SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB

[x]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   
          SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998

[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 0-13803

                            GATEWAY INDUSTRIES, INC.
                 (Name of small business issuer in its charter)

           Delaware                                      33-0637631
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                              150 East 52nd Street
                            New York, New York 10022
           (Address of principal executive offices including zip code)

Issuer's telephone number, including area code:  877-431-2942

Securities registered under Section 12(b) of the Act:  NONE.

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act of 1934  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 [ ]

Issuer has no continuing operations for its most recent fiscal year.

Check  if no  disclosure  of  delinquent  filers  in  response  to  Item  405 of
Regulation S-B is contained in this form,  and no disclosure  will be contained,
to the best of the  registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendments to this Form 10-KSB. [ ]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant at April 12, 1999 was approximately $2,489,669,  based on the average
high/low ask/bid prices of $1.625 for such stock on that date.

As of April 12,  1999,  the  Registrant  had  3,592,024  shares of common  stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  NONE

Transitional small business disclosure format.   Yes  [ ]  No  [X]


                            GATEWAY INDUSTRIES, INC.

                               TABLE OF CONTENTS

                                                                    PAGE NO.

                                     PART I

Item 1.  Description of Business.                                       2

Item 2.  Description of Property.                                       2

Item 3.  Legal Proceedings.                                             3

Item 4.  Submission of Matters to a Vote 
         of Security Holders.                                           3

                                    PART II

Item 5.  Market for Common Equity and
         Related Stockholder Matters.                                   4

Item 6.  Management's Discussion and
         Analysis or Plan of Operation.                                 5

Item 7.  Financial Statements                                           7

Item 8.  Changes In and Disagreements With
         Accountants on Accounting and
         Financial Disclosure.                                          7

                                    PART III

Item 9.  Directors, Executive Officers, Promoters 
         and Control Persons; Compliance With 
         Section 16(a) of the Exchange Act.                             8

Item 10. Executive Compensation                                         9

Item 11. Security Ownership of Certain Beneficial 
         Owners and Managers                                           11

Item 12. Certain Relationships and Related
         Transactions.                                                 12

Item 13. Exhibits and Reports on Form 8-K                              12

Signatures                                                             13


                                     PART I

ITEM 1.  Description of Business

     Gateway  Industries,  Inc. (the "Company") was  incorporated in Delaware in
July  1994.  The  Company  currently  has no  operating  business.  The Board of
Directors is pursuing various strategic alternatives, including the possible use
of the Company's  liquid assets to acquire,  merge,  or consolidate or otherwise
combine with an operating business or businesses; however, there is no assurance
that any such  transaction  will be  consummated.  As of December 31, 1998,  the
Company had cash and cash equivalents of $5,140,000.

     The Company has no full time  employees,  although  its Chairman and Acting
President  devote time to the  Company's  administrative  needs and in exploring
potential acquisitions and combinations.

     On October 14,  1997,the  Company signed a letter of intent to acquire Only
Multimedia  Network,  Incorporated  ("OMNI"),  a privately  held  company in the
business of providing casting directors with Internet access to text,  pictorial
and video  information  on actors through its CastNet?  service.  CastNet became
operational  recently,  and OMNI has had  limited  revenues  therefrom  to date.
Pursuant to a letter of intent, the Company advanced $450,000 ($360,000 in 1997)
to OMNI, and OMNI issued a $500,000 secured promissory note.

     Omni's financial  performance had been less than expected,  and the Company
wrote off as  uncollectible  the  $360,000  advanced to Omni as of December  31,
1997.  During 1998,  the Company and Omni  terminated  merger  discussions.  The
Company  continued to pursue the amounts  advanced to OMNI,  and  received  full
payment of the secured promissory note and related interest in March 1999.

     From November 22, 1995 through  December 21, 1996,  the Company was engaged
in the  manufacture  and sale of mirror and glass products  through its formerly
wholly-owned  subsidiary,  Marsel Mirror & Glass Products,  Inc. ("Marsel").  On
December  21, 1996 the Company sold Marsel with an option to  repurchase  50% of
Marsel for $2. The option expires December 21, 1999.

ITEM 2. Description of Property.

     The Company  occupies  offices at 150 East 52nd Street,  New York, New York
10022, under a lease agreement extending through March 30, 2001.

ITEM 3. Legal Proceedings.

     There are no material pending legal proceedings against the Company.

ITEM 4. Submission of Matters to a Vote of Security Holders.

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the last quarter of its fiscal year ended December 31, 1998.


                                    PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters.

MARKET FOR COMMON STOCK

     Since  November  17,  1994,  the  Company's  Common  Stock has been  traded
over-the-counter  using the symbol "GWAY" on what is commonly referred to as the
"Bulletin  Board."  The  following  table sets forth the high and low bid prices
during  each  quarter  of its last two  fiscal  years,  and during the first and
second quarter of 1999 through April 12, 1999, as quoted on the Bulletin  Board.
Such prices represent quotations between  broker-dealers,  do not include retail
markups and markdowns,  or any commissions,  and do not reflect prices in actual
transactions.



                                                        CLOSING BID PRICES
                                                      HIGH($)         LOW($)
     1997
FIRST QUARTER                                         2.5000          1.5000
SECOND QUARTER                                        2.1875          2.0000
THIRD QUARTER                                         2.0000          1.6250
FOURTH QUARTER                                        3.0000          1.7500

     1998
FIRST QUARTER                                         1.8125          1.8125
SECOND QUARTER                                        1.8750          1.8750
THIRD QUARTER                                         1.7500          1.7500
FOURTH QUARTER                                        1.6500          1.6500

     1999
FIRST QUARTER                                         1.5000          1.5000
SECOND QUARTER (April 12, 1999)                       1.6250          1.6250



DIVIDENDS

     The Company  has not paid any  dividends  on its Common  Stock and does not
anticipate doing so in the foreseeable future.

HOLDERS OF RECORD

     At April 12, 1999, there were approximately  1,398 holders of the Company's
Common Stock.

ITEM 6. Management's Discussion and Analysis or Plan of Operations

SALE OF OPERATING BUSINESS IN 1996

     In December 1996 the Company sold Marsel, its only operating business.  The
Company  currently has no operating  business or revenue  producing  activities.
Management is pursuing various strategic alternatives which include the possible
use of the Company's remaining net assets to acquire,  merge or consolidate with
an operating business or businesses.  There can be no assurance,  however,  that
any such transaction will be consummated. See "Item 1. Description of Business".
Accordingly, a discussion and analysis of the Company's operating results during
its fiscal year ended December 31, 1998 is not meaningful.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash and cash equivalents  totaled $5,140,000 at December 31,
1998,  compared with $5,433,000 at December 31, 1997. The change arose primarily
from the Company's  advances in 1997 and 1998 to OMNI (see "Item 1.  Description
of Business"), related expenses, and general and administrative expenses.

YEAR 2000 ISSUE

     The Company's  Year 2000 Project is currently  proceeding on schedule.  The
Company  began its  assessment  in the Spring of 1998 in  response  to a need to
address  the issue of older  computer  programs  and  embedded  computer  chips'
inability to distinguish between the year 1900 and the year 2000.

     The current  assessment  project  schedule is to be Year 2000  compliant by
mid- 1999. Areas deemed critical with potential to affect the Company's  ability
to do business (word processing and bookkeeping) are Year 2000 compliant at this
time.

     Year 2000 issues as they relate to the physical  premises  (building power,
incoming  phone  service,   etc.  )  are  outside  the  Company's   control  and
correspondence  inquiring  as to Year 2000  compliance  will be delivered to the
principals of buildings'  property  management,  phone system  suppliers,  alarm
system  supplier,  and  communications  service  providers.  Because  it is  not
possible to gauge the readiness of  third-party  vendors,  the Company is in the
process  of  drafting  a  contingency  plan  in the  event  that  the  Company's
third-party  vendors do not complete  their Year 2000  implementations  in time.
This contingency plan is scheduled to be drafted and implemented by mid-1999.

     The total cost of the required modifications  necessary to become Year 2000
compliant is not expected to be material to the  Company's  financial  position.
The total amount expended on the Year 2000 Project through  February 1, 1999 was
$2,150 that related to the cost of an allocated portion of updating software and
of a portion of new hardware expenditure.

     The  failure to correct  material  Year 2000  problems  could  result in an
interruption  in, or a failure of, certain  normal  business  operations.  These
failures could potentially materially affect the Company's results of operations
and  financial  condition;  however , due to the  general  uncertainty  which is
inherent in potential Year 2000 problems, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers,  customers or partners, the
Company is unable to determine,  at this time,  whether the consequences of Year
2000 failures will have a material impact on the Company's results of operations
or financial condition.

     Readers should  understand that the dates on which the Company believes the
Year 2000 project will be completed are based upon  Management's best estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the availability of certain resources,  third-party modification plans and other
factors.  Due to the  general  uncertainty  inherent  in the Year 2000  problem,
resulting in part from the  uncertainty of Year 2000 readiness of  third-parties
and the  inter-connection  of  businesses,  the Company  cannot  ensure that its
ability to timely and cost effectively resolve problems associated with the Year
2000  issue  may not  affect  its  operations  and  business,  or  expose  it to
third-party liability.


ITEM 7. Financial Statements

     The Company's financial statements are filed as part of this Annual Report,
as indicated in the Index to Financial Statements included in the Report.

ITEM 8. Changes in and Disagreements With Accountants on Accounting and 
Financial Disclosure

     None.


PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 
Compliance With Section 16(a) of the Exchange Act.

     The directors and executive officers of the Company are as follows:

     NAME                       AGE                     POSITION
     ----                       ---                     --------
Ronald W. Hayes                  61                     Director
810 Saturn Street
Suite 16-432
Jupiter, FL  33477-4398

Jack Howard                      37                     Acting President
2927 Montecito Avenue                                     Director
Santa Rosa, CA  95404

Warren G. Lichtenstein           33                     Chairman of the Board of
150 East 52nd Street                                      Directors
New York, NY  10022                                                     


     WARREN G.  LICHTENSTEIN was appointed a director of the Company in May 1994
and became  Chairman of the Board in October  1995.  He served as President  and
Director  of Marsel  from its  inception  in July 1995 until  shortly  after the
acquisition  of its business in November 1995, and continued as a director until
its  disposition  in December 1996. Mr.  Lichtenstein  has been chief  executive
officer of the general  partner of Steel  Partners II, LP, a private  investment
firm,  since 1993 and  Chairman  of Steel  Partners  Services,  Ltd.,  a private
investment  firm,  since 1993. Mr.  Lichtenstein  is President and CEO of Rose's
Holdings,  Inc., parent of WebBank;  and Chairman of Aydin Corporation.  He is a
director of Saratoga Spring Water Corporation, Inc. and PLM International.

     RONALD W. HAYES was  appointed a director  of the company in May 1993.  Mr.
Hayes is the owner of Lincoln  Consultors & Investors,  Inc.,  an investing  and
consulting firm.

     JACK HOWARD was  appointed  Acting  President  of the Company in  September
1994.  He was elected  director of the Company in May 1994.  Since 1989,  he has
been a principal of Mutual  Securities,  Inc  (securities  brokers).  Mr. Howard
serves on the Board of Directors of Rose's Holdings, Inc. and Pubco Inc.


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors  and  executive  officers,  and  persons  who own  more  than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange  Commission  initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.  Officers,
directors and  greater-than  10%  shareholders are required by SEC regulation to
furnish the  Company  with  copies of all  Section  16(a)  forms they file.  The
Corporation  believes  that all such  reports  required  to be filed  during the
fiscal year ended December 31, 1998 ("Fiscal 1998") were filed on a timely basis
except that each of Messrs.  Howard,  Lichtenstein,  and Hayes inadvertently did
not file a report on a timely basis relating to stock purchased. Upon discovery,
the reports were filed. The  Corporation's  belief is based solely on its review
of Forms 3, 4, and 5 and amendments thereto furnished to the Corporation during,
and with respect to, Fiscal 1998 by persons known to be subject to Section 16 of
the Exchange Act. To the Company's knowledge,  based solely on its review of the
copies of such reports  furnished  to the Company,  during its fiscal year ended
December  31, 1998 all  Section  16(a)  filing  requirements  applicable  to its
officers, directors and greater-than 10% beneficial owners were satisfied.

BOARD AND COMMITTEE MEETINGS

     The Board of Directors of the Company held two formal  meetings  during its
fiscal year ended  December 31, 1998.  Presently,  the Board of Directors has no
standing  committees.  No director attended less than 75% of the total number of
Board meetings held during the fiscal year.

ITEM 10. Executive Compensation

The following  table sets forth all  compensation  paid to the Company's  Acting
President  during its fiscal year ended  December 31, 1998.  No other  executive
officer received annual  compensation at the rate of $100,000 or more during the
fiscal year.

                           SUMMARY COMPENSATION TABLE

                                    
                                        Annual Compensation           Long Term
                                                                    Compensation
                                                                       Awards

                                      Fiscal   Salary   Bonus         All Other
Name and Principal Position            Year      Compensation          Options
---------------------------            ----      ------------          -------
Jack Howard,                           1998      -    $50,000             -
Acting President                       1997      -    $50,000             -

OPTION GRANTS IN LAST FISCAL YEAR

        None

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

     The following table sets forth  information  concerning  options  exercised
during the fiscal year ended  December  31,  1998 and the number of  unexercised
options held by the Company's executive officers at the end of such fiscal year:
<TABLE>
<CAPTION>

                                                                                      Value of
                          Number                         Number of                   Unexercised
                            of                          Unexercised                  in-the-Money
                          Shares       Shares            Options at                   Options at
                         Acquired       Value             FY-End                      FY-End($)
                            On        Realized
Name                     Exercise        ($)       Exercisable/Unexercisable   Exercisable/Unexercisable
--------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>          <C>                               <C>
Jack Howard                  0            0             82,834/16,666                    0/0
  Acting President

Warren G. Lichtenstein       0            0            100,000/0                         0/0
  Chairman of the Board
<FN>

-----------
(1) Based on $1.6875,  the average  high/low  bid prices for the Common Stock on
the last date of 1998 for which trading was reported.
</FN>
</TABLE>

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

     The following  table sets forth  information as of March 31, 1999 regarding
the beneficial ownership of the Common Stock by each person known by the Company
to own  beneficially  more than 5% of the Common  Stock,  by each  director  and
executive officer,  individually, and by all directors and executive officers as
a group.  Shares  listed  below have been  adjusted to reflect the  one-for-five
split effective September 22, 1994.

Name and Address                       Amount and Nature of         Percent
of Beneficial Owner                    Beneficial Ownership         of Class

Warren G. Lichtenstein
150 East 52nd Street
New York, NY  10022                          1,815,760  (1)(2)       50.5%

Ronald W. Hayes
810 Saturn Street
Suite 16-432
Jupiter, FL  33477-4398                         103,340 (3)           2.9%

Jack Howard
2927 Montecito Avenue
Santa Rosa, CA  95404                           140,820 (4)           3.9%

Steel Partners II, L.P.
750 Lexington Avenue
New York, NY  10022                           1,674,208              38.7%

George Soros
888 Seventh Avenue
New York, NY 10022                              827,716 (5)          23.0%

All directors and executive officers
 as a group (three persons)                   2,059,920 (1)          57.3%

(1) Includes:  (i) 1,674,208  shares owned by Steel Partners II, L.P., an entity
controlled  by Mr.  Lichtenstein,  (ii)  41,552  shares  owned  directly  by Mr.
Lichtenstein, and (iii) 100,000 shares underlying stock options.

(2) More  than one  beneficial  owner is listed  above for the same  securities,
since the shares owned  beneficially  by Steel Partners II, L.P. are included in
the shares beneficially owned by Mr. Lichtenstein. See note (1) above.

(3) Includes 8,333 shares which may be acquired in 120 days through the exercise
of stock options.

(4)  Includes  16,667  shares  which may be  acquired  in 120 days  through  the
exercise of stock options.

(5) As reported in the shareholder's most recent Schedule 13D.

ITEM 12. Certain Relationships and Related Transactions

     The Company  leases  offices at 150 East 52nd  Street,  New York,  NY 10022
under a lease  expiring  March  30,  2001,  at an annual  cost of  approximately
$100,000.  It  sub-leases  offices,  at one-third of its cost for the space,  to
Steel Partners Services, Ltd., an entity controlled by Mr. Lichtenstein,  and it
also  sub-leases  offices,  at  one-third  of its cost for the space,  to Rose's
Holdings,  Inc.,  a  company  in which  Steel  Partners  II,  L.P.,  and  entity
controlled by Mr. Lichtenstein, has an approximately 22% beneficial interest and
of which he and Mr. Howard are directors.

     During the year ended  December  31, 1998,  the Company paid  approximately
$147,000 to a company affiliated with Mr. Lichtenstein, Steel Partners Services,
Ltd.,  for  certain  general  administrative  services.  This price for  general
administrative  services is on par with administrative services charged to other
companies for similar services.

ITEM 13. Exhibits, Lists and Reports on Form 8-K

(a) Exhibits

        See exhibits index immediately following the signature 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 INDUSTRIES, INC.

                                       Date:  April 30, 1999


                                       By:/s/Jack L. Howard      
                                          Jack L. Howard, 
                                          Acting President
                                          Principal Executive Officer


                                       Date:  April 30,1999


                                       By:/s/Warren G. Lichtenstein      
                                          Warren G. Lichtenstein,
                                          Chairman of the Board and
                                          Principal Accounting Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


Date: April 30, 1999    
/s/ Jack L. Howard
Jack L. Howard
Director

Date: April 30, 1999
/s/ Warren G. Lichtenstein
Warren G. Lichtenstein
Director

Date: April 30, 1999
/s/ Ronald W. Hayes
Ronald W. Hayes
Director


                                 EXHIBIT INDEX


2.1  Agreement  and Plan of Merger  of  Gateway  Industries,  Inc.,  a  Delaware
     Corporation,  and Gateway  Communications,  Inc., a California Corporation.
     (a)
3.1  Articles of Incorporation. (a)
3.2  By laws. (a)
10.8 Amended and Restated 1990 Incentive Stock Option Plan and 1990 Nonstatutory
     Stock Option Plan. (a)
10.9 Form of  Indemnity  Agreement  between  the  Registrant  and certain of its
     Officers and Directors. (c)
10.11Stock  Purchase  Agreement,   dated  December  21,  1996, between  Gateway
     Industries, Inc. and Richard A. Hickland. (d)
27   Financial Data Schedule (f)

---------------
(a) Filed as an exhibit to the Company's Proxy Statement for its Special Meeting
of Shareholders held on September 9, 1994, and incorporated herein by reference.

(b) Filed as an exhibit to the Company's Form 10-KSB filed for its quarter ended
March 31, 1996, and incorporated herein by reference.

(c) Filed as an exhibit to the Company's  Form 10-QSB for the quarter ended June
30, 1989, and incorporated herein by reference. 

(d) Filed as an exhibit to the  Company's  Form 8-K filed on or about January 5,
1997, and incorporated herein by reference.

(e) Filed as an  exhibit to the  Company's  10-KSB  filed on or about  March 31,
1998, and incorporated herein by reference.

(f) Filed herein.

                         INDEX TO FINANCIAL STATEMENTS

                            GATEWAY INDUSTRIES, INC.




        Report of Independent Auditors                                F-2

        Balance Sheet at December 31, 1998                            F-3

        Statements of Operations for the years ended
                December 31, 1998 and 1997                            F-4

        Statements of Shareholder's Equity for the years ended
                December 31, 1998 and 1997                            F-5

        Statements of Cash Flows for the years ended
                December 31, 1998 and 1997                            F-6

        Notes to Financial Statements                                 F-7



<PAGE>
                         REPORT OF INDEPENDENT AUDITORS





The Board of Directors and Shareholders
Gateway Industries, Inc.


We have audited the accompanying balance sheet of Gateway Industries, Inc. as of
December  31,  1998 and the  related  statements  of  operations,  shareholders'
equity,  and cash flows for each of the two years in the period  ended  December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Gateway  Industries,  Inc. at
December 31, 1998 and the results of its  operations and its cash flows for each
of the two years in the period  ended  December  31, 1998,  in  conformity  with
generally accepted accounting principles.




                         /s/Ernst & Young LLP
                         Ernst & Young LLP 
Los Angeles, California
April 6, 1999
<PAGE>



<TABLE>

                            GATEWAY INDUSTRIES, INC.

                                 Balance Sheet

                               December 31, 1998
<CAPTION>
Assets
<S>                                                                                <C>
  Cash and cash equivalents ....................................................   $ 5,140,000
  Note receivable ..............................................................       566,000
  Prepaid expenses and other current assets ....................................        28,000

    Total current assets .......................................................     5,734,000

  Security Deposit .............................................................        80,000

Total Assets ...................................................................   $ 5,814,000


Liabilities and shareholders' equity

Current liabilities:
  Accounts payable & accrued expenses ..........................................   $    76,000

Total liabilities ..............................................................        76,000

Commitments and contingencies

Shareholders' Equity:
  Preferred stock, $.10 par value:
    1,000,000 shares authorized
    No shares issued and outstanding ...........................................          --
  Common stock, $.001 par value:
    10,000,000 shares authorized
      3,592,024 shares issued (including treasury shares) ......................         4,000
  Capital in excess of par value ...............................................     9,555,000
  Accumulated deficit ..........................................................    (3,775,000)
Treasury stock, 11,513 shares ..................................................       (46,000)
Total shareholders' equity .....................................................     5,738,000
Total liabilities and shareholders' equity .....................................   $ 5,814,000

See accompanying notes
</TABLE>

<TABLE>

                            GATEWAY INDUSTRIES, INC

                            Statements of Operations
<CAPTION>


                                                                                    Year Ended December 31, 
                                                                                       1998           1997
<S>                                                                               <C>             <C>
Revenues .......................................................................  $       --      $      --

General and administrative expenses ............................................      359,000        366,000
Operating loss .................................................................     (359,000)      (366,000)

Other income (expense)
  Interest .....................................................................      375,000        297,000
  Gain on sale of investment ...................................................       13,000         52,000
  Write up (down) of note receivable ...........................................      360,000       (360,000)
  Other ........................................................................          --          38,000
Total other income .............................................................      748,000         27,000
Net income (loss)  .............................................................  $   389,000    $  (339,000)


Net income (loss) per share-basic and diluted ..................................  $       .11    $      (.09)

See accompanying notes.
</TABLE>

<TABLE>

                            GATEWAY INDUSTRIES, INC.

                       Statements of Shareholders' Equity


<CAPTION>

                         Common      Stock      Excess of      (Accumulated      Treasury
                         Shares     Amount      Par Value        Deficit)          Stock       Total   
                         ---------------------------------------------------------------------------
<S>                    <C>         <C>         <C>             <C>               <C>         <C>
Balance at
December 31, 1996      3,592,024   $  4,000    $9,555,000      $(3,825,000)      $(46,000)   $5,688,000

Net loss                       -          -             -         (339,000)             -      (339,000)
                       ---------   --------    ----------      -----------       --------    ----------
Balance at
December 31, 1997      3,592,024      4,000     9,555,000       (4,164,000)       (46,000)    5,349,000

Net income                     -          -             -          389,000              -       389,000
                       ---------   --------    ----------      -----------       --------    ----------
Balance at
December 31, 1998      3,592,024   $  4,000    $9,555,000      $(3,775,000)      $(46,000)   $5,738,000
                       =========   ========    ==========      ===========       ========    ==========
See accompanying notes.
</TABLE>

<TABLE>
                            GATEWAY INDUSTRIES, INC.

                            Statements of Cash Flows

<CAPTION>


                                                                Year Ended December 31,
                                                                  1998           1997 
<S>                                                        <C>            <C>    
Operating activities
Net income (loss) ......................................   $   389,000    $  (339,000)
Adjustments to reconcile net Income (loss) to net cash
used in operating activities:

        Gain on sale of securities .....................       (13,000)          --
        Net change in assets and liabilities
                Note receivable (566,000) ..............          --
                Prepaid and other ......................       (13,000)          --
                Security deposit .......................       (80,000)          --
                Accounts payable .......................       (24,000)      (273,000)
                                                              --------       --------
Net cash used in operating activities ..................      (307,000)      (612,000)
                                                              --------       --------
Cash flows from investing activities:

        Purchase of equities available for sale.........       (92,000)          --
        Sale of equities available for sale ............       106,000           --
                                                             ---------      ---------
Net cash  provided by investing activities .............        14,000           --
                                                             ---------      ---------
Net decrease in cash and cash equivalents ..............      (293,000)      (612,000)
Cash and cash equivalents at beginning of year .........     5,433,000      6,045,000
                                                             ---------      ---------
Cash and cash equivalents at end of year ...............   $ 5,140,000    $ 5,433,000
                                                             =========      =========

Supplemental cash flow information:
        Income taxes paid during the year ..............   $       800    $       800

See accompanying notes.
</TABLE>

                            GATEWAY INDUSTRIES, INC.

                         Notes to Financial Statements

                               December 31, 1998

1.   ORGANIZATION,  BUSINESS  ACTIVITIES AND SUMMARY OF  SIGNIFICANT  ACCOUNTING
     POLICIES

ORGANIZATION AND BUSINESS ACTIVITIES

     Gateway Industries, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on September 24, 1994, and was the  successor,  by merger,
to Gateway Communications,  Inc., a California corporation incorporated on March
6, 1991.

     On November 24, 1995, Glass Acquisition Corp., a wholly-owned subsidiary of
Gateway Industries,  Inc., acquired substantially all of the assets and business
of Marsel  Mirror & Glass  Products,  Inc.  ("Old  Marsel") and the related real
estate  interest  of Barlow  Associates  from  which Old  Marsel  conducted  its
business in Brooklyn,  New York.  Old Marsel was one of the  originators of mass
producing mirrors for consumption across the country. Subsequent to the closing,
Glass Acquisition Corp. changed its name to Marsel Mirror & Glass Products, Inc.
("Marsel").

     On December 21, 1996, the Company sold all outstanding shares of its wholly
owned subsidiary,  Marsel, to an unrelated third party for $1.00,  pursuant to a
Stock Purchase Agreement (the "Agreement"). Under the Agreement, the Company has
the right to purchase 50% of the outstanding shares of Marsel until December 21,
1999 for  $2.00.  The  Company  paid  $75,000  to  Marsel's  lender  and  issued
approximately  $300,000 of  guarantees on behalf of Marsel which have been fully
satisfied.  In  addition,  the  Agreement  contains  provisions  relating to the
allocation  between the Company and the  unrelated  third party of sums from the
sale or  liquidation  of Marsel or the sale of equity in Marsel by the unrelated
third party,  if either occur.  The purchase price and terms were  determined by
the Company and the unrelated  third party  following the expiration of Marsel's
credit  facility;  and,  said  bank's  demand  for  immediate  repayment  of all
outstanding  balances  and Marsel's  failure to negotiate a financing  agreement
with a new commercial lender;  and, the failure of Marsel to obtain an extension
of its letter of credit  beyond  December  31,  1996.  Since the  Company  has a
contingent 50% interest in Marsel,  the above  transaction was not accounted for
as a discontinued operation.

     On December 23, 1996,  Marsel filed for bankruptcy  under Chapter 11 of the
Bankruptcy Code.

     The Company  currently  has no operating  business.  Management  is pursing
various strategic  alternatives  which include the possible use of the Company's
remaining net assets to acquire, merge, or consolidate or otherwise combine with
an operating  business or  businesses;  however,  there is no assurance that any
such alternatives will occur.

CASH EQUIVALENTS

     The Company  considers all highly liquid debt  instruments with an original
maturity date of three months or less and  investments in money market  accounts
to be cash  equivalents.  At December 31, 1998, cash and cash  equivalents  were
held principally at one financial institution.

USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  amounts  reported  in the  financial  statements  and
accompanying notes. Actual results could differ from those estimates.

NET INCOME (LOSS) PER SHARE

     For  1998,  the  basic  and  diluted  weighted  average  number  of  shares
outstanding are 3,592,024 and 3,593,454,  respectively.  For 1997, the basic and
diluted weighted average number of shares outstanding was 3,592,024.  The effect
of common stock  equivalents  for 1997 has not been considered as such items are
antidilutive.

RECLASSIFICATION

        Certain prior year account  balances have been  reclassified  to conform
with the current year's presentation.

2.   INCOME TAXES

     Financial  Accounting  Standards Board  Statement No. 109,  "Accounting for
Income  Taxes" ("FAS 109"),  requires the liability  approach to accounting  for
deferred income taxes for financial reporting purposes.  Under the provisions of
FAS 109,  deferred tax assets and liabilities are determined  based on tax rates
expected  to be in  effect  when the  taxes  will  actually  be paid or  refunds
received.

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998 are as
follows:

Deferred tax assets:
     Reserves                                     $       11,000
     Net operating loss carryforward                   3,126,000
Total deferred tax assets                              3,173,000

Valuation allowance                                   (3,173,000)     
Deferred tax assets, net of valuation allowance   $           -       
                                                   =============

     The  deferred  tax assets were offset by a valuation  allowance  due to the
uncertainty of realizing the income tax benefits  associated with these deferred
tax assets.

     At  December  31,  1998,   the  Company  had  federal  net  operating  loss
carryforwards of approximately  $9,145,000 that begin to expire between 2001 and
2012.  Utilization  of the  net  operating  losses  may  be  subject  to  annual
limitation  due to the  ownership  change  rules  provided by Section 382 of the
Internal Revenue Code and similar state provisions.

3. STOCK OPTION PLANS

     The Company's  Incentive  Stock Option Plan and  Nonstatutory  Stock Option
Plan (collectively,  the "Plans"), as amended in December 1995, provides for the
granting of nonqualified  and qualified stock options under the Internal Revenue
Code. An aggregate of 400,000 shares of common stock has been reserved for grant
at December 31, 1998.  Persons who are not employees of the Company are eligible
to receive only  nonqualified  stock  options.  The options may be granted for a
term up to five years.  If an incentive stock option is granted to an individual
owning more than 10% of the total  combined  voting  power of all classes of the
Company's  stock,  the exercise price of the option may not be less than 110% of
the fair market value of the underlying shares on the date of the grant.

     Directors  who are not  employees  or  officers  of the Company are granted
2,000 options upon joining the Company's  Board, and 2,000 options on the day of
each  annual  meeting  of  shareholders  in which  such  director  is elected or
reelected  to office.  Options  due but not issued in the  current  year will be
issued in 1999.

     The Company has elected to follow  Accounting  Principles Board Opinion No.
25,  "Accounting  for  Stock  Issued  to  Employees"  ("APB  25"),  and  related
interpretations in accounting for its employee stock options.

     Pro forma information  regarding net income (loss) per share is required by
FASB Statement No. 123,  "Accounting for Stock Based Compensation," and has been
determined  as if the Company had accounted for its stock options under the fair
value method of that  Statement.  The fair value for these options was estimated
at the  date of  grant  using a  Black-Scholes  option  pricing  model  with the
following  weighted-average  assumptions for 1997;  risk-free  interest rates of
6.19%;  volatility  factors of the expected market price of the Company's common
stock of 1.13.  The  weighted-average  expected life of the option is 5.3 years.
Dividends are not expected in the future.  There were no options  granted during
1998.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input  of  high  subjective  assumptions  including  the  expected  stock  price
volatility.   Because  the   Company's   stock   options  have   characteristics
significantly  different from those traded  options,  and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the  options'  vesting  period.  Given this
method of amortization, the initial impact of applying SFAS No. 123 on pro forma
net  income  and pro forma net  income  per share is not  representative  of the
potential  impact on pro forma amounts in future  years,  when the effect of the
amortization  from multiple  awards would be reflected.  The Company's pro forma
information follows:
<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                                                 1998            1997
<S>                                                           <C>             <C>   
Pro forma net income (loss)                                   $ 187,775       $(531,000)
Pro forma net income (loss) per share-basic and diluted       $     .05       $    (.15)
</TABLE>


Stock option activity is summarized as follows:
                                                     Weighted-
                                                      Average
                                                      Exercise
                                           Shares      Price
                                           ------      -----
Balance at December 31, 1996 ...........   146,000       3.88
        Granted ........................   102,000       1.82
        Canceled .......................        --         --
Options outstanding at December 31, 1997   248,000   $   2.99
        Granted ........................        --         --
        Canceled .......................        --         --
                                           -------   --------
Options outstanding at December 31, 1998   248,000   $   2.99

     The weighted  average fair value of options  granted during 1997 was $1.66.
The exercise prices for options  outstanding as of December 31, 1998 ranged from
$1.00 to $4.25. The weighted average remaining contractual life of these options
is 4.29 years.

     At December 31, 1998,  approximately  197,000 options were exercisable.  No
options were exercised during the years ended December 31, 1998 and 1997.

4. NOTE RECEIVABLE

     In October  1997,  the  Company  signed a letter of intent to acquire  Only
Multimedia  Network  Incorporated  ("OMNI"),  a  privately  held  company in the
business of providing casting directors with Internet access to text,  pictorial
and video information on actors.  Pursuant to the letter of intent,  the Company
advanced OMNI $450,000  (including  $90,000 in 1998),  and OMNI issued a secured
promissory  note to the  Company in the  amount of  $500,000  originally  due at
December  31,  1998.  After the letter of intent was  signed,  OMNI's  financial
performance was significantly  worse than expected,  and the Company reserved as
uncollectible  the $360,000  advanced to OMNI as of December  31,  1997.  During
1998, the Company and OMNI terminated merger  discussions.  The Company received
payments of amounts due from OMNI (including the amounts previously reserved) in
March 1999

5. RELATED PARTY TRANSACTIONS

     The Company  leases  offices in New York under a lease  expiring  March 30,
2001, at an annual cost of approximately  $100,000.  It sub-leases  offices,  at
one-third of its cost for the space, to Steel Partners Services, Ltd., an entity
controlled  by the  Company's  chairman,  and it  also  sub-leases  offices,  at
one-third  of its cost for the space,  to Rose's  Holdings,  Inc.,  a company in
which Steel Partners II, L.P., and the Company's  chairman have an approximately
32% beneficial interest.

     During the year ended  December  31, 1998,  the Company paid  approximately
$147,000  to a  company  affiliated  with  its  chairman,  for  certain  general
administrative services.

6. COMMITMENTS

     The Company  entered  into a  three-year  operating  lease for office space
commencing April 1, 1998.  Future minimum lease payments under this lease are as
follows:

                                Deduct      Net
                               Sublease    Rental
           Year   Commitments  Rentals  Commitments
           ----   -----------  -------  -----------
           1999     97,000      65,000     32,000
           2000     97,000      65,000     32,000
           2001     24,000      16,000      8,000
                   -------     -------    -------
                  $218,000    $146,000   $ 72,000

     The  Company  has  sublet  a  portion  of its  office  space  to  companies
affiliated with its chairman.  Rent expense for the year ended December 31, 1998
was $32,412. There was no rent expense for the year ended December 31, 1997.