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 October 31, 1996

                         Commission File Number: 0-27776

                        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:  2,804,721  shares of common  stock,  $.01 par value (as of December 13,
1996)
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY
                                      INDEX


                                                                           Page
                                                                           ----

PART I.           FINANCIAL INFORMATION

Item 1.           Financial Statements

                  Consolidated Balance Sheets as of October 31, 1996
                  and January 31, 1996                                       3

                  Consolidated Statements of Operations for the
                  Three and Nine Months ended October 31, 1996 and 1995      4

                  Consolidated Statements of Cash Flows for the
                  Nine Months ended October 31, 1996 and 1995                5

                  Notes to Consolidated Financial Statements                 6

Item 2.           Management's Discussion and Analysis of
                  Financial Condition and Results of Operations              7

PART II. OTHER INFORMATION                                                  14

                  Signatures                                                15

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

                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
                   AS OF OCTOBER 31, 1996 AND JANUARY 31, 1996

<TABLE>
<CAPTION>
                                                                                 October 31,       January 31,
                                                                                    1996               1996
                                                                                ------------       ------------
                                                                                (Unaudited)
<S>                                                                             <C>                <C>         
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                   $  2,142,928       $     93,402
    Trade receivables- less allowance of $84,800 and $63,100, respectively         8,489,465          2,914,154
    Inventories                                                                    1,575,672            388,041
    Prepaid expenses and other assets                                                386,672            928,287
                                                                                ------------       ------------

                Total Current Assets                                              12,594,737          4,323,884
PROPERTY AND EQUIPMENT - Net                                                       1,774,497          1,139,770
NET INVESTMENT IN LEASE RESIDUALS                                                  1,572,253          1,558,547
OTHER ASSETS                                                                         515,396            116,216
                                                                                ------------       ------------
                                                                                $ 16,456,883       $  7,138,417
                                                                                ============       ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
    Accounts payable                                                            $  1,647,745       $  1,279,947
    Accrued liabilities                                                            2,157,136          2,121,871
    Accrued payroll and benefits                                                     836,066            262,719
    Due to officers and employees (Note 3)                                              --              536,172
    Current portion of notes payable                                                 154,788            136,436
    Current portion of capital lease obligations                                      76,256             58,798
    Line of Credit                                                                 1,971,655            311,555
    Deferred revenue                                                               1,012,013            808,731
                                                                                ------------       ------------

                Total Current Liabilities                                          7,855,659          5,516,229
DEFERRED REVENUE, recognized after one year                                        1,531,280          1,769,314
NOTES PAYABLE, less current portion                                                  323,541          1,252,038
CAPITAL LEASE OBLIGATIONS, less current portion                                       72,848             61,545
                                                                                ------------       ------------

                Total Liabilities                                                  9,783,328          8,599,126
                                                                                ------------       ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
    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,
      2,804,721 shares issued and outstanding at October 31, 1996 and
      1,543,199 shares issued and outstanding at January 31, 1996                     28,047             15,431
    Additional paid-in capital                                                     9,158,099          2,587,848
    Deferred compensation                                                             (3,900)           (11,700)
    Accumulated deficit                                                           (2,508,690)        (4,052,288)
                                                                                ------------       ------------
                Total shareholders' equity (deficit)                               6,673,556         (1,460,709)
                                                                                ------------       ------------
                                                                                $ 16,456,883       $  7,138,417
                                                                                ============       ============
</TABLE>
                 See notes to consolidated financial statements
                                      -3-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

          FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                    Three Months Ended                  Nine Months Ended
                                                        October 31,                         October 31,
                                                        (Unaudited)                         (Unaudited)
                                                  1996              1995              1996               1995
                                              ------------      ------------      ------------       ------------
<S>                                           <C>               <C>               <C>                <C>         
REVENUE
    Product revenue                           $  7,163,221      $  5,981,333      $ 14,383,153       $ 16,832,177
    Software license revenue                       726,211           445,863         3,108,475          2,004,510
    Professional services revenue                  774,336           447,355         1,928,397          1,139,589
                                              ------------      ------------      ------------       ------------
                Total revenue                    8,663,768         6,874,551        19,420,025         19,976,276
                                              ------------      ------------      ------------       ------------

OPERATING EXPENSES:
    Products sold                                4,909,630         4,484,157        10,064,921         12,710,852
    Software development                         1,016,712           686,958         2,825,201          2,132,567
    Professional services                          794,717           450,077         1,991,982          1,306,543
    Sales and marketing                            492,950           425,265         1,365,073          1,272,159
    General and administrative                     625,113           431,630         1,442,635          1,195,569
                                              ------------      ------------      ------------       ------------
                Total expenses                   7,839,122         6,478,087        17,689,812         18,617,690
                                              ------------      ------------      ------------       ------------

INCOME FROM OPERATIONS                             824,646           396,464         1,730,213          1,358,586

OTHER (INCOME) EXPENSE:
    Interest expense                               101,469           114,662           188,505            567,922
    Other                                              294               196            (1,890)            (2,944)
                                              ------------      ------------      ------------       ------------
                Total other expense, net           101,763           114,858           186,615            564,978
                                              ------------      ------------      ------------       ------------

INCOME BEFORE INCOME TAXES                         722,883           281,606         1,543,598            793,608

PROVISION FOR INCOME TAXES                               0                 0                 0                  0
                                              ------------      ------------      ------------       ------------

NET INCOME                                    $    722,883      $    281,606      $  1,543,598       $    793,608
                                              ============      ============      ============       ============

NET INCOME PER COMMON AND
    COMMON EQUIVALENT
      SHARE (Note 2)                          $       0.26      $       0.19      $       0.57       $       0.53
                                              ============      ============      ============       ============

COMMON AND COMMON
    EQUIVALENT SHARES
      OUTSTANDING (Note 2)                       2,819,776         1,543,562         2,610,456          1,687,150
                                              ============      ============      ============       ============
</TABLE>
                 See notes to consolidated financial statements
                                      -4-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                            Nine Months Ended
                                                                                October 31,
                                                                       -----------------------------
                                                                          1996              1995
                                                                       -----------       -----------
                                                                                (Unaudited)
<S>                                                                    <C>               <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                             $ 1,543,598       $   793,608
Adjustments to reconcile net income to net cash used in operating
      activities
       Depreciation and amortization                                       430,371           247,339
       Amortization of deferred compensation                                 7,800              --
Effect of changes in assets and liabilities:
       Trade receivables                                                (5,575,311)       (2,374,322)
       Inventories                                                      (1,187,631)        1,336,805
       Prepaid expenses and other assets                                   142,435          (493,588)
       Accounts payable                                                    367,798         1,268,084
       Accrued liabilities                                                  48,484        (1,071,694)
       Accrued payroll and benefits                                        573,347            81,116
       Accrued interest                                                    (13,219)           51,291
       Deferred revenue                                                    (34,752)           20,890
                                                                       -----------       -----------

                    Net cash used in operating activities               (3,697,080)         (140,471)
                                                                       -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of property & equipment                                 (1,065,099)         (547,146)
       Net investment in lease residuals                                   (13,706)         (834,728)
                                                                       -----------       -----------

                    Net cash used in investing activities               (1,078,805)       (1,381,874)
                                                                       -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from additional borrowings of notes payable                   --             810,000
       Principal payments on notes payable                                (910,145)          (95,000)
       Additional borrowings on capital lease obligations                   66,344              --
       Principal payments on capital lease obligations                     (37,583)         (190,844)
       Additional borrowings on line of credit                           1,660,100         1,097,594
       Proceeds from issuance of common stock                               51,058              --
       Net proceeds from initial public offering                         6,531,809              --
       Payments to officers and employees                                 (536,172)         (153,148)
                                                                       -----------       -----------

                    Net cash provided by financing activities            6,825,411         1,468,602
                                                                       -----------       -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     2,049,526           (53,743)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              93,402           311,916
                                                                       -----------       -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                               $ 2,142,928       $   258,173
                                                                       ===========       ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Cash paid during the period for interest                        $   201,724       $   516,323
                                                                       ===========       ===========

       Cash paid during the period for income taxes                    $    39,500       $      --
                                                                       ===========       ===========
</TABLE>
                 See notes to consolidated financial statements
                                      -5-
<PAGE>
                GATEWAY DATA SCIENCES CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1996



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  and  nine-month  periods  ended  October  31, 1996 are not
necessarily  indicative  of the  operating  results that may be expected for the
entire year ending January 31, 1997. These financial  statements  should be read
in conjunction  with the Company's Form 10-KSB for the fiscal year ended January
31, 1996.


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.   TRANSACTIONS WITH RELATED PARTIES

         During the nine months  ended  October  31,  1996,  the Company  used a
portion  of the  proceeds  of its  initial  public  offering  (Note 4) to retire
$536,172  of accrued  liabilities  due to certain  officers  and  employees  and
$660,000  of bridge  notes  payable  due to certain of the  Company's  officers,
members of the Board of Directors, and an affiliated party.


4.   INITIAL PUBLIC OFFERING

         In March 1996 the Company  completed an initial public  offering of its
common stock. The Company sold 1,250,000 shares of its common stock at $6.75 per
share,  resulting in net proceeds to the Company of approximately  $6.5 million.
The  Company  used a portion of the  proceeds to pay down its line of credit and
retire the bridge  notes  payable  (Note 3). The Company  also  intends to use a
portion  of  the  net  proceeds  to  develop  new  software   applications   and
enhancements  to  existing  applications,  to modify its  software  products  to
operate  on  open  architecture   platforms,   to  expand  marketing  and  sales
operations,  to make  additional  capital  investments,  and for working capital
purposes.
                                      -6-
<PAGE>


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

         The  statements  contained  in this  Report on Form 10-QSB 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 the remainder of fiscal 1997 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
document 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 this Report as well as in the "Risk  Factors"  section  included in
the Company's  Registration Statement on Form S-B2, as declared effective by the
Securities and Exchange Commission on March 22, 1996 (Reg. No. 333-2708-LA).

Operations

         The Company designs, develops, markets and implements software products
and provides  related  customer  support  services and hardware for customers in
retailing  and  logistics.  The Company  also  provides  professional  services,
including installation, training, maintenance,  customization, and modifications
in conjunction  with  sales  of its software products. The Company  markets  its
products and services entirely through an internal sales force.

         Founded in 1985, the Company historically derived its revenue primarily
from  sales of  hardware  and  software  products  developed  by third  parties,
primarily   International   Business  Machines  Corp.  ("IBM").   The  Company's
dependence  on the resale of third  parties'  products  adversely  affected  the
Company's competitive position,  gross profit margins, and operating results. As
a result,  in 1991 the Company  changed its business  strategy to emphasize  the
development and sale of its own software products.  The Company intends to use a
substantial  portion of the proceeds from its initial public offering  completed
in March 1996 to  significantly  accelerate the transition of its business focus
to proprietary  software  products.  As a result,  the Company  anticipates that
revenue  from  third-party  hardware  and  software  products  will  continue to
decrease  from  historical  levels and that revenue from  software  licenses and
professional services will increase in dollar amounts as well as a percentage of
total revenue during the next several years. The Company believes that, although
the change in revenue mix may initially  result in lower total revenue,  it will
also result in a more  favorable  gross profit  margin for the Company,  reduced
borrowing  requirements,  and a higher  net  margin  as sales  of  software  and
services become a higher percentage of total revenue.

         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,  and 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  products  (software and
hardware) 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  
                                      -7-
<PAGE>
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 and 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.

         The Company's  revenue and  operating  results are subject to quarterly
and other  fluctuations  as a result  of a variety  of  factors,  including  the
budgeting and purchasing practices of its customers,  the length of the customer
evaluation  process  for  Company  products,   the  timing  of  customer  system
conversions,  and, to a lesser extent, the Company's sales commission practices,
which are based  partly on quarterly  incentives  and annual  quotas,  and other
factors. The Company's  professional  services revenue tends to fluctuate due to
the completion or commencement of significant projects,  which may continue over
multiple quarters,  the number of working days in a quarter, and the utilization
rate of  professional  services  personnel.  The Company has often  recognized a
substantial  portion of its  license  revenue in the last month of the  quarter,
sometimes in the last week. A  significant  portion of the  Company's  operating
expenses is relatively  fixed,  since  personnel  levels and other  expenses are
based upon anticipated  revenue.  Because a substantial  portion of this revenue
may not be generated until the end of each quarter,  the Company may not be able
to reduce  spending in response to sales  shortfalls or delays.  These important
factors can cause  significant  variations in operating  results from quarter to
quarter.  The  Company  believes  that  quarter-to-quarter  comparisons  of  its
financial  results are not necessarily  meaningful and should not be relied upon
as an indication of future performance.

Results of Operations of the Company for the Three Months ended October 31, 1996
and 1995

         Revenue. Total revenue increased by 26% from approximately $6.8 million
in the three months ended October 31, 1995 to approximately  $8.6 million in the
three  months  ended  October 31, 1996.  Product  revenue  increased by 20% from
approximately  $6.0  million  to  approximately  $7.1  million  during  the same
periods.  As a percentage of total revenue,  product revenue  decreased from 87%
during the three  months  ended  October 31, 1995 to 83% during the three months
ended  October  31,  1996.   Software   license   revenue   increased  63%  from
approximately   $446,000  in  the  three  months  ended   October  31,  1995  to
approximately  $726,000  in the  three  months  ended  October  31,  1996.  As a
percentage of total revenue,  software  license revenue  increased from 6% to 8%
during  the  same  period.  Professional  services  revenue  increased  73% from
approximately  $447,000 to approximately $774,000 during the three month periods
ending  October  31,  1995 and  1996,  respectively.  As a  percentage  of total
revenue,  professional  services revenue increased from  approximately 7% during
the three months ended October, 1995 to approximately 9% of total revenue during
the three months ended October 31, 1996.

         The increase in product  revenue is  attributed  to increased  sales of
third-party hardware products,  principally those manufactured by IBM, including
the IBM AS/400. IBM had delayed shipment on its new AS/400 line of RISC (Reduced
Instruction Set Computing)  processors  during the first quarter of fiscal 1997,
with  shipments  beginning  in the  Company's  second  quarter.  The increase in
software  revenue is attributed to new software  products  announced and shipped
during the Company's  third  quarter.  During the three months ended October 31,
1996 the  Company  announced  general  availability  of its  Wireless  Inventory
Manager  module,  Release 2.0 of its Internet and  kiosk-enabled  Gift  Registry
module, and MPower(TM),  its new retail  merchandising  product. The increase in
professional  services  revenue  resulted from the Company's  continued focus on
providing professional services to its customer base.
                                      -8-
<PAGE>
         Cost  of  Products  Sold.  Cost  of  products  sold  increased  9% from
approximately  $4.5 million  during the three  months ended  October 31, 1995 to
approximately  $4.9 million during the three months ended October 31, 1996. This
increase is attributed  to the  corresponding  increase in sales of  third-party
hardware  products during the same period.  As a percentage of product  revenue,
cost of  products  sold was  approximately  69% and 75% during the three  months
ended October 31, 1996 and 1995, respectively.

         Software  Development  Expense.  Software development expense increased
from  approximately  $687,000  during the three months ended October 31, 1995 to
approximately  $1.0 million  during the three months ended October 31, 1996. The
48%  increase  is  attributed  to  increased  research  and  development  effort
associated with the development of the Company's proprietary software products.

         Professional Services Expense.  Professional services expense increased
by 77% from  approximately  $450,000  during the three months ended  October 31,
1995 to  approximately  $795,000 during the three months ended October 31, 1996.
Additional  personnel   contributed  to  this  increase.   As  a  percentage  of
professional services revenue, professional services expense increased from 101%
in the three  months  ended  October 31, 1995 to 103% in the three  months ended
October 31, 1996. This increase as a percentage is attributed to low utilization
rates of professional services personnel.

         Sales and Marketing Expense.  Sales and marketing expense increased 16%
from  approximately  $425,000  during the three months ended October 31, 1995 to
approximately  $493,000  during the three  months ended  October 31,  1996.  The
increase  can be  attributed  to costs  incurred for new  marketing  literature,
additional sales and marketing personnel, and increased marketing activities.

         General and Administrative Expense.  General and administrative expense
increased from approximately $432,000 in the three months ended October 31, 1995
to  approximately  $625,000 in the three  months ended  October 31,  1996.  This
increase is attributed to additional  personnel and associated costs,  increased
insurance costs, and additional building rent cost.

         Other Income  (Expense).  Interest expense was  approximately  $101,000
during the three months ended October 31, 1996,  as compared with  approximately
$115,000 during the three months ended October 31, 1995.

         Net Income. Net income increased 157% from approximately  $282,000,  or
$.19 per share,  in the three  months  ended  October 31, 1995 to  approximately
$723,000,  or $.26 per share,  in the three months ended  October 31, 1996.  The
Company  attributes this increase to improved sales of higher margin product and
reduced operating costs.

Results of  Operations of the Company for the Nine Months ended October 31, 1996
and 1995

         Revenue. Total revenue decreased by 3% from approximately $20.0 million
in the nine months ended October 31, 1995 to approximately  $19.4 million in the
nine months  ended  October 31,  1996.  Product  revenue  decreased  by 15% from
approximately  $16.8  million to  approximately  $14.4  million  during the same
periods.  As a percentage of total revenue,  product revenue  decreased from 84%
during the nine  months  ended  October  31,  1995 to 74% during the nine months
ended  October  31,  1996.  Software  license  revenue  increased  by  55%  from
approximately  $2.0  million  in the  nine  months  ended  October  31,  1995 to
approximately  $3.1  million in the nine months  ended  October 31,  1996.  As a
percentage of total revenue,  software license revenue increased from 10% to 16%
during  the same  periods.  Professional  services  revenue  increased  69% from
approximately  $1.1 million to approximately  $1.6 million during the nine month
periods ending October 31, 1995 and 1996,
                                      -9-
<PAGE>
respectively.  As a percentage of total revenue,  professional  services revenue
increased from 6% to 10% during the nine months ended October 31, 1995 and 1996,
respectively.

         The overall  decrease in total revenue is  attributed to  significantly
lower product revenue during the first three months of fiscal 1997. The decrease
in  product  revenue  is a  result  of  reduced  sales of  third-party  hardware
products,  principally those  manufactured by IBM, including the IBM AS/400. IBM
had delayed  shipment on its new AS/400 line of RISC  (Reduced  Instruction  Set
Computing)  processors,  thus delaying sales to many of the Company's  customers
during that period.  Product  revenue  increased  when IBM began  shipping those
products in the second quarter of fiscal 1997. The increase in software  license
and 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.
Although  revenue from  third-party  products  rebounded during the three months
ended  October 31,  1996,  the Company  continues  to believe  that revenue from
third-party products will decrease as a percentage of total revenue.

         Cost of  Products  Sold.  Cost of  products  sold  decreased  21%  from
approximately  $12.7  million  during the nine months ended  October 31, 1995 to
approximately  $10.0 million during the nine months ended October 31, 1996. 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 70% and 76% during the nine months ended October
31, 1996 and 1995, respectively.

         Software  Development  Expense.  Software development expense increased
from  approximately  $2.1 million to approximately  $2.8 million during the nine
months  ended  October  31,  1995 and 1996,  respectively.  The 32%  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 11% in the nine months
ended October 31, 1995 to 15% in the nine months ended October 31, 1996.

         Professional Services Expense.  Professional services expense increased
by 52% from  approximately $1.3 million to approximately $1.6 million during the
nine months ended October 31, 1995 and 1996, respectively.  Additional personnel
contributed to this increase.  As a percentage of professional services revenue,
professional  services  expense  decreased  from 115% in the nine  months  ended
October  31,  1995 to 103% in the nine  months  ended  October  31,  1996.  This
decrease as a percentage  is attributed to better  utilization  of  professional
services personnel.

         Sales and Marketing  Expense.  Sales and marketing expense increased 7%
from approximately $1.3 million to approximately $1.4 million in the nine months
ended October 31, 1995 and 1996, 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  $1.2 million in the nine months ended October 31,
1995 to  approximately  $1.4 million in the nine months ended  October 31, 1996.
This 21% increase is attributed to additional  personnel and  associated  costs,
additional insurance costs, and increased building rent costs.

         Other Income  (Expense).  Interest expense was  approximately  $189,000
during the nine months ended October 31, 1996,  as compared  with  approximately
$568,000  during the nine months ended October 31, 1995. In September  1995, the
Company  converted  approximately  $1.2  million  of debt into  shares of common
stock. Interest expense related to this debt, together with interest expense due
to vendor late payments that were incurred  during the nine months ended October
31, 1995, were not incurred during the nine month period ended October 31, 1996.
                                      -10-
<PAGE>
         Net Income.  Net income increased 95% from approximately  $794,000,  or
$.53 per share, in the nine months ended October 31, 1995 to approximately  $1.5
million,  or $.57 per share,  in the nine months  ended  October 31,  1996.  The
Company  attributes this increase to the 67% decrease in interest expense during
the  comparable  periods,   together  with  the  27%  increase  in  income  from
operations.

Liquidity and Capital Resources

         The Company's  working  capital  position  increased  from a deficit of
approximately  ($880,000) at January 31, 1996 to  approximately  $4.7 million at
October  31,  1996.  In March  1996,  the Company  completed  an initial  public
offering  of  1,250,000  shares  of common  stock and  raised  net  proceeds  of
approximately $6.5 million. The Company used a portion of the proceeds from this
offering to retire  $810,000 of bridge notes and related  accrued  interest,  to
purchase  approximately  $528,000 of capital equipment,  to retire approximately
$536,000 of debt to officers and employees,  to fund additional  development for
new software products, and to develop new marketing collateral material.

         The Company used net cash of approximately  $3.7 million for operations
during the nine months  ended  October 31,  1996,  primarily  as a result of the
increase in accounts receivable and inventories, partially offset by an increase
in accounts payable and accrued payroll and benefits.  The increase in inventory
can be attributed to timing of inventory in transit to the Company's  customers,
and is temporary in nature.

         Capital  expenditures for the nine-month  period ended October 31, 1996
totaled approximately $1.1 million, of which approximately  $847,000 was for the
purchase of computer  hardware and software  products  needed for the  continued
efficient  development  of the  Company's  proprietary  software  products.  The
balance of $217,000  was used for the  expansion  of physical  office  space and
related purchases of furniture and fixtures.

         Financing activities provided net cash of approximately $6.8 million in
the nine months ended October 31, 1996. The Company completed its initial public
offering in March 1996,  which,  together  with  additional  borrowings  of $1.6
million on the Company's line of credit,  generated  approximately $8.1 million,
partially  offset by  retirement  of  approximately  $810,000  in  bridge  notes
payable,  approximately  $100,000  in notes  payable,  approximately  $38,000 in
capital   lease   obligations,   and  payments  to  officers  and  employees  of
approximately $536,000.

         The Company currently has an agreement with Concord Growth  Corporation
providing for a line of credit that expires August 22, 1997, in the
amount that is the lower of $2.0 million or 75% of eligible accounts receivable.
The line of credit  bears  interest at the prime rate of interest  quoted in the
Wall  Street  Journal  on the first day of each  month  plus 8% and  requires  a
monthly  minimum  payment of $5,000.  The  Company is  currently  seeking a more
favorable  borrowing  facility and  anticipates a marked decrease in its cost of
borrowing, beginning in the fourth quarter of fiscal 1997.

         The Company  believes that existing cash balances,  cash generated from
operations,  and available  borrowings  will be sufficient to meet the Company's
liquidity  needs  for the next 12  months at its  current  level of  operations.
However,  the Company may be required to obtain  additional  capital to fund its
planned growth in the future,  particularly to provide funds required to finance
the Company's  planned  software  development  programs and increased  sales and
marketing  efforts.  Potential  sources of such capital may include the proceeds
from the exercise of outstanding options and warrants, bank financing, strategic
alliances,  and additional offerings of the Company's equity or debt securities.
There can be no assurance  that such  capital  will be  available on  acceptable
terms from these or other potential sources,  and the lack of such capital could
have a material adverse effect on the Company's operations.
                                      -11-
<PAGE>
Business Outlook and Risk Factors

         The trends  indicated by the Company's  operating  results for the nine
months ended October 31, 1996 reflect the Company's  belief that although  total
revenue may remain flat or grow only  slightly in the near future,  software and
services  revenue  should  contribute 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 and to decrease  dependence  on IBM as a primary vendor. The
Company's  current  contract with IBM expires in July 1997,  and there can be no
assurance  that the Company will continue that  relationship  after the contract
expires.  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  cycle;  the  complicated   nature  of  the  Company's  product
installations;  and  unanticipated  postponement  or cancellation of significant
orders.

         The  Company  continues  to invest in sales and  marketing  in order to
enhance its image and brand awareness. The Company added seven new marketing and
sales  personnel  during the last six months,  updated its  industry  trade-show
presence and image,  invested  heavily in collateral  marketing  materials,  and
redefined the Company's look and feel through a new corporate logo. 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  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
its employees.  The high cost associated  with industry  hiring  practices could
have a material adverse affect 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
                                      -12-
<PAGE>
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  and to 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.
                                      -13-
<PAGE>
PART II           OTHER INFORMATION

Item 1.           Legal Proceedings

                  Not applicable

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

Item 6.           Exhibits and Reports on Form 8-K

                  (a)  Exhibits

                           27.  Financial Data Schedule

                  (b)   Reports on Form 8-K

                           Not applicable
                                      -14-
<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

<TABLE>
<S>                                    <C>                          <C>
/s/ Michael M. Gordon                  Chairman of the Board,       December 14, 1996
----------------------------------     President, and Chief
Michael M. Gordon                      Executive Officer   
                                       (Principal Executive
                                       Officer)
                                       

/s/ Vickie B. Jarvis                   Vice President, Finance and  December 14, 1996
----------------------------------     Chief Financial Officer
Vickie B. Jarvis                       (Principal Financial and
                                       Accounting Officer)
</TABLE>
                                      -15-