<PAGE>

                     U. S. SECURITIES AND EXCHANGE COMMISSION
                       Washington, D. C. 20549 
                               Form 10-QSB
 
             /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
               For the quarterly period ended November 30, 1996
                                              -----------------

            / / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
                                   EXCHANGE ACT
 
                         For the transition period from
                           ___________ to __________
            
                           Commission File No. 1-4766
                                               ------
 
                           GATEWAY ENERGY CORPORATION
    ----------------------------------------------------------------
    (Exact name of small business issuer as specified in its charter)
 
                  Delaware                         44-0651207
       --------------------------------      ---------------------------------
       (State or other jurisdiction of     (IRS Employer Identification Number)
        incorporation or organization)    

 
                         10842 Old Mill Road, Suite #5
                                Omaha, NE 68154
                                ---------------
                    (Address of principal executive offices)
 
    Issuer's telephone number (402) 330-8268
 
    Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/    No / /
 
                      APPLICABLE ONLY TO CORPORATE ISSUERS
 
    As of December 31, 1996 the Issuer had 39,706,186 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 November 30, 1996.                                         8

            Unaudited Consolidated Statements of Operations for 
            the three months and nine months ended November 30, 1996, 
            and November 30, 1995.                                          10

            Unaudited Consolidated Statements of Cash Flows for the 
            nine months ended November 30, 1996, and November 30, 1995.     11

            Notes to Consolidated Financial Statements                      12
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.
 
    The following management's discussion and analysis contains trend 
analysis and other forward-looking statements within the meaning of Section 
27A of the Securities Act of 1933, as amended, and Section 21E of the 
Securities Exchange Act of 1934, as amended. Actual results could differ 
materially from those projected in the forward-looking statements throughout 
this document as a result of the risk factors set forth below in the section 
entitled "Factors Affecting Future Results" and elsewhere in this document.
 
RESULTS OF OPERATIONS
 
    Henry Hub natural gas index prices averaged $2.13 and $2.38 for the three
months and nine months ended November 30, 1996, compared to $1.66 and $1.59 in
the comparable periods in 1995. El Paso Permian Basin index prices were also
higher reflecting continued demand for natural gas and lower storage volumes
than normal. These higher prices have resulted in increased drilling and
production activities and producers have also invested capital funds to rework
and improve production on existing wells. Natural gas prices continue to be
strong into January 1997 as heating degree days continue to be higher than
normal across the country.
 
<PAGE>

Three Months Ended November 30, 1996 Compared To November 30, 1995.
 
    The following table sets forth information for the three months ended
November 30, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                             INCREAE
                                                   1996          1995       (DECREASE)
                                               ------------  ------------  ------------
<S>                                            <C>           <C>           <C>
Operating Revenues                             $  4,977,000  $  3,147,600  $  1,829,400
Operating Margin                                  1,605,600       742,600       863,000
Depreciation, Depletion and Amortization            808,900       193,300       615,600
General and Administrative                          519,100       451,600        67,500
Other Income (Expense)                             (601,700)       54,000      (655,700)
Net Earnings (Loss)                                (296,800)      127,900      (424,700)
Loss Applicable to Common Stock                    (963,900)     (483,500)     (480,400)
</TABLE>
 
    OPERATING REVENUES. Operating revenues increased $1,829,400 or 58% over the
prior year period. Castex Energy 1995 LP ("Castex LP"), 66% owned by the Company
and formed in January 1996, had revenues from oil and gas sales of $1,409,500 in
the third quarter of 1996. Gas sales revenues from joint ventures increased
$91,900. A volume decrease of one percent was offset by price increases on
several joint venture systems. Revenues from Gateway Pipeline Company ("GPC")
operations increased $295,000 due to the purchase of Venture Resources, Inc. in
March 1996. Revenues from Fort Cobb Fuel Authority decreased $186,700 due to a
decrease in irrigation and drying volumes resulting from favorable weather
conditions.
 
    OPERATING MARGINS. Operating margins are defined as operating revenues less
gas purchases, and operation and maintenance expenses. Operating margins
increased $863,000 or 116% over the prior year period. Castex LP generated
$1,102,800 of operating margin for the period. Operating margins from Fort Cobb
were adversely affected by higher gas purchase prices and operating expenses.
Operating margins from joint venture operations reflect reduced margins on gas
purchased and resold and legal expenses on joint venture litigation.
 
    DEPRECIATION AND DEPLETION.  Depreciation and depletion increased $615,600
due almost entirely to $585,700 of depletion from Castex LP oil and gas
production. The remaining increase in depreciation is due to the acquisition of
Venture Resources, Inc. in March 1996.
 
    GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
by $67,500 or 15% over the prior year period. Expenses increased at GPC and
Castex Energy, Inc. ("Castex") by $55,000, reflecting increases in personnel to
manage Castex LP and other properties acquired. Corporate expenses increased by
$10,800 due to higher accounting and legal fees.
 
    OTHER INCOME (EXPENSE). Other income (expense) decreased $655,700 
primarily due to an increase in interest expense of $386,000. Interest 
expense increased because of $325,000 of interest on the bank line of credit 
obtained by Castex LP and $60,000 of other interest reflecting the cost of 
bridge loans and short-term notes. Other expense includes charges of $201,300 
for losses incurred on the disposal of assets. The Company sold its interest 
in Castex and discontinued Houston operations to reduce future general and 
administrative costs. Other income (expense) also decreased $70,500 due to 
the earnings of Castex LP attributable to minority interests.
 
<PAGE>

    NET EARNINGS (LOSS). Net earnings decreased $424,700 from the prior
year resulting in a net loss of $296,800, largely as the result of higher 
general and administrative costs of $67,500, and the loss on the disposal 
of assets of $201,300. Net earnings were also adversely affected by favorable 
weather conditions at Fort Cobb and reduced margins on gas purchased and 
resold.
 
    LOSS APPLICABLE TO COMMON STOCK.  The loss applicable to common stock
increased $480,400 over the prior year period. The increase was almost entirely
due to the decrease in net earnings. The increase in preferred stock dividends
from the additional sales of Series N Preferred Stock was offset by conversions
and redemptions of the Series G Preferred Stock.
 
    Nine Months Ended November 30, 1996 Compared To November 30, 1995.
 
    The following summary sets forth information for the nine months ended
November 30, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                             INCREASE
                                                  1996           1995       (DECREASE)
                                              -------------  ------------  ------------
<S>                                           <C>            <C>           <C>
Operating Revenues                            $  17,581,100  $  8,368,200  $  9,212,900
Operating Margin                                  5,162,600     1,960,900     3,201,700
Depreciation, Depletion and Amortization          2,269,800       513,600     1,756,200
General and Administrative                        1,584,300     1,240,800       343,500
Other Income (Expense)                           (1,506,300)      126,000    (1,632,300)
Net Earnings (Loss)                                (197,800)      300,600      (498,400)
Loss Applicable to Common Stock                  (2,893,200)   (1,426,200)   (1,467,000)
</TABLE>
 
    OPERATING REVENUES.  Operating revenues increased $9,212,900 or 110%. Of
this increase, $3,745,600 was attributable to gas and oil sales of Castex LP, 
acquired in January 1996. Joint venture revenues increased $3,554,900 due to 
a 4.6% increase in volumes and an increase of 48% in the average price for 
natural gas. Revenues from Fort Cobb decreased $191,300 due to a reduction in 
volumes sold of 23% or 52,000 MMBtu's. Retail prices to customers were 
slightly higher in 1996 due to higher gas purchase prices. Gas processing 
revenues increased $413,300 due to increases in throughput at the Company's 
processing plants and higher liquids prices.
 
    In 1996, GPC began marketing gas produced by an affiliate, such marketing
activities generated $1,064,000 in revenues during the current period. Also, 
GPC acquired Venture Resources, Inc. in March 1996; revenues attributable to 
this acquisition were $801,700 in this nine month period.
 
    OPERATING MARGINS.  Operating margins increased $3,201,700 or 163% over the
similar period in the prior year. Castex LP, acquired in January 1996, 
generated operating margins of $3,058,800. Joint venture operating margins 
increased $162,500 from higher volumes and prices which were partially offset 
by increased operating and maintenance expenses and legal expenses to enforce 
a joint venture gas purchase contract. Margins decreased at Fort Cobb by 
$218,300 due to lower volumes, increased cost of gas resulting from higher 
purchase prices, line losses and higher operating expenses.
 

<PAGE>

    Operating margins from acquisitions made in 1996 by GPC increased by
$165,000 in the nine month period.
 
    DEPRECIATION AND DEPLETION.  Depreciation and depletion increased by
$1,756,200 due primarily from depletion on Castex LP of $1,602,800. Other 
depreciation increases of $153,400 resulted from acquisitions made after 
November 1995, and minor capital expenditures on existing properties.
 
    GENERAL AND ADMINISTRATIVE EXPENSE.  General and administrative expenses
increased $343,500 due primarily to increases in costs for the Company's 
Houston operations. These costs increased $297,000 as a result of increased 
personnel costs to manage Castex LP and properties acquired, increased rent 
and increased legal and accounting fees. Corporate expenses increased by 
$46,300 largely due to increased accounting and legal fees.
 
    OTHER INCOME (EXPENSE). Other income (expense) decreased by $1,632,300 due
primarily to an increase in interest expense on the bank line of credit for 
Castex LP of $822,100. Other interest expense increased $236,300 due to costs 
of bridge loans and other short-term notes. Interest expense includes the 
cost of common stock issued for commitment and extension fees.
 
    Other expenses also includes charges of $401,200 for losses incurred on the
disposal of assets. The Company sold the Guymon pipeline and its interest in 
Castex and discontinued Houston operations to reduce future general and 
administrative expenses to levels appropriate for properties under management.
 
    NET EARNINGS (LOSS). Net earnings decreased $498,400 over the prior
period resulting in a net loss of $197,800. Operating margin increases were 
offset by higher depreciation, higher general and administrative costs, 
interest expense for Castex LP and bridge loans and the loss on the disposal 
of assets.
 
    LOSS APPLICABLE TO COMMON STOCK.  The loss applicable to common stock
increased $1,467,000 over the prior year period. In addition to the decrease 
in net earnings of $498,400 preferred stock dividends increased $256,800 
reflecting additional sales of Series N offset by conversions and redemptions 
of the Series G. In addition, preferred stock dividends includes $693,000 for 
the redemption of Series C Preferred Stock resulting from the Settlement and 
Purchase Agreement entered into with Pipeline Capital, Inc. in May 1996 (See 
Note 6).
 
LIQUIDITY AND CAPITAL RESOURCES
 
    During the nine months ended November 30, 1996 and 1995, the Company
generated net cash flow from operating activities of $1,845,500 and 65,900,
respectively. The net cash flows from operating activities plus dividend
reserves from Series N and Series G Preferred Stock were used to meet its
dividend obligations to the extent possible. In addition, the cash generated
from operating activities of Castex LP was used to reinvest in their drilling
program and to reduce the bank line of credit used to acquire the South Lake
Arthur interests.
 

<PAGE>


    During the first nine months of fiscal 1997, the Company raised $1,699,000,
before offering costs, from the sale of Series N Preferred Stock. The Company 
also issued promissory notes for bridge loans in the amount of $650,000 and 
raised $739,000 through the sale of two year convertible notes. The Company 
also issued promissory notes in the amount of $150,000 to certain 
shareholders and obtained a $400,000 operating line of credit from an area 
bank.
 
   The Company used the proceeds from the above financings to invest $1,400,000
in natural gas gathering systems and to repay bridge loans issued in 
connection with the purchase of these systems. The proceeds from the 
promissory notes to stockholders and the operating line of credit were used 
to provide working capital for the Company and to make a gas purchase deposit 
of $295,000.
 
    In July 1996, Castex LP acquired additional working interests in
the South Lake Arthur Field for $3,371,400. Castex LP has also expended 
$1,265,000 for drilling costs and additional prospects. Castex LP plans to 
drill several additional wells in the next several months. Funds for the 
acquisition and the costs of drilling were supplied by additional draws from 
the bank line of credit and by cash flows from the partnership's operating 
activities.
 
    As of November 30, 1996, the Company had a working capital deficit of
$2,232,000 which includes bridge loans of $650,000 which are expected to be 
repaid through the sale of a gas pipeline and other permanent financing. The 
working capital deficit is caused largely by the current maturity portion of 
the bank line of credit in Castex LP. Although this results in a temporary 
deficit, cash flow from Castex LP is expected to be sufficient to meet this 
obligation.
 
    The Company has temporarily suspended the payment of Series G dividends
effective with the October 1 payment. Revenues from the properties purchased 
with Series G proceeds were not sufficient to meet the dividend requirements 
and the $295,000 deposit requirement with a supplier of gas on one of the 
Company's delivery systems. The Company has also suspended the payment of 
dividends on all other series of preferred stock effective January 1, 1997.
 
   In November 1996, the Company retained the services of an investment advisor
to assist it in developing a plan to recapitalize the Company and improve its
balance sheet. The Board of Directors has approved a Recapitalization Plan
("Plan") which will allow the Company to eliminate its preferred dividend
requirements and improve its cash flow.
 
    The Plan must be approved by a majority of each series of preferred stock.
The Plan, as presently contemplated, consists of a conversion in part and 
redemption in part of each outstanding share of preferred stock. Each $1,000 
of preferred stock will receive 1) a 10% Subordinated Debenture of $330, 2) 
common stock, and 3) common stock warrants. Subsequent to acceptance of the 
Plan, the preferred stockholders will own approximately 75% of the 
outstanding common stock. The Plan also requires a reverse stock split of 1 
share for each 25 shares of common stock which must be approved the common 
stockholders. The Company expects common shareholder approval of the reverse 
split by January 31, 1997, and preferred stockholder approval of the Plan by 
approximately February 28, 1997.
 

<PAGE>

    Management anticipates that annual cash flow will be increased by
approximately $1.5 million which represents the difference in dividends on 
preferred stock and the interest expense on the Subordinated Debentures. In 
addition, the Company has terminated its employees in Houston and entered 
into a management contract which is expected to reduce general and 
administrative costs by as much as $400,000 annually. The Company is also 
seeking ways to reduce its reliance on joint venture partners in order to 
reduce the costs associated with managing these properties.
 
FACTORS AFFECTING FUTURE RESULTS
 
    Approximately 85% of the Company's gathering and processing revenues are
received under "back to back" contracts where the Company, or its joint 
venture partners, purchase gas at the wellhead, transport the gas and sell it 
to one or more customers. Accordingly, a substantial majority of the 
Company's revenues are affected by the price of natural gas. During times 
when warm winter weather conditions prevail, manufacturing needs are down or 
the supply of natural gas in the market is up, prices will be lower and the 
Company's revenues will be adversely affected. Substantially all of the 
Company's properties are managed by joint venture partners or other third 
parties. The ability of such parties to manage the properties efficiently 
affects operating costs and therefore the net revenues that flow through to 
the Company.
 
    Over the next several months, the Company needs to reduce the cash payments
for dividends. As discussed above under "Liquidity and Capital Resources", the
Company believes the Recapitalization Plan will accomplish this objective. There
can be no assurances, however, that the Company will be successful in
implementing this Plan or that the preferred and common shareholders will
approve the Plan. The state of the natural gas market, the general economic and
stock market conditions and the long-term investment value of the Company's
operating properties will have a significant impact upon the Company's ability
to raise capital and generate funds.
 
    The potential of the holders of common stock of the Company to derive
long-term value for their investment is dependent upon the profitable 
operation of the Company's properties, the long-term investment value of the 
Company's properties, and the ultimate ability of the Company to effect the 
Recapitalization Plan discussed above. The ability of the Company to derive 
such long-term value for the holders of the common stock is dependent upon a 
number of factors, many of which are outside of the control of the Company, 
including the capability of third parties to operate the wells drilled and 
adequate reserves for existing wells within the purview of the Company's 
gathering system properties, the ability of the third party operators to 
secure new gas supply and distribution contracts on profitable terms, the 
availability of new properties at prices that make profitable operations 
possible and the availability of appropriately priced financing to secure new 
properties.
 
<PAGE>

           GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED BALANCE SHEET
                        NOVEMBER 30, 1996 
                             (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<S>                                                                <C>
CURRENT ASSETS
  Cash and cash equivalents                                        $1,545,500
  Restricted cash                                                      58,100
  Trade accounts receivable, net                                    4,480,600
  Prepaid expenses and other assets                                   802,100
                                                                    ---------
    Total current assets                                            6,886,300
PROPERTY AND EQUIPMENT--AT COST
  Gas gathering, processing and transportation                     12,280,200
  Oil and gas properties, using full cost accounting               16,238,800
  Office furniture and other equipment                                414,000
                                                                    ---------
                                                                   28,933,000
  Less accumulated depreciation, depletion and amortization        (3,714,300)
                                                                   ---------
                                                                   25,218,700
OTHER ASSETS
  Note receivable--related party                                      293,900
  Other                                                               671,000
                                                                    ---------
                                                                      964,900
                                                                    ---------
                                                                  $33,069,900
                                                                    ---------
                                                                    ---------
</TABLE>
 
           The accompanying notes are an integral part of this statement.
 
<PAGE>

             GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEET
                        NOVEMBER 30, 1996
                             (UNAUDITED)
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
<TABLE>
<S>                                                            <C>
CURRENT LIABILITIES
  Notes payable                                                  $1,133,100
  Current maturities of long-term debt                            2,973,500
  Accounts payable                                                3,742,000
  Accrued expenses and other liabilities                            720,300
  Preferred dividends payable                                       549,400
                                                                 ----------
    Total current liabilities                                     9,118,300
Long-term debt, less current maturities                          10,111,500
Minority interests                                                1,077,400
Preferred stock of subsidiary                                       466,500
Mandatory redeemable preferred stock                              7,809,500
STOCKHOLDERS' EQUITY
  Preferred stock                                                     9,400
  Common stock- authorized, 75,000,000 shares of $.01 par        37,357,400
    value; issued and outstanding, 37,357,400 shares
  Additional paid-in capital                                     10,926,800
  Accumulated deficit                                            (6,823,100)
                                                                 ----------
    Total stockholders' equity                                    4,486,700
                                                                 ----------
                                                                $33,069,900
                                                                 ----------
                                                                 ----------
</TABLE>
 
           The accompanying notes are an integral part of this statement.
 
<PAGE>

   
                            GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF OPERATIONS 
                                             (Unaudited)
 
<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED           NINE MONTHS ENDED
                                          NOVEMBER 30                  NOVEMBER 30
                              ------------------------------  ----------------------------
                                    1996            1995           1996           1995
                              ---------------  -------------  -------------  -------------
<S>                           <C>              <C>            <C>            <C>          
OPERATING REVENUES
  Natural gas sales              $4,477,600   $ 2,663,300  $  15,532,000  $   6,951,400
  Transportation                    261,400       210,800        824,100        619,700
  Processing and other              238,000       273,500      1,225,000        797,100
                               ------------  ------------  -------------  -------------
                                  4,977,000     3,147,600     17,581,100      8,368,200
OPERATING COSTS AND EXPENSES
  Cost of natural gas
    purchased                     2,347,800     1,828,700      9,599,400      4,755,700
  Operation and maintenance       1,023,600       576,300      2,819,100      1,651,600
  General and administrative        519,100       451,600      1,584,300      1,240,800
  Depreciation and depletion        808,900       193,300      2,269,800        513,600
                                 ---------- -------------  -------------  -------------
                                  4,699,400     3,049,900     16,272,600      8,161,700
                                 ---------- -------------  -------------  -------------
    Operating profit                277,600        97,700      1,308,500        206,500
OTHER INCOME (EXPENSE)
  Interest income                    47,100        26,000        106,800         73,000
  Interest expense                 (412,000)      (26,000)    (1,107,400)       (49,000)
  Minority interests                (35,500)       35,000       (104,500)        83,200
  Loss on disposal of assets       (201,300)       19,000       (401,200)        18,800
                                ----------- -------------  -------------  -------------
                                   (601,700)       54,000     (1,506,300)       126,000
                                ----------- -------------  -------------  -------------
    Earnings (Loss) before      
      income taxes                 (324,100)      151,700       (197,800)       332,500
Income taxes                        (27,300)       23,800              -         31,900
                               ------------ -------------  -------------  -------------
    NET EARNINGS (LOSS)            (296,800)      127,900       (197,800)       300,600
Provision for preferred         
  dividends, including
  amortization of Series G
  offering costs of
  $120,500, $114,300,
  $361,600 and $342,800,
  respectively, and Series C
  redemption cost of $-0- and
  $693,000 in 1996 (Note 6).        667,100        611,400      2,695,400  $   1,726,800
                               ------------  -------------  -------------  -------------

Loss applicable to common      
  stock                          $(963,900)   $   (483,500) $  (2,893,200) $  (1,426,200)
                               ------------  -------------  -------------  --------------
                               ------------  -------------  -------------  --------------

Loss per common share             $(0.03)           (0.02) $       (0.09) $       (0.06)
                              ------------  -------------  -------------  ------------- 
                              ------------  -------------  -------------  ------------- 

Number of shares used in      
  computing the loss per
  common share                  35,536,200     26,061,100     33,651,400     25,916,000
                              ------------  -------------  -------------  ------------- 
                              ------------  -------------  -------------  ------------- 
</TABLE>
 
          The accompanying notes are an integral part of these statements.
 
<PAGE>


                     GATEWAY ENERGY CORPORATION AND SUBSIDIARIES 
                        CONSOLIDATED STATEMENTS OF CASH FLOWS 
                                    (Unaudited)
 
<TABLE>
<CAPTION>
                                                                        NINE MONTHS ENDED
                                                                           NOVEMBER 30,
                                                                    --------------------------
<S>                                                                 <C>           <C>
                                                                        1996          1995
                                                                    ------------  ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities-
  Net earnings (loss)                                               $   (197,800) $    300,600
Adjustments to reconcile net earnings (loss)to net cash provided
  by operating activities-
  Depreciation, depletion and amortization                             2,269,800       513,600
  (Gain) loss on disposal of assets                                      401,200       (30,700)
  Amortization of deferred income                                        --            (33,300)
  Minority interest in net income (loss) of subsidiaries                 104,500       (83,200)
  Compensation accrued under stock award plans                            (2,300)       30,300
  Stock issued for fees and interest                                     115,800        31,500
Increase (decrease) in cash and cash equivalents, net of
  businesses sold, resulting from changes in-
  Trade accounts receivable                                             (303,600)     (286,900)
  Prepaid expenses and other current assets                             (474,400)     (399,800)
  Accounts payable                                                      (274,000)       57,800
  Accrued expenses and other liabilities                                 206,300       (34,000)
                                                                    ------------  ------------
    Net cash provided by operating activities                          1,845,500        65,900
                                                                    ------------  ------------
Cash flows from investing activities-
  Capital expenditures                                                (1,462,800)     (924,200)
  Acquisition of businesses, net of cash acquired of $79,900 in
    1996                                                              (4,833,800)   (1,177,100)
  Other                                                                  (10,400)      (43,300)
  Proceeds from sale of properties                                       631,600       220,000
                                                                    ------------  ------------
    Net cash used in investing activities                             (5,675,400)   (1,924,600)
                                                                    ------------  ------------
Cash flows from financing activities-
  (Increase) decrease in escrowed cash                                   747,200       412,100
  Payments on borrowings                                              (3,005,100)      (58,500)
  Proceeds from borrowings                                             6,036,800       --
  Redemption of preferred stock                                          (97,000)      --
  Net proceeds from sale of preferred stock                            1,437,400     2,657,400
  Preferred dividends paid                                            (1,316,500)   (1,363,400)
  Issuance of short term notes                                           --            235,000
                                                                    ------------  ------------
    Net cash provided by financing activities                          3,802,800     1,882,600
                                                                    ------------  ------------
Net change in cash and cash equivalents                                  (27,100)       23,900
Cash and cash equivalents at beginning of period                       1,572,600       337,900
                                                                    ------------  ------------
Cash and cash equivalents at end of period                          $  1,545,500  $    361,800
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>
 
          The accompanying notes are an integral part of these statements.
 
<PAGE>
                  GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    (1) Basis of 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 generally accepted
accounting principles.
 
   The consolidated financial statements include the accounts of Gateway Energy
Corporation ("GEC"), its joint venture investments, and its majority owned
subsidiaries, Gateway Pipeline Company ("GPC"), Fort Cobb Oklahoma Irrigation
Fuel Authority L.L.C. ("Fort Cobb") Shoreham Gathering Company ("SGC"), Castex
Energy, Inc. ("Castex"--See Note 7), Castex Energy 1995 LP ("Castex LP") and
Ozark Natural Gas Company ("Ozark"), all collectively referred to as the
"Company". The Company's investments in its joint ventures are accounted for
using the proportional consolidation method. All significant intercompany
transactions have been eliminated in consolidation.
 
    The Company purchases, develops, owns, and operates natural gas gathering
pipeline systems and processing plants and related facilities in the 
southwestern states of Texas, New Mexico, Oklahoma and Louisiana, both 
internally and through joint ventures. The Company also owns a local natural 
gas distribution company in Oklahoma and conducts oil and gas development and 
production activities, primarily in Louisiana.
 
    (2) Acquisitions
 
   Effective March 1, 1996, GPC acquired all of the outstanding common stock of
Venture Resources, Inc. ("Venture") for $1,300,000 in cash. Effective May 1, 
1996, GPC also acquired the remaining partnership interest in a gas gathering 
system in Oklahoma for $100,000 in cash. Venture's assets include gas 
gathering systems in Louisiana, Texas and Oklahoma consisting of 50 miles of 
various size pipe and related rights of way, easements and other facilities. 
The purchase was accounted for using the purchase method of accounting and 
the acquisition cost was equal to the fair value of the assets acquired. The 
acquisitions were financed using $750,000 of proceeds from the issuance of 
Series N Preferred Stock and the issuance of bridge loans in the amount of 
$650,000.
 

<PAGE>

    Effective July 1, 1996, the Company acquired additional oil and gas working
interests in the South Lake Arthur Field in Louisiana. The purchase price of
$3,371,400 was provided by cash generated from operations of Castex LP and
additional funds advanced under the Company's bank credit facility initiated in
January 1996. These working interests were in the same wells in which interests
were purchased in January 1996.
 
    Assuming the acquisitions noted above occurred at the beginning of fiscal
1995, the pro forma consolidated results of operations for the three months and
nine months ended November 30, 1996 and 1995 would be as follows:
 
<TABLE>
<CAPTION>
                                                  1996                          1995
                                      ----------------------------  ----------------------------
<S>                                   <C>            <C>            <C>            <C>
                                      THREE MONTHS    NINE MONTHS   THREE MONTHS    NINE MONTHS
                                      -------------  -------------  -------------  -------------
Revenues                               $ 4,977,000   $  18,291,000   $ 3,649,300   $  10,269,900
Net earnings (loss)                       (296,800)       (113,800)      183,400         491,600
Loss applicable to common stock           (963,900)     (2,809,200)     (448,000)     (1,313,200)
Loss per common share                        (0.03)          (0.08)        (0.02)          (0.05)
</TABLE>
 
    (3) Notes Payable
 
    Notes payable consists of the following at November 30, 1996.
 
<TABLE>
        <S>                                   <C>
        Bank Operating Line of Credit         $ 395,000
        Bridge loan                             650,000
        Other                                    88,100
                                              ---------
                                             $1,133,100
                                              ---------
                                              ---------
</TABLE>
 
    On September 27, 1996, the Company executed a Promissory Note with Intrust
Bank for a maximum amount of $400,000. The note bears interest at the rate of 
9.25% and is due September 27, 1997. The Company may withdraw funds against 
the Note for operating expenses. As of November 30, 1996, the outstanding 
balance was $395,000. The proceeds were used to provide a deposit for gas 
purchases on a delivery system and other operating expenses. The Note is 
secured by the Company's ownership interest in the El Paso Joint Venture and 
further guaranteed up to $200,000 by certain officers and shareholders of the 
Company.
 
    On May 31, 1996, the holder of a $650,000 promissory note issued in return
for a bridge loan, agreed to extend the principal payment date until February
28, 1997. The Company issued 250,000 shares of common stock in connection with
such extension and will amortize the cost over the remaining period of the note.
 
<PAGE>

    (4) Long-term Debt
 
    Long-term debt at November 30, 1996, consists of the following:
 
<TABLE>
        <S>                                  <C>
        Bank credit agreement                $11,674,600
        Two-year convertible notes               739,200
        Shareholders                             150,000
        Other                                    521,200
                                             -----------
                                              13,085,000
                                                  
        Less Current Maturities                2,973,500
                                             -----------
                                             $10,111,500
                                             -----------
                                             -----------
</TABLE>
 
    In July 1996, the Company increased its borrowings by $3,371,400 under the
bank credit agreement to purchase additional interests in the South Lake 
Arthur Field. The Company also issued two-year convertible notes in the 
amount of $739,200, the proceeds of which were used to repay bridge loans 
issued in connection with the acquisition of Venture Resources, Inc. 
Eighty-seven percent of the common stock of Venture has been pledged as 
collateral for these notes.
 
    The Company issued a promissory note to an investment banker in the amount
of $200,000 in April 1996 in consideration of fees due under a financing 
agreement. Payments of $9,200 are due monthly over a twenty-four month 
period. As more fully described in Note 6, the Company issued a promissory 
note for the repurchase of Series C Preferred Stock.
 
    (5) Sale of Guymon Pipeline
 
    On November 1, 1996, the Company's subsidiary, Gateway Pipeline Company,
completed the sale of the Guymon Pipeline in Texas County, Oklahoma for 
$575,000 in cash. As a result of the sale, the Company has recorded a 
$215,500 loss in the statement of operations, $200,000 of which was recorded 
in the second quarter of 1996.
 
    (6) Sponsorship Agreement
 
    The Company had a sponsorship agreement with Pipeline Capital, Inc. ("PCI")
whereby PCI raised funds and assisted the Company in acquiring properties. 
For these services, the agreement provided for an "Exit Amount" due PCI five 
or seven years from the date of the agreement. Series C Preferred Stock was 
issued to PCI to evidence this Exit Amount. The Company and PCI disagreed on 
the calculation of the Exit Amount and the continued involvement of PCI in 
obtaining capital and securing properties in light of changes in the 
Company's operations. Therefore, on May 6, 1996, the Company and PCI entered 
into a Settlement and Purchase Agreement which provides for the following:

<PAGE>

  -  The Company repurchased the 56.5 shares of Series C Preferred Stock
     owned by PCI, representing its right to receive the Exit Amount and the
     10% interest in defined net operating cash flows for $480,000 represented
     by a promissory note requiring payments of $10,000 per month commencing
     July 1, 1996 and ending June 1, 2000. The Company may, at its option,
     prepay all of the note at a discount rate of 8%.
 
  -  PCI executed a new promissory note in the amount of $278,728 plus
     interest at 7% per annum representing all advances to PCI to date. All
     principal and interest on this note will be offset against the amounts
     which are payable to PCI upon a "Payment Event" under the Series O
     Preferred Stock, described below.
 
  -  The Company issued to PCI one share of its Series O Preferred Stock
     which is non-voting and has no dividend rights. Upon the following
     described events, payments will be made to PCI as described below:
 
     1)  In the event of the merger of the Company where it is not the
         surviving corporation, the sale of all, or substantially all, of its
         assets or the sale or exchange of a majority or more of the
         outstanding common stock, PCI shall be entitled to receive 10% of the
         consideration realized in the transaction.
 
     2)  In the event of the liquidation and dissolution of the Company after
         payment of all debts and obligations senior to the Series O Stock and
         any distributions required to be made to the holders of the Series G
         Preferred Stock, PCI shall receive a payment equal to 10% of the
         remaining assets of the Company.
 
     3)  If neither of the events described in (1) or (2) above have occurred
         by July 1, 2000, the Company and PCI will agree upon an investment
         banking or appraisal firm to value the Company and PCI shall receive
         an amount equal to 10% of the fair market value appraisal. The
         Company must pay $250,000 at closing, any remaining balance up to
         $500,000 within 12 months after closing, and if there is any
         remaining balance, half will be paid within 24 months of closing. Any
         balances bear interest at the rate of 8% per annum.
 
        In the event the Company pays less than $5,000 on any monthly payment
         under the $480,000 promissory note described above and has failed to
         pay any remaining amount within 30 days, PCI may either accelerate
         all remaining payments under the note or shall have a one time right
         to increase the 10% amounts described in subparagraphs (1) through
         (3) above to 20%. Each of the events in subparagraphs (1) through (3)
         above constitute a Payment Event and all principal and interest
         remaining due under the $278,728 PCI note shall be offset against
         those amounts.
 

<PAGE>

  -  The Company has agreed to consider on a property-by-property basis,
     engaging PCI to act as a finder and complete all reasonable and necessary
     due diligence on future property acquisitions and to pay fees based on a
     formula for all such properties actually acquired.
 
    As a result of this settlement the Company recorded, during the first
quarter, a charge to earnings of $693,000. This charge includes the discounted
present value of the note payable to PCI for the purchase of Series C Preferred
Stock and the amount of the note receivable from PCI described above. No
external appraisal of the Company has been performed, however, the amount
represents the Company's estimate of the value of Series O Preferred Stock
issued to PCI. Prospectively, the Company will adjust the Series O
Preferred Stock value through charges to earnings for future changes in the
estimated fair value of the Company.
 
    (7) Sale of Castex Energy, Inc.
 
    Effective November 1, 1996, the Company sold its sixty percent (60%)
interest in Castex Energy, Inc. ("Castex") to the minority shareholders of 
Castex in exchange for the cancellation and forgiveness of certain 
obligations. The financial statements for the three months and nine months 
ended November 30, 1996, include a net loss on this transaction of $57,300.
 
    (8) Subsequent Events
 
   On January 10, 1997, the Company sold certain pipeline properties of Venture
for $346,600 in cash. The sale will result in a gain of approximately 
$60,000. The proceeds of the sale will be used to repay a portion of a bridge 
loan due February 28, 1997.
 
    Effective December 1, 1996, the Company has terminated all of the employees
of Gateway Pipeline Company. The Company has set up a reserve as of November 
30, 1996, primarily for a disposal of assets associated with the termination, 
in the amount of $130,000.
 
    (9) Liquidity and Recapitalization
 
    The Company has temporarily suspended the payment of Series G dividends
effective with the October 1 payment. Revenues from the properties purchased 
with Series G proceeds were not sufficient to meet the dividend requirements 
and the $295,000 deposit required by the supplier of gas on one of the 
Company's delivery systems. The Company has also suspended the payment of 
dividends on all other series of preferred stock effective January 1, 1997.
 
   In November 1996, the Company retained the services of an investment advisor
to assist it in developing a plan to recapitalize the Company and improve its 
balance sheet. The Board of Directors has approved a Recapitalization Plan 
("Plan") which will allow the Company to eliminate its preferred dividend 
requirements and improve its cash flow.
 

<PAGE>

    The Plan must be approved by a majority of each series of preferred stock.
The Plan, as presently contemplated, consists of a conversion in part and 
redemption in part of each outstanding share of preferred stock. Each $1,000 
of preferred stock will receive 1) a 10% Subordinated Debenture of $330, 2) 
common stock, and 3) common stock warrants. Subsequent to acceptance of the 
Plan, the preferred stockholders will own approximately 75% of the 
outstanding common stock. The Plan also requires a reverse stock split of 1 
share for each 25 shares of common stock.
 
    On January 13, 1997, the Company mailed to its common stockholders a
Solicitation of Consents of Stockholders asking the stockholders to approve 
the 1 for 25 reverse split of the outstanding common stock and to reduce the 
authorized common shares from 75,000,000 to 10,000,000 and the authorized 
preferred shares from 1,750,000 to 10,000. The Company expects common 
shareholder approval by January 31, 1997.

    (10) Issuance of Common Stock

    Common stock outstanding increased from 27.0 million shares on 
February 29, 1996, to 37.4 million shares at November 30, 1996. This increase 
was due to i) 7,820,964 shares issued in connection with the conversion of 
mandatorily redeemable and other preferred stock, ii) 941,250 shares issued 
in connection with guaranties, extensions and interest related to short-term 
financings, iii) 1,366,766 shares issued in connection with Series N 
preferred stock offering, and iv) 251,167 shares issued in connection with 
the two-year convertible notes.

<PAGE>

                                    PART II
 
ITEM 1. LEGAL PROCEEDINGS
 
    None
 
ITEM 2. CHANGES IN SECURITIES
 
    None
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
    (b)As of January 15, 1997, the Company is in arrears on its preferred stock
dividends as follows:
 
                                                            DATE
                                             AMOUNT       LAST PAID
                                           ----------  ---------------
Series G                                   $  350,800  Sept. 1, 1996
Series N                                   $   56,000   Dec. 1, 1996
Other                                      $  113,337   Oct. 1, 1996
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
  SECURITY HOLDERS
 
        a) Solicitation of Consents in Lieu of Special Meeting dated January
    13, 1997.
 
        b) The solicitation asks shareholders to approve the following matters:
 
             i)  Reverse stock split of 1 share for 25 shares.

            ii)  Reduce authorized common shares from 75,000,000 to 10,000,000.

           iii)  Reduce authorized preferred shares from 1,750,000 to 10,000.
 
ITEM 5. OTHER INFORMATION
 
    None
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
 
    a) Exhibits:
 
       11  Statement of Computation of Per Share Earnings, filed herewith.
 
       21  Subsidiaries, filed herewith.
 
       27  Financial Data Schedule, filed herewith.
 
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned thereunto duly authorized.
 
                                GATEWAY ENERGY CORPORATION

                                  /s/ NEIL A. FORTKAMP
                                ------------------------------
                                   Chief Financial Officer
 
    January 20, 1997
------------------------
         (Date)