U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

                QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended April 30, 1997

                        Gateway Data Sciences Corporation
      --------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

            Arizona                                          86-0527788
      -----------------                                   ----------------
(State or other jurisdiction of                    (IRS Employer Identification)
 incorporation or organization)

                   3410 E. University Drive, Phoenix, AZ 85034
           -----------------------------------------------------------
                    (Address of principal executive offices)

                                 (602) 968-7000
           -----------------------------------------------------------
                (Issuer's telephone number, including area code)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15 (d) of the  Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

Yes               No  X
     -----          -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity:  2,838,138  shares of common  stock,  $.01 par value (as of October  28,
1997)
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
                                      INDEX

                                                                            Page
                                                                            ----

PART I.        FINANCIAL INFORMATION

Item 1.        Financial Statements

               Consolidated Balance Sheets as of April 30, 1997
               and January 31, 1997                                          3

               Consolidated Statements of Operations for the
               three months ended April 30, 1997 and 1996                    4

               Consolidated Statements of Cash Flows for the
               three months ended April 30, 1997 and 1996                    5

               Notes to Consolidated Financial Statements                    6

Item 2.        Management's Discussion and Analysis of
               Financial Condition and Results of Operations                 8

PART II.       OTHER INFORMATION                                            15

               Signatures                                                   16
                                      -2-
<PAGE>
PART I, ITEM 1.   FINANCIAL STATEMENTS

                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
              AS OF APRIL 30, 1997 (UNAUDITED) AND JANUARY 31, 1997

<TABLE>
<CAPTION>
                                                                                 April 30,       January 31,
                                                                                   1997             1997
                                                                               ------------     ------------
<S>                                                                            <C>              <C>         
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                   $     64,385     $    936,232
   Trade receivables - less allowance of $23,800 and $112,300, respectively       5,679,356        7,684,086
   Inventories                                                                    2,502,521        2,420,393
   Prepaid expenses and other assets                                                367,771          432,140
                                                                               ------------     ------------

                  Total current assets                                            8,614,033       11,472,851

PROPERTY AND EQUIPMENT - Net                                                      1,829,258        1,794,894
NET INVESTMENT IN LEASE RESIDUALS                                                 1,663,870        1,663,870
ACCOUNTS RECEIVABLE - Long Term                                                   3,371,826             --
OTHER ASSETS                                                                        458,950          666,884

                                                                               $ 15,937,937     $ 15,598,498
                                                                               ============     ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                                            $  1,606,736        1,452,775
   Accrued liabilities                                                              545,232        2,889,574
   Accrued payroll and benefits                                                     717,002          346,319
   Line of Credit                                                                 3,343,317             --
   Current portion of notes payable                                                 168,374          161,438
   Current portion of capital lease obligations                                      58,987           74,375
   Deferred revenue                                                               1,028,540        1,058,759
                                                                               ------------     ------------

                  Total current liabilities                                       7,468,188        5,204,674

DEFERRED REVENUE, recognized after one year                                       1,419,303        1,785,266
NOTES PAYABLE, less current portion                                                 235,815          280,600
CAPITAL LEASE OBLIGATIONS, less current portion                                      53,048           56,445
                                                                               ------------     ------------

                  Total liabilities                                               9,176,354        8,105,552
                                                                               ------------     ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
   Preferred stock, $.01 par value, 5,000,000 shares authorized,
     no shares issued and outstanding                                                  --               --
   Common stock, $.01 par value, 20,000,000 shares authorized,
     2,817,201 shares issued and outstanding at April 30, 1997 and
     2,813,312 shares issued and outstanding at January 31, 1997                     28,172           28,133
   Additional paid-in capital                                                     9,235,736        9,203,940
   Deferred Compensation                                                            (17,905)            --
   Accumulated deficit                                                           (2,484,420)      (1,739,128)
                                                                               ------------     ------------

                  Total shareholders' equity                                      6,761,583        7,492,946
                                                                               ------------     ------------

                                                                               $ 15,937,937     $ 15,598,498
                                                                               ============     ============
</TABLE>

                 See notes to consolidated financial statements.
                                      -3-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

               FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996

                                                  Three Months Ended
                                                      April  30,
                                              ---------------------------
                                                     (Unaudited)
                                                 1997            1996
                                                 ----            ----

REVENUE
   Product revenue                            $ 2,734,502     $   968,748
   Software license revenue                     1,016,731       1,252,300
   Maintenance revenue                            169,356          87,633
   Professional services                          749,466         486,417
                                              -----------     -----------

                  Total revenues                4,670,055       2,795,098
                                              -----------     -----------
OPERATING EXPENSES:
   Products sold                                2,128,786         557,482
   Software development                         1,097,484         754,981
   Maintenance                                    130,356         133,044
   Professional services                          456,646         356,923
   Sales and marketing                            858,479         342,549
   General and administrative                     649,461         344,600
                                              -----------     -----------

                  Total expenses                5,321,212       2,488,579
                                              -----------     -----------

INCOME (LOSS) FROM OPERATIONS                    (651,157)        306,519

OTHER (INCOME) EXPENSE:
   Interest expense                                99,005          50,984
   Other, net                                      (4,870)            (95)
                                              -----------     -----------

                  Total other expense, net         94,135          50,889
                                              -----------     -----------

INCOME (LOSS) BEFORE INCOME TAXES                (745,292)        255,630

PROVISION FOR INCOME TAXES                           --              --
                                              -----------     -----------

NET INCOME (LOSS)                             $  (745,292)    $   255,630
                                              ===========     ===========
NET INCOME (LOSS) PER COMMON AND COMMON
   EQUIVALENT SHARE (Note 2)                  $      (.22)    $       .12
                                              ===========     ===========
COMMON AND COMMON EQUIVALENT SHARES
   OUTSTANDING (Note 2)                         3,318,052       2,214,934
                                              ===========     ===========

                 See notes to consolidated financial statements.
                                      -4-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                               April 30,
                                                                     ---------------------------
                                                                         1997            1996
                                                                         ----            ----
                                                                             (Unaudited)
<S>                                                                  <C>             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ............................................    $  (745,292)    $   255,630
   Adjustments to reconcile net income (loss) to net cash used in
     operating activities:
       Depreciation and amortization ............................        203,839         117,624
   Effect of changes in assets and liabilities:
       Trade receivables ........................................     (1,367,096)     (1,152,414)
       Inventories ..............................................        (82,128)       (501,060)
       Prepaid expenses and other assets ........................        272,302          12,269
       Accounts payable .........................................        153,961        (670,013)
       Accrued liabilities ......................................     (2,344,343)       (320,860)
       Accrued payroll and benefits .............................        370,683          56,879
       Deferred revenue .........................................       (396,183)        171,552
                                                                     -----------     -----------

                  Net cash used in operating activities .........     (3,934,257)     (2,030,393)
                                                                     -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment ...........................       (238,203)       (395,395)
                                                                     -----------     -----------

                  Net cash used in investing activities .........       (238,203)       (395,395)
                                                                     -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from initial public offering ....................           --         6,534,599
   Principal payments on notes payable ..........................        (37,849)       (841,987)
   Principal payments on capital lease obligations ..............        (18,785)        (14,075)
   Borrowings on (payments to) line of credit ...................      3,343,317        (283,183)
   Proceeds from issuance of common stock .......................         13,930            --
   Net payments to officers and employees .......................           --          (536,172)
                                                                     -----------     -----------

                  Net cash provided by financing activities .....      3,300,613       4,859,182
                                                                     -----------     -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............       (871,847)      2,433,394

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................        936,232          93,402
                                                                     -----------     -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD ........................    $    64,385     $ 2,526,796
                                                                     ===========     ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period for interest .....................    $    99,005     $    64,429
                                                                     ===========     ===========

   Cash paid during the period for income taxes .................    $      --       $    39,500
                                                                     ===========     ===========

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES:
   Fair market value of stock issued to non-employee directors ..    $    19,533     $      --
                                                                     ===========     ===========
</TABLE>
                 See notes to consolidated financial statements
                                      -5-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 APRIL 30, 1997

1.   INTERIM FINANCIAL REPORTING

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly,  they do
not include all the  information  and footnotes  required by generally  accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management,  all adjustments  (which include only normal recurring  adjustments)
necessary to present fairly the financial position,  results of operations,  and
cash flows for the periods  presented  have been made. The results of operations
for the three-month  period ended April 30, 1997 are not necessarily  indicative
of the operating results that may be expected for the entire year ending January
31, 1998.  These  financial  statements  should be read in conjunction  with the
Company's Form 10-KSB for the fiscal year ended January 31, 1997.

2.   NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

         Net income per common and common equivalent share is computed using the
weighted  average  number of common and  common  equivalent  shares  outstanding
during  each  period.  Common  stock  equivalents  consist of stock  options and
warrants.

3.   OTHER

         The Company is party to various  legal and  administrative  proceedings
arising  in the  ordinary  course of  business.  The  Company is  involved  in a
material  dispute  with  a  customer.  The  dispute  involves  a  receivable  of
$3,371,826 at April 30, 1997, of which  approximately  $1.5 million was one year
past due at that  date.  As of August  31,  1997,  the  receivable  balance  was
$3,803,055.  On May 30, 1997, the customer filed suit against the Company in the
United States  District  Court for the Eastern  District of Wisconsin  (Case No.
97-C-0635).  The complaint  alleges that the Company  breached its contract with
the customer by (i) failing to deliver and install  certain  software  products,
(ii) failing to use its best efforts to achieve  productive use of the Company's
software  products,  and (iii)  failing to provide its  professional  consulting
services  in a  reasonable,  workmanlike  manner.  The  customer  is  seeking an
unspecified  amount of damages and a  declaratory  judgment  with respect to the
parties'  respective  rights and legal  obligations.  The complaint also alleges
that the Company acted in a fraudulent manner by making false representations to
the customer in connection with the contractual  agreements  between the Company
and the customer.  On October 15, 1997, the court dismissed the customer's fraud
claim against the Company.  The Company has filed a counterclaim for the amounts
that the Company  claims the  customer  owes under the contract and has filed an
answer denying the customer's  claims in the complaint.  The Company  intends to
vigorously  pursue its counterclaim and to vigorously  defend the lawsuit by the
customer.  In the event  that the  Company  is  unable  to  obtain a  successful
decision on its  counterclaim  or a decision  adverse to the Company is rendered
with respect to the claims by the customer,  the resolution of this matter could
have a material adverse effect on the Company.
                                      -6-
<PAGE>
4.   TRANSACTIONS WITH RELATED PARTIES

         Included in Accrued Liabilities is a payable due to a related entity of
approximately  $216,000.  The payable is due to the related  entity for loans of
approximately  $650,000 to the Company,  partially offset by amounts  receivable
for  management  and  consulting  services  provided  during  the year.  Certain
executives of the Company  maintain a direct interest and managerial role in the
related entity. The receivable portion is recorded as an arms-length transaction
at the estimated fair value of services performed.

     In January 1997, the Company entered into an equipment lease agreement with
Anderson & Wells Investment  Companies,  an affiliate of Gregory S. Anderson and
Larry J.  Wells,  who are  directors  of the  Company.  The lease  provides  for
payments  totaling   approximately  $675,700  to  Anderson  &  Wells  Investment
Companies during the period from January 1997 to November 1999.
                                      -7-
<PAGE>
ITEM 2.  MANAGEMENT'S   DISCUSSION  AND  ANALYSIS  OF   CONSOLIDATED   FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Statement Regarding Forward-Looking Statements

         The statements  contained in this Report that are not purely historical
are  forward-looking  statements  within  the  meaning  of  Section  27A  of the
Securities Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934,
including  statements  regarding the Company's  "expectations,"  "anticipation,"
"intentions,"  "beliefs," or "strategies" regarding the future.  Forward-looking
statements include statements regarding revenue, margins, expenses, and earnings
analysis for fiscal 1998 and thereafter; future products or product development;
future research and development  spending and the Company's product  development
strategy;  and  liquidity  and  anticipated  cash  needs and  availability.  All
forward-looking  statements  included  in this  Report are based on  information
available to the Company on the date of this Report,  and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's  actual  results could differ  materially  from those in such
forward-looking statements. Among the factors that could cause actual results to
differ  materially  are the factors  discussed in the  Company's  Report on Form
10-KSB, Item 1, "Special Considerations."

Operations

         Gateway Data Sciences  Corporation (the "Company") and its wholly owned
subsidiary,  Gateway Credit Corporation ("GCC"),  design,  develop,  market, and
implement  software  products and provide related  customer support services for
retail and warehouse management systems. The Company also provides  professional
services   including   product   installation,    training,   maintenance,   and
customization in conjunction with sales of its software products.

         The Company historically has generated the majority of its revenue from
the  resale  of  hardware  and  software  products  produced  by third  parties,
primarily  International  Business  Machines  Corp.  ("IBM")  AS/400 and related
peripheral equipment.  The Company also has historically  generated a portion of
its revenue from the sale of its proprietary  software  products,  primarily the
Kinetics(TM)  warehouse management system,  which was developed  exclusively for
use on the AS/400 platform,  and from providing professional services related to
these  products.  Sales  of IBM  products,  including  hardware,  software,  and
maintenance,  accounted for  approximately  27% and 28% of total revenue for the
three months ended April 30, 1996 and 1997, respectively,  and approximately 66%
and 56% of the Company's  total revenue for the years ended January 31, 1996 and
1997,  respectively.  The Company's  reseller agreement with IBM expired in July
1997.  During the year ended January 31, 1996, the Company  changed its business
strategy to focus on the development  and marketing of its proprietary  software
products.  In  conjunction  with this change in strategy,  the Company has since
dedicated many of its resources to the development and marketing of new software
products.  The  Company  anticipates  that this  will  result in a change in its
revenue mix. The Company  believes that,  although the change in revenue mix may
initially result in lower total revenue, it should also result in improved gross
profit margins as software  revenue  increases as a percentage of total revenue.
There  can  be  no  assurance,  however,  that  the  Company  will  be  able  to
successfully complete this transition in its business focus.

         The Company has marketed the Kinetics(TM) warehouse management software
product for several years and will continue its current sales efforts  dedicated
to this product and related services.  Kinetics  currently  operates only on the
IBM AS/400  family of  midrange  computers.  To date,  the  Company  has derived
substantially  all of its  software  revenue from  Kinetics and other  IBM-based
software  products.  Future revenue from sales of Kinetics and related  services
will depend upon continued widespread use of IBM midrange computers and upon the
continued  support of such  computers by IBM. In  addition,  the Company will be
required to adapt Kinetics to any changes made by IBM to the AS/400's  operating
system software.  A significant shift away from 
                                      -8-
<PAGE>
IBM midrange  computer systems by the Company's  customers or the failure by IBM
to continue its support of these systems could have a material adverse effect on
the Company.

         During  the  year  ended  January  31,  1997,  the  Company  introduced
Transact(TM), a point-of-sale software product developed in Java(TM) that can be
utilized on a wide variety of point-of-sale hardware platforms. During the three
months  ended  April 30,  1997,  the  Company  introduced  MarketBuilder(TM),  a
relationship   marketing   system   for   retailers,   and   Crossfire(TM),   an
Internet-based  store communication  system, both of which are also developed in
Java.  The  Company  intends to increase  the  resources  dedicated  to software
development   and   marketing  in  support  of  its  newly   introduced   retail
point-of-sale  software  products.  Although  the Company has not yet  generated
significant  sales  of  its  new  Java-based  products,   it  expects  that  the
functionality of its new products,  the flexibility of Java-based software,  and
the continued focus on software development and marketing efforts will result in
sufficient future revenue to fund its ongoing operations.

         Product  revenue   includes   hardware,   third-party   software,   and
third-party  maintenance  sold  to the  Company's  customers.  Software  license
revenue  includes  revenue  from  the  licensing  of the  Company's  proprietary
software offerings as well as revenue from the customization and modification of
the Company's software for its customers. Professional services revenue includes
services to install the Company's software products and third-party hardware and
software  products  as well as  services  to train  customers  in the use of the
Company's software products and third-party hardware and software products.

         Cost of products  sold  includes  costs of those  software and hardware
products not manufactured by the Company and maintenance  resold by the Company.
The Company does not capitalize any software  development  costs associated with
the  development  of its  proprietary  software  products  and has  expensed all
payroll  and  related  costs for  software  development  as  incurred.  Software
development  cost also  includes  all other  general  and  administrative  costs
associated with software development  personnel.  Professional  services expense
consists of  salaries,  benefits,  and other  general and  administrative  costs
attributable to professional  services  personnel.  Sales and marketing expenses
consist  primarily  of salaries,  commissions,  benefits,  marketing  materials,
travel expenses,  and other general and administrative  costs associated with or
allocated  to  the  Company's  sales  and  marketing   personnel.   General  and
administrative  expenses  include  the cost of  finance  and  accounting,  human
resources,  corporate information systems, and other administrative functions of
the Company.

Results of  Operations  of the Company for the Three Months Ended April 30, 1997
and 1996

         Revenue. Total revenue increased 67% from approximately $2.8 million in
the three months ended April 30, 1996 to approximately $4.6 million in the three
months ended April 30, 1997.  Product revenue increased 182% from  approximately
$969,000 to approximately $2.7 million during the same periods.  As a percentage
of total  revenue,  product  revenue  increased from 35% during the three months
ended  April 30,  1996 to 59%  during the three  months  ended  April 30,  1997.
Software license revenue  decreased 19% from  approximately  $1.3 million in the
three  months  ended April 30, 1996 to  approximately  $1.0 million in the three
months ended April 30, 1997. As a percentage of total revenue,  software license
revenue decreased from 45% to 22% during the same periods.  Software maintenance
revenue  increased  approximately  93% from  approximately  $88,000 in the three
months ended April 30, 1996 to approximately  $169,000 in the three months ended
April 30, 1997. As a percentage of total revenue,  maintenance revenue increased
from 3% in the three  months  ended  April 30, 1996 to  approximately  4% in the
three months ended April 30, 1997.  Professional  services revenue increased 54%
from  approximately  $486,000 to approximately  $749,000 during the three months
ended April 30, 1996 and 1997,  respectively.  As a percentage of total revenue,
professional  services revenue decreased from 17% to 16% during the three months
ended April 30, 1996 and 1997, respectively.
                                      -9-
<PAGE>
         The overall  increase in total  revenue is  attributed  to increases in
sales of third party products,  maintenance revenue, and professional  services.
The increase in third party product revenue is due to delayed shipments from IBM
of the then-new RISC AS/400 processors in the three months ended April 30, 1996.
Although  revenue from  third-party  products  increased during the three months
ended April 30,  1997,  the  Company  continues  to believe  that  revenue  from
third-party products will decrease as a percentage of total revenue and that the
total dollar  amounts of revenue from  third-party  products may decrease in the
future,  particularly after the expiration of the reseller agreement with IBM in
July 1997.  The  increase in  maintenance  revenue is  attributed  to  increased
software sales. The increase in professional  services revenue resulted from the
Company's continued focus on sales of its proprietary software products, as well
as  the  Company's  continuing  efforts  to  provide  professional  services  to
implement its software products.

         Cost of  Products  Sold.  Cost of  products  sold  increased  282% from
approximately  $557,000  during  the  three  months  ended  April  30,  1996  to
approximately  $2.1 million  during the three months ended April 30, 1997.  This
increase is attributed  to the  corresponding  increase in sales of  third-party
products  during the same period.  As a percentage of product  revenue,  cost of
products sold was  approximately 58% and 78% during the three months ended April
30, 1996 and 1997, respectively.

         Software  Development  Expense.  Software development expense increased
from  approximately  $755,000 to  approximately  $1.1  million  during the three
months  ended  April  30,  1996 and  1997,  respectively.  The 45%  increase  is
attributed to increased  research and  development  efforts  associated with the
development of the Company's  proprietary software products.  As a percentage of
total revenue, software development costs decreased from 27% in the three months
ended April 30, 1996 to 24% in the three months ended April 30, 1997.

         Software Maintenance Expense. Software maintenance expense decreased by
1% from  approximately  $132,000 in the three months  ended April 30,  1996,  to
approximately $130,000 in the three months ended April 30, 1997.

         Professional Services Expense.  Professional services expense increased
by 28% from  approximately  $357,000 to approximately  $457,000 during the three
months ended April 30, 1996 and 1997, respectively.  Salaries and other expenses
for  additional  personnel  contributed  to this  increase.  As a percentage  of
professional services revenue,  professional services expense decreased from 73%
in the three  months ended April 30, 1996 to 61% in the three months ended April
30, 1997.  This decrease as a percentage is attributed to better  utilization of
professional services personnel.

         Sales and Marketing Expense. Sales and marketing expense increased 151%
from approximately  $343,000 to approximately $858,000 in the three months ended
April 30, 1996 and 1997,  respectively.  The increase can be attributed to costs
incurred for marketing literature, additional sales and marketing personnel, and
an increased marketing presence at industry trade shows.

         General and Administrative Expense.  General and administrative expense
increased from  approximately  $345,000 in the three months ended April 30, 1996
to  approximately  $649,000 in the three months  ended April 30, 1997.  This 88%
increase is attributed to additional personnel and associated costs,  additional
insurance costs, and increased building rent costs.

         Other Income  (Expense).  Interest  expense was  approximately  $51,000
during the three  months ended April 30, 1996,  as compared  with  approximately
$99,000 during the three months ended April 30, 1997.  Interest expense incurred
on the  Company's  line of credit  contributed  to this  increase.  The  average
outstanding  balance on the line of credit  during the three  months ended April
30, 1996 was approximately $361,000 and approximately $2.8 million for the three
months ended April 30, 1997.
                                      -10-
<PAGE>
         Net  Income  (Loss).  Net  income  decreased  392%  from  approximately
$256,000,  or $.12 per share,  in the three months ended April 30, 1996 to a net
loss of approximately $(745,000), or $(.22) per share, in the three months ended
April 30, 1997 as a result of the factors described above.

Liquidity and Capital Resources

         The Company's  working capital  position  decreased from  approximately
$2.6  million at January 31,  1997 to  approximately  $1.1  million at April 30,
1997.

         The Company used net cash of approximately  $3.9 million for operations
during the three  months  ended  April 30,  1997,  primarily  as a result of the
decrease  in  accrued  liabilities  and  an  increase  in  accounts  receivable,
partially  offset by an increase  in prepaid  expenses  and accrued  payroll and
benefits.

         Capital  expenditures for the three months ended April 30, 1997 totaled
approximately  $238,000  for the  purchase of  computer  hardware  and  software
products  needed  for  the  continued  efficient  development  of the  Company's
proprietary software products.

         Financing activities provided net cash of approximately $3.3 million in
the three months ended April 30, 1997.  This cash was provided by  borrowings on
the  Company's  line of credit  agreement  with Norwest  Business  Credit,  Inc.
("Norwest").  That line of credit,  which matures on February 21, 2000, provides
borrowing capacity in the amount of the lower of $3.0 million or 80% of accounts
receivable,  plus the lower of $250,000 or 50% of eligible inventory, as defined
in the agreement.  The agreement,  as  subsequently  amended,  requires a $5,000
minimum monthly fee that includes  interest  calculated at the base lending rate
(prime rate) plus 2%, plus an unused facility fee of .25%. The Company signed an
addendum to this agreement in April 1997 that temporarily provided for borrowing
capacity  in  the  amount  of the  lower  of  $3.5  million  or 80% of  accounts
receivable, plus the lesser of $250,000 or 50% of eligible inventory, as defined
in  the  agreement.   Borrowings  under  the  line  of  credit  are  secured  by
substantially all of the Company's  tangible and intangible assets. As of May 1,
1997 the agreement reverted back to the original terms that included  borrowings
of the lesser of $3.0 million or 80% of eligible  accounts  receivable  plus the
lesser of $250,000 or 50% of eligible  inventory.  As of October 27,  1997,  the
Company  was in  default  under  certain  covenants  on  this  line  of  credit.
Accordingly, Norwest has the right to demand payment of all amounts outstanding,
which amounted to  approximately  $1.1 million at October 27, 1997. In addition,
in October 1997 Norwest  exercised its right to not provide any further advances
under the line. In July 1997,  Michael M. Gordon,  the Company's Chairman of the
Board, President, and Chief Executive Officer and Mr. Gordon's spouse personally
guaranteed  the Company's  indebtedness  under this line of credit.  The Company
currently is seeking additional  sources of financing,  which may include one or
more private placements of debt or equity securities.  There can be no assurance
that any  additional  financing  will be  available  to the Company or as to the
terms of any such  financing  that is  available.  The  inability to obtain such
financing  could  result in the  inability of the Company to continue as a going
concern.  If  such  financing  is not  available  in  sufficient  amounts  or on
satisfactory  terms, the Company also may be unable to expand its business or to
develop  new  customers  at the rate  desired and its  operating  results may be
adversely affected.

         The Company's financial statements for the three months ended April 30,
1997 have been  prepared  assuming  that the  Company  will  continue as a going
concern.  The Company had negative cash flow from  operations of $2,612,680  for
the year  ended  January  31,  1997,  is in  default of the terms of its line of
credit agreement,  does not have any readily available financing,  is engaged in
material  litigation  with  a  significant  customer,  recorded  a net  loss  of
approximately  $700,000  (unaudited) for the six months ended July 31, 1997, and
has not yet generated  sufficient revenue from its software products to fund its
ongoing  operations.  Additionally,  its IBM reseller  agreement expired in July
1997.  These factors  raise  substantial  doubt about the  Company's  ability to
continue as a going concern.  The Company's  plans with regards to these matters
are described in "Business Outlook and Risk Factors," below.
                                      -11-
<PAGE>
The  consolidated  financial  statements have been  prepared on a going  concern
basis and do not include any  adjustments  relating  to the  recoverability  and
classification  of asset carrying  amounts or the amount and  classification  of
liabilities  that might  result  should the  Company be unable to  continue as a
going concern.

         The  Company's  independent  public  accountants  have  reported to the
Company that, in the course of their audit of the Company's financial statements
for the fiscal year ended  January 31,  1997 and their  review of the  unaudited
financial  statements  for the six months ended July 31, 1997,  they  discovered
various  conditions  that they believe  constitute  material  weaknesses  in the
Company's  internal  controls.  These  conditions  consist of (i)  weaknesses in
forecasting  internal  cash  requirements;   (ii)  weaknesses  in  policies  and
procedures  to ensure the  accurate  timing,  classification,  and  recording of
significant   transactions;   and  (iii)   weaknesses  in   maintaining   formal
documentation regarding acquisitions and dispositions of assets. The Company has
been  taking  various  steps  intended  to  strengthen  its  internal  controls,
including engaging more experienced  personnel in both operational and financial
positions. 

Business Outlook and Risk Factors

         The trends indicated by the Company's  operating  results for the three
months ended April 30, 1997, together with the expiration of the IBM contract in
July 1997, reflect the Company's belief that although total revenue may decrease
in the near future,  software and services revenue should contribute to a larger
share of overall  revenue,  which  should  result in an increase in gross profit
margins and net margins. The Company continues to invest heavily in research and
development  of new and  enhanced  software  products in order to reach a larger
segment of its targeted  market.  The Company  recently  announced  new software
products  that  are  platform   independent   and  contain  added  and  improved
functionality.  The transition to hardware platform  independence is designed to
lead to a broader market for the Company's products. The Company's total revenue
and product mix could be materially and adversely affected by many factors, some
of which are beyond the  control  of the  Company.  Those  factors  include  the
Company's  ability to maintain the software design and development  capabilities
necessary to design and produce  innovative  and desirable  products on a timely
and  cost-effective  basis;  the Company's  ability to penetrate new markets and
attract new customers;  the budgeting and purchasing practices or constraints of
its customers;  the length of the Company's sales cycles; the complicated nature
of the  Company's  product  installations;  and  unanticipated  postponement  or
cancellation  of  significant  orders.  There also can be no assurance  that the
Company's  software  products will achieve market acceptance or that the Company
will be able to develop new products and services in a timely and cost-effective
manner.  The failure of the Company to  successfully  develop and market its own
software  products and to overcome the loss of revenue from the sale of hardware
and software  products  developed by others could have a material adverse effect
on the Company.

     As a result of the factors discussed in "Liquidity and Capital  Resources."
above,  the Company is in default under certain  covenants in its line of credit
agreement,  and the lender has  exercised  its right to not  provide any further
advances  under  the  line of  credit.  In  addition,  the  Company  has not yet
generated  sufficient  revenue  from its  software  products to fund its ongoing
operations.  The Company currently is seeking  additional  sources of financing,
which may include one or more private  placements of debt or equity  securities.
There can be no assurance that such financing will be available.

     During July 1997, the Company's reseller agreement with IBM expired and the
Company  entered into an agreement with  Information  Systems of North Carolina,
Inc.  ("ISI") with  respect to future sales of specified  IBM AS/400 and related
products  and  services  to  certain  of the  Company's  customers.  Under  this
agreement,  the  Company  has ceased  selling,  and ISI has begun  selling,  the
specified  AS/400-related products and services to the designated customers. The
agreement provides that ISI will pay to the Company 50% of its operating profits
(as defined) from sales of the 
                                      -12-
<PAGE>
specified products to the designated  customers during the four-year term of the
agreement.  The  Company has the right to  terminate  the  agreement  and resume
direct  sales of the  specified  AS/400-related  products  and  services  to the
designated  customers  in the event that ISI's  payments to the Company are less
than $50,000 in each of two consecutive quarterly periods. In addition,  ISI has
the right to  terminate  the  agreement  upon  written  notice  to the  Company,
provided  that ISI ceases  selling the  specified  AS/400-related  products  and
services  to the  designated  customers  for a period  of two years  after  such
termination.  As of the date of this Report,  this  arrangement has not provided
the Company with any meaningful revenue,  and there can be no assurance that the
Company will derive significant revenue from this arrangement in the future.

     The Company  operates in an industry that is characterized by fast-changing
technology.  As a result,  the Company  will be  required to expend  substantial
funds for continuing product  development,  including  expenses  associated with
research  and  development  activities  and  additional  engineering  and  other
technical personnel. There can be no assurance that such funds will be available
to the Company given its current financial  condition and results of operations.
Any failure by the Company to anticipate or respond  adequately to technological
developments, customer requirements, or new design and production techniques, or
any  significant  delays in product  development or  introduction,  could have a
material adverse effect on the operating results of the Company.

         The  Company  continues  to invest in sales and  marketing  in order to
enhance its image and brand  awareness.  The Company  has  continued  to add new
marketing and sales personnel during the last three months,  and has invested in
updating  its  industry  trade-show  presence  and image.  Although  the Company
believes that its increased  sales and marketing  efforts will  contribute to an
increased number of customers and increased revenue associated with the sales of
software products, certain risk factors exist that could have a material adverse
effect on the Company's  operating  results.  Those risk factors include lack of
assurance  that its products  will achieve or maintain  market  acceptance;  the
complexity of the Company's software programs, which may cause delays in product
development and could result in loss of market  acceptance,  loss of sales,  and
reduction of market  share;  and the fact that the Company's  software  products
compete with those of many major domestic and international  companies,  many of
which have greater  market  recognition  and  substantially  greater  financial,
technical, and marketing resources than the Company possesses.

     The Company has hired a new Vice President - Marketing and Chief  Operating
Officer who has  considerable  experience  in the sale of  software  products to
retail enterprises and in the management of software development companies.  The
Company believes that this  individual's  expertise in the development of retail
software applications, his contacts in the retail industry, and his expertise in
the  management  of software  development  companies  will enhance the Company's
ability to generate significant sales of its proprietary software products.

         The  Company  plans  to  continue  to  increase  the   utilization   of
professional  services  personnel.  An increase in utilization  of  professional
services  personnel can have a direct impact on revenue  without any  additional
associated  costs.  Risk  factors  that could,  however,  materially  affect the
ability of the Company to increase  utilization rates and professional  services
revenue include factors such as fluctuating demand for professional services and
lack of  assurance  that there will  continue  to be a demand for the  Company's
services.  The  Company  may not be able to react to a  significant  decrease in
demand  for its  services  during  any  given  quarter,  which  could  result in
continued expenses for professional personnel without offsetting revenue.

Although  the  Company  has  focused on  controlling  administrative  costs,  it
recognizes  the  added  costs  associated  with  attracting  and  retaining  key
personnel.  Because it operates in an industry that is  characterized  by a high
cost of  recruiting  and a current  lack of  qualified  personnel,  the  Company
constantly evaluates employee benefits and the work environment that it provides
for its employees. The high cost associated with industry hiring practices could
have a material adverse effect on the Company's quarterly operating results. The
Company intends to continue to moderate 
                                      -13-
<PAGE>
general and administrative  costs so that revenue growth will continue to exceed
operating expenses. There can be no assurance, however, that the Company will be
able to predict or respond to a shortfall in sales  during any given  quarter in
order to reduce its fixed general and administrative expenses on a timely basis.

         The Company believes that the industry in which it markets its products
and services has a strong outlook,  with expanding  markets  characterized  by a
highly  fragmented  group of competitors.  As competition for consumer  products
rises,  retailers that represent a significant  portion of the Company's current
and  potential  customers  increasingly  are  aware  of the  need  for  business
information  systems that allow them to focus on efficiently  managing inventory
and of finding  new ways to bring  customers  into  their  stores.  The  Company
strives  to provide  market-leading  solutions  that  address  those  real-world
problems. Due to the risk factors discussed above and in the Company's Report on
Form 10-KSB,  Item 1,  "Special  Considerations,"  as well as other factors that
generally affect high technology  companies,  there can be no assurance that the
Company will be able to successfully penetrate these markets in the future.
                                      -14-
<PAGE>
PART II           OTHER INFORMATION

Item 1.           Legal Proceedings

                  Not applicable

Item 2.           Changes in Securities and Use of Proceeds

                  Not applicable

Item 3.           Defaults Upon Securities

                  Not Applicable

Item 4.           Submissions of Matters to a Vote of Security Holders

                  Not Applicable

Item 5.           Other Information

                  Not Applicable

Item 6.           Exhibits and Reports on Form 8-K

                  (a)  Exhibits
                           10.15    Credit and Security  Agreement,  dated as of
                                    February  21,  1997,  between  Gateway  Data
                                    Sciences    Corporation,    Gateway   Credit
                                    Corporation,  and Norwest  Business  Credit,
                                    Inc., together with Form of Revolving Note

                           10.16    First   Amendment  to  Credit  and  Security
                                    Agreement,  dated  as  of  April  23,  1997,
                                    between  Gateway Data Sciences  Corporation,
                                    Gateway  Credit  Corporation,   and  Norwest
                                    Business Credit, Inc., together with Form of
                                    Temporary Replacement Revolving Note

                           11.      Computation of Net Income Per Share

                           27.      Financial Data Schedule

                  (b)   Reports on Form 8-K

                           Not applicable
                                      -15-
<PAGE>
SIGNATURES

         In accordance with the  requirements of the Securities  Exchange Act of
1934,  the  registrant  has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Signature:
----------

GATEWAY DATA SCIENCES CORPORATION


/s/ Michael M. Gordon           Chairman of the Board,          October 29, 1997
-------------------------       President, and Chief
Michael M. Gordon               Executive Officer
                                (Principal Executive
                                Officer)

/s/ Vickie B. Jarvis            Vice President, Finance and     October 29, 1997
-------------------------       Chief Financial Officer 
Vickie B. Jarvis                (Principal Financial and
                                Accounting Officer)
                                      -16-