<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  AUGUST 31, 1998
                                       
       [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
                                       
                        For the transition period from
                            __________to __________
                                       
                          Commission File No. 1-4766
                                       
                                       
                          GATEWAY ENERGY CORPORATION
     ----------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)
                                       
                                       
                     Delaware                        44-0651207
      -------------------------------    -----------------------------------
      (State or other jurisdiction of    (IRS Employer Identification Number)
       incorporation or organization)

                        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 September 30, 1998 the Issuer had 14,782,500 shares of its common
stock outstanding.

     Transitional Small Business Disclosure Format:  Yes____ No___X___
<PAGE>


                                  FORM 10-QSB
                                       
                                    PART  I

<TABLE>
<CAPTION>
<S>       <C>                                                            <C>
ITEM  1.  FINANCIAL STATEMENTS
                                                                         Page
          Unaudited Consolidated Balance Sheet
          as of August 31, 1998.                                          10

          Unaudited Consolidated Statements of Operations for
          the three months and six months ended August 31, 1998,
          and August 31, 1997.                                            11

          Unaudited Consolidated Statements of Cash Flows for
          the six months ended August 31, 1998, and August 31, 1997.      12

          Notes to Consolidated Financial Statements                      13
</TABLE>

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

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

RESULTS OF OPERATIONS

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

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


                                      2
<PAGE>


     The Henry Hub Index price for gas delivered in southern Louisiana averaged
$2.11 in the second quarter of fiscal 1999, compared with $2.26 in the prior
quarter and $1.93 in the same quarter of the prior year.  Natural gas prices
have remained firm in spite of the downward pressure on oil prices.  Natural
gas producers continue to exploit new drilling opportunities.

THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO AUGUST 31, 1997

     The following table sets forth information for the three months ended
August 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                           1998        1997
                                           ----        ----
                                                     (restated)
<S>                                     <C>         <C>
     Operating Revenues                 $2,554,800  $ 3,481,400
     Operating Margin                      690,800      628,400
     Depreciation and Amortization         185,400      228,100
     General and Administrative            709,500      333,900
     Other Income (Expense)                 14,200     (300,100)
     Net Loss                             (222,700)    (245,500)
</TABLE>

     Operating revenues declined $926,600 in the second quarter of fiscal 1999
from the same quarter of the prior year.  Sales attributable to the Company's
interests in properties sold to Shoreham were $1,814,400, and oil and gas
production revenues were $60,000 in fiscal 1998.  These decreases were
partially offset by the startup of Gateway Energy Marketing, by higher volumes
at Fort Cobb and increased revenues in offshore operations.

     Operating margins, that is revenues less cost of gas and operating
expenses, increased $62,400 in fiscal 1999 over the same quarter of the prior
year.  Operating margins from the joint ventures sold to Shoreham and the oil
and gas properties were $429,400 in fiscal 1998.  That shortfall was more than
made up by increased volumes at Fort Cobb, by the increased offshore activity
and the startup of Gateway Energy Marketing.  In fiscal 1999, the Company has
primarily focused on enhancing and increasing the profitability of its existing
systems.

     General and administrative expenses increased $375,600 in the second
quarter of fiscal 1999 compared to the same quarter of the prior year.  During
1997 the Company changed its management philosophy and opted to terminate all
of its joint venture arrangements and operate and manage its properties with
company employees.  In connection therewith, the Company hired management and
support staff who manage its operations from the office in Houston.  This
change in strategy added significant general and administrative costs,
reflecting costs of additional personnel, office rent and telecommunications,
legal fees and other office costs.  The second quarter of fiscal 1999 includes
$125,000 of costs  expected to be incurred to effect a move of its corporate
headquarters to Houston, Texas.  These costs include expected employee
severance payments and other moving expenses.

     General and administrative costs are expected to be approximately the 
same after the move because Houston staff will be added to replace most of 
the employees who opted not to move with the Company, and because office 
costs are expected to be relatively higher in the Houston, Texas metropolitan 
area compared with Omaha, Nebraska.  However, the 

                                      3
<PAGE>


Company expects to continue to improve the profitability of its current 
properties and is actively seeking to acquire or invest in new properties.

     Interest expense decreased $316,800 in the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998.  Interest expense in fiscal 1998
includes $306,800 of interest expense related to changes to certain convertible
promissory notes in August 1997.

     The increase in net loss for the quarter to $222,700 reflects (i) the
effect of the fiscal 1998 settlement with Shoreham and related sale of joint
venture interests, (ii) the fiscal 1998 sale of the Castex LP partnership
interest, and (iii) higher general and administrative expenses to manage and
operate properties, seek out additional investment opportunities and relocate
the accounting, financial and administrative functions to Houston, Texas in
fiscal 1999.  These negative effects were partially offset by increased volumes
and revenues at Fort Cobb and offshore properties and by decreased depreciation
expense and higher interest income in fiscal 1999.

SIX MONTHS ENDED AUGUST 31, 1998 COMPARED TO AUGUST 31, 1997

     The following summary sets forth information for the six months ended
August 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                           1998       1997
                                           ----       ----
                                                    (Restated)
<S>                                     <C>         <C>
     Operating Revenues                 $4,079,800  $6,477,300
     Operating Margin                      881,300   1,192,500
     Depreciation and Amortization         363,100     455,400
     General and Administrative          1,244,600     623,800
     Other Income (Expense)               (47,500)    (283,600)
     Net Loss                            (779,200)    (185,100)
</TABLE>

     Operating revenues declined $2,397,500 in the six months ended August 31,
1998 from the same period of the prior year.  Sales attributable to the
Company's interests in properties sold to Shoreham accounted for $3,353,900 of
the revenues in the fiscal 1998 period, and oil and gas production revenues
were $102,700.  These decreases were partially offset by the startup of Gateway
Energy Marketing, by higher volumes at Fort Cobb and increased revenues from
offshore operations.

     Operating margins, that is revenues less cost of gas and operating
expenses, decreased $311,200 in the first half of fiscal 1999 over the same
period of the prior year.  Operating margins from the joint ventures sold to
Shoreham and the oil and gas properties totaled $849,800 in the fiscal 1998
period.  That shortfall was largely made up by increased volumes at Fort Cobb,
by increased offshore activity and the startup of Gateway Energy Marketing.  In
fiscal 1999, the Company has primarily focused on enhancing the profitabilty of
its existing systems.

     General and administrative expenses increased $620,800 in the six months
ended August 31, 1998 compared to the same period of the prior year.  During
1997 the Company 


                                      4
<PAGE>


changed its management philosophy and opted to terminate all of its joint 
venture arrangements and operate and manage its properties with company 
employees.  In connection therewith, the Company hired management and support 
staff who manage its operations from the office in Houston.  This change in 
strategy added significant general and administrative costs, reflecting costs 
of additional personnel, office rent and telecommunications, legal fees and 
other office costs.  Fiscal 1999 includes $125,000 of costs expected to be 
incurred to effect a move of its corporate headquarters to Houston, Texas.  
These costs include expected employee severance payments and other moving 
expenses.

     General and administrative costs are expected to continue at approximately
their current level because Houston staff will be added to replace most of the
employees who opted not to move with the Company, and because office costs are
expected to be relatively higher in the Houston, Texas metropolitan area
compared with Omaha, Nebraska.  However, the Company expects to continue to
improve the profitability of its current properties and is actively seeking to
acquire or invest in new properties.

     Interest expense decreased $286,800 in the first half of fiscal 1999
compared to the first half of fiscal 1998.  Interest expense in fiscal 1998
includes $306,800 of interest expense related to changes to certain convertible
promissory notes in August 1997.

     The increase in net loss for in the six months ended August 31, 1998 to
$779,200 reflect (i) the effect of the fiscal 1998 settlement with Shoreham and
related sale of joint venture interests, (ii) the fiscal 1998 sale of the
Castex LP partnership interest, and (iii) higher general and administrative
expenses to manage and operate properties, seek out additional investment
opportunities and relocate the accounting, financial and administrative
functions to Houston, Texas in fiscal 1999.  These negative effects were
partially offset by decreased depreciation expense and higher interest income
in fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Company substantially improved its financial condition with the
completion of the Recapitalization in the first quarter of fiscal 1998.
Monthly cash requirements of approximately $175,000 for preferred dividends
were eliminated and total debt service reduced to $22,000 per month.  The
Company's debt to total capitalization is approximately 15% at August 31, 1998
which should provide opportunity for the Company to utilize conventional long-
term financing to fund acquisitions or construction opportunities.

     The Company has in place an operating line of credit with a bank with
maximum borrowings of up to $500,000.  As of August 31, 1998 the amount
available under this operating line was $480,700.

     The Company has cash and cash equivalents and a certificate of deposit
totaling $1.7 million as of August 31, 1998. The Company experienced a deficit
in cash flow from operating activities of $723,000 in the first half of fiscal
1999.  Management has reached an agreement with certain promissory convertible
noteholders and will pay noteholders principal and accrued interest of
approximately $550,000 in October 1998.


                                      5
<PAGE>


     As a result of the September 1997 Settlement Agreement the Company has a 
receivable from Shoreham in the amount of $1,603,100.  Shoreham has defaulted 
on this obligation, and the Company is pursuing all legal remedies available 
to compel Shoreham to resume payments on the receivable.  Management believes 
it will be successful; however, the Company and Shoreham are in the early 
stages of resolving these matters.

FACTORS AFFECTING FUTURE RESULTS

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

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

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

     The Company's operations are also significantly affected by factors which
are outside the control of the Company. Gas gathering and processing is
dependent on throughput volume. Throughput on the Company's systems is
dependent on natural gas production which is significantly affected by natural
gas prices as prices affect the willingness of producers to invest the required
capital to obtain geological and geophysical information, drill development or
exploratory wells, and to rework or maximize production on existing wells.
Natural gas prices have recently stabilized at levels which should provide
adequate incentive to producers; however, there is no assurance that such
prices will remain at current levels, and that producers will continue to react
positively to the current prices.

     The Company's revenues, particularly in its retail operations, are also
affected by weather. Much of the retail demand is for crop irrigation and
drying. Heavy precipitation in 


                                      6
<PAGE>


the growing season and hot, dry weather in the fall can significantly reduce 
demand for natural gas.














                                      7
<PAGE>


                                    PART II


ITEM 1.   LEGAL PROCEEDINGS

          None

ITEM 2.   CHANGES IN SECURITIES

          None

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None

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

            a) Annual Meeting held July 16, 1998.

            b) The following directors were elected at the Annual Meeting 
               and comprise all of the directors of the Company.

                    D. L. Anderson           E. P. Hoffman
                    J. B. Ewing              C. A. Holtgraves
                    M. T. Fadden             G. A. McConnell
                    N. A. Fortkamp           N. J. Pilger
                    L. J. Horbach            A. Yeddis

            c) The following table sets forth the matters voted upon at the 
               meeting.
<TABLE>
<CAPTION>
                                          Votes For   Votes Against   Abstaining
                                          ---------   -------------   ----------
<S>                                       <C>            <C>            <C>
             i)  Approve the adoption
                 of the Company's 1998
                 Stock Option Plan        8,193,300      958,000        577,100
               
             ii) Ratify appointment of
                 Grant Thornton LLP
                 as independent public
                 accountants.             9,037,200      175,200        216,000
</TABLE>


                                      8
<PAGE>


<TABLE>
<CAPTION>
                                           Votes For     Votes Against
                                           ---------     -------------
<S>                                        <C>              <C>
             iii) Elect the following
                  nominated directors
                    D. L. Anderson         8,896,600        531,800
                    J. B. Ewing            8,910,800        517,500
                    M. T. Fadden           8,910,800        517,500
                    N. A. Fortkamp         8,896,600        531,800
                    L. J. Horbach          8,888,700        539,700
                    E. P. Hoffman          8,910,800        517,500
                    C. A. Holtgraves       8,910,800        517,500
                    G. A. McConnell        8,910,800        517,500
                    N. J. Pilger           8,910,800        517,500
                    A. Yeddis              8,910,800        517,500
</TABLE>

ITEM 5.   OTHER INFORMATION

          The Company has elected to move its accounting, financial and
          administrative functions to its operating headquarters in Houston,
          Texas from their current location in Omaha, Nebraska.  The
          combination of these functions with operations is expected to improve
          the efficiency and communications between these areas.

          The relocation is estimated to cost approximately $125,000 including
          severance pay for employees not relocating to Houston, moving costs,
          lease termination costs and other miscellaneous expenses.  A reserve
          for this amount has been charged against operations for the three
          month period ended August 31, 1998.  Personnel and other costs are
          expected to be approximately the same after the relocation to
          Houston.

          The Office of the Chairman will remain in Omaha.

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

          a)  Exhibits:

          11   Statement re Computation of Per Share Earnings. *

          21   Subsidiaries*

          27   Financial Data Schedule.*
_____________________________
* Included in SEC 10-QSB filing only


                                      9
<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__________
                         Executive Vice President and Treasurer


____October 15, 1998____
(Date)






                                      10
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST  31, 1998
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
<S>                                               <C>
CURRENT ASSETS
 Cash and cash equivalents                        $   306,600
 Certificate of deposit                             1,400,000
 Trade accounts receivable                          1,373,600
 Note receivable, current portion                   1,110,600
 Inventories                                           98,500
 Prepaid expenses and other assets                    273,500
                                                  -----------
     Total current assets                           4,562,800
                                                  -----------

PROPERTY AND EQUIPMENT, AT COST
 Gas gathering, processing and transportation      10,101,500
 Equipment and office furniture                       650,800
                                                  -----------
                                                   10,752,300
 Less accumulated depreciation and amortization     2,267,300
                                                  -----------
                                                    8,485,000
                                                  -----------

OTHER ASSETS
 Note receivable, less current portion                482,500
 Other                                                386,800
                                                  -----------
                                                      869,300
                                                  -----------
                                                  $13,917,100
                                                  -----------
                                                  -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Notes payable                                 $      22,900
  Current maturities of long-term debt                664,500
  Accounts payable                                  1,089,000
  Accrued expenses and other liabilities              260,500
                                                  -----------
            Total current liabilities               2,036,900
                                                  -----------

LONG-TERM DEBT, LESS CURRENT MATURITIES             1,144,300

STOCKHOLDERS' EQUITY
  Common stock-  authorized, 17,500,000 shares
    of $.25 par value; issued and outstanding,
    14,782,500 shares                               3,695,700
  Additional paid-in capital                       16,022,400
  Accumulated deficit                              (8,982,200)
                                                  -----------
  Total stockholders' equity                       10,735,900
                                                  -----------
                                                  $13,917,100
                                                  -----------
                                                  -----------
</TABLE>

        The accompanying notes are an integral part of this statement.

                                      11
<PAGE>

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

<TABLE>
<CAPTION>
                                           Three Months Ended           Six Months Ended
                                               August 31                     August 31
                                       ------------------------      ------------------------
                                          1998           1997           1998           1997
                                          ----           ----           ----           ----
                                                      (Restated)                    (Restated)
<S>                                    <C>            <C>            <C>            <C>
OPERATING REVENUES:
 Natural gas sales                     $2,166,900     $3,150,900     $3,497,700     $5,776,600
 Transportation and processing            361,500        168,600        528,800        351,200
 Other                                     26,400        161,900         53,300        349,500
                                       ----------     ----------     ----------     ----------
                                        2,554,800      3,481,400      4,079,800      6,477,300
                                       ----------     ----------     ----------     ----------

OPERATING COSTS AND EXPENSES:
 Cost of natural gas purchased          1,535,600      2,163,900      2,596,000      3,972,000
 Operation and maintenance                328,400        689,100        602,500      1,312,800
 Depreciation and amortization            185,400        228,100        363,100        455,400
 General and administrative               709,500        333,900      1,244,600        623,800
                                       ----------     ----------     ----------     ----------
                                        2,758,900      3,415,000      4,806,200      6,364,000
                                       ----------     ----------     ----------     ----------
OPERATING PROFIT (LOSS)                  (204,100)        66,400       (726,400)       113,300

OTHER INCOME (EXPENSE)
  Equity in earnings of partnership             -         90,000              -        180,000
  Interest and other income                71,200         12,100        150,700         21,400
  Interest expense                        (85,400)      (402,200)      (198,200)      (485,000)
                                       ----------     ----------     ----------     ----------
                                          (14,200)      (300,100)       (47,500)      (283,600)
                                       ----------     ----------     ----------     ----------
LOSS BEFORE INCOME
  TAXES                                  (218,300)      (233,700)      (773,900)      (170,300)

  Income taxes                              4,400         11,800          5,300         14,800
                                       ----------     ----------     ----------     ----------
NET LOSS                               $ (222,700)    $ (245,500)    $ (779,200)    $ (185,100)
                                       ----------     ----------     ----------     ----------
                                       ----------     ----------     ----------     ----------

BASIC AND DILUTED LOSS
   PER COMMON SHARE                      $  (.02)       $  (.02)       $  (.05)       $  (.01)
                                       ----------     ----------     ----------     ----------
                                       ----------     ----------     ----------     ----------
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      12
<PAGE>

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

<TABLE>
<CAPTION>

                                                       Six Months Ended August 31
                                                       --------------------------
                                                          1997          1998
                                                          ----          ----
                                                                      (Restated)
<S>                                                    <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                             $ (779,200)    $ (185,100)
  Adjustments to reconcile net loss
     to net cash provided by (used in) 
     operating activities-
  Equity in undistributed earnings of partnership               -       (167,000)
  Depreciation and amortization                           363,100        455,400
  Non-cash expenses                                       108,200        359,500
  Other                                                    (8,000)       (11,100)
  Changes in operating assets and liabilities-
    Trade accounts receivable                            (466,800)       182,400
    Inventories                                            23,200        (28,300)
    Prepaid expenses and other current assets             (12,700)      (279,800)
    Accounts payable                                       31,700       (295,600)
    Accrued expenses and other liabilities                 16,900        325,100
                                                       ----------     ----------
         Net cash provided by (used in) operating
          activities                                     (723,600)       355,500
                                                       ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                                    (408,700)      (151,700)
 Acquisition of business                                  (44,000)             -
 Payments on notes receivable                             646,400              -
 Net decrease in certificate of deposit                 1,350,000              -
 Other                                                          -        (43,000)
                                                       ----------     ----------
         Net cash provided by (used in) investing
          activities                                    1,543,700       (194,700)
                                                       ----------     ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings                                341,300        989,000
  Payments on borrowings                               (1,294,600)    (1,266,800)
  Other                                                         -        (16,700)
                                                       ----------     ----------
 Net cash used in financing activities                   (953,300)      (294,500)
                                                       ----------     ----------

Net change in cash and cash equivalents                  (133,200)      (133,700)
Cash and cash equivalents at beginning of period          439,800        329,500
                                                       ----------     ----------
Cash and cash equivalents at end of period             $  306,600     $  195,800
                                                       ----------     ----------
                                                       ----------     ----------
</TABLE>

       The accompanying notes are an intregal part of these statements.

                                      13
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     (1)  Principles of Consolidation and Nature of Business

     The accompanying consolidated financial statements have been prepared by
the Company, without audit.  In the opinion of management, such financial
statements reflect all adjustments necessary for a fair presentation of the
financial position and results of operations in accordance with generally
accepted accounting principles. The financial statements should be read in
conjunction with the financial statements and the Notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended February 28, 1998.
Certain minor reclassifications to the August 31, 1997 statements have been
made to conform with the August 31, 1998 presentation. The Company also
restated the Statement of Operations and Statement of Cash Flows for the three
month and six month periods ended August 31, 1997 (see also Note 6).

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

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

     (2)  Earnings Per Common Share

     In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, EARNINGS PER SHARE. Basic earnings per share is computed by dividing the
net earnings or loss by the weighted average number of common shares
outstanding during the period.  Diluted earnings per share is computed by
dividing net earnings or loss by the weighted average number of common shares
outstanding after giving effect to all potentially dilutive common shares that
were outstanding during the period.  Potential dilutive common shares are not
included in the computation of diluted earnings per share if they are anti-
dilutive.  For the three month and six month periods ended May 31, 1998 and
1997, the diluted loss per common share is the same as basic since the effect
of potentially dilutive common shares arising from convertible debt and
outstanding stock options and warrants was anti-dilutive.

     The weighted average number of common shares outstanding used in the
computation of basic and  diluted  earnings per share  for the three month
periods ended August 31, 1998 and 1997 and the six month periods ended August
31, 1998 and 1997 were  14,659,800, 14,337,400, 14,557,300 and 14,198,400
respectively.


                                      14
<PAGE>

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

     (3)  Notes Payable

     Notes payable consists of the following at August 31, 1998:
<TABLE>
<CAPTION>
<S>                                                   <C>
          Operating line of credit                    $19,300
          Other                                         3,600
                                                      -------
                                                      $22,900
                                                      -------
                                                      -------
</TABLE>

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

     (4)  Long-term Debt

     Long-term debt at August 31, 1998 consists of the following:
<TABLE>
<CAPTION>
<S>                                                <C>
               Convertible promissory notes        $  585,400
               Subordinated notes                   1,019,400
               Note payable to PCI                    204,000
                                                   ----------
                                                    1,808,800
               Less current maturities               664,500
                                                   ----------
                                                   $1,144,300
                                                   ----------
                                                   ----------
</TABLE>

     The original conversion privileges of substantially all of the promissory
notes allowed noteholders to convert into common stock of the Company at a pre-
reverse stock split price of $.40 per share.  The promissory notes
inadvertently did not contain the customary anti-dilution language to  effect a
change in the conversion price in the case of stock splits, stock dividends or
other capitalization changes.  In 1997, certain noteholders tendered their
promissory notes for conversion at $.40 per share.  In lieu of conversion, the
Company and the noteholders agreed to  i) a one year extension on the notes,
and ii) a thirty day window for conversion in the event the Company called the
promissory notes as consideration for the noteholders not converting their
notes at that time.
     
     The Company and the Noteholders disagreed as to the proper conversion
price per share after giving effect to the one for twenty-five reverse split.

     In October 1998, the Company and the noteholders reached an agreement
whereby the Company would exchange the convertible promissory notes for cash
equal to the principal and accrued interest through October 15, 1998 and
210,000 shares of common stock.  In addition, certain noteholders agreed to
cancel a Subscription Agreement with attached Stock Purchase Rights and to
reduce warrants issued to the noteholders from 200,000 to 40,000.  The value of
the cash and common stock was equal to the fair market value of the convertible
     

                                      15
<PAGE>

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
     
promissory notes at the date of exchange; therefore no charges will be included
in the statements of operations for this exchange.
     
      (5) Note Receivable
     
     In September 1997, the Company entered into a Settlement Agreement with
Shoreham Pipeline Company ("Shoreham") to dissolve all of the joint ventures
between the Company and Shoreham and to settle litigation between the parties.
The Settlement Agreement provided that the Company would receive $540,000 in
cash, a note receivable of $2,160,000 and Shoreham's minority interest in
certain joint ventures in exchange for the Company's interest in other joint
ventures.  The note receivable is without collateral and is due in twenty-four
monthly installments beginning December 1, 1997.  Shoreham was to complete the
final accounting for all the Joint ventures for June, July and August 1997 and
make cash distributions as appropriate.
     
     The Company performed an audit of the final cash distributions from
Shoreham in April 1998 and believes that cash distributions to the Company for
June, July and August 1997 were substantially understated.  The Company has
initiated legal proceedings to collect the remaining distributions to which it
is entitled.
     
     Beginning July 1, Shoreham defaulted on the payments required under the 
Settlement Agreement.  The Company is pursuing all legal remedies available 
to compel Shoreham to resume payments.  Mediation between the parties 
regarding disputed distributions and Shoreham's default is scheduled for 
October 27, 1998.  Management believes it will be successful and thus has not 
recorded a reserve against the receivable.  However, the Company and Shoreham 
are in the early stages of resolving these matters.

     (6)   Restatement of August 31, 1997 Statement of Operations

     The financial statements as of August 31, 1997, and for the three month 
and six month periods then ended have been restated to reflect an adjustment 
for the cost of amending certain convertible promissory notes effective 
August 22, 1997. The adjustment increased interest expense by $306,800 and 
reduced earnings per share by $.02 for the three month and six month periods 
ended August 31, 1997.

     As more fully described in Note 4, certain convertible promissory notes
did not contain the customary anti-dilution language. In the fourth quarter of
fiscal 1998, pursuant to the agreement reached in August 1997, the Company
recognized a charge to interest expense that reflected the difference between
the $.40 per share conversion price and the market value of the Company's
common stock in August 1997.


                                      16
<PAGE>

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

     (7)  Acquisitions

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

          Cash paid during the periods is as follows:
<TABLE>
<CAPTION>
                                       Six Months Ended August 31
                                       --------------------------
                                           1998        1997
                                           ----        ----
<S>                                      <C>         <C>
          Interest                       $117,600    $125,400
          Income taxes                     12,400      94,500
</TABLE>

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

     In August 1998, the Company issued 285,000 shares of common stock to
acquire Abtech Resources, Inc.



                                      17