<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 March 31, 1998

                                          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 March 31, 1998:

$1.00 Par Value Common Stock                                3,899,596
----------------------------                     -----------------------------
    (Title of Class)                             (Number of Shares Outstanding)


<PAGE>

                       PACIFIC GATEWAY PROPERTIES, INC.

                                    INDEX


<TABLE>
<CAPTION>

Part I - Financial Information:                                                     Page Number
<S>                                                                                 <C>
          Item 1.        Financial Statements

          Condensed Consolidated Balance Sheet as of
                March 31, 1998 and December 31, 1997                                      3


          Condensed Consolidated Statement of Income for
                the Three Months Ended March 31, 1998 and 1997                            4


          Condensed Consolidated Statement of Cash Flows
                for the Three Months Ended March 31,
                1998 and 1997                                                             5

          Notes to Condensed Consolidated Financial Statements                            6-10

          Item 2.        Management's Discussion and 
                           Analysis of Financial Condition
                           and Results of Operations                                      11-16


Part II - Other Information

          Item 1.        Legal Proceedings                                                16-17

          Item 2.        Changes in Security                                              None

          Item 3.        Defaults Upon Senior Securities                                  None

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

          Item 5.        Other Information                                                17

          Item 6.        Exhibits and Reports on Form 8-K                                 17



Signatures                                                                                18
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>

                                                                         AS OF              AS OF
                                                                     MARCH 31,       DECEMBER 31,
                                                                          1998               1997
                                                                     ---------       ------------
<S>                                                                    <C>               <C>
ASSETS
Cash and cash equivalents                                              $    820          $  2,065
Restricted cash                                                           1,775             1,746
Accounts receivable, prepaid taxes and other
  current assets                                                            392               252
Investment properties:                                                   72,294            70,656
  Less-accumulated depreciation and reserve
  for write-down to net realizable value                                (17,215)          (16,431)
                                                                       --------          --------
    Investment properties, net                                           55,079            54,225
                                                                       --------          --------
Deferred tax asset                                                        8,844             8,203
Capitalized loan costs, net                                                 794               818
Capitalized lease commissions, rent concessions
  and other deferred costs, net                                           1,724             1,402
                                                                       --------          --------
     Total assets                                                      $ 69,428          $ 68,711
                                                                       --------          --------
                                                                       --------          --------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable, prepaid rent, tenant security
  deposits, accrued interest and other current
  liabilities                                                          $  4,231          $  2,678
Debt related to investment properties                                    47,159            47,402
Deferred tax liability                                                   18,534            17,983
                                                                       --------          --------
     Total liabilities                                                   69,924            68,063
                                                                       --------          --------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock $1.00 par value--
  Authorized--10,000,000 shares
  Issued--4,018,150 shares                                                4,018             4,018
Paid-in-deficit                                                          (9,140)          (10,023)
Retained earnings                                                         6,663             6,800
Treasury stock, at cost--118,554 common shares at
  March 31, 1998 and December 31, 1997                                   (2,037)           (2,037)
Warrants for common stock                                                    --             1,890
                                                                       --------          --------
   Total stockholders' equity (deficit)                                    (496)              648
                                                                       --------          --------
     Total liabilities and stockholders' equity (deficit)              $ 69,428          $ 68,711
                                                                       --------          --------
                                                                       --------          --------
</TABLE>

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


                                       3

<PAGE>

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

<TABLE>
<CAPTION>

                                                                          FOR THE THREE MONTHS
                                                                               ENDED MARCH 31,
                                                                          --------------------
                                                                            1998          1997
                                                                          -------      -------
<S>                                                                       <C>          <C>
INVESTMENT PROPERTIES:
  Rental revenues                                                         $ 3,469      $ 3,309
  Operating expenses                                                       (1,395)      (1,273)
  Interest expense                                                         (1,059)        (851)
  Depreciation and amortization                                              (819)        (714)
                                                                          -------      -------
    Investment properties income                                              196          471
                                                                          -------      -------
General and administrative expenses                                          (440)        (419)
Other income, net                                                              24           48
                                                                          -------      -------
Income (loss) before hotel operations and taxes                              (220)         100
Loss from hotel operations                                                     --          (94)
                                                                          -------      -------
Income (loss) before taxes                                                   (220)           6
Income tax benefit                                                             83           --
                                                                          -------      -------
  Net income (loss)                                                       $  (137)     $     6
                                                                          -------      -------
                                                                          -------      -------

Income (loss) per share, basic                                            $ (0.04)     $  0.00
                                                                          -------      -------
                                                                          -------      -------

Income (loss) per share, diluted                                          $ (0.04)     $  0.00
                                                                          -------      -------
                                                                          -------      -------
</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
                                                                               ENDED MARCH 31,
                                                                          --------------------
                                                                            1998          1997
                                                                          -------     --------
<S>                                                                       <C>         <C>

Cash flow from operating activities:
  Net income (loss)                                                       $  (137)    $      6
  Non-cash revenues and expenses
    included in net income (loss):
      Depreciation and amortization                                           819          714
      Deferred taxes, net                                                     (90)          --
  Change in assets and liabilities:
      Accounts receivable, prepaid taxes and
        other current assets                                                 (140)         575
      Accounts payable and other current liabilities                        1,553          379
                                                                          -------     --------
  NET CASH GENERATED BY OPERATING ACTIVITIES                                2,005        1,674
                                                                          -------     --------

Cash flow from investing activities:
  Additions to building and other improvements,
    capitalized lease commissions, rent concessions,
    and other deferred costs                                               (1,971)        (586)
  Acquisition of investment properties                                         --      (10,975)
                                                                          -------     --------
  NET CASH USED IN INVESTING ACTIVITIES                                    (1,971)     (11,561)
                                                                          -------     --------

Cash flow from financing activities:
  Borrowings under debt related to investment properties                       --        2,112
  Repurchase of warrants                                                   (1,007)          --
  Payments on debt                                                           (243)        (191)
  Payments of loan costs and fees                                              --          (64)
  (Increase) decrease in restricted cash                                      (29)       8,193
                                                                          -------     --------
  NET CASH GENERATED BY (USED IN) FINANCING
      ACTIVITIES                                                           (1,279)      10,050
                                                                          -------     --------

Increase (decrease) in cash and cash equivalents                           (1,245)         163
Balance at beginning of period                                              2,065        2,899
                                                                          -------     --------
Balance at end of period                                                  $   820     $  3,062
                                                                          -------     --------
                                                                          -------     --------

SUPPLEMENTAL DISCLOSURES:
  Cash paid for interest                                                  $ 1,032     $    943
                                                                          -------     --------
                                                                          -------     --------
  Cash paid for taxes                                                     $     1     $      1
                                                                          -------     --------
                                                                          -------     --------
  Non-cash transactions:
    Portion of acquisition of investment properties
      funded by assumption of mortgage debt                               $    --     $ 10,203
                                                                          -------     --------
                                                                          -------     --------

    Increase in additional paid-in capital
      from repurchase of warrants                                         $   883     $     --
                                                                          -------     --------
                                                                          -------     --------
</TABLE>

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


                                       5


<PAGE>

                          PACIFIC GATEWAY PROPERTIES, INC.
           NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                        FOR THE QUARTER ENDED MARCH 31, 1998

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying unaudited condensed consolidated financial statements 
should be read in conjunction with the Registrant's 1997 Form 10-K and Form 
10-Q for the quarter ended March 31, 1997.  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 months ended March 31, 1998 are not 
necessarily indicative of the results that may be expected for the year 
ending December 31, 1998.

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 provision for settlement of the reimbursement 
obligation and deferred income tax liabilities related to the tax that would 
result from any gain recognized from the 


                                   6
<PAGE>


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. As of January 1, 1998, no new commitment 
had been secured although negotiations with the current lender were in 
progress.  In order to allow those discussions to continue, Chrysler agreed 
to temporarily delay the enforcement of the purchase requirements.  RCA can 
make no assurances about the outcome of this negotiation.  As a result of the 
current loan negotiations, RCA has written-down the carrying value of the 
assets related to this segment of the property by $17,150,000 in 1997 to the 
estimated net realizable value.  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 Citibank.  The residential portion of Rincon Center Phase Two is 
being financed with redevelopment bonds from the Redevelopment Agency of the 
City and County of San Francisco, California, which are due December 1, 2006. 
The bonds are secured by an irrevocable letter-of-credit issued by Citibank 
in the name of RCA.  In the event that drawings are made on the 
letter-of-credit, RCA has agreed to reimburse Citibank for such drawings 
pursuant to the terms of the Reimbursement Agreement which is secured by a 
deed of trust on Rincon Center Phase Two and other guarantees.  During 1997, 
the irrevocable letter-of-credit was due to expire.  RCA is currently in 
negotiations with Citibank to extend the letter-of-credit and no assurances 
can be made about the outcome of this negotiation.  Currently, the 
letter-of-credit has been extended to June 15, 1998.

     The commercial portion of Rincon Center Phase Two was financed pursuant 
to a Construction Loan Agreement between RCA and Citibank.  The Construction 
Loan Agreement is secured by a deed of trust on the commercial portion of 
Rincon Center Phase Two.  In 1993, RCA extended the loan to October 1, 1998.  
RCA is currently in negotiations with Citibank to extend the loan and no 
assurances can be made about the outcome of this negotiation.  A portion of 
the security for the Construction Loan Agreement was a $3.65 million 
letter-of-credit issued by Bank of America National Trust and Savings 
Association (the Issuing Bank) on behalf of the Company in favor of Citibank.

     The reimbursement obligation of the Registrant to the Issuing Bank is full


                                   7
<PAGE>


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 Citibank prior to its expiration date of June 23, 
1997. Citibank 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 410 
First Avenue 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 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 a "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 410 First Avenue 
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 the provision for settlement of the 
reimbursement obligation and the amount ultimately settled upon may 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 1996, the Registrant ceased recording any activity related to its 
interest in RCA because (i) it had previously written-down its equity 
investment in and loans to RCA to zero in 1995, and (ii) the Registrant 
currently has no obligation, prospects or plans to invest further in or on 
behalf of RCA.

     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 partnership interests in RCA.  The RCA Advances are only required to 
be repaid from the Registrant's 


                                   8
<PAGE>


share of future distributions from RCA, if any.  During the first three 
months of 1998 and 1997, RCA incurred net losses of $4,403,000 and $4,590,000, 
respectively.  The RCA Advances amount to approximately $7,289,000 at March  
31, 1998, 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 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 recorded these claims pending 
resolution of this matter with RCA's managing general partner.

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

<TABLE>
<CAPTION>

AS OF                                           FEBRUARY 28,       DECEMBER 31,
                                                        1998               1997
                                                ------------       ------------
<S>                                                <C>                <C>
Investment properties, net                         $  99,375          $ 107,045
Other assets                                           9,516              6,857
                                                   ---------          ---------
                                                   $ 108,891          $ 113,902
                                                   ---------          ---------
                                                   ---------          ---------

Debt                                               $  46,487          $  49,228
Amounts due to partners                              188,981            185,208
Other liabilities                                      9,614             12,723
Partners' deficit                                   (136,191)          (133,257)
                                                   ---------          ---------
                                                   $ 108,891          $ 113,902
                                                   ---------          ---------
                                                   ---------          ---------

                                                         THREE MONTHS ENDED
                                                             MARCH 31,
                                                   ----------------------------
                                                        1998               1997
                                                   ---------          ---------

Revenue                                            $   4,571          $   4,008
Expenses:
  Operating and lease expenses                         4,793              4,407
  Interest expense                                     3,411              3,480
  Depreciation expense                                   770                711
                                                   ---------          ---------
                                                       8,974              8,598
                                                   ---------          ---------
Net loss                                           $  (4,403)         $  (4,590)
                                                   ---------          ---------
                                                   ---------          ---------
</TABLE>


   As of the date of this report, the managing general partner of RCA had not 
completed the financial accounting for RCA.  As a result, the Registrant has 
recorded an estimate of revenue and expenses for the first three months of 
1998 based upon actual operating revenue and expenses for January and 
February 1998, and has included the actual unaudited balance sheet as of 
February 28, 1998. The Registrant has conferred with the managing general 
partner of RCA and considers these estimates to be reasonable; however, 
actual results will differ from these estimates.


                                   9
<PAGE>


3. PER SHARE DATA 

   In March 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per 
Share". SFAS No. 128 requires the disclosure of basic earnings per share and 
modifies the existing guidance for computing diluted earnings per share.  
Under the new standard, basic earning per share is computed as earnings 
divided by weighted average shares, excluding the dilutive effects of stock 
options and other potentially dilutive securities.  Outstanding warrants and 
stock options enter into the weighted average shares outstanding when 
computing diluted earnings per share using the Treasury Stock Method.

   The number of weighted average common shares and potential common shares 
used in the earning per share calculations are as follows:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                            MARCH 31,
                                                    -----------------------
                                                         1998          1997
                                                         ----          ----
<S>                                                 <C>           <C>
Basic                                               3,899,596     3,892,596

Stock options and warrants                                 --       349,556
                                                    ---------     ---------
Diluted                                             3,899,596     4,242,152
                                                    ---------     ---------
                                                    ---------     ---------
</TABLE>


     In the first quarter of 1998, due to the Registrant's loss position, the 
inclusion of stock options would have been anti-dilutive, and accordingly the 
number of outstanding shares used in calculating basic and diluted earnings 
per share for this quarter are the same.

4.   REPURCHASE OF WARRANTS

     On March 31, 1998, the Registrant completed the repurchase of 1,000,000 
outstanding warrants to purchase 1,000,000 shares of the Registrant's common 
stock at an exercise price of $2.875 per share from Citicorp Real Estate, 
Inc. (Citicorp), for $1,000,000.  The warrants were issued in 1993 in 
connection with a debt restructuring with Citicorp and recorded in the 
stockholders' equity section of the Registrant's Unaudited Condensed 
Consolidated Balance Sheet at a carrying value of $1,890,000.  As a result of 
this transaction, the Registrant has recorded the difference between the 
carrying value of the warrants and the net purchase price, which amounts to 
$883,000, as additional paid-in-capital in the Registrant's Unaudited 
Condensed Consolidated Balance Sheet as of March 31, 1998.


                                   10
<PAGE>


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 1997, quarterly report on Form 10-Q for the 
quarter ended March 31, 1997, and in conjunction with the Unaudited Condensed 
Consolidated Balance Sheet, Statements of Income 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 months ended March 31, 1998, there were additions to investment
properties amounting to approximately $1,971,000 for tenant improvements, 
capital improvements and other deferred costs which includes leasing 
commissions.  The Registrant anticipates further additions to investment 
properties of approximately $2,704,000 during the remainder of 1998.

     FINANCING -- Approximately $223,000 of debt principal was repaid in the 
three months ended March 31, 1998 as scheduled debt amortization. 

MATERIAL CHANGES IN RESULTS OF OPERATIONS

     INVESTMENT PROPERTIES  - During the first three months of 1998, the 
income from investment properties was $196,000 compared to income of $471,000 
during the first three months of 1997.  Interest expense increased from 
$851,000 during the first three months of 1997 to $1,059,000 during the first 
three months of 1998 primarily as a result of 1997 including only two months 
of interest on the properties acquired in January 1997.  Also included in 
interest expense for the first three months of 1998 is $104,000 of interest 
recorded on the settlement


                                   11
<PAGE>


obligation as described above.  Depreciation and amortization expense 
increased as a result of commencing depreciation of expenditures capitalized 
during 1997 and early 1998 relating to the Registrant's leasing activities 
and capital improvement projects.

     GENERAL AND ADMINISTRATIVE EXPENSES -  General and administrative 
expenses in the first three months of 1998 amounted to $440,000 compared to 
$419,000 for the first three months of 1997.  The increase is primarily 
attributable to a increase in professional services offset by a decrease in 
personnel costs.  

     OTHER INCOME, NET - Other income, net, consisting primarily of interest 
income, was $24,000 and $48,000 during the first three months of 1998 and 
1997, respectively.  The decrease is primarily due to the reduction of cash 
invested resulting from the repurchase of the warrants as more fully 
discussed on the following page.

     HOTEL PROPERTY - The Registrant sold its hotel property in December 1996 
and, accordingly, a comparison of hotel operations for the first quarter of 1998
to the first quarter of 1997 is not meaningful.

     INCOME TAX BENEFIT - A tax benefit of $83,000 has been recorded in 
connection with the net loss for the first three months of 1998.  No tax 
provision was recorded in connection with the net income for the three months 
ended March 31, 1997.  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 shown signs that 
rental rates and property values have stabilized and in selected markets has 
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 developments in each market, the impact these developments will have 
on the Registrant's future cash flow and 


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<PAGE>


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 March 31, 1998, the Registrant has approximately $.8 
million of unrestricted cash, approximately $1.8 million of restricted cash, 
investment properties with a net book value of approximately $55.1 million 
(including the 410 First Avenue property recorded at its estimated net 
realizable value of $2.2 million), total non-recourse mortgage debt and 
secured settlement obligation of approximately $47.2 million and 
stockholders' deficit of approximately $(0.5) million.  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.

     As discussed in the Registrant's Unaudited Condensed Consolidated 
Financial Statements, 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 March 31, 
1999, will amount to approximately $695,000.

     Scheduled principal maturites on the above described debt during the 
twelve month period ending March 31, 1999, will amount to approximately 
$3,150,000. This amount includes the $2,200,000 liability related to the 
reimbursement obligation as described below.

     The Registrant's 410 First Avenue 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


                                   13
<PAGE>


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. The 
reimbursement obligation of the Registrant to the Issuing Bank is full 
recourse to the Registrant and is secured by the 410 First Avenue property. 
On August 21, 1997, the Issuing Bank commenced an action for conditional 
judgement seeking, among other remedies, to foreclose on the 410 First Avenue 
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 410 
First Avenue 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 a "provision for settlement of reimbursement 
obligation" in the amount of $2.2 million.  The accrued amount is equal to 
the net book value at June 30, 1997, of the 410 First Avenue 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 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, 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 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). As indicated previously, RCA's managing 
general partner is seeking to void the letter agreement under which these 
loans were made and is also seeking restitution of the loans advanced. The 
RCA Advances amount to approximately $7,289,000 at March 31, 1998, 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


                                   14
<PAGE>


distributions from RCA, if any, and (iii) the Registrant does not anticipate 
any material cash distributions by RCA in the foreseeable future.  The 
managing general partner of RCA is currently in negotiations to refinance the 
debt on Rincon Center Phases One and Two as more fully described in Note 2 to 
the Registrant's Unaudited Condensed Consolidated Financial Statements.  The 
proposed refinancing is subject to a number of conditions and approvals among 
the parties involved in the refinancing.  The managing general partner of RCA 
and the Registrant can make no assurances that the refinancing will be 
completed.

     Except as described above, at March 31, 1998, the Registrant's material 
capital expenditures over the next twelve months and beyond are expected to 
be funded from restricted cash or future cash flow generated by operating 
activities.  Ongoing repair and maintenance expenditures are expected to be 
funded from cash flow generated by operating activities.  Future tenant 
improvements and leasing commissions will be funded from restricted cash, 
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 properties during the first quarter of 1998, 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 and the Registrant is continuing to aggressively 
pursue new leases on currently available space and renew existing leases as 
they expire.

REPURCHASE OF WARRANTS

     On March 31, 1998, the Registrant completed the repurchase of 1,000,000 
outstanding warrants to purchase 1,000,000 shares of the Registrant's common 
stock at an exercise price of $2.875 per share from Citicorp Real Estate, 
Inc. (Citicorp), for $1,000,000.  The warrants were issued in 1993 in 
connection with a debt restructuring with Citicorp and recorded in the 
stockholders' equity section of the Registrant's Unaudited Condensed 
Consolidated Balance Sheet at a carrying value of $1,890,000.  As a result of 
this transaction, the Registrant has recorded the difference between the 
carrying value of the warrants and the net purchase price, which amounts to 
$883,000, as additional paid-in-capital in the Registrant's Unaudited 
Condensed Consolidated Balance Sheet as of March 31, 1998.

YEAR 2000 COMPLIANCE

     To the extent that the Registrant's software applications contain source 
code that is unable to appropriately interpret the upcoming calendar year 
"2000" and beyond, some level of modification or replacement of such 
applications will be necessary.  The Registrant has received notification 
from its primary software vendor indicating that the software application 
used by the Registrant will be Year 2000 compliant by the end of 1998, at a 
minimal cost to the Registrant.

FORWARD-LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS

     Certain information included in this form 10-Q and other materials filed 


                                   15
<PAGE>


or to be filed by the Registrant with the Securities and Exchange Commission 
may constitute forward-looking statements within the meaning of the Private 
Securities Litigation Reform Act of 1995.  Such forward-looking information 
involves known and unforseen risks, uncertainties and other factors that may 
cause actual results or performance to be materially different from those 
expressed or implied by such forward-looking statements.  These risks and 
uncertainties include, but are not limited to, uncertainties affecting the 
real estate business generally, such as lease renewals and the financial 
stability of tenants, general economic conditions and conditions in the 
Registrant's markets, risks relating to acquisitions and dispositions of 
properties, risks relating to interest rate levels and fluctuations, the 
availability of financing, and regulatory risks.  Given these and other risks 
described elsewhere in this Form 10-Q, investors are cautioned not to place 
undue reliance on any forward-looking statements.

ITEM 1.  LEGAL PROCEEDINGS

     On March 20, 1997, the Registrant filed a Complaint in the San Francisco 
Superior Court, Case No. 985464, against Rincon Center Associates and Perini 
Land and Development Company seeking to recover approximately $812,000 in 
commissions due for leasing and construction services performed for Rincon 
Center.  The Complaint has been answered and a Cross-Complaint has been 
filed.  The Cross-Complaint seeks indemnity concerning the claim for leasing 
commissions on the ground that the Registrant is also a general partner of 
RCA, and further seeks to rescind or otherwise avoid the effect of a letter 
agreement of June 22, 1993, regarding non-recourse loans from Perini Land and 
Development Company to the Registrant, together with restitution of amounts 
loaned to the Registrant pursuant to such letter agreement.  A trial date has 
been set for August 3, 1998, however the case is only in the beginning stages 
of discovery, and the Registrant is not in a position at this time to opine 
as to the likelihood or remoteness of liability, or the amount of damages 
should liability be established.

     See Note 2 to the Registrant's Unaudited Condensed Consolidated 
Financial Statements 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 18, 1997, the Issuing Bank commenced an action against the 
Registrant in the Land Court Department of the Trial Court of Massachusetts, 
to obtain a conditional judgement in the full amount of the Registrant's 
indebtedness to the Issuing Bank, which the Issuing Bank alleges is in excess 
of $3.7 million.  In the event that the Registrant fails to pay such 
conditional judgement, the complaint seeks, among other remedies, to 
foreclose on the 410 First Avenue property and obtain a deficiency judgement. 
Under Massachusetts law, such foreclosure cannot take place until at least 
three years and two months after the issuance of a conditional judgement.  
However, if the Issuing Bank should obtain a conditional judgement, the 
Issuing Bank could take possession of the property and receive rents paid 
thereon during the three year period preceding foreclosure.  The Registrant 
is vigorously defending the action.  The Registrant filed a complaint against 
the Issuing Bank on November 21, 1997 in the Superior Court Department of the 
Trial Court of the Commonwealth of Massachusetts seeking damages, equitable 
relief and a jury trial for causes of action flowing from the Issuing


                                   16
<PAGE>


Bank's conduct regarding the letter-of-credit.  The result of the action 
brought by the Issuing Bank against the Registrant is uncertain, and it is 
not possible at this time to project a likely outcome of the proceeding.

     The Registrant is involved in various other claims and lawsuits 
incidental to its business.  In the opinion of the Registrant, these other 
claims and lawsuits in the aggregate will not have a material adverse impact 
on the Registrant's financial condition.

ITEM 5.  OTHER INFORMATION

     On April 30, 1998, the Registrant filed Form 10-K/A for the year ended 
December 31, 1997 to include Items 10 through 13.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          a)   Exhibits

               NO.  DESCRIPTION

               27   Financial Data Schedule


          b)   Report on Form 8-K - On April 9, 1998, the Registrant filed Form
               8-K to report the Warrant Repurchase Agreement entered into as of
               March 31, 1998.


                                   17
<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:  May  , 1998                 /s/ Raymond V. Marino
     ------------------            -------------------------------------
                                   Raymond V. Marino
                                   President and Chief Executive Officer
                                   (Principal Executive and Financial Officer)



Date:  May  , 1998                 /s/ Melanie L. Adkins
     ------------------            -------------------------------------
                                   Melanie L. Adkins
                                   Controller - Corporate
                                   (Principal Accounting Officer)



Date:  May  , 1998                 /s/ Neil C. Marck
     ------------------            -------------------------------------
                                   Neil C. Marck
                                   Controller - Management Company
                                   (Principal Accounting Officer)


                                   18