<PAGE>


                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                   FORM 10-Q

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


          For the quarterly period ended September 30, 1997

                                      OR

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

                          Commission File Number 1-8692

                        PACIFIC GATEWAY PROPERTIES, INC.
             (Exact name of Registrant as specified in its charter)

                NEW YORK                               04-2816560
     -------------------------------               ------------------
     (State or other jurisdiction of                 (IRS Employer
      incorporation or organization)               Identification No.)

         930 MONTGOMERY STREET, SUITE 400, SAN FRANCISCO, CALIFORNIA 94133      
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code (415) 398-4800

                                NOT APPLICABLE 
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last 
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes   X   No      
                                       -----    -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1997: 

$1.00 Par Value Common Stock                            3,892,596
---------------------------------              ----------------------------
      (Title of Class)                        (Number of Shares Outstanding)


<PAGE>

                        PACIFIC GATEWAY PROPERTIES, INC.

                                     INDEX


Part I - Financial Information:                                  Page Number
                                                                 -----------
     Item 1.   Financial Statements

     Condensed Consolidated Balance Sheets as of
          September 30, 1997 and December 31, 1996                    3


     Condensed Consolidated Statements of Income for
          the Three and Nine Months Ended September 30, 
          1997 and 1996                                               4


     Condensed Consolidated Statements of Cash Flows
          for the Three and Nine Months Ended September 30,           5-6
          1997 and 1996 

     Notes to Condensed Consolidated Financial Statements             7-12

     Item 2.   Management's Discussion and 
                    Analysis of Financial Condition
                    and Results of Operations                         12-18


Part II - Other Information

     Item 1.   Legal Proceedings                                      18
          
     Item 2.   Changes in Security                                    None

     Item 3.   Defaults Upon Senior Securities                        None

     Item 4.   Submission of Matters to a Vote                        None
               of Security Holders                                    

     Item 5.   Other Information                                      None

     Item 6.   Exhibits and Reports on Form 8-K                       18



Signatures                                                            19


<PAGE>

                        PACIFIC GATEWAY PROPERTIES, INC.
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) 
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                          AS OF         AS OF 
                                                  SEPTEMBER 30,  DECEMBER 31, 
                                                           1997          1996 
                                                  -------------  ------------
<S>                                               <C>            <C>
ASSETS    
Cash and cash equivalents                             $  2,516      $  2,899 
Cash reserved for capital improvements,
  acquisitions, debt service, property taxes 
  and insurance                                          1,532         9,975 
Accounts receivable, prepaid taxes and other                                 
  current assets                                           509         1,179 
Investment properties                                   69,506        46,632 
  Less-accumulated depreciation and provision
  for write-down to net realizable value               (15,875)      (13,835)
                                                      --------      --------
    Investment properties, net                          53,631        32,797 
                                                      --------      --------
Deferred tax asset                                       7,093         4,183 
Capitalized loan costs, net                                856           717 
Capitalized lease commissions and rent 
  concessions, net                                         885           643 
                                                      --------      --------
     Total assets                                     $ 67,022      $ 52,393 
                                                      --------      --------
                                                      --------      --------

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, prepaid rent, tenant security
  deposits, accrued interest and other current 
  liabilities                                         $  1,792      $  1,491 
Debt related to investment properties                   47,615        33,722 
Deferred tax liability                                  16,952        15,012 
                                                      --------      --------
     Total liabilities                                  66,359        50,225 
                                                      --------      --------
STOCKHOLDERS' EQUITY
Common stock $1.00 par value--
  Authorized--10,000,000 shares
  Issued--4,011,150 shares                               4,011         4,011 
Paid-in-deficit                                        (10,038)      (10,222)
Retained earnings                                        6,837         8,526 
Treasury stock, at cost--118,554 common shares at
  September 30, 1997 and December 31, 1996              (2,037)       (2,037)
Warrants for common stock                                1,890         1,890 
                                                      --------      --------
Total stockholders' equity                                 663         2,168 
                                                      --------      --------
     Total liabilities and stockholders' equity       $ 67,022      $ 52,393 
                                                      --------      --------
                                                      --------      --------

</TABLE>

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


                                      3

<PAGE>

                        PACIFIC GATEWAY PROPERTIES, INC.
             CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)     

<TABLE>
<CAPTION>

                                                  FOR THE THREE MONTHS     FOR THE NINE MONTHS
                                                  ENDED SEPTEMBER 30,      ENDED SEPTEMBER 30,
                                                  --------------------     -------------------
                                                    1997        1996         1997        1996
                                                    ----        ----         ----        ----
<S>                                               <C>         <C>          <C>         <C>
INVESTMENT PROPERTIES:
  Rental revenues                                 $  3,274    $  2,699     $ 10,152    $  8,419 
  Operating expenses                                (1,557)     (1,456)      (4,410)     (4,056)
  Interest expense                                  (1,089)       (661)      (2,989)     (2,169)
  Depreciation and amortization                       (793)       (661)      (2,300)     (1,899)
                                                  --------    --------     --------    --------
    Investment properties income (loss)               (165)        (79)         453         295 
                                                  --------    --------     --------    --------
General and administrative expenses                   (250)       (408)        (950)     (1,266)
Other income, net                                       30          38          131         252 
                                                  --------    --------     --------    --------
Loss before hotel operations, estimated         
   settlement obligation, property              
   transactions and taxes                             (385)       (449)        (366)       (719)
Income (loss) from hotel operations                     --        (108)         (93)      1,038 
                                                  --------    --------     --------    --------
Income (loss) before estimated settlement       
   obligation, property transactions and        
   taxes                                              (385)       (557)        (459)        319 
Estimated provision for settlement of the       
   reimbursement obligation                             --          --       (2,200)         -- 
Gain on sale of real estate assets, net                 --          --           --      10,900 
                                                  --------    --------     --------    --------
Income (loss) before taxes                            (385)       (557)      (2,659)     11,219 
Income tax benefit (provision)                         140           8          970      (4,800)
                                                  --------    --------     --------    --------
  Net income (loss)                               $   (245)   $   (549)    $ (1,689)   $  6,419 
                                                  --------    --------     --------    --------
                                                  --------    --------     --------    --------


Income (loss) per share, primary                    $(0.05)     $(0.13)      $(0.37)     $ 1.53
                                                    ------      ------       ------      ------
                                                    ------      ------       ------      ------
                                                                      
Income (loss) per share, fully diluted              $(0.05)     $(0.13)      $(0.37)     $ 1.53 
                                                    ------      ------       ------      ------
                                                    ------      ------       ------      ------

</TABLE>

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


                                      4

<PAGE>

                        PACIFIC GATEWAY PROPERTIES, INC.
           CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                    FOR THE THREE MONTHS     FOR THE NINE MONTHS
                                                    ENDED SEPTEMBER 30,      ENDED SEPTEMBER 30,
                                                    --------------------     -------------------
                                                      1997        1996         1997        1996
                                                      ----        ----         ----        ----
<S>                                                 <C>         <C>          <C>         <C>
Cash flow from operating activities:
  Net income (loss)                                 $   (245)   $   (549)    $ (1,689)   $  6,419 
  Non-cash revenues and expenses
      included in net income (loss):
      Depreciation and amortization                      793         661        2,300       1,899 
      Estimated provision for settlement of 
        the reimbursement obligation                      --          --        2,200          -- 
      Gain on sale of real estate assets, net             --          --           --     (10,900)
  Change in assets and liabilities:
      Accounts receivable, prepaid taxes and
        other current assets                             132         752          670         502 
      Accounts payable and other current 
        liabilities                                      365         182          301        (810)
      Current tax liability                               --        (535)          --          91 
      Deferred taxes                                    (140)         33         (970)      4,032 
                                                    --------    --------     --------    --------
  NET CASH GENERATED BY OPERATING ACTIVITIES             905         544        2,812       1,233 
                                                    --------    --------     --------    --------

Cash flow from investing activities:
  Additions to investment properties,
    capitalized loan costs, and capitalized 
    lease commissions and rent concessions              (878)       (359)      (2,337)     (1,452)
  Proceeds from sale of properties, net                   --          --           --      19,122 
  Acquisition of investment properties                    --          --      (10,975)         -- 
                                                    --------    --------     --------    --------
  NET CASH GENERATED BY (USED IN) INVESTING 
      ACTIVITIES                                        (878)       (359)     (13,312)     17,670 
                                                    --------    --------     --------    --------

Cash flow from financing activities:
  Borrowings on debt related to investment
    properties                                            --       3,850        2,112       3,850 
  Payments on debt related to investment 
    properties                                          (219)     (4,020)        (622)     (5,082)
  Mortgages satisfied in connection with
    property dispositions                                 --         (26)          --     (15,250)
  Proceeds from shareholder short-swing sale              --          --          184          -- 
  (Increase) decrease in cash reserved for
    capital improvements, acquisitions, 
    debt service, property taxes and
    insurance, net                                       377         (70)       8,443          68 
                                                    --------    --------     --------    --------
  NET CASH GENERATED BY (USED IN) FINANCING 
      ACTIVITIES                                         158        (266)      10,117     (16,414)
                                                    --------    --------     --------    --------

Increase (decrease) in cash and cash equivalents         185         (81)        (383)      2,489 
Balance at beginning of period                         2,331       2,746        2,899         176 
                                                    --------    --------     --------    --------
Balance at end of period                            $  2,516    $  2,665     $  2,516    $  2,665 
                                                    --------    --------     --------    --------
                                                    --------    --------     --------    --------

</TABLE>

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


                                      5

<PAGE>

                        PACIFIC GATEWAY PROPERTIES, INC.
           CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                    FOR THE THREE MONTHS     FOR THE NINE MONTHS
                                                    ENDED SEPTEMBER 30,      ENDED SEPTEMBER 30,
                                                    --------------------     -------------------
                                                      1997        1996         1997        1996
                                                      ----        ----         ----        ----
<S>                                                 <C>         <C>          <C>         <C>
SUPPLEMENTAL DISCLOSURES:

  Cash paid for interest                            $   968     $   674      $  2,868    $  2,559 
                                                    -------     -------      --------    --------
                                                    -------     -------      --------    --------
  Cash paid for taxes                               $    --     $    --      $     --    $    410 
                                                    -------     -------      --------    --------
                                                    -------     -------      --------    --------
  Non-cash transactions: 
    Portion of acquisition of investment 
      properties funded by assumption of 
      mortgage debt                                 $    --     $    --      $ 10,203    $     -- 
                                                    -------     -------      --------    --------
                                                    -------     -------      --------    --------
    Increase in mortgage debt in connection
      with reimbursement obligation                 $    --     $    --      $  2,200    $     -- 
                                                    -------     -------      --------    --------
                                                    -------     -------      --------    --------

</TABLE>

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


                                      6

<PAGE>

                        PACIFIC GATEWAY PROPERTIES, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying unaudited condensed consolidated financial statements 
should be read in conjunction with the Registrant's 1996 Form 10-K and Form 
10-Q for the quarter and nine months ended September 30, 1996.  These 
statements have been prepared in accordance with the instructions of the 
Securities and Exchange Commission Form 10-Q and do not include all of the 
information and footnotes required by generally accepted accounting 
principles for complete financial statements.

     In the opinion of the Registrant, all material adjustments of a normal 
recurring nature considered necessary for a fair presentation of results of 
operations for the interim periods have been included.  The results of 
consolidated operations for the three and nine months ended September 30, 
1997 are not necessarily indicative of the results that may be expected for 
the year ending December 31, 1997.

RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to be consistent with 
current year classifications.

ESTIMATES AND ASSUMPTIONS

     The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities, 
disclosure of contingent assets and liabilities at the date of the financial 
statements, and the reported amounts of revenues and expenses during the 
reporting period.  Actual results will differ from those estimates.

2.   RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)-- SAN FRANCISCO, CALIFORNIA

     The Registrant owns general (non-managing) and limited partnership 
interests in RCA totaling approximately 22.8% and, subject to the funding 
agreement entered into with RCA's managing general partner, Perini Land & 
Development Company (a wholly owned subsidiary of Perini Corporation), 
discussed below, is responsible for 20% of cash requirements in excess of 
available financing.  The Registrant's minority, general (non-managing) and 
limited partnership interests in RCA represent significant potential 
financial exposure. This exposure includes and may not be limited to the 
potential tax liability associated with the Registrant's negative tax basis, 
the joint and several guarantees and letter-of-credit provided by the 
Registrant to the mortgage lender on Rincon Center Phase Two and the master 
lessor on Rincon Center Phase One, and the potential tax liability that would 
exist from the cancellation of debt in connection with a possible debt 
restructuring.  Except for the estimated provision for settlement of the 
reimbursement obligation and deferred income tax 


                                      7

<PAGE>

liabilities related to the tax that would result from any gain recognized 
from the Registrant's negative tax basis in its partnership interest, the 
accompanying financial statements do not include any adjustments for these 
uncertainties.

     RCA sold Rincon Center Phase One to Chrysler MacNalley Corporation 
(Chrysler) in June 1988; subsequently, RCA leased the property back under a 
master lease which is treated as an operating lease for financial reporting 
purposes.  In July 1993, Chrysler completed refinancing of Rincon Center 
Phase One.  The maturity date of this debt is July 1, 1998.  Payments under 
the master lease agreement may be adjusted to reflect adjustments in the rate 
of interest payable by Chrysler on the Rincon Center Phase One debt.  The 
master lease also permits Chrysler to put the property back to RCA at 
stipulated prices beginning January 1998 if long-term financing meeting 
certain conditions is not obtained. RCA is attempting to obtain financing or 
restructure the existing debt in order to meet the condition of the master 
lease prior to January 1998.  On June 30, 1997, RCA filed a lawsuit against 
Chrysler in Superior Court in the State of California, County of San 
Francisco.  The lawsuit's primary cause of action alleges that Chrysler has 
breached the master lease and a certain letter agreement because the rent 
payments due from RCA after the 1993 refinancing of Rincon Center Phase One, 
resulted in an increase in Chrysler's after tax rate of return from rent 
payments.  The lawsuit states that such excessive rent recalculations 
directly contravene both the letter and the spirit of the master lease.

     In September 1993, RCA completed a refinancing of Rincon Center Phase 
Two with its existing lender.  A portion of the security for the refinanced 
loan was a $3.65 million letter-of-credit issued by a bank (the Issuing Bank) 
on behalf of the Registrant in favor of the refinancing lender.  The 
reimbursement obligation of the Registrant to the Issuing Bank is full 
recourse to the Registrant and is secured by the Registrant's 410 First 
Avenue property located in Needham, Massachusetts.   The letter-of-credit for 
$3.65 million was drawn by the refinancing lender prior to its expiration 
date of June 23, 1997.  The refinancing lender is currently holding the $3.65 
million in a separate restricted account on behalf of RCA and has not applied 
said funds to any outstanding debt of RCA.  The Issuing Bank made a demand on 
the Registrant to reimburse them for the $3.65 million drawn on the 
letter-of-credit and also notified the Registrant it is in default with 
respect to the reimbursement obligation.  On August 21, 1997, the Issuing 
Bank commenced an action for conditional judgement seeking, among other 
remedies, to foreclose on the Massachusetts property.  Under Massachusetts 
law, such foreclosure could not take place until at least three years and two 
months after the issuance of the conditional judgement. However, if the 
Registrant does not pay the amount of the conditional judgement within two 
months after its issuance, the Issuing Bank could take possession of the 
property during the three year period preceding foreclosure.  In such action, 
the Issuing Bank is seeking to assert a deficiency claim against the 
Registrant for any alleged difference between the value of the foreclosed 
property and the $3.65 million drawn on the letter-of-credit including 
outstanding interest and fees.  The Registrant intends to vigorously defend 
such deficiency claim.  Since any assets of the Registrant which are applied 
to the reimbursement obligation would constitute additional investment in 
RCA, which the Registrant considers of no value, the net book value of such 
assets would be 


                                      8

<PAGE>

written off and charged to the earnings of the Registrant when said assets 
were applied to the reimbursement obligation.  In accordance with generally 
accepted accounting principles, effective June 30, 1997, the Registrant 
recorded an "estimated provision for settlement of the reimbursement 
obligation" in the amount of $2.2 million to provide for the ultimate 
settlement of the reimbursement obligation.  The accrued amount is equal to 
the net book value at June 30, 1997, of the Needham, Massachusetts property 
that serves as collateral for the reimbursement obligation, resulting in an 
effective discount of the $3.65 million face value of the reimbursement 
obligation.   The Registrant has recorded rental revenue and operating 
expenses related to this property, as well as accrued interest on the $3.65 
million settlement obligation at a rate of prime plus three percent.  Any 
difference between that estimated provision for settlement of the 
reimbursement obligation and the amount ultimately settled upon will be 
charged or credited to the Registrant's operations as such difference becomes 
determinable.  Management can provide no assurances as to the ultimate 
settlement amount or method (and the timing thereof) relating to the 
reimbursement obligation.

     In 1993, the Registrant entered into an agreement with RCA's managing 
general partner whereby such managing general partner agreed to advance funds 
to RCA on behalf of the Registrant on an unsecured non-recourse basis, 
subject to interest at prime plus 2% and certain annual fees (principal, 
unpaid interest and fees are collectively referred to as the RCA Advances).  
This agreement does not reduce the level of the Registrant's general and 
limited partner interest in RCA.  The RCA Advances are only required to be 
repaid from the Registrant's share of future distributions from RCA, if any.  
During the first nine months of 1997 and 1996, RCA incurred net losses of 
$16,355,000 and $10,650,000 respectively.  The RCA Advances amount to 
approximately $6,219,000 at September 30, 1997, and as noted above, are not 
recorded on the Registrant's financial statements since (i) the RCA advances 
are only required to be repaid from the Registrant's share of future 
distributions from RCA, if any, (ii) the Registrant has no intention or legal 
obligation to repay the RCA Advances other than from its share of 
distributions from RCA, if any, and (iii) the Registrant does not anticipate 
any material cash distributions by RCA in the foreseeable future.

     During 1997, the Registrant has asserted certain claims against RCA for 
payment to the Registrant by RCA for leasing services provided to RCA by the 
Registrant during 1996.  The Registrant has not accrued for such claims 
pending resolution of this matter with RCA's managing general partner.


                                      9

<PAGE>

     Summary financial statement data for RCA is as follows (in thousands):



AS OF                              SEPTEMBER 30,  DECEMBER 31,
                                            1997          1996 
                                            ----          ----

Investment properties, net             $ 100,034     $ 110,495 
Other assets                              31,465        21,042 
                                       ---------     ---------
                                       $ 131,499     $ 131,537 
                                       ---------     ---------
                                       ---------     ---------

Debt                                   $  54,287     $  56,012 
Amounts due to partners                  177,131       158,156 
Other liabilities                         11,770        12,703 
Partners' deficit                       (111,689)      (95,334)
                                       ---------     ---------
                                       $ 131,499     $ 131,537 
                                       ---------     ---------
                                       ---------     ---------


                                   THREE MONTHS ENDED  NINE MONTHS ENDED
                                      SEPTEMBER 30,       SEPTEMBER 30,
                                      -------------       -------------
                                     1997       1996     1997       1996
                                     ----       ----     ----       ----
Revenue                            $ 4,439    $ 5,373  $ 12,166   $ 16,197 
Expenses:
  Operating and lease expenses       6,177      2,941    15,192      9,621 
  Interest expense                   3,890      4,997    11,129     14,391 
  Depreciation expense                 769        946     2,200      2,835 
                                   -------    -------  --------   --------
                                    10,836      8,884    28,521     26,847 
                                   -------    -------  --------   --------
Net loss                           $(6,397)   $(3,511) $(16,355)  $(10,650)
                                   -------    -------  --------   --------
                                   -------    -------  --------   --------

     In 1996, the Registrant ceased recording any activity related to its 
interest in RCA and has written down its equity investment in and loans to 
RCA to zero. 

3.   PER SHARE DATA -  Per share data is based on the weighted average number 
of the Registrant's common shares and common share equivalents outstanding. 
Outstanding warrants and stock options enter into the common shares 
outstanding using the Treasury Stock Method.  

     The weighted average number of common shares and common share 
equivalents outstanding for the three and nine months ended September 30, 
1997 and 1996 are as follows:



                         FOR THE THREE MONTHS     FOR THE NINE MONTHS 
                          ENDED SEPTEMBER 30,     ENDED SEPTEMBER 30,
                           1997        1996         1997       1996 
                           ----        ----         ----       ----

Primary                  4,567,270   4,290,710    4,509,204  4,208,196 
                         ---------   ---------    ---------  ---------
                         ---------   ---------    ---------  ---------

Fully diluted            4,567,270   4,290,710    4,545,880  4,208,196 
                         ---------   ---------    ---------  ---------
                         ---------   ---------    ---------  ---------


                                     10

<PAGE>

     In March 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standard No. 128, Earnings Per Share (SFAS No. 128).  
SFAS No. 128 requires the disclosure of basic earnings per share and modifies 
existing guidance for computing diluted earnings per share.  Under the new 
standard, basic earnings per share is computed as earnings divided by 
weighted average shares, excluding the dilutive effects of stock options and 
other potentially dilutive securities.   The effective date of SFAS No. 128 
is December 15, 1997, and early adoption is not permitted.  The Registrant 
intends to adopt provisions of SFAS No. 128 during the quarter and year ended 
December 31, 1997.  Had the provisions of SFAS No. 128 been applied to the 
Registrant's results of operations for the three months ended September 30, 
1997 and 1996, the Registrant's basic earnings per share would have been 
($0.06) and ($0.14) per share, respectively, and its diluted earnings per 
share would have been ($0.05) and ($0.13) per share, respectively.  Had the 
provisions of SFAS No. 128 been applied to the Registrant's results of 
operations for the nine months ended September 30, 1997 and 1996, the 
Registrant's basic earnings per share would have been ($0.42) and $1.60 per 
share, respectively, and its diluted earnings per share would have been 
($0.37) and $1.53 per share, respectively.

4.   ACQUISITION OF INVESTMENT PROPERTY

     On January 17, 1997, the Registrant purchased two properties to complete 
a tax deferred exchange in accordance with Section 1031 of the Internal 
Revenue Code, in connection with the December 1996 sale of the Radisson 
Suites Hotel. The first acquisition was West Valley Executive Park, a 
multi-tenant, six building, 165,000 square foot campus style office park in 
San Jose, California, that was acquired for $17,500,000.  In connection with 
the West Valley Executive Park acquisition, the Registrant assumed 
approximately $10,203,000 in mortgage debt from Sun Life Assurance Company of 
Canada (U.S.).  The loan is amortized over twenty years at a fixed annual 
interest rate of 9.125% and matures on June 30, 2005.  The debt continues to 
be assumable and is subject to a prepayment penalty if paid off prior to 
maturity.  The second acquisition was a multi-tenant, 23,000 square foot, six 
story steel frame office building located at 930 Montgomery Street, San 
Francisco, California, for $3,250,000.  In connection with the 930 Montgomery 
Street acquisition, the Registrant obtained $2,112,500 in mortgage debt from 
Redwood Bank.  The loan is amortized over twenty-five years at a floating 
interest rate of 3% over the one year treasury bond rate, adjustable every 
six months, and matures on February 1, 2002.  The Redwood Bank debt can be 
prepaid at any time without a penalty.


                                     11

<PAGE>

     The following unaudited pro-forma information reflects adjustments to 
the Registrant's historical results from these acquisitions and certain other 
transactions as if they had occurred on January 1, 1996 (in thousands, except 
share amounts):


                                   FOR THE THREE MONTHS     FOR THE NINE MONTHS
                                    ENDED SEPTEMBER 30,     ENDED SEPTEMBER 30,
                                     1997        1996         1997       1996 
                                     ----        ----         ----       ----

Revenues                           $ 3,274     $ 3,517      $ 10,297   $ 10,874 
                                   -------     -------      --------   --------
                                   -------     -------      --------   --------

Loss before hotel operations, 
  estimated settlement 
  obligation, property 
  transactions and taxes           $  (385)    $  (353)     $   (317)  $   (431)
                                   -------     -------      --------   --------
                                   -------     -------      --------   --------

Loss before hotel operations, 
  estimated settlement 
  obligation, property 
  transactions and taxes per 
  common share --
     Primary                       $ (0.08)    $ (0.08)     $  (0.07)  $  (0.10)
                                   -------     -------      --------   --------
                                   -------     -------      --------   --------
     Fully diluted                 $ (0.08)    $ (0.08)     $  (0.07)  $  (0.10)
                                   -------     -------      --------   --------
                                   -------     -------      --------   --------

Weighted average common shares
  outstanding --
     Primary                     4,567,270   4,290,710     4,509,204  4,208,196 
                                 ---------   ---------     ---------  ---------
                                 ---------   ---------     ---------  ---------
     Fully diluted               4,567,270   4,290,710     4,545,880  4,208,196 
                                 ---------   ---------     ---------  ---------
                                 ---------   ---------     ---------  ---------


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

INTRODUCTION

     The Registrant is a New York corporation formed in 1984 for the purpose 
of investing and managing income producing real estate.  The Registrant's 
overall business plan has been to assemble a substantial portfolio of income 
producing properties.  The Registrant historically focused its property 
acquisitions in four markets: Northern California, Arizona, Florida and 
Massachusetts.  The Registrant's long-term objectives continue to be 
maximizing net cash flow from operations and achieving growth through 
appreciation of asset values.  The current strategic plan of the Registrant 
is to focus on real estate investment on the West Coast with specific 
emphasis on the San Francisco Bay Area.  The current investment emphasis is 
on commercial properties which require aggressive management and leasing in 
order to maximize their potential.  This strategy is influenced by the 
following factors: (1) the Registrant's current property portfolio is 
concentrated on the West Coast; and (2) the Registrant believes that 
geographic concentration will enhance operational efficiencies.

     The following discussion should be read in conjunction with the 
Registrant's Form 10-K for 1996, quarterly report on Form 10-Q for the quarter


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<PAGE>

and nine months ended September 30, 1996, and in conjunction with the 
Condensed Consolidated Balance Sheet, Statement of Operations and Cash Flows 
and the notes thereto.  Unless otherwise defined in this report, or unless 
the context otherwise requires, the capitalized words or phrases used in this 
section either (i) describe accounting terms that are used as line items in 
such financial statements, or (ii) have the meaning ascribed to them in such 
financial statements and the notes thereto.

FINANCIAL CONDITION

     CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS AND OTHER DEFERRED COSTS -- 
During the three and nine months ended September 30, 1997, there were 
additions to investment properties amounting to approximately $878,000 and 
$2,337,000, respectively, for tenant improvements, capital improvements and 
other deferred costs which includes leasing commissions.  The Registrant 
anticipates further additions to investment properties of approximately 
$2,000,000 during the remainder of 1997.

     FINANCING -- Approximately $219,000 and $622,000 of debt principal was 
repaid in the three and nine months ended September 30, 1997, respectively, 
as scheduled debt amortization.  In connection with the acquisitions of 
investment properties during the nine months ended September 30, 1997, the 
Registrant assumed and borrowed mortgage notes totaling approximately 
$12,315,000. Accordingly, at September 30, 1997, the Registrant has fixed 
rate mortgage debt of approximately $43.3 million bearing interest at a 
weighted average rate of 8.49%, one floating rate mortgage of approximately 
$2.1 million bearing interest at a rate of 8.75%, and a secured estimated 
settlement obligation recorded at $2.2 million (accruing interest at a rate 
of prime plus 3% on the stated settlement obligation of $3.65 million), as 
more fully discussed in Note 2 of the Registrant's unaudited condensed 
consolidated financial statements.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

     INVESTMENT PROPERTIES  - During the first nine months of 1997, the 
income from investment properties was $453,000 compared to income of $295,000 
during the first nine months of 1996.  During the third quarter of 1997 the 
loss from investment properties was $165,000 compared to a loss of $79,000 
for the third quarter of 1996.   Interest expense increased from $2,169,000 
during the first nine months of 1996 to $2,989,000 during the first nine 
months of 1997 primarily as a result of the debt associated with the 
properties acquired in January 1997. Also included in interest expense for 
the first nine months of 1997 is $121,000 of interest recorded on the 
settlement obligation as described above. Depreciation and amortization 
expense increased as a result of commencing depreciation of expenditures 
capitalized during 1996 and early 1997 relating to the Registrant's leasing 
activities and capital improvement projects,  and new investment property 
acquisitions completed in the first quarter of 1997.


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<PAGE>

     The following table identifies the impact of certain investment property 
dispositions, acquisitions, and properties owned in the three and nine months 
ended September 30, 1997 and 1996, respectively (in thousands):

<TABLE>
<CAPTION>

                                               FOR THE THREE        FOR THE NINE
                                                MONTHS ENDED        MONTHS ENDED
                                                SEPTEMBER 30,       SEPTEMBER 30,
                                                -------------       -------------
                                               1997      1996      1997      1996 
                                               ----      ----      ----      ----
<S>                                         <C>       <C>       <C>       <C>
INVESTMENT PROPERTIES OWNED IN 
   1997 AND 1996:

     Rental revenue                          $ 2,539   $ 2,699   $ 7,826   $ 7,713 
     Operating expense                        (1,194)   (1,479)   (3,459)   (3,960)
     Interest expense                           (813)     (661)   (2,207)   (1,900)
     Depreciation expense                       (653)     (661)   (1,945)   (1,899)
                                             -------   -------   -------   -------
                                                (121)     (102)      215       (46)
                                             -------   -------   -------   -------

INVESTMENT PROPERTIES ACQUIRED IN
   JANUARY 1997:

     Rental revenue                              735        --     2,326        -- 
     Operating expense                          (363)       --      (951)       -- 
     Interest expense                           (276)       --      (782)       -- 
     Depreciation expense                       (140)       --      (355)       -- 
                                             -------   -------   -------   -------
                                                 (44)                238        -- 
                                             -------   -------   -------   -------

INVESTMENT PROPERTY SOLD IN APRIL 1996:

     Rental revenue                               --        --        --       706 
     Operating expense                            --        23        --       (96)
     Interest expense                             --        --        --      (269)
     Depreciation expense                         --        --        --        -- 
                                             -------   -------   -------   -------
                                                  --        23        --       341 
                                             -------   -------   -------   -------


TOTAL INVESTMENT PROPERTIES:

     Rental revenue                            3,274     2,699    10,152     8,419 
     Operating expense                        (1,557)   (1,456)   (4,410)   (4,056)
     Interest expense                         (1,089)     (661)   (2,989)   (2,169)
     Depreciation expense                       (793)     (661)   (2,300)   (1,899)
                                             -------   -------   -------   -------

   TOTAL INVESTMENT PROPERTIES
     INCOME (LOSS)                           $  (165)  $   (79)  $   453   $   295 
                                             -------   -------   -------   -------
                                             -------   -------   -------   -------

</TABLE>

     GENERAL AND ADMINISTRATIVE EXPENSES -  General and administrative 
expenses in the first nine months of 1997 amounted to $950,000 compared to 
$1,226,000 for the first nine months of 1996.  General and administrative 
expenses for the third quarter of 1997 and 1996 were $250,000 and $408,000, 
respectively.  The decrease is primarily attributable to a decrease in 
professional services and personnel costs including severance to a former 
executive.


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<PAGE>

     OTHER INCOME, NET - Other income, net, consisting primarily of interest 
income was $131,000 and $30,000 during the first nine months and third 
quarter of 1997, respectively.  Other income, net, consisting primarily of 
business advisory fees and income from the sale of vacant land in Colorado 
was $252,000 and $38,000 during the first nine months and third quarter of 
1996, respectively.

     HOTEL PROPERTY - The Registrant sold its hotel property in December 1996 
and, accordingly, a comparison of operations from the first nine months and 
third quarter of 1996 to the first nine months and third quarter of 1997 is 
not meaningful.

     ESTIMATED PROVISION FOR SETTLEMENT OF THE REIMBURSEMENT OBLIGATION - 
Effecive June 30, 1997, the Registrant recorded an estimated provision of 
$2.2 million for the ultimate settlement of the letter-of-credit 
reimbursement obligation, as more fully discussed in Note 2 to the 
Registrant's unaudited condensed consolidated financial statements.

     GAIN ON SALE OF REAL ESTATE ASSETS, NET - In April 1996, the Registrant 
sold the Village Commons Shopping Center, located in West Palm Beach, 
Florida, to an unrelated party and realized a gain of $10,900,000. 

     INCOME TAX BENEFIT (PROVISION) - A tax benefit of $970,000 and $140,000 
has been recorded in connection with the net loss for the first nine months 
and third quarter of 1997, respectively.  A tax provision of $4,800,000 has 
been recorded in connection with the net income for the nine months ended 
September 30, 1996.  A tax benefit of $8,000 has been recorded in connection 
with the net loss for the three months ended September 30, 1996.  These 
amounts have been recorded in accordance with Statement of Financial 
Accounting Standards No. 109.

LIQUIDITY AND CAPITAL RESOURCES

REGULATION AND SUPERVISION

     Many jurisdictions have adopted laws and regulations relating to the 
ownership of real estate.  Compliance with these requirements from time to 
time may require capital expenditures by the Registrant (for example, 
expenditures necessary in order to comply with the Americans with 
Disabilities Act or changes in local building or other codes).  In addition, 
the Registrant may from time to time have to expend capital for environmental 
control facilities.  While the ownership of real estate may entail 
environmental risks and liabilites to the owner, the Registrant's management 
is sensitive to environmental issues and is not currently aware of and does 
not expect any material effects on current or future capital expenditures, 
earnings or competitive position resulting from compliance with present 
federal, state or local environmental control provisions.

DISCUSSION OF KNOWN TRENDS, EVENTS AND UNCERTAINTIES

     The economic climate for commercial real estate has begun to show signs 
that rental rates and property values have stabilized and in selected markets 
have actually improved.  Notwithstanding a stabilizing real estate market, 
tenants may or may not continue to renew leases as they expire or may renew 
on less favorable terms.  Conditions differ in each market in which the 
Registrant's properties are located.  Because of the continuing uncertainty 
of future economic 


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<PAGE>

developments in each market, the impact these developments will have on the 
Registrant's future cash flow and results of operations is uncertain.

     Inflation, inflationary expectations and their effect on interest rates 
may affect the Registrant in the future by changing the underlying value of 
the Registrant's real estate or by impacting the costs of financing the 
Registrant's operations.

LIQUIDITY AND CAPITAL RESOURCES

     The bulk of the Registrant's resources are committed to relatively 
non-liquid real estate assets.  These assets, due to their value and cash 
flow, have provided the Registrant with an ability to generate capital as 
required, both internally and externally, through asset-based financings.  In 
addition, since 1992, assets or portions thereof were sold to provide further 
liquidity.

     The Registrant has taken several actions to generate and conserve cash, 
and continues to review and analyze alternative actions.  At the same time, 
the Registrant is seeking to retain value and identify future opportunities 
for investment.  At September 30, 1997, the Registrant has approximately $2.5 
million of unrestricted cash, investment properties with a net book value of 
approximately $53.6 million (including the Needham, Massachusetts property 
recorded at its estimated net realizable value of $2.2 million), total 
non-recourse mortgage debt and secured estimated settlement obligation of 
approximately $47.6 million and stockholders' equity of approximately $.7 
million.  At September 30, 1997, the Registrant had approximately $1.5 
million of restricted cash.  Given the Registrant's desire to increase its 
liquidity, the Registrant has actively pursued the sale of selected real 
estate assets in the past, has restructured and refinanced its mortgage debt, 
and has entered into an agreement with the managing general partner of RCA to 
limit the Registrant's cash obligations to RCA.  The Registrant continues to 
evaluate various alternatives to improve its liquidity through debt 
refinancing and the sale of properties which do not fit within its long term 
strategy.  Funds raised in the preceeding fashion would be used for tenant 
improvements and other capital requirements, certain mandatory debt 
reductions, and possible new investments.

     Scheduled principal maturites on the above described debt during the 
twelve month period ending September 30, 1998, will amount to approximately 
$923,000. This amount does not include the ultimate settlement of the 
reimbursement obligation.

     The Registrant is also obligated to fund reserves for building, tenant 
improvements, leasing commissions and debt service in connection with its 
mortgage loans on Walnut Creek Executive Park, North Tucson Business Center 
and South Bay Office Tower.  Scheduled funding under the various loan 
agreements during the twelve month period ending September 30, 1998, will 
amount to approximately $695,000.

     The Registrant's Massachusetts property is pledged as collateral for a 
$3.65 million letter-of-credit that was drawn as of June 30, 1997.  As 
discussed in Note 2 of the Registrant's unaudited condensed consolidated 
financial statements, the Issuing Bank made a demand on the Registrant to 
reimburse them for the $3.65 million drawn on the letter-of-credit and also 
notified the 


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<PAGE>

Registrant it is in default with respect to the reimbursement obligation. On 
August 21, 1997, the Issuing Bank commenced an action for conditional 
judgement seeking, among other remedies, to foreclose on the Massachusetts 
property.  Under Massachusetts law, such foreclosure could not take place 
until at least three years and two months after the issuance of the 
conditional judgement.  However, if the Registrant does not pay the amount of 
the conditional judgement within two months after its issuance, the Issuing 
Bank could take possession of the property during the three year period 
preceding foreclosure. If the Issuing Bank completes a foreclosure on the 
Massachusetts property, the Registrant will eliminate $3.65 million in 
secured debt (currently recorded at $2.2 million) on a property that is 
producing approximately $240,000 in annual cash flow. In such action, the 
Issuing Bank is seeking to assert a deficiency claim against the Registrant 
for any alleged difference between the value of the foreclosed property and 
the $3.65 million drawn on the letter-of-credit including outstanding 
interest and fees.  The Registrant intends to vigorously defend such 
deficiency claim.  In accordance with generally accepted accounting 
principles, effective June 30, 1997, the Registrant recorded an "estimated 
provision for settlement of reimbursement obligation" in the amount of $2.2 
million to provide for the ultimate settlement of the reimbursement 
obligation.  The accrued amount is equal to the net book value at June 30, 
1997, of the Needham, Massachusetts property that serves as collateral for 
the remibursement obligation, resulting in an effective discount of the $3.65 
million  face value of the reimbursement obligation.  The Registrant has 
recorded rental revenue and operating expenses related to this property, as 
well as accrued interest on the $3.65 million settlement obligation at a rate 
of prime plus three percent.  Any difference between that estimated provision 
for settlement of the reimbursement obligation and the amount ultimately 
settled upon will be charged or credited to the Registrant's operations as 
such difference becomes determinable.  Management can provide no assurances 
as to the ultimate settlement amount or method (and the timing thereof) 
relating to the reimbursement obligation.

     The Registrant's minority, non-managing partnership interest in RCA 
represents significant potential financial exposure.  This exposure includes, 
and may not be limited to, the potential tax liability associated with the 
Registrant's negative tax basis, the joint and several guarantees and 
letter-of-credit provided by the Registrant to the mortgage lender on Rincon 
Center Phase Two and the master lessor on Rincon Center Phase One, and the 
potential tax liability that would exist from the cancellation of debt in 
connection with a possible debt restructuring.  Additionally, RCA's managing 
general partner agreed to advance funds to RCA on behalf of the Registrant on 
an unsecured non-recourse basis, subject to interest at prime plus 2% and 
certain annual fees (principal, unpaid interest, and fees are collectively 
referred to as the RCA Advances).  The RCA Advances amount to approximately 
$6,219,000 at September 30, 1997, and are not recorded by the Registrant 
since (i) the RCA Advances are only required to be repaid from the 
Registrant's share of future distributions from RCA, if any, (ii) the 
Registrant has no intention or legal obligation to repay the RCA Advances 
other than from its share of distributions from RCA, if any, and (iii) the 
Registrant does not anticipate any material cash distributions by RCA in the 
foreseeable future.

     Except as described above, at September 30, 1997, the Registrant has no 
contractual commitments for any material capital expenditures over the next 
twelve months or beyond that are not expected to be funded from the cash


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<PAGE>

restricted for capital improvements, acquisitions and debt service or future 
cash flow generated by operating activities.  Ongoing repair and maintenance 
expenditures are expected to be funded from cash flow generated by operating 
activiites.  Future tenant improvements and leasing commissions will be 
funded, in part, from the restricted cash described above, cash flow 
generated by operating activities and funds generated from future debt 
refinancings or property sales, if any.

     The Registrant continued to experience more stabilized operating results 
in its wholly owned property during the first three quarters of 1997, and 
except for RCA, expects this trend to continue.  In addition, the completion 
of certain leasing transactions has continued to reduce the level of vacancy 
in the Registrant's portfolio; however the Registrant is continuing to 
aggressively pursue new leases on currently available space and renew 
existing leases as they expire.

ITEM 1.  LEGAL PROCEEDINGS

     See Note 2 to the Registrant's unaudited condensed consolidated 
financial statements in Part I of this Quarterly Report on Form 10-Q 
concerning the $3.65 million letter of credit issued by the Bank of America 
National Trust and Savings Association (the "Issuing Bank") as a portion of 
the security for the refinancing of Rincon Center, Phase Two.  On August 21, 
1997, the Issuing Bank commenced an action against the Registrant in the Land 
Court, Department of the Trial Court, of the Commonwealth of Massachusetts, 
to obtain a conditional judgement in the full amount of the Registrant's 
indebtedness to the Bank, which the Bank alleges is in excess of $3,700,000, 
and in the event Registrant fails to pay such conditional judgement, among 
other remedies, to foreclose on the Needham, Massachusetts property.  Under 
Massachusetts law, such foreclosure cannot take place until three years and 
two months after the issuance of a conditional judgement.  However, if the 
Issuing Bank should obtain a conditional judgement, and the Company does not 
pay the amount of the conditional judgement within two months after its 
issuance, the Issuing Bank could take possession of the property during the 
three-year period preceding foreclosure.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

           a)   Exhibits

                No.  Description
                ---  -----------

                27   Financial Data Schedule


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<PAGE>

                                 SIGNATURES


Pursuant to the requirements 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.


                                       PACIFIC GATEWAY PROPERTIES, INC.
                                       --------------------------------
                                       Registrant



Date: November 11, 1997                /s/Raymond V. Marino
                                       --------------------
                                       Raymond V. Marino
                                       President and Chief Executive Officer



Date: November 11, 1997                /s/Melanie L. Adkins
                                       --------------------
                                       Melanie L. Adkins
                                       Controller - Management Company
                                       (Principal Accounting Officer)



Date: November 11, 1997                /s/George S. Mercado
                                       --------------------
                                       George S. Mercado
                                       Controller - Corporate
                                       (Principal Accounting Officer)


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