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 July 31, 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  X      No 
   -----       -----
                      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 July 31, 1997
                  and January 31, 1997                                        3

                  Consolidated Statements of Operations for the
                  six months ended July 31, 1997 and 1996                     4

                  Consolidated Statements of Cash Flows for the
                  six months ended July 31, 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                                          16

                  Signatures                                                 18
                                      -2-
<PAGE>
PART I, ITEM 1.   FINANCIAL STATEMENTS

                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                                                  July 31,        January 31,
                                                                                    1997             1997
                                                                               ------------     ------------
<S>                                                                            <C>              <C>         
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                   $      7,171     $    936,232
   Trade receivables - less allowance of $67,300 and $112,300, respectively       4,376,175        7,684,086
   Inventories                                                                    2,680,448        2,420,393
   Prepaid expenses and other assets                                                737,184          432,140
                                                                               ------------     ------------

                  Total current assets                                            7,800,978       11,472,851

PROPERTY AND EQUIPMENT - Net                                                      1,839,022        1,794,894
NET INVESTMENT IN LEASE RESIDUALS                                                 1,860,204        1,663,870
ACCOUNTS RECEIVABLE - Long Term                                                   3,803,055             --
OTHER ASSETS                                                                        836,770          666,884
                                                                               ------------     ------------

                                                                               $ 16,140,029     $ 15,598,498
                                                                               ============     ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                                            $  2,427,430        1,452,775
   Accrued liabilities                                                              450,187        2,889,574
   Accrued payroll and benefits                                                     520,612          346,319
   Line of Credit                                                                 2,807,654             --
   Current portion of notes payable                                                 175,608          161,438
   Current portion of capital lease obligations                                      41,846           74,375
   Deferred revenue                                                               1,111,187        1,058,759
                                                                               ------------     ------------

                  Total current liabilities                                       7,534,524        5,204,674

DEFERRED REVENUE, recognized after one year                                       1,483,244        1,785,266
NOTES PAYABLE, less current portion                                                 189,105          280,600
CAPITAL LEASE OBLIGATIONS, less current portion                                      49,565           56,445
                                                                               ------------     ------------

                  Total liabilities                                               9,256,438        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,
     2,838,138 shares issued and outstanding at July 31, 1997 and
     2,813,312 shares issued and outstanding at January 31, 1997                     28,381           28,133
   Additional paid-in capital                                                     9,309,016        9,203,940
   Deferred Compensation                                                            (13,022)            --
   Accumulated deficit                                                           (2,440,784)      (1,739,128)
                                                                               ------------     ------------

                  Total shareholders' equity                                      6,883,591        7,492,946
                                                                               ------------     ------------

                                                                               $ 16,140,029     $ 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 AND SIX MONTHS ENDED JULY 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                    Three Months Ended                  Six Months Ended
                                                          July 31,                          July 31,
                                                        (Unaudited)                       (Unaudited)
                                                   1997             1996             1997             1996
                                                   ----             ----             ----             ----
<S>                                           <C>              <C>              <C>              <C>         
REVENUE
   Product                                    $  4,402,253     $  6,251,184     $  7,136,755     $  7,219,932
   Software license                                695,689        1,011,141        1,712,420        2,263,441
   Maintenance and support services                203,025          143,764          372,381          231,397
   Professional services                           854,958          555,070        1,604,424        1,041,487
                                              ------------     ------------     ------------     ------------
                  Total revenue                  6,155,925        7,961,159       10,825,980       10,756,257
                                              ------------     ------------     ------------     ------------
OPERATING EXPENSES:
   Products sold                                 2,680,039        4,597,809        4,808,825        5,155,291
   Software development                          1,202,802        1,043,489        2,300,286        1,798,470
   Maintenance and support services                149,489          162,924          279,845          294,968
   Professional services                           514,951          555,394          971,597          912,317
   Sales and marketing                             798,524          529,574        1,657,003          872,123
   General and administrative                      594,569          472,920        1,244,030          817,520
   Restructuring charges                           107,582             --            107,582             --
                                              ------------     ------------     ------------     ------------

                  Total expenses                 6,047,956        7,362,110       11,369,168        9,850,689
                                              ------------     ------------     ------------     ------------

INCOME FROM OPERATIONS                             107,969          599,049         (543,188)         905,568

OTHER (INCOME) EXPENSE:
   Interest expense                                131,158           36,052          230,163           87,036
   Other, net                                      (66,284)          (2,089)         (71,694)          (2,184)
                                              ------------     ------------     ------------     ------------

                  Total other expense, net          64,334           33,963          158,469           84,852
                                              ------------     ------------     ------------     ------------

INCOME BEFORE INCOME TAXES                          43,635          565,086         (701,657)         820,716

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

NET INCOME                                    $     43,635     $    565,086     $   (701,567)    $    820,716
                                              ============     ============     ============     ============
NET INCOME PER COMMON AND
  COMMON EQUIVALENT
    SHARE (Note 2)                            $        .02     $        .19     $       (.20)    $        .31
                                              ============     ============     ============     ============

COMMON AND COMMON
  EQUIVALENT SHARES
    OUTSTANDING (Note 2)                         2,831,665        2,920,574        3,177,253        2,571,292
                                              ============     ============     ============     ============
</TABLE>
                 See notes to consolidated financial statements.
                                      -4-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                           Six Months Ended
                                                                                               July 31,
                                                                                    ---------------------------
                                                                                        1997            1996
                                                                                        ----            ----
                                                                                             (Unaudited)
<S>                                                                                 <C>             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ..................................................................    $  (701,656)    $   820,716
   Adjustments to reconcile net income to net cash used in operating activities:
       Depreciation and amortization ...........................................        421,964         266,017
       Amortization of deferred compensation ...................................          6,511           7,800
   Effect of changes in assets and liabilities:
       Trade receivables .......................................................       (495,144)     (3,429,125)
       Inventories .............................................................       (260,055)     (1,078,645)
       Prepaid expenses and other assets .......................................       (474,931)        140,726
       Accounts payable ........................................................        974,655         533,646
       Accrued liabilities .....................................................     (2,439,389)       (786,993)
       Accrued payroll and benefits ............................................        174,293         209,627
       Deferred revenue ........................................................       (249,595)         79,377
                                                                                    -----------     -----------

                  Net cash used in operating activities ........................     (3,043,347)     (3,236,854)
                                                                                    -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment ..........................................       (466,091)       (802,424)
   Net investment in lease residuals ...........................................       (196,334)        138,424
                                                                                    -----------     -----------

                  Net cash (used in) provided by  investing activities .........       (662,425)       (664,000)
                                                                                    -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from initial public offering ...................................           --         6,531,809
   Principal payments on notes payable .........................................        (77,325)       (875,350)
   Principal payments on capital lease obligations .............................        (39,409)        (28,543)
   Additional borrowings on capital lease obligations ..........................           --            66,344
   Borrowings on line of credit ................................................      2,807,654         984,011
   Proceeds from issuance of common stock ......................................         85,791          51,057
   Net payments to officers and employees ......................................           --          (536,172)
                                                                                    -----------     -----------

                  Net cash provided by financing activities ....................      2,776,711       6,193,156
                                                                                    -----------     -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...........................       (929,061)      2,292,302

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

CASH AND CASH EQUIVALENTS, END OF PERIOD .......................................    $     7,171     $ 2,385,704
                                                                                    ===========     ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period for interest ....................................    $   230,163     $    87,036
                                                                                    ===========     ===========

   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     $    15,600
                                                                                    ===========     ===========
</TABLE>
                 See notes to consolidated financial statements
                                      -5-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JULY 31, 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 and  six-month  periods  ended July 31,  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
$3,803,055  at July 31, 1997. 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 Other Assets is a receivable  due from a related  entity of
approximately  $408,000. The amounts due represent a receivable of approximately
$608,000 for management and consulting  services  provided by Company  personnel
during  the year,  partially  offset by a loan  from the  related  entity to the
Company of approximately $200,000.  Certain executives of the Company maintain a
direct  interest and managerial  role in the related  entity.  The receivable is
recorded as an  arms-length  transaction at the estimated fair value of services
performed. In addition, management believes the balance is fully collectible and
a valuation allowance has not been recorded.

         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.

         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  obligations  under its line of credit.  The guaranty
includes the pledge of all of the Company's  Common Stock held by Mr. Gordon and
his spouse. Outstanding borrowings under the line of credit that were guaranteed
by Mr.  Gordon and his spouse  total  approximately  $2.8 million as of July 31,
1997.
                                      -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  66% and 56% of the  Company's  total
revenue  for the  years  ended  January  31,  1996 and 1997,  respectively,  and
approximately  51% and 46% for the six  months  ended  July 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.  Prior to January 31, 1997, the Company
had 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 
                                      -8-
<PAGE>
any changes made by IBM to the AS/400's operating system software. A significant
shift away from 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.  Subsequent to
January 31,  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 personnel changes that have been
made to focus on  software  development  and  marketing  efforts  will result in
sufficient future revenue to fund its ongoing operations.

         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. Maintenance and support services
includes  cost of personnel and related  administrative  costs  associated  with
telephone  support of the Company's  software  products.  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 July 31, 1997
and 1996

         Revenue. Total revenue decreased by 23% from approximately $8.0 million
in the three  months  ended July 31, 1996 to  approximately  $6.1 million in the
three  months  ended  July  31,  1997.  Product  revenue  decreased  by 30% from
approximately  $6.3  million  to  approximately  $4.4  million  during  the same
periods.  As a percentage of total revenue,  product revenue  decreased from 79%
during the three months ended July 31, 1996 to 72% during the three months ended
July 31, 1997. Software license revenue decreased by 31% from approximately $1.0
million in the three months ended July 31, 1996 to approximately $696,000 in the
three months ended July 31, 1997.  As a percentage  of total  revenue,  software
license revenue  decreased from 13% to 11% during the same periods.  Maintenance
and support revenue increased  approximately 41% from approximately  $144,000 in
the three  months  ended July 31,  1996 to  approximately  $203,000 in the three
months  ended July 31,  1997.  As a  percentage  of total  revenue,  maintenance
revenue  increased  from  2%  in  the  three  months  ended  July  31,  1996  to
approximately 3% in the three months ended July 31, 1997.  Professional services
revenue  increased 54% from  approximately  $555,000 to  approximately  $855,000
during  the  three  months  ended  July 31,  1996 and 1997,  respectively.  As a
percentage of total revenue,  professional services revenue increased from 7% to
14% during the three months ended July 31, 1996 and 1997, respectively.

         The overall  decrease in total  revenue is  attributed  to decreases in
third-party  products and  software  revenue,  partially  offset by increases in
maintenance and support services revenue and professional  services revenue. The
decrease  in third party  product  revenue is due (i) to the  expiration  of the
Company's  reseller  agreement in July 1997 and (ii)  shipments  from IBM of the
then new RISC AS/400  processors that were delayed during the three months ended
April 30, 1996 and  subsequently  shipped during the three months ended July 31,
1996. The Company  continues to 
                                      -9-
<PAGE>
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.  The  decrease  in  software  revenue is
attributed to reduced sales of Kinetics and the  unavailability of the Company's
new software products.  The increase in maintenance and support services revenue
is  attributed  to new  software  sales and support  contracts.  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  decreased  42%  from
approximately  $4.6  million  during the three  months  ended  July 31,  1996 to
approximately  $2.7 million  during the three  months ended July 31, 1997.  This
decrease is attributed  to the  corresponding  decrease in sales of  third-party
products  during the same period.  As a percentage of product  revenue,  cost of
products sold was  approximately  74% and 61% during the three months ended July
31, 1996 and 1997, respectively.

         Software  Development  Expense.  Software development expense increased
from  approximately  $1.0 million to approximately $1.2 million during the three
months  ended  July  31,  1996  and  1997,  respectively.  The 15%  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 increased from 13% in the three months
ended July 31, 1996 to 20% in the three months ended July 31, 1997.

         Maintenance  and  Support  Services  Expense.  Maintenance  and support
services expense decreased by 8% from approximately $163,000 in the three months
ended July 31, 1996,  to  approximately  $150,000 in the three months ended July
31, 1997. As a percentage of total  revenue,  maintenance  and support  services
remained even at 2% of total revenue.

         Professional Services Expense.  Professional services expense decreased
by 7% from  approximately  $555,000 to  approximately  $515,000 during the three
months  ended July 31, 1996 and 1997,  respectively.  A reduction  in  personnel
contributed to this decrease.  As a percentage of professional services revenue,
professional services expense decreased from 100% in the three months ended July
31, 1996 to 60% in the three  months  ended July 31,  1997.  This  decrease as a
percentage  is  attributed  to  better  utilization  of  professional   services
personnel.

         Sales and Marketing Expense.  Sales and marketing expense increased 51%
from approximately  $530,000 to approximately $595,000 in the three months ended
July 31, 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 $473,000 in the three months ended July 31, 1996 to
approximately  $595,000  in the  three  months  ended  July 31,  1997.  This 26%
increase is attributed to additional personnel and associated costs,  additional
insurance costs, and increased building rent costs.

         Restructuring  Charge. During the three months ended July 31, 1997, the
Company took a restructuring charge of approximately  $108,000.  This charge was
for the costs  associated  with an  overall  decrease  of  approximately  27% of
personnel  during August 1997.  This reduction of personnel was primarily due to
the expiration of the reseller agreement with IBM.

         Other Income  (Expense).  Interest  expense was  approximately  $36,000
during the three  months  ended July 31, 1996,  as compared  with  approximately
$131,000 during the three months ended July 31, 1997.  Interest expense incurred
on the  Company's  line of credit  contributed  to this  increase.  The  average
outstanding  balance  on the  line of  credit  was  approximately  $443,400  and
approximately  $2.8 million during the three months ended July 31, 1996 and 1997
respectively.
                                      -10-
<PAGE>
         Net Income.  Net income decreased 92% from approximately  $565,000,  or
$.19 per  share,  in the  three  months  ended  July 31,  1996 to  approximately
$44,000, or $.02 per share, in the three months ended July 31, 1997.

Results of  Operations of the Company for the Six Months Ended July 31, 1997 and
1996

         Revenue. Total revenue remained constant at approximately $10.8 million
in the six  months  ended  July 31,  1996 and July  31,  1997.  Product  revenue
decreased by 1% from  approximately  $7.2 million to approximately  $7.1 million
during the same  periods.  As a percentage  of total  revenue,  product  revenue
decreased  from 67% during the six months  ended July 31, 1996 to 66% during the
six months ended July 31, 1997.  Software license revenue  decreased by 24% from
approximately   $2.3   million  in  the  six  months  ended  July  31,  1996  to
approximately  $1.7  million  in the  six  months  ended  July  31,  1997.  As a
percentage of total revenue,  software license revenue decreased from 21% to 16%
during the same periods.  Maintenance  and support  services  revenue  increased
approximately 61% from  approximately  $231,000 in the six months ended July 31,
1996 to  approximately  $372,000  in the six months  ended July 31,  1997.  As a
percentage of total revenue,  maintenance  revenue  increased from 2% in the six
months ended July 31, 1996 to  approximately 3% in the six months ended July 31,
1997.  Professional  services  revenue  increased  54% from  approximately  $1.0
million to approximately  $1.6 million during the six months ended July 31, 1996
and 1997, respectively.  As a percentage of total revenue, professional services
revenue  increased from 10% to 15% during the six months ended July 31, 1996 and
1997, respectively.

         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. The decrease in
software   revenue  is   attributed   to  reduced  sales  of  Kinetics  and  the
unavailability  of  the  Company's  new  software  products.   The  increase  in
maintenance and support services revenue is attributed to new software sales and
support contracts.  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  decreased  7% from
approximately  $5.1  million  during  the six  months  ended  July  31,  1996 to
approximately  $4.8  million  during the six months  ended July 31,  1997.  As a
percentage of product revenue,  cost of products sold was  approximately 71% and
67% during the six months ended July 31, 1996 and 1997, respectively.

         Software  Development  Expense.  Software development expense increased
from  approximately  $1.8 million to  approximately  $2.3 million during the six
months  ended  July  31,  1996  and  1997,  respectively.  The 28%  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 increased from 17% in the six months
ended July 31, 1996 to 21% in the six months ended July 31, 1997.

         Maintenance  and  Support  Services  Expense.  Maintenance  and support
services expense decreased by 5% from  approximately  $295,000 in the six months
ended July 31, 1996, to approximately  $280,000 in the six months ended July 31,
1997.  As a  percentage  of total  revenue,  maintenance  and  support  services
remained even at 3% of total revenue.

         Professional Services Expense.  Professional services expense increased
by 6% from  approximately  $912,000  to  approximately  $972,000  during the six
months  ended  July  31,  1996  and  1997,  respectively.  As  a  percentage  of
professional services revenue,  professional services expense decreased from 88%
in the six months  ended July 31,  1996 to 61% in the six months  ended July 31,
                                      -11-
<PAGE>
1997.  This  decrease as a percentage is  attributed  to better  utilization  of
professional services personnel.

         Sales and Marketing Expense.  Sales and marketing expense increased 90%
from  approximately  $872,000 to  approximately  $1.7  million in the six months
ended July 31, 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  $817,000 in the six months ended July 31, 1996 to
approximately  $1.2  million in the six months  ended  July 31,  1997.  This 52%
increase is attributed to additional personnel and associated costs,  additional
insurance costs, and increased building rent costs.

         Restructuring  Charge. During the three months ended July 31, 1997, the
Company took a restructuring charge of approximately  $108,000.  This charge was
for costs associated with an overall decrease of approximately  27% of personnel
during  August  1997.  This  reduction  of personnel  was  primarily  due to the
expiration of the reseller agreement with IBM.

         Other Income  (Expense).  Interest  expense was  approximately  $87,000
during the six months  ended  July 31,  1996,  as  compared  with  approximately
$230,000 during the six months ended July 31, 1997. Interest expense incurred on
the  Company's  line  of  credit  contributed  to  this  increase.  The  average
outstanding  balance  on the  line of  credit  was  approximately  $402,100  and
approximately  $2.8 million  during the six months ended July 31, 1996 and 1997,
respectively.

         Net Income. Net income decreased 185% from approximately  $820,000,  or
$.31  per  share,  in the  six  months  ended  July  31,  1996 to a  deficit  of
approximately  $(702,000) or $(.20) per share,  in the six months ended July 31,
1997.

Liquidity and Capital Resources

         The Company's  working capital  position  decreased from  approximately
$2.6 million at January 31, 1997 to approximately $266,000 at July 31, 1997.

         The Company used net cash of approximately  $3.0 million for operations
during the six months ended July 31, 1997, primarily as a result of the decrease
in accrued liabilities and an increase in accounts  receivable,  inventories and
prepaid expenses, partially offset by an increase in accounts payable.

         Capital  expenditures  for the six months  ended July 31, 1997  totaled
approximately  $466,000  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 $2.8 million in
the six months ended July 31, 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.   Borrowings  under  the  line  of  credit  are  secured  by
substantially  all  of  the  Company's   tangible  and  intangible  assets.  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%. As of July 31, 1997,  and 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 $2.8 million at July 31, 1997 and
                                      -12-
<PAGE>
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 six months ended July 31,
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.  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

         Although the trends  reflected by the operating  results of the Company
in the six  months  ended  July  31,  1997  indicate  that  revenue  has  remain
essentially  unchanged,  the Company  continues to believe 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. During the six months
ended  July 31,  1997 the  Company  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  
                                      -13-
<PAGE>
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  softwareproducts 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 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 six 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.
                                      -14-
<PAGE>
         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 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.
                                      -15-
<PAGE>
PART II           OTHER INFORMATION

Item 1.           Legal Proceedings

                  The Company is involved in a material dispute with a customer.
     The dispute  involves a receivable  of  $3,803,055  at July 31, 1997 and at
     October 27,  1997.  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.

Item 2.           Changes in Securities

                  Not applicable

Item 3.           Defaults Upon Securities

                  Not Applicable

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

                  Not Applicable

Item 5.           Other Information

                  Not Applicable
                                      -16-
<PAGE>
Item 6.           Exhibits and Reports on Form 8-K

                  (a)  Exhibits

                           10.17    Second  Amendment  to  Credit  and  Security
                                    Agreement,   dated  as  of  June  10,  1997,
                                    between  Gateway Data Sciences  Corporation,
                                    Gateway  Credit  Corporation,   and  Norwest
                                    Business Credit, Inc.

                           10.18    Third   Amendment  to  Credit  and  Security
                                    Agreement,  dated  as  of  August  8,  1997,
                                    between  Gateway Data Sciences  Corporation,
                                    Gateway  Credit  Corporation,   and  Norwest
                                    Business Credit, Inc.

                           11.      Computation of Net Income Per Share

                           27.      Financial Data Schedule

                  (b)   Reports on Form 8-K

                           Not applicable
                                      -17-
<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)
                                      -18-