<PAGE>
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                       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 JUNE 30, 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 of incorporation)                    (IRS Employer
                                                   Identification No.)
 
       930 MONTGOMERY STREET, SUITE 400, SAN FRANCISCO, CALIFORNIA 94133
       (Address of principal executive offices)               (zip code)
 
                                 (415) 398-4800
              (Registrant's telephone number, including area code)
 
                                [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 June 30, 1998:
 
<TABLE>
<S>                                     <C>
   $1.00 PAR VALUE COMMON STOCK                      3,899,596
         (Title of Class)                 (Number of Shares Outstanding)
</TABLE>
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                                       PAGE NUMBER
                                                                                                      -------------
<S>                                                                                                   <C>
Part I--Financial Information:
 
        Item 1.  Consolidated Financial Statements
 
        Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997                         3
 
        Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998
          and 1997                                                                                              4
 
        Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30,
          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                                                                                 11-15
 
Part II--Other Information:
 
        Item 1.  Legal Proceedings                                                                          15-16
 
        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                                                                           None
 
        Item 6.  Exhibits and Reports on Form 8-K                                                              16
 
Signatures                                                                                                     17
</TABLE>
 
                                       2
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                       AS OF          AS OF
                                                    JUNE 30,   DECEMBER 31,
                                                        1998           1997
                                                    --------   ------------
<S>                                                 <C>        <C>
ASSETS
 
Cash and cash equivalents                           $  2,053     $   2,065
Restricted cash                                        1,766         1,746
Accounts receivable, prepaid taxes and other
  current assets                                         280           252
Investment properties                                 72,377        70,656
  Less--accumulated depreciation and reserve for
    write-down to net realizable value               (17,655)      (16,431)
                                                    --------     ---------
    Investment properties, net                        54,722        54,225
                                                    --------     ---------
Deferred tax asset                                    10,556         8,203
Capitalized loan costs, net                              806           818
Capitalized lease commissions, rent concessions
  and other deferred costs, net                        2,019         1,402
                                                    --------     ---------
    Total assets                                    $ 72,202     $  68,711
                                                    --------     ---------
                                                    --------     ---------
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Accounts payable, prepaid rent, tenant security
  deposits, accrued interest and other current
  liabilities                                       $  3,310     $   2,678
Debt related to investment properties                 48,477        47,402
Deferred tax liability                                20,521        17,983
                                                    --------     ---------
    Total liabilities                                 72,308        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                                      7,053         6,800
Treasury stock, at cost--118,554 common shares at
  June 30, 1998 and December 31, 1997                 (2,037)       (2,037)
Warrants for common stock                                 --         1,890
                                                    --------     ---------
  Total stockholders' equity (deficit)                  (106)          648
                                                    --------     ---------
    Total liabilities and stockholders' equity
      (deficit)                                     $ 72,202     $  68,711
                                                    --------     ---------
                                                    --------     ---------
</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      FOR THE SIX
                                               MONTHS            MONTHS
                                           ENDED JUNE 30,    ENDED JUNE 30,
                                          ----------------  ----------------
                                             1998     1997     1998     1997
                                          -------  -------  -------  -------
<S>                                       <C>      <C>      <C>      <C>
INVESTMENT PROPERTIES:
  Rental revenues                         $ 4,595  $ 3,557  $ 8,064  $ 6,878
  Operating expenses                       (1,650)  (1,580)  (3,045)  (2,853)
  Interest expense                         (1,065)  (1,049)  (2,124)  (1,900)
  Depreciation and amortization              (991)    (793)  (1,810)  (1,507)
                                          -------  -------  -------  -------
    Investment properties income              889      135    1,085      618
General and administrative expenses          (254)    (280)    (694)    (700)
Other income, net                              30       64       54      101
                                          -------  -------  -------  -------
Income (loss) before hotel operations,
  settlement obligation and taxes             665      (81)     445       19
Income (loss) from hotel operations            --        1       --      (93)
                                          -------  -------  -------  -------
Income (loss) before settlement
  obligation and taxes                        665      (80)     445      (74)
Provision for settlement of
  reimbursement obligation                     --   (2,200)      --   (2,200)
                                          -------  -------  -------  -------
Income (loss) before taxes                    665   (2,280)     445   (2,274)
Income tax benefit (provision)               (275)     830     (192)     830
                                          -------  -------  -------  -------
    Net income (loss)                     $   390  $(1,450) $   253  $(1,444)
                                          -------  -------  -------  -------
                                          -------  -------  -------  -------
Income (loss) per share, basic            $  0.10  $ (0.37) $  0.06  $ (0.37)
                                          -------  -------  -------  -------
                                          -------  -------  -------  -------
Income (loss) per share, diluted          $  0.10  $ (0.37) $  0.06  $ (0.37)
                                          -------  -------  -------  -------
                                          -------  -------  -------  -------
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
 
                                       4
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                              FOR THE THREE        FOR THE SIX
                                                                                                 MONTHS               MONTHS
                                                                                             ENDED JUNE 30,       ENDED JUNE 30,
                                                                                            -----------------   ------------------
                                                                                               1998      1997      1998       1997
                                                                                            -------   -------   -------   --------
<S>                                                                                         <C>       <C>       <C>       <C>
Cash flow from operating activities:
  Net income (loss)                                                                         $   390   $(1,450)  $   253   $ (1,444)
  Non-cash revenues and expenses included in net income (loss):
    Depreciation and amortization                                                               991       793     1,810      1,507
    Deferred taxes, net                                                                         275      (830)      185       (830)
    Provision for settlement of reimbursement obligation                                         --     2,200        --      2,200
  Change in assets and liabilities:
    Accounts receivable, prepaid taxes and other current assets                                 112       (37)      (28)       538
    Accounts payable and other current liabilities                                             (921)     (443)      632        (64)
                                                                                            -------   -------   -------   --------
  NET CASH GENERATED BY OPERATING ACTIVITIES                                                    847       233     2,852      1,907
                                                                                            -------   -------   -------   --------
Cash flow from investing activities:
  Additions to building and other improvements, capitalized lease commissions, rent
    concessions, and other deferred costs                                                      (900)     (809)   (2,871)    (1,459)
  Acquisition of investment properties                                                           --        --        --    (10,975)
                                                                                            -------   -------   -------   --------
  NET CASH USED IN INVESTING ACTIVITIES                                                        (900)     (809)   (2,871)   (12,434)
                                                                                            -------   -------   -------   --------
Cash flow from financing activities:
  Borrowings under debt related to investment properties                                      1,575        --     1,575      2,112
  Repurchase of warrants                                                                         --        --    (1,007)        --
  Payments on debt                                                                             (257)     (212)     (500)      (403)
  Payments of loan costs and fees                                                               (41)       --       (41)        --
  Proceeds from shareholder short-swing sale                                                     --       184        --        184
  (Increase) decrease in restricted cash                                                          9      (127)      (20)     8,066
                                                                                            -------   -------   -------   --------
  NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES                                        1,286      (155)        7      9,959
                                                                                            -------   -------   -------   --------
Increase (decrease) in cash and cash equivalents                                              1,233      (731)      (12)      (568)
Balance at beginning of period                                                                  820     3,062     2,065      2,899
                                                                                            -------   -------   -------   --------
Balance at end of period                                                                    $ 2,053   $ 2,331   $ 2,053   $  2,331
                                                                                            -------   -------   -------   --------
                                                                                            -------   -------   -------   --------
Supplementary disclosures:
  Cash paid for interest                                                                    $   960   $   972   $ 1,992   $  1,900
                                                                                            -------   -------   -------   --------
                                                                                            -------   -------   -------   --------
  Cash paid for taxes                                                                       $     6   $    --   $     7   $     --
                                                                                            -------   -------   -------   --------
                                                                                            -------   -------   -------   --------
  Non-cash transactions:
    Portion of acquisition of investment properties funded by assumption of mortgage debt   $    --   $    --   $    --   $ 10,203
                                                                                            -------   -------   -------   --------
                                                                                            -------   -------   -------   --------
    Increase in debt related to investment properties in connection with reimbursement
      obligation                                                                            $    --   $ 2,200   $    --   $  2,200
                                                                                            -------   -------   -------   --------
                                                                                            -------   -------   -------   --------
    Decrease in paid-in-deficit 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 AND SIX MONTHS ENDED JUNE 30, 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 Forms
10-Q and 10-Q/A for the quarter and six months ended June 30, 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 and six months ended June 30, 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 may 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 (PL&D), (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 in the partnership, 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. Except for the provision for
settlement of the reimbursement obligation (as discussed below) and deferred
income tax 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 MacNally 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.
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. 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
 
                                       6
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
               FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
 
2.  RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
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 July 1993, Chrysler completed a refinancing of Rincon Center Phase One.
This debt matured on July 1, 1998, and as previously reported by the Registrant
in its 1997 Form 10-K PL&D reached a preliminary agreement, early in 1998,
subject to various approvals and further negotiations, with regard to
restructuring certain financial obligations on Rincon Center. These negotiations
are continuing and now include the possible acquisition of Rincon Center Phase
One. While further negotiations with and final approval by the various parties
involved are ongoing, RCA has received the appropriate waivers or assurances to
date that (i) Chrysler will continue to defer enforcement of the purchase
requirement provisions under the master lease, and (ii) while the loan to
Chrysler on Rincon Center Phase One has matured, the current lender has deferred
enforcement to any remedies pending completion of the restructuring discussions.
The Registrant can make no assurances about the outcome of these negotiations.
As a result of the loan negotiations, RCA wrote down the carrying value of the
assets related to this segment of the property by $17,150,000 in 1997 to its
estimated net realizable value.
 
    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.
 
    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 Registrant in favor of Citibank.
 
    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 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 has made a demand on the Registrant to reimburse them for the
$3.65 million drawn on the letter-of-credit and has 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
 
                                       7
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
               FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
 
2.  RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
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 any such deficiency claim. On July 10,
1998, the Issuing Bank's motion for summary judgement in the Land Court action
was allowed. Following a hearing on an assessment of damages, the Court could
award the Issuing Bank damages in excess of $4 million. The Registrant intends
to appeal any such judgement. In addition, the Court denied the Issuing Bank's
motion to dismiss the Registrant's lawsuit against the Issuing Bank in Superior
Court. The Registrant's damages claim in the Superior Court action could offset
or exceed all or some of the damages that the Issuing Bank is likely to be
awarded in the Land Court action. However, there is no assurance whatsoever that
this result will be achieved. Discovery has just commenced and no trial date has
been set. 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 (as discussed below), 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 continued
to record 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
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 share of future distributions from RCA, if any. During the first
six months of 1998 and 1997, RCA incurred net losses of approximately $7,991,000
and $9,958,000, respectively. The RCA Advances amount to approximately
$7,528,000 at June 30, 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.
 
                                       8
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
               FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
 
2.  RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
    During 1997, the Registrant has asserted certain claims against RCA for
payment of 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>
                                                     JUNE 30,    DECEMBER 31,
AS OF                                                    1998            1997
                                                    ---------    ------------
<S>                                                 <C>          <C>
Investment properties, net                          $ 103,347       $ 107,045
Other assets                                            4,137           6,857
                                                    ---------       ---------
                                                    $ 107,484       $ 113,902
                                                    ---------       ---------
                                                    ---------       ---------
 
Debt                                                $  43,458       $  49,228
Amounts due to partners                               192,525         185,208
Other liabilities                                      12,748          12,723
Partners' deficit                                    (141,247)       (133,257)
                                                    ---------       ---------
                                                    $ 107,484       $ 113,902
                                                    ---------       ---------
                                                    ---------       ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                       THREE MONTHS         SIX MONTHS
                                                      ENDED JUNE 30,      ENDED JUNE 30,
                                                     -----------------   -----------------
                                                        1998      1997      1998      1997
                                                     -------   -------   -------   -------
<S>                                                  <C>       <C>       <C>       <C>
Revenue                                              $ 4,246   $ 3,719   $ 9,227   $ 7,727
Expenses:
  Operating and lease expenses                         3,161     4,608     6,497     9,015
  Interest expense                                     4,608     3,759     9,153     7,239
  Depreciation expense                                   325       720     1,568     1,431
                                                     -------   -------   -------   -------
                                                       8,094     9,087    17,218    17,685
                                                     -------   -------   -------   -------
Net loss                                             $(3,848)  $(5,368)  $(7,991)  $(9,958)
                                                     -------   -------   -------   -------
                                                     -------   -------   -------   -------
</TABLE>
 
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 earnings per share is computed as earnings divided by weighted
average shares, excluding the dilutive effects of stock options and other
potentially dilutive securities. Outstanding stock options enter into the
weighted average shares outstanding when computing diluted earnings per share
using the Treasury Stock Method.
 
                                       9
<PAGE>
                        PACIFIC GATEWAY PROPERTIES, INC.
 
   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
               FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
 
3.  PER SHARE DATA (CONTINUED)
    The number of weighted average common shares and potential common shares
used in the earnings per share calculations for the three and six months ended
June 30, 1998 and 1997, are as follows:
 
<TABLE>
<CAPTION>
                                            FOR THE THREE MONTHS   FOR THE SIX MONTHS
                                               ENDED JUNE 30,        ENDED JUNE 30,
                                            --------------------  --------------------
                                                 1998       1997       1998       1997
                                            ---------  ---------  ---------  ---------
<S>                                         <C>        <C>        <C>        <C>
Basic                                       3,899,596  3,892,596  3,899,596  3,892,596
Stock options                                 150,597         --    128,751         --
                                            ---------  ---------  ---------  ---------
Diluted                                     4,050,193  3,892,596  4,028,347  3,892,596
                                            ---------  ---------  ---------  ---------
                                            ---------  ---------  ---------  ---------
</TABLE>
 
    In the three and six months ended June 30, 1997, 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
dilutive earnings per share for this quarter and six month period are the same.
 
4.  DEBT RELATED TO INVESTMENT PROPERTIES
 
    In June 1998, the Registrant completed the financing of $1,575,000 of
mortgage debt from Redwood Bank related to the 4050 Moorpark building at its
West Valley Executive Park in San Jose, California. The new loan carries a
variable interest rate of 2.875% over the one year treasury bond rate,
adjustable semi-annually (8.375% at June 30, 1998). The loan has fixed monthly
amortization payments of approximately $12,550. The loan is amortized over 25
years but matures on July 1, 2008. This debt is nonrecourse and can be prepaid
at any time without a penalty. This debt contains a cross default provision with
the loan on the Registrant's 930 Montgomery Street property in San Francisco,
California.
 
5.  SUBSEQUENT EVENT
 
    In July 1998, the Registrant completed the refinancing of $2,112,500 of
mortgate debt from Redwood Bank related to its 930 Montgomery Street property in
San Francisco, California. The new loan of $2,697,500 carries a variable
interest rate of 2.875% over the one year treasury bond rate, adjustable semi-
annually (8.375% at August 1, 1998). The loan has fixed monthly amortization
payments of approximately $21,500. The loan is amortized over 25 years but
matures on September 1, 2008. This debt is nonrecourse and can be prepaid at any
time without a penalty. This debt contains a cross default provision with the
loan on the Registrant's 4050 Moorpark Avenue building at West Valley Executive
Park in San Jose, California.
 
                                       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 investments
on the West Coast with a 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 reports on Forms 10-Q and 10-Q/A for the quarter
and six months ended June 30, 1997, and in conjunction with the Unaudited
Condensed Consolidated Balance Sheets, 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 meanings 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 six months ended June 30, 1998, there were additions to investment
properties amounting to approximately $900,000 and $2,871,000, respectively, for
tenant improvements, capital improvements and other deferred costs which
includes leasing commissions. Additionally, the Registrant incurred $41,000 of
loan fees in the second quarter of 1998 relating to the new debt financing. The
Registrant anticipates further additions to investment properties of
approximately $1,400,000 during the remainder of 1998.
 
    FINANCING--Approximately $257,000 and $500,000 of debt principal was repaid
in the three and six months ended June 30, 1998, respectively, as scheduled debt
amortization. In connection with the financing of the 4050 Moorpark Avenue
building at West Valley Executive Park, during the three months ended June 30,
1998, the Registrant borrowed $1,575,000 under a floating rate mortgage note.
Accordingly, at June 30, 1998, the Registrant had fixed rate mortgage debt of
approximately $42.6 million bearing interest at a weighted average rate of
8.49%, two floating rate mortgages of approximately $1.6 million and $2.1
million, bearing interest at the rates of 8.38% and 8.63%, respectively, and a
secured estimated settlement obligation recorded at $2,200,000 (accruing
interest at a rate of prime plus 3% on the stated settlement obligation of $3.65
million). The estimated settlement obligation is more fully discussed in Note 2
to the Registrant's Unaudited Condensed Consolidated Financial Statements.
 
MATERIAL CHANGES IN RESULTS OF OPERATIONS
 
    INVESTMENT PROPERTIES--During the first six months of 1998, the income from
investment properties was $1,085,000 compared to income of $618,000 during the
first six months of 1997. During the second quarter of 1998 the income from
investment properties was $889,000 compared to income of $135,000 for the second
quarter of 1997. Included in rental revenues for the second quarter of 1998 is a
$340,000 lease buyout from a tenant at Walnut Creek Executive Park.
Concurrently, this space was leased to another tenant. A majority of the funds
received from the buyout will be used to finance the improvements for this new
tenant. Interest expense increased from $1,900,000 during the first six months
of 1997 to $2,124,000 during the first six months of 1998, as a result of 1997
including only five months of interest on the
 
                                       11
<PAGE>
properties acquired in January 1997, and 1998 including $208,000 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 late 1997 and early 1998 relating to the
Registrant's leasing activities and capital improvement projects. In addition,
the Registrant wrote off $96,000 of unamortized leasing costs related to the
lease buyout at Walnut Creek Executive Park in the second quarter of 1998.
 
    GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses in
the first six months of 1998 amounted to $694,000 compared to $700,000 for the
first six months of 1997. General and administrative expenses for the second
quarter of 1998 and 1997 were $254,000 and $280,000, respectively. The decrease
is primarily attributable to a decrease in personnel costs offset by an increase
in professional services.
 
    OTHER INCOME, NET--Other income, net, consisting primarily of interest
income, was $54,000 and $101,000 during the first six months of 1998 and 1997,
respectively. The decrease is primarily due to the reduction of cash invested as
a result of the repurchase of the warrants in the first quarter of 1998.
 
    HOTEL PROPERTY--The Registrant sold its hotel property in December 1996 and,
accordingly, a comparison of the operations from the first six months and second
quarter of 1997 to the first six months and second quarter of 1998 is not
meaningful.
 
    PROVISION FOR SETTLEMENT OF REIMBURSEMENT OBLIGATION--Effective June 30,
1997, the Registrant recorded a provision of $2,200,000 for the ultimate
settlement of a letter-of-credit reimbursement obligation, as more fully
discussed in Note 2 to the Registrant's Unaudited Condensed Consolidated
Financial Statements.
 
    INCOME TAX BENEFIT (PROVISION)--A tax provision of $275,000 and $192,000 has
been recorded in connection with the net income for the three and six months
ended June 30, 1998, respectively at rates that approximate the effective
statutory rate. A tax benefit of $830,000 was recorded in connection with the
net loss for the three and six months ended June 30, 1997, respectively. 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 liabilities 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 results of operations is uncertain.
 
                                       12
<PAGE>
    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 June 30, 1998, the Registrant had approximately $2.1 million of
unrestricted cash, approximately $1.8 million of restricted cash, investment
properties with a net book value of approximately $54.7 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 $48.5 million and stockholders' deficit of $106,000. 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 preceding fashion would be
used for tenant improvements and other capital requirements, certain mandatory
debt reductions, and possible new investments.
 
    The Registrant is also obligated to fund reserves for building, tenant
improvements, leasing commissions and debt service in connection with its
mortage 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 June 30, 1999, will amount to
approximately $695,000.
 
    Scheduled principal maturities on the above described debt during the twelve
month period ending June 30, 1999, will amount to approximately $3,165,000. 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
for the $3.65 million drawn on the letter-of-credit and has 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 foreclsoure 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 $268,000 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. On July 10, 1998, the Issuing Bank's motion for summary
judgement in the Land Court action was allowed. Following a hearing on an
assessment of
 
                                       13
<PAGE>
damages, the Court could award the Issuing Bank damages in excess of $4 million.
The Registrant intends to appeal any such judgement. In addition, the Court
denied the Issuing Bank's motion to dismiss the Registrant's lawsuit against the
Issuing Bank in Superior Court. The Registrant's damages claim in the Superior
Court action could offset or exceed all or some of the damages that the Issuing
Bank is likely to be awarded in the Land Court action. However, there is no
assurance whatsoever that this result will be achieved. Discovery has just
commenced and no trial date has been set. 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 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 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.
 
    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 in the partnership, 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 $7,528,000 at June 30, 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 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 June 30, 1998, the Registrant's material
capital expenditures over the next twelve months or 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 and second quarters 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.
 
                                       14
<PAGE>
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 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 unforeseen 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 December 7,
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. 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 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. On July 10,
1998, the Issuing Bank's motion for summary judgement in the Land Court action
was allowed.
 
                                       15
<PAGE>
Following a hearing on an assessment of damages, the Court could award the
Issuing Bank damages in excess of $4 million. The Registrant intends to appeal
any such judgement. In addition, the Court denied the Issuing Bank's motion to
dismiss the Registrant's lawsuit against the Issuing Bank in Superior Court. The
Registrant's damages claim in the Superior Court action could offset or exceed
all or some of the damages that the Issuing Bank is likely to be awarded in the
Land Court action. However, there is no assurance whatsoever that this result
will be achieved. Discovery has just commenced and no trial date has been set.
 
    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 6. EXHIBITS AND REPORTS ON FORM 8-K
 
    a)  Exhibits:
 
<TABLE>
<CAPTION>
 NO.
  --    DESCRIPTION
        ----------------------------------------------------------------------
<S>     <C>
 27     Financial Data Schedule
</TABLE>
 
                                       16
<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.
 
<TABLE>
<S>                                           <C>
                                              PACIFIC GATEWAY PROPERTIES, INC.
                                              -------------------------------------------
                                              Registrant
 
Date: August 14, 1998                                     /s/ RAYMOND V. MARINO
                                               -------------------------------------------
                                                            Raymond V. Marino
                                                  PRESIDENT AND CHIEF EXECUTIVE OFFICER
                                               (PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER)
 
Date: August 14, 1998                                     /s/ MELANIE L. ADKINS
                                               -------------------------------------------
                                                            Melanie L. Adkins
                                                          CONTROLLER--CORPORATE
                                                      (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
 
                                       17