the operations of three main segments--Onshore Operations,
Offshore Operations and Fort Cobb Operations. Each segment is an aggregation of
operations subject to similar economic and regulatory conditions such that they
are likely to have similar long-term prospects for financial performance.
Onshore Operations include natural gas gathering, transportation and
distribution activities in Texas and Oklahoma. Offshore Operations include
natural gas and liquid hydrocarbon gathering and transportation activities in
the Gulf of Mexico, in Texas and in federal waters. The principal markets for

                                       12

<PAGE>
<TABLE>
<CAPTION>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


the Onshore segment are affiliates of large intrastate and interstate pipeline
companies and industrial customers, and for the Offshore segment they are
affiliates of large intrastate and interstate pipeline companies. Fort Cobb
Operations are comprised of a local natural gas distribution company in
Oklahoma. This segment supplies natural gas to approximately 1,800 customers,
principally for irrigation and crop drying fuel for farming cooperatives and
residential fuel.

         The accounting policies of the reportable segments are the same as
those described in Note 2 to the Consolidated Financial Statements. The Company
evaluates the segments based on operating margin, defined as revenues less cost
of purchased gas and operating and maintenance expenses. Such amounts are before
general and administrative expense, depreciation, interest income or expense or
income taxes. Inter-segment sales of approximately $302,000 and $255,000 were
eliminated during consolidation for the three months ended September 30, 2006
and 2005. Inter-segment sales of approximately $765,000 and $946,000 were
eliminated during consolidation for the nine months ended September 30, 2006 and
2005.

         Summarized financial information of the Company's reportable segments,
and a reconciliation of operating margin to consolidated net income, is
presented below:

                                             Three Months Ended             Nine Months Ended
                                                September 30,                 September 30,
                                             2006           2005           2006           2005
                                          -----------    -----------    -----------    -----------
              Onshore Operations
         <S>                              <C>            <C>            <C>            <C>
         Revenues .....................   $ 1,594,294    $ 1,957,998    $ 5,276,502    $ 4,740,180
         Operating margin .............       246,283        307,589        843,280        596,628
         Depreciation and amortization         63,443         67,364        191,725        203,332
         Interest expense .............         2,592            928          8,135         25,629
         Capital expenditures .........        52,248          7,491         63,670         14,238
         Total assets .................     5,411,244      5,722,998      5,411,244      5,722,998

              Offshore Operations
         Revenues .....................   $   372,702    $   397,000    $ 1,074,894    $ 1,036,863
         Operating margin .............       303,953        326,953        837,776        829,753
         Depreciation and amortization         38,014         37,693        113,652        113,080
         Capital expenditures .........        28,950           --           28,950           --
         Total assets .................     1,387,139      1,464,184      1,387,139      1,464,184

              Fort Cobb Operations
         Revenues .....................   $   316,626    $   316,626    $ 1,143,416    $ 1,127,961
         Operating margin .............       (27,056)          (616)       (39,485)        18,943
         Depreciation and amortization         30,241         30,043         86,712         98,222
         Interest expense .............        12,793         14,657         31,464         45,003
         Capital expenditures .........           541          1,252         32,972         11,061
         Total assets .................     1,657,780      1,822,498      1,657,780      1,822,498


              Total
         Revenues .....................   $ 2,327,781    $ 2,671,624    $ 7,494,812    $ 6,905,004
         Operating margin .............       523,180        633,926      1,641,571      1,445,324
         Depreciation and amortization        131,698        135,100        392,089        414,634
         Interest expense .............        15,385         15,585         39,599         70,632
         Capital expenditures .........        81,739          8,743        125,592         25,299
         Total assets .................     8,456,163      9,009,680      8,456,163      9,009,680



               Following is a reconciliation of net income (loss) for the three
         and nine month periods ended September 30,:

                                       13
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED (Unaudited)
September 30, 2006


                                           Three Months Ended             Nine Months Ended
                                              September 30,                 September 30,
                                           2006           2005           2006          2005
                                        -----------    -----------    -----------   -----------
  Reconciliation to net income (loss)
<S>                                     <C>            <C>            <C>           <C>
Operating margin ....................   $   523,180    $   633,926    $ 1,641,571   $ 1,445,324
Less:
  Depreciation and amortization .....       131,698        135,100        392,089       414,634
  Accretion expense .................         6,155          5,743         18,466        17,232
  General and administrative ........       417,161        723,656      1,134,165     1,372,876
  Interest expense ..................        15,385         15,585         39,599        70,632
  Minority interest .................        26,418          6,782         65,874         6,782
Plus:
  Interest income ...................         7,060            577         20,580         1,121
  Other income, net .................        49,718        (25,011)        48,328        (9,741)
  Discontinued operations ...........          --           26,027           --         314,694
  Gain on discontinued operations ...          --        1,705,257           --       1,705,257
                                        -----------    -----------    -----------   -----------
Net income (loss) ...................   $   (16,859)   $ 1,453,910    $    60,286   $ 1,574,499
                                        ===========    ===========    ===========   ===========

                                               14
</TABLE>

<PAGE>


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

         This Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that relate to possible future events, our future performance, and our
future operations. In some cases, you can identify these forward-looking
statements by the use of words such as "may," "will," "should," "anticipates,"
"believes," "expects," "plans," "future," "intends," "could," "estimate,"
"predict," "potential," "continue," or the negative of these terms or other
similar expressions. These statements are only our predictions. Our actual
results could and likely will differ materially from these forward-looking
statements for many reasons, including the risks described herein. We cannot
guarantee future results, levels of activities, performance, or achievements. We
are under no duty to update any of the forward-looking statements after the date
of this document to conform them to actual results or to changes in our
expectations.

Critical Accounting Policies

         A summary of the significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows. Certain reclassifications have been made to the prior period statements
to be consistent with the current presentation.

Revenue Recognition Policy

         Revenues from the sales of natural gas are generated under back-to-back
purchase and sales contracts. Revenues from the sales of natural gas are
recognized at the redelivery point, which is the point at which title to the
natural gas transfers to the purchaser. Transportation revenues are generated
under contracts which have a stated fee per unit of production (Mcf, MMBtu, or
Bbl) gathered or transported. Transportation revenues onshore are recognized at
the redelivery point, which is the point at which another party takes physical
custody of the natural gas or liquid hydrocarbons. Transportation revenues
offshore are recognized at the receipt point.

Property and Equipment

         Property and equipment is stated at cost, plus capitalized interest
costs on major pipeline projects during their construction period. Additions and
improvements that add to the productive capacity or extend the useful life of an
asset are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Depreciation is provided using the straight-line method
over estimated useful lives ranging from 6 to 30 years for pipeline systems, gas
plant and processing equipment, and from 2 to 10 years for office furniture and
other equipment. Upon disposition or retirement of pipeline components or gas
plant components, any gain or loss is charged or credited to accumulated
depreciation. When entire pipeline systems, gas plants or other property and
equipment are retired or sold, any resulting gain or loss is credited to or
charged against operations.

         Impairment losses are recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying value. The amount of

         Impairment is measured by comparing the fair value of the asset to its
carrying amount. There was no impairment required as of September 30, 2006.

Asset Retirement Obligation

         The Company provides for the future asset retirement obligations
related to the Shipwreck offshore platform because, eventually, law or
regulation will require its abandonment. The present value of the estimated
future asset retirement obligation, as of the date of acquisition, was
capitalized to gas gathering, processing and transportation equipment. The
present value of the estimated future asset retirement obligation, as of the
balance sheet date, is presented as a noncurrent liability. Until the platform
is ultimately sold or retired, the Company will recognize (i) depreciation
expense on the additional capitalized costs; (ii) accretion expense as the
present value of the future asset retirement obligation increases with the
passage of time, and; (iii) the impact, if any, of changes in estimates of the
liability.

Use of Estimates

         The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management's significant estimates include depreciation of

                                       15

<PAGE>


long-lived assets, amortization of deferred loan costs, valuation of the ARO
liability, and valuation of stock based transactions. Actual results could
differ from those estimates.

Results of Operations

General

         The Henry Hub closing index price for natural gas during the nine
months ended September 30, 2006 averaged $6.81 per MMBtu, compared to $8.24 for
the same period of the prior year. In the accompanying financial statements, the
Company's revenues from sales of natural gas, along with the cost of natural gas
purchased, increased proportionately from prior year levels. Because the Company
buys and sells gas under "back-to-back" purchase and sale contracts designed to
minimize commodity price risk, the Company's net operating margin is relatively
insensitive to fluctuations in the market price of gas. Accordingly, the Company
evaluates each of its activities based on the operating margin it produces. The
Company defines operating margin as revenues, less the cost of purchased gas and
operating and maintenance expenses. Management reviews and evaluates the
operations of three main segments--Onshore operations, Offshore operations and
Fort Cobb operations.

         During 2005, the Company sold its four-inch gathering line and
three-inch injection line as well as the Orginial Madisonville Agreements ("the
Sold Assets"), all of which were part of the Company's Madisonville Pipeline
Facility. The Company presented the operating results of those assets in the
accompanying consolidated statements of operations and cash flows for the three
months and nine months ended September 30, 2005 as discontinued operations. The
amounts for that period presented below have been adjusted to remove the
operating results of the Sold Assets and to reflect those amounts seperately as
discontinued operations.

Three Months Ended September 30, 2006 Compared to Three Months Ended September
30, 2005

Total Operations

                                                             Three Months
                                                         Ended September 30,
                                                     --------------------------
                                                        2006            2005
                                                     ----------      ----------
       Revenues..................................    $2,327,781      $2,671,624
       Operating margin..........................       523,180         633,926
       Depreciation and amortization.............       131,698         135,100

         Operating margins for the three months ended September 30, 2006
decreased $111,000 compared to the same period of the prior year. Onshore
operating margin decreased $61,000, Fort Cobb operating margins decreased
$27,000, and Offshore operating margins decreased by $23,000. These segments are
discussed individually below in greater detail.

Onshore Operations

                                                           Three Months
                                                        Ended September 30,
                                                     --------------------------
                                                        2006            2005
                                                     ----------      ----------
        Revenues.................................    $1,594,294      $1,957,998
        Operating margin.........................       246,283         307,589
        Depreciation and amortization............        63,443          67,364

         Operating margins for onshore operations decreased in the third quarter
of 2006 by $61,000 from the same period of the prior year. The decrease was
mainly due to unexpected maintenance expenses at the Company's Waxahachie
distribution system.

Offshore Operations

                                                            Three Months
                                                        Ended September 30,
                                                     --------------------------
                                                        2006            2005
                                                     ----------      ----------
        Revenues..................................   $  372,702      $  397,000
        Operating margin..........................      303,953         326,953
        Depreciation and amortization.............       38,014          37,693

         Operating margins for offshore operations decreased in the third
quarter of 2006 by $27,000 from the same period of the prior year. The decrease
was primarily due to declines in natural gas and liquids volumes transported
through the Company's Pirates' Beach and Shipwreck systems. Offshore volumes
fluctutate significantly based upon well production levels of a relatively small
number of wells which can be impacted by maintenance, weather, and drilling
activities.

                                       16

<PAGE>


Fort Cobb Operations

                                                            Three Months
                                                         Ended September 30,
                                                     --------------------------
                                                        2006            2005
                                                     ----------      ----------
        Revenues.................................    $  360,785      $  316,626
        Operating loss...........................       (27,056)           (616)
        Depreciation and amortization............        30,241          30,043

Operating loss for Fort Cobb operations increased in the third quarter of 2006
by $26,000 from the same period of the prior year. Fort Cobb's sales and
purchase volume increased in current period, however, the increase in the cost
of purchased gas offset against the increase in revenues. On May 30, 2006, the
Company filed with the Oklahoma Corporation Commission ("OCC") an Application
for a Change or Modification of Rates, Charges and Tariffs. On November 8, 2006,
the Company entered into a joint stipulation agreement that the Company
estimates will result in a $605,000 increase in Fort Cobb's revenue on an annual
basis. The joint stipulation agreement will not be effective unless approved by
the OCC. The Company expects the OCC to make its determination of whether to
approve the joint stipulation agreement during November 2006. There can be no
assurance that the OCC will approve the joint stipulation agreement or that the
OCC will not require material modification of the terms thereof.

Discontinued Operations
         Effective July 27, 2005, Gateway Pipeline Company and Gateway
Processing Company, wholly owned subsidiaries of the Company, sold their
four-inch gathering line and three-inch injection line as well as the Original
Madisonville Agreements to a third party buyer for approximately $2.7 million.
The Company retained the ten-inch sales line connected to the Madisonville
Pipeline Facility and became a transporter of gas from the Madisonville Plant to
the sales point. Due to the sale of these facilities in 2005, the operations of
the Madisonville Pipeline Facility has been reported as a discontinued
operation. Accordingly, the 2005 financial statement amounts have been adjusted
to give effect to this disposition as a discontinued operation. Interest has
been allocated to this discontinued operation based on the debt amounts directly
attributable to and secured by the underlying assets disposed in accordance with
Emerging Issue Task Force 87-24 "Allocation of Interest to Discontinued
Operations." For the three months ended September 30, 2005, the amount of
interest allocated to discontinued operations was $37,498.

                                       17

<PAGE>


     Following are the results of operations of the Madisonville pipeline
facility for the three months ended September 30, 2005:

                   Operating revenues (1).......       $   1,618,169
                   Operating costs and expenses (2)...     1,551,640
                   Other expenses, net (3)............       (40,502)
                                                       -------------
                   Income from discontinued
                     operations, net of taxes......... $      26,027
                                                       =============
                   Basic and diluted income per share
                     from discontinued operations..... $        --
                                                       =============
                   Weighted average number of
                     common shares outstanding:
                   Basic and diluted..................    16,920,854


     (1)  Operating revenues were $1,618,169 for the three months ended
          September 30, 2005. This revenue stream contains gas sales from the
          gas purchased from the Madisonville producer and the price upside
          revenue received when the market price of the gas that the Company
          receives is in excess of certain contract minimum prices.

     (2)  Operating costs and expenses were $1,551,640 for the three months
          ended September 30, 2005. This cost is comprised of the gas purchased
          at the well head from the Madisonville purchaser and other operating
          expenses.

     (3)  Other expenses were $40,502 for the three months ended September 30,
          2005. This cost is attributable to the 15% guaranteed return to ADAC
          as a result of the guarantee that ADAC provided on the $900,000
          Balloon Note that is extinguished upon their conversion of the ADAC
          guarantee into a 33.33% interest in the Madisonville project just
          prior to closing of the final funding, interest expense on the debt
          associated with the Madisonville pipeline facility, as well as
          depreciation expense.

Operations Support

          General and administrative expenses for the quarter decreased by
$306,000 compared to 2005, primarily due to decreased legal and accounting
expense as well as expenses due to the annual meeting and annual report being
held and prepared in May 2006 versus September 2005, partially offset by an
increase in insurance expense.

          Interest income fluctuates directly with the average amount of cash on
deposit.

          Interest expense fluctuates directly with the amount of outstanding
long-term debt and the amount of borrowings under the Company's bank revolving
credit agreement.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005

Total Operations

                                                             Nine Months
                                                         Ended September 30,
                                                      -------------------------
                                                         2006           2005
                                                      ----------     ----------
       Revenues..................................     $7,494,812     $6,905,004
       Operating margin..........................      1,641,571      1,445,324
       Depreciation and amortization.............        392,089        414,634

          Operating margins for the nine months ended September 30, 2006
increased $196,000 compared to the same period of the prior year. Onshore
operating margin increased $247,000, Offshore operating margins increased
$8,000, and Fort Cobb's operating margins decreased by $59,000. These segments
are discussed individually below in greater detail.

                                       18

<PAGE>



Onshore Operations

                                                             Nine Months
                                                         Ended September 30,
                                                      -------------------------
                                                         2006           2005
                                                      ----------     ----------
        Revenues.................................     $5,276,502     $4,740,180
        Operating margin.........................        843,280        596,628
        Depreciation and amortization............        191,725        203,332


        Operating margins for onshore operations increased by $247,000 for the
nine months ended September 30, 2006 compared to the same period of the prior
year. The increase was mainly due to increased throughput volumes at the
Company's Waxahachie distribution system and Madisonville pipeline, offset by
unexpected maintenance expenses on the Waxahachie system.

Offshore Operations

                                                             Nine Months
                                                         Ended September 30,
                                                      -------------------------
                                                         2006           2005
                                                      ----------     ----------
        Revenues..................................    $1,074,894     $1,036,863
        Operating margin..........................       837,776        829,753
        Depreciation and amortization.............       113,652        113,080

        Operating margins for offshore operations increased by $8,000 for the
nine months ended September 30, 2006 compared to the same period of the prior
year. The increase was due to an increase in transportation volumes on the
Company's Pirates' Beach system offset by a reduction in transporation volumes
on the Company's Shipwreck pipeline system. Offshore volumes fluctutate
significantly based upon well production levels of a relatively small number of
wells which can be impacted by maintenance, weather, and drilling activities.

Fort Cobb Operations

                                                             Nine Months
                                                         Ended September 30,
                                                      -------------------------
                                                         2006           2005
                                                      ----------     ----------
        Revenues.................................     $1,143,416     $1,127,961
        Operating margin.........................        (39,485)        18,943
        Depreciation and amortization............         86,712         98,222

        Operating margins for Fort Cobb operations decreased $59,000 during the
nine months ended September 30, 2006 compared to the same period of the prior
year primarily due to a increase in operating expense and the increase in the
cot of gas purchased. On May 30, 2006, the Company filed with the Oklahoma
Corporation Commission ("OCC") an Application for a Change or Modification of
Rates, Charges and Tariffs. On November 8, 2006, the Company entered into a
joint stipulation agreement that the Company estimates will result in a $605,000
increase in Fort Cobb's revenue on an annual basis. The joint stipulation
agreement will not be effective unless approved by the OCC. The Company expects
the OCC to make its determination of whether to approve the joint stipulation
agreement during November 2006. There can be no assurance that the OCC will
approve the joint stipulation agreement or that the OCC will not require
material modification of the terms thereof.

Discontinued Operations
        Effective July 27, 2005, Gateway Pipeline Company and Gateway
Processing Company, wholly owned subsidiaries of the Company, sold their
four-inch gathering line and three-inch injection line as well as the Original
Madisonville Agreements to a third party buyer for approximately $2.7 million.
The Company retained the ten-inch sales line connected to the Madisonville
Pipeline Facility and became a transporter of gas from the Madisonville Plant to
the sales point. Due to the sale of these facilities, the operations of the
Madisonville Pipeline Facility has been reported as a discontinued operation.
Accordingly, prior period financial statement amounts have been adjusted to give
effect to this disposition as a discontinued operation. Interest has been
allocated to this discontinued operation based on the debt amounts directly
attributable to and secured by the underlying assets disposed in accordance with
Emerging Issue Task Force 87-24 "Allocation of Interest to Discontinued
Operations." For the nine months ended September 30, 2005, the amount of
interest allocated to discontinued operations was $94,063

                                       19

<PAGE>


     Following are the results of operations of the Madisonville pipeline
facility for the nine months ended September 30, 2005:

              Operating revenues (1)................  $ 9,661,595
              Operating costs and expenses (2)......    9,161,310
              Other expenses, net (3)...............     (185,591)
                                                      -----------
              Income from discontinued
                  operations, net of taxes..........  $   314,694
                                                      ===========
              Basic and diluted income per share
                  from discontinued operations......  $      0.02
                                                      ===========
              Weighted average number of
                  common shares outstanding:
              Basic and diluted.....................   16,718,425

     (1)  Operating revenues were $9,661,595 for the nine months ended September
          30, 2005. This revenue stream contains gas sales from the gas
          purchased from the Madisonville producer and the price upside revenue
          received when the market price of the gas that the Company receives is
          in excess of certain contract minimum prices.

     (2)  Operating costs and expenses were $9,161,310 for the nine months ended
          September 30, 2005. This cost is comprised of the gas purchased at the
          well head from the Madisonville purchaser and other operating
          expenses.

     (3)  Other expenses were $185,591 for the nine months ended September 30,
          2005. This cost is attributable to the 15% guaranteed return to ADAC
          as a result of the guarantee that ADAC provided on the $900,000
          Balloon Note that is extinguished upon their conversion of the ADAC
          guarantee into a 33.33% interest in the Madisonville project just
          prior to closing of the final funding, interest expense on the debt
          associated with the Madisonville pipeline facility, as well as
          depreciation expense.

Operations Support

          General and administrative expenses for the nine months ended
September 30, 2006 decreased by $239,000 compared to 2005, primarily due to a
decrease in accounting and auditing charges and legal fees, which includes a
$144,000 negotiated reduction of legal fees from prior periods, offset by
increased insurance and salaries. The increase in salaries was due to the hiring
of a CEO and CFO of the Company during the second quarter of 2005 as both
compensated positions were vacant since November 2004.

          Interest income fluctuates directly with the average amount of cash on
deposit.

          Interest expense fluctuates directly with the amount of outstanding
long-term debt and the amount of borrowings under the Company's bank revolving
credit agreement.

Liquidity and Capital Resources

          Going forward, the Company's strategy is to maximize the potential of
currently owned properties, to construct new treating facilities and related
pipeline systems, and to acquire properties that meet its economic performance
hurdles. Until we are able to successfully raise additional growth capital, we
will execute our growth strategy through strategic alliances. Also, any
currently owned properties are subject to sale under the right circumstances
(valuation and timing) if the Company believes that the proceeds from any such
sale could be effectively redeployed.

          The Company is actively seeking additional outside capital to allow it
to accelerate the implementation of its growth strategy. Such new capital may
take any of several forms. If we are successful raising new capital, then we
believe the resultant projects will yield greater results to the Company in less
time.


                                       20

<PAGE>


          There is no guarantee that we will be able to raise outside capital or
be able to sell assets on terms favorable to the Company. Without a significant
infusion of new capital, we believe we can finance the construction of new
facilities and generate new cash flows to the Company, but at a pace that can be
supported by cash flows and our existing financing agreements.

          The Company had available cash of $720,055 at September 30, 2006.

          Net cash provided by operating activities totaled $222,147 for the
nine months ended September 30, 2006, compared to $713,509 from continuing and
discontinued operations during the same period of the previous year. The
decrease is in part due to the reduction in accounts payable and accrued expense
by $990,000 because of lower cost of gas purchased and general and
administrative expense offset by an increase in accounts receiveable and prepaid
expense of $754,000 and $200,000, respectively.

          Absent significant acquisitions or development projects, the Company
will continue to fund its operations through internally generated funds and
available cash and bank borrowings as needed. The Company believes its cash
flows from such sources will be sufficient to fund its ongoing operations for
the foreseeable future.

          In connection with the Gateway-ADAC Pipeline, L.L.C. partnership, the
Company paid to ADAC $22,294 and $64,343 for distributable net income for the
three and nine months ended September 30, 2006 and has a distribution payable to
ADAC in the amount of $21,196 as of September 30, 2006.

          Fort Cobb's revolving credit agreement provides for maximum available
borrowings of up to $250,000 through September 16, 2007. Principal outstanding
under the agreement accrues interest at a variable rate, based on the bank's
prime rate index plus 1.25%, with a minimum rate of 8%. The interest rate at
September 30, 2006 was 9.5%. The balance under the agreement is due upon demand,
or if no demand is made, at maturity, and is renewable annually. Costs of
obtaining this debt were capitalized as deferred loan costs and are being
charged to interest expense ratably over the maturity period of the note. Fort
Cobb uses the proceeds from time to time for general working capital purposes.
The agreement, along with the Fort Cobb Term Note discussed below, is
collateralized with the assets of Fort Cobb and guaranteed by the Company. The
Company had $180,022 of available borrowings under this agreement as of
September 30, 2006.

          Effective June 1, 2001, Fort Cobb borrowed $750,000 from a bank.
Principal outstanding under the note accrues interest at a variable rate, based
on the bank's prime rate index plus 1.25%, with a minimum rate of 8%. The
interest rate at September 30, 2006 was 9.5%. The note requires monthly
principal and interest payments of approximately $13,000, with the balance under
the note due June 1, 2008. Costs of obtaining this debt are being charged to
interest expense ratably over the term of the note. Fort Cobb used the proceeds
to refinance its previous borrowings from the Company, and the Company used the
proceeds for general corporate purposes.

          Effective March 2003, Fort Cobb borrowed $57,900 from a bank to buy
three replacement service vehicles. The note requires monthly principal and
interest payments of $1,387, including interest at 6.99%, and matures on March
25, 2007. On June 21, 2006, Fort Cobb purchased and financed a new vehicle. In
doing this, Fort Cobb rolled the remaining balance of the March 2003 loan, which
was $13,622, into a new note. This note requires monthly principal and interest
payments of $1,331, including interest at 7.49%, and matures on May 25, 2009.

          In October 2005, in connection with the settlement of a dispute with
Michael Fadden, the Company executed a trade note for $96,000, bearing no
interest, payable in twenty-four monthly installments of $4,000. The note is
secured by a letter of credit. Interest expense is being recognized over the
life of the note at an imputed rate of 10% and will be paid in full on October
1, 2007.

          At September 30, 2006, the Company's long-term debt to total
capitalization was approximately 3%.

          At September 30, 2006, the Company had outstanding letters of credit
for gas purchases totaling $1,202,000.

          Natural gas prices as represented by the NYMEX Henry Hub index
averaged $6.81 and $8.24 for the nine months ended September 30, 2006 and 2005.
The Company's operating margin is not significantly affected by the price of
natural gas since gas gathering and transportation are generally based on fee
arrangements and sales of natural gas are made under back-to-back purchase and
sales arrangements. However, natural gas prices can affect exploration and
development which can result in higher or lower volumes available for gathering
and transportation.

                                       21

<PAGE>


Off-Balance Sheet Arrangements

         The Company has no off-balance sheet arrangements at September 30,
2006; however, see Note 6 to the consolidated financial statements regarding
Commitments and Contingencies.

                                       22

<PAGE>


Item 3.   Controls and Procedures
          -----------------------

          Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act is accumulated and communicated to management, including the Company's
President and Chief Executive Officer and the Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

          An evaluation of the Company's disclosure controls and procedures (as
defined in Section 13(a)-15(e) and 15d-15(e)) of the Securities Exchange Act of
1934 was carried out under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer as of the end of
the period covered by this quarterly report. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (1) accumulated and communicated to the Company's
management in a timely manner, and (2) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.

          There were no changes in the Company's internal controls over
financial reporting that occurred during the quarter ended September 30, 2006
that have materially affected, or are reasonably likely to materially affect,
the internal control over financial reporting.


                                     Part II
                                     -------

Item 1.       Legal Proceedings
              -----------------

              None

Item 2.       Unregistered Sales of Securities and Use of Proceeds
              ----------------------------------------------------

              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
              --------

              31.1     Section 302 Certification of Chief Executive Officer
              31.2     Section 302 Certification of Chief Financial Officer
              32.1     Section 906 Certification of Chief Executive Officer
              32.2     Section 906 Certification of Chief Financial Officer

                                       23

<PAGE>



                                   SIGNATURES

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

                                            GATEWAY ENERGY CORPORATION

                                            /s/  Robert Panico
                                            -----------------------------------
                                                 Robert Panico
                                                 President and
                                                 Chief Executive Officer

                                            /s/  Christopher M. Rasmussen
                                            -----------------------------------
                                                 Christopher M. Rasmussen
                                                 Chief Financial Officer

          November 10, 2006
-----------------------------------
(Date)

                                       24