<PAGE>
-------------------------------------------------------------------------------
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q


  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 1999

                                       OR

  [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

  For the transition period from ______________to______________

                         Commission File Number 0-20191

                                   * * * * * *

                               ODS NETWORKS, INC.
                               ------------------
             (Exact name of Registrant as specified in its charter)


            Delaware                               75-1911917
-------------------------------               -------------------
(State or other jurisdiction of                (I.R.S. Employer
incorporation or organization)                Identification No.)


                 1101 East Arapaho Road, Richardson, Texas 75081
                 -----------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (972) 234-6400
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
                   -------------------------------------------
                   (Former name, if changed since last report)

                                 *  *  *  *  *  *

Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days: Yes X  No
                                                  --    --
                                 *  *  *  *  *  *
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, on April 30, 1999 was 18,535,530.

------------------------------------------------------------------------------





<PAGE>



                               ODS NETWORKS, INC.
                               ------------------
                                      INDEX

                         PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S>                                                                <C>
                                                                    PAGE
                                                                    ----
Item 1.  Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 1999
     and December 31, 1998 . . . . . . . . . . . . . . . . . . .      3

Condensed Consolidated Statements of Operations for the three
     months ended March 31, 1999 and March 31, 1998  . . . . . .      4

Condensed Consolidated Statements of Cash Flows for the three
     months ended March 31, 1999 and March 31, 1998. . . . . . .      5

Notes to Condensed Consolidated Financial Statements . . . . . .      6-7

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition. . . . . . . . . . .      8-17

Item 3. Quantitative and Qualitative Disclosures About Market Risk    18

                           PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . .     19

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .     20

</TABLE>


                                      2

<PAGE>

                       ODS NETWORKS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (In thousands, except par value amounts)

<TABLE>
<CAPTION>
                                                March 31,    Dec. 31,
                                                  1999        1998
                                               ----------   ---------
                                               (Unaudited)
<S>                                            <C>          <C>
                                     ASSETS
Current Assets:
   Cash and cash equivalents                     $12,736      $16,791
   Short-term investments                          5,754        4,760
   Accounts receivable, net of allowance           7,420        6,265
      for doubtful accounts and returns
      of $870 in 1999 and $880 in 1998
   Income taxes receivable                         4,711        4,749
   Inventories                                     7,552        9,262
   Other assets                                      900          759
                                                 -------      -------
Total current assets                              39,073       42,586

Property and equipment (net)                       7,386        7,627
Long-term investments                                998          -
Equity investment                                    700          700
Goodwill and intangible assets, net               10,222       10,614
Other assets                                         174          183
                                                 -------      -------
TOTAL ASSETS                                     $58,553      $61,710
                                                 =======      =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable and accrued expenses         $ 7,123      $ 7,700
   Deferred revenue                                2,754        3,123
                                                 -------      -------
Total current liabilities                          9,877       10,823

Deferred tax liabilities                           1,316        1,361
Capital lease obligation                              15           20

Stockholders' Equity:
   Preferred stock, $.01 par value,
      Authorized shares - 5,000
      No shares issued and outstanding
   Common stock, $.01 par value,
      Authorized shares - 80,000
      Issued and outstanding shares - 18,536
      in 1999 and 18,513 in 1998                     185          185
   Additional paid-in capital                     29,636       29,551
   Retained earnings                              19,033       21,282
   Note receivable from stockholder               (1,187)      (1,189)
   Foreign currency translation adjustments         (322)        (323)
                                                  ------       ------
Total stockholders' equity                        47,345       49,506
                                                 -------      -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $58,553      $61,710
                                                 =======      =======

</TABLE>
                             See accompanying notes.


                                      3


<PAGE>
                       ODS NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                --------------------------
                                                  March 31,      March 31,
                                                    1999           1998
                                                ----------       ---------
<S>                                             <C>              <C>
Net sales                                          $14,065        $18,213
Cost of sales                                        7,890         10,198
                                                   --------        --------
     Gross profit                                    6,175          8,015

Operating expenses:
     Sales and marketing                             4,693          7,802
     Research and development                        2,330          2,667
     General and administrative                      1,259          1,163
     Amortization of intangibles                       391            -
                                                   --------       --------
Operating loss                                      (2,498)        (3,617)

Interest income, net                                   249            439
                                                   --------       --------
Loss before income taxes                            (2,249)        (3,178)

Income tax benefit                                     -           (1,204)
                                                   --------       --------
Net loss                                           $(2,249)       $(1,974)
                                                   ========       ========

Basic and diluted loss per share                   $ (0.12)       $ (0.12)
                                                   ========       ========

Weighted average common shares
   outstanding                                      18,530         16,503
                                                   ========       ========
Weighted average shares outstanding
   assuming dilution                                18,530         16,503
                                                   ========       ========

</TABLE>

                             See accompanying notes.


                                       4


<PAGE>


                       ODS NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                      Three Months Ended
                                                  --------------------------
                                                   March 31,      March 31,
                                                     1999           1998
                                                  -----------     ----------
<S>                                               <C>            <C>
Operating Activities:
Net loss                                           $ (2,249)      $ (1,974)
Adjustments to reconcile net loss to
 net cash used in operating activities:
   Depreciation and amortization                        872            821
   Deferred income taxes                                (45)          (293)
 Changes in operating assets and liabilities:
      Accounts receivable                            (1,155)        (1,465)
      Income taxes receivable                            38           (469)
      Inventories                                     1,710         (3,238)
      Other assets                                     (132)          (206)
      Accounts payable and accrued expenses            (582)         2,614
      Deferred revenue                                 (369)           (55)
                                                    --------       --------
Net cash used in operating activities                (1,912)        (4,265)
                                                    --------       --------
Investing Activities:
  Equity Investment                                       -         (1,250)
  Purchases of short-term investments                (1,000)             -
  Maturities of short-term investments                    -          3,636
  Purchases of long-term investments                   (998)             -
  Maturities of long-term investments                     6              3
  Purchases of property and equipment                  (239)          (627)
                                                    --------       --------
Net cash provided by (used in) activities            (2,231)         1,762
                                                    --------       --------
Financing Activities:
  Exercise of warrants and employee stock options        85            171
  Payments on stockholder loan                            2              -
                                                    --------       --------
Net cash provided by financing activities                87            171
                                                    --------       --------
Effect of foreign currency translation
 adjustment on cash and cash equivalents                  1             30
                                                    --------       --------
Net decrease in cash and cash equivalents            (4,055)        (2,302)

Cash and cash equivalents at beginning of
 period                                              16,791         17,911
                                                   --------       --------
Cash and cash equivalents at end of period         $ 12,736       $ 15,609
                                                   ========       ========

</TABLE>
                             See accompanying notes.


                                       5
<PAGE>


                       ODS NETWORKS, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
        ----------------------------------------------------------------

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have 
been prepared in accordance with generally accepted accounting principles for 
interim financial information and with the instructions to Form 10-Q and 
Article 10 of Regulation S-X. Accordingly, they do not include all of the 
information and footnotes required by generally accepted accounting 
principles for complete financial statements. The December 31, 1998 balance 
sheet was derived from audited financial statements, but does not include all 
the disclosures required by generally accepted accounting principles. 
However, the Company believes that the disclosures are adequate to make the 
information presented not misleading. In the opinion of management, all the 
adjustments (consisting of normal recurring adjustments) considered necessary 
for fair presentation have been included. The results of operations for the 
three month period ending March 31, 1999 are not necessarily indicative of 
the results which may be achieved for the full fiscal year or for any future 
period. The condensed consolidated financial statements included herein 
should be read in conjunction with the consolidated financial statements and 
notes thereto included in the Company's annual report on Form 10-K for the 
year ended December 31, 1998.

2. Inventories (In thousands)

Inventories consist of:

<TABLE>
<CAPTION>

                                         March 31,       Dec. 31,
                                          1999             1998
                                        -------------------------
                                        (unaudited)
<S>                                    <C>             <C>
   Raw materials                         $ 1,535        $ 1,845
   Work in process                           782            401
   Finished products                       4,036          5,669
   Demonstration systems                   1,199          1,347
                                         -------        -------
                                         $ 7,552        $ 9,262
                                         =======        =======

</TABLE>

3. Goodwill and Intangibles (In thousands)

Included in goodwill and intangibles are the following:

<TABLE>
<CAPTION>

                                         March 31,       Dec. 31,
                                          1999             1998
                                       --------------------------
                                        (unaudited)
<S>                                  <C>                 <C>
   CMDS purchased software             $ 4,136            $ 4,136
   CMDS intangible asset                   135                135
   Essential goodwill                    3,971              3,971
   Essential purchased development       3,000              3,000
   Essential intangible asset              340                340
                                        -------           -------
                                        11,582             11,582

   Accumulated amortization              1,360                968
                                       -------            -------
                                       $10,222            $10,614
                                       =======            =======

</TABLE>


                                       6

<PAGE>
4. Accounts Payable and Accrued Expenses (In thousands)

Included in accounts payable and accrued expenses are the following:

<TABLE>
<CAPTION>

                                          March 31,     Dec. 31,
                                           1999           1998
                                        ------------------------
                                         (unaudited)
<S>                                     <C>             <C>
      Accounts payable                   $ 3,610        $ 3,345
      Accrued sales commissions              486            768
      Accrued property taxes                 121            494
      Accrued vacation expense               773            776
      Accrued incentive bonus                249            406
      Accrued warranty expense               475            475
      Other (individually less than
       5% of current liabilities)          1,409          1,436
                                         -------        -------
                                         $ 7,123        $ 7,700
                                         =======        =======

</TABLE>

5. Note Receivable from Stockholder

Note receivable from stockholder of $1.2 million at March 31, 1999 and 
December 31, 1998 represents amounts loaned to an officer during the third 
quarter of 1998 secured by the Company's common stock. These amounts have 
been classified as contra-equity because in the event the officer fails to 
remit payment, the Company will receive shares of the Company's common stock.

6. Earnings per Share (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                  Three Months Ended
                                                -----------------------
                                                March 31,     March 31,
                                                 1999           1998
                                                -----------------------
                                                       (unaudited)
<S>                                           <C>                <C>
       Numerator:
       Net loss                                $ (2,249)      $ (1,974)
                                               ---------      ---------
       Numerator for basic and diluted
           earnings per share                  $ (2,249)      $ (1,974)

       Denominator:

       Denominator for basic earnings
           per share - weighted average
           common shares outstanding             18,530         16,503

       Effect of dilutive securities:
           Stock options and warrants                 0              0
       Denominator for diluted earnings
           per share - adjusted weighted
           average common shares out-
           standing                              18,530         16,503
                                               =========      =========
        Basic loss per share                   $  (0.12)      $  (0.12)
                                               =========      =========
        Diluted loss per share                 $  (0.12)      $  (0.12)
                                               =========      =========

</TABLE>

                                      7

<PAGE>

Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS
          -----------------------------------

THIS REPORT CONTAINS 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, THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS 
STATEMENTS CONCERNING: GROWTH AND FUTURE OPERATING RESULTS; DEVELOPMENTS IN 
THE COMPANY'S MARKETS AND STRATEGIC FOCUS; NEW PRODUCTS AND PRODUCT 
ENHANCEMENTS; POTENTIAL ACQUISITIONS AND THE INTEGRATION OF ACQUIRED 
BUSINESSES, PRODUCTS AND TECHNOLOGIES; STRATEGIC RELATIONSHIPS; AND FUTURE 
ECONOMIC, BUSINESS AND REGULATORY CONDITIONS. SUCH FORWARD-LOOKING STATEMENTS 
ARE GENERALLY ACCOMPANIED BY WORDS SUCH AS "PLAN," "ESTIMATE," "EXPECT," 
"BELIEVE," "SHOULD," "WOULD," "COULD," "ANTICIPATE," "MAY" OR OTHER WORDS 
THAT CONVEY UNCERTAINTY OF FUTURE EVENTS OR OUTCOMES. THESE FORWARD-LOOKING 
STATEMENTS AND OTHER STATEMENTS MADE ELSEWHERE IN THIS REPORT ARE MADE IN 
RELIANCE ON THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE SECTION 
BELOW ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS" SETS 
FORTH AND INCORPORATES BY REFERENCE CERTAIN FACTORS THAT COULD CAUSE ACTUAL 
FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THESE STATEMENTS.

Results of Operations

The following table sets forth, for the periods indicated, certain financial 
data as a percentage of net sales. The period to period comparison of 
financial results is not necessarily indicative of future results.

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                           ------------------
                                                                March 31,
                                                           ------------------
                                                           1999         1998
                                                           ----         ----
<S>                                                     <C>           <C>
       Net sales                                          100.0%       100.0%
       Cost of sales                                       56.1         56.0
                                                          -----        -----
       Gross profit                                        43.9         44.0
       Operating expenses:
          Sales and marketing expenses                     33.4         42.8
          Research and development expenses                16.6         14.6
          General and administrative expenses               8.9          6.4
          Amortization of intangibles                       2.8          -
                                                          -----        -----
       Operating loss                                     (17.8)       (19.8)
       Interest income, net                                 1.8          2.4
                                                          -----        -----
       Loss before income taxes                           (16.0)       (17.4)
       Income tax (benefit) provision                       -           (6.6)
                                                          ------       ------
       Net loss                                           (16.0)%       10.8)%
                                                          ======       ======
       Switching product sales                             57.4%        41.1%
       Shared bandwidth hub sales                          23.4         49.8
       Security, service and other sales                   19.2          9.1
                                                          ------       -----
       Net sales                                          100.0%       100.0%
                                                          =====        =====
       Domestic sales                                      83.8%        80.6%
       Export sales to:
         Europe                                            12.3         12.2
         Canada                                             1.9          4.5
         Asia                                               1.0          2.1
         Latin America                                      1.0          0.6
                                                          -----        -----
       Net sales                                          100.0%       100.0%
                                                          =====        =====

</TABLE>

                                       8


<PAGE>

Net Sales. Net sales for the quarter ended March 31, 1999 decreased to $14.1 
million compared to $18.2 million for the same period of 1998 as sales of the 
Company's network switching and data security products did not increase 
quickly enough to offset the decrease in sales of its prior generation shared 
bandwidth intelligent hubs. Demand for prior generation shared bandwidth 
intelligent hubs may continue to decline as the market transitions to 
switching products with enhanced price/performance characteristics. The 
Company's goal is to transition an increasing proportion of its net sales to 
data security and high performance switching solutions in 1999.

Export sales for the quarter ended March 31, 1999 decreased to $2.3 million 
compared to $3.5 million for the same period of 1998, primarily due to 
decreases in European sales. Adverse economic conditions in certain foreign 
countries may continue to adversely affect demand for the Company's products 
in those countries for the remainder of 1999.

Sales to Electronic Data Systems Corporation ("EDS") were 6.4% of net sales 
during the quarter ended March 31, 1999, compared to 13.7% of net sales for 
the same period of 1998. Sales to SGI, Inc. ("SGI") were 18.6% of net sales 
during the quarter ended March 31, 1999. Direct net sales to various agencies 
of the U.S. Government were 17.3% of net sales during the quarter ended March 
31, 1999 compared to 13.7% of net sales for the same period of 1998. In 
addition, a portion of the Company's sales to EDS, SGI and other corporations 
were resold by those organizations to various agencies of the U.S. Government.

Gross Profit. Gross profit decreased to $6.2 million or 43.9% of net sales 
for the quarter ended March 31, 1999 compared to $8.0 million or 44.0% of net 
sales for the quarter ended March 31, 1998. Gross profit margins in future 
periods may be affected by several factors such as continued product 
transition, declining market demand for prior generation products, 
obsolescence or surplus of inventory, shifts in product mix, changes in 
channels of distribution, sales volume, fluctuation in manufacturing costs, 
pricing strategies of the Company and its competitors and fluctuations in 
sales of integrated third-party products. Gross profit margins are typically 
lower on sales of integrated third-party products.

Sales and Marketing. Sales and marketing expenses decreased to $4.7 million 
or 33.4% of net sales for the quarter ended March 31, 1999 compared to $7.8 
million or 42.8% of net sales for the quarter ended March 31, 1998. The 
Company expects sales and marketing expenses to decrease in 1999 compared to 
1998 based on its restructuring and expense reduction programs. Sales and 
marketing expenses may vary as a percentage of net sales in the future.

Research and Development. Research and development expenses decreased to $2.3 
million or 16.6% of net sales for the quarter ended March 31,1999 compared to 
$2.7 million or 14.6% of net sales for the quarter ended March 31, 1998. The 
Company's research and development costs are expensed in the period incurred. 
The Company expects research and development expenses to decrease in 1999 
compared to 1998 based on the Company's restructuring and expense reduction 
programs implemented in the fourth quarter of 1998.

General and Administrative. General and administrative expenses increased to 
$1.3 million or 8.9% of net sales for the quarter ended March 31, 1999 from 
$1.2 million or 6.4% of net sales for the quarter ended March 31, 1998. 
General and administrative expense may vary as a percentage of net sales in 
the future.


                                       9

<PAGE>

Amortization. The Company incurred $0.4 million of amortization expense for the
quarter ended March 31, 1999 primarily associated with the amortization of
intangible assets related to the acquisition of Essential Communication
Corporation ("Essential") and the acquisition of certain assets of Science
Applications International Corporation ("SAIC") in 1998.

Interest. Net interest income decreased to $0.2 million for the quarter ended 
March 31, 1999 compared to $0.4 million for the same period in 1998. Net 
interest income may vary in the future based on the Company's cash flow and 
rate of return on investments.

Income Taxes. The Company did not record an income tax benefit for the quarter
ended March 31, 1999 related to its net operating losses which can be carried
forward to offset taxable income in future periods.

Liquidity and Capital Resources

The Company's principal sources of liquidity at March 31, 1999 were $12.7
million of cash and cash equivalents, $5.8 million of short-term investments,
$1.0 million of highly liquid investments with a stated maturity beyond one
year. As of March 31, 1999, working capital was $29.2 million compared to $31.8
million as of December 31, 1998.

Cash flows used in operations for the quarter ended March 31, 1999 were $1.9
million, primarily due to an increase in accounts receivable balances, a
decrease in accounts payable and accrued expenses and a net loss for the period,
partially offset by a decrease in inventory. Future fluctuations in accounts
receivable and inventory balances will be dependent upon several factors,
including, but not limited to, quarterly sales, ability to collect accounts
receivable timely, the Company's strategy as to building inventory in advance of
receiving orders from customers, and the accuracy of the Company's forecasts of
product demand and component requirements.

Cash used by investing activities in the quarter ended March 31, 1999 consisted
of purchases of short-term investments of $1.0 million, purchases of long term
investments of $1.0 million and equipment purchases of $0.2 million.

Cash provided by financing activities in the quarter ended March 31, 1999 was
$0.1 million, which primarily consisted of the issuance of common stock upon the
exercise of employee stock options.

During the quarter ended March 31, 1999, the Company funded its operations
through the use of cash and cash equivalents.

The Company believes that its cash, cash equivalents and investment balances
will provide sufficient cash resources to finance its operations and currently
projected capital expenditure through 1999. However, there can be no assurance
that the Company's cash resources will be sufficient for 1999.

The Company intends to explore possible acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company is
continuing to identify and prioritize additional networking and security
technologies which it may wish to develop, either internally or through the
licensing or acquisition of products from third parties. While the Company
engages from time to time in discussions with respect to potential acquisitions,
there can be no assurances that any acquisitions will be made or that the
Company will be able to successfully integrate any acquired business. In order
to finance acquisitions, it may be necessary for the Company to raise 


                                      10
<PAGE>

additional funds through public or private financings. Any equity or debt 
financings, if available at all, may be on terms which are not favorable to 
the Company and, in the case of equity financings, may result in dilution to 
the Company's stockholders.

Factors That May Affect Future Results of Operations

Numerous factors may affect the Company's business and future results of
operations. These factors include, but are not limited to, technological
changes, competition and market acceptance, acquisitions, intellectual property
and licenses, product transitions, manufacturing and suppliers, third-party
products, dependence on key customers, international operations, intellectual
property and Year 2000 compliance issues. The discussion below addresses some of
these and other factors. For a more thorough discussion of these and other
factors that may affect the Company's business and future results, see the
discussion under the caption "Factors That May Affect Future Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.

Technological Changes. The market for the Company's products is characterized by
frequent product introductions, rapidly changing technology and continued
evolution of new industry standards. The market for network intelligent hubs,
switches, and management and security products requires the Company's products
to be compatible and interoperable with products and architectures offered by
various vendors, including other networking products, workstation and personal
computer architectures and computer and network operating systems. The Company's
success will depend to a substantial degree upon its ability to develop and
introduce in a timely manner new products and enhancements to its existing
products that meet changing customer requirements and evolving industry
standards. The development of technologically advanced products is a complex and
uncertain process requiring high levels of innovation as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will be able to identify, develop, manufacture, market and support
new or enhanced products successfully or in a timely manner. Further, the
Company or its competitors may introduce new products or product enhancements
that shorten the life cycle of, or obsolete, the Company's existing product
lines which could have a material adverse effect on the Company's business,
operating results and financial condition.

Competition and Market Acceptance. The market for network switches and data
security solutions is intensely competitive and subject to frequent product
introductions with improved price/performance characteristics. Industry
suppliers compete in areas such as conformity to existing and emerging industry
standards, interoperability with other networking products, network management
and security capabilities, performance, price, ease of use, scalability,
reliability, flexibility, product features and technical support. The Company
believes that its solutions-oriented approach to networking (combining network
design services, ODS products and third-party products to provide superior,
secure networking systems to customers) provides the Company a competitive
advantage with large organizations with complex networking requirements.

There are numerous companies competing in various segments of the data security
and network switch markets. The Company's principal competitors include Cisco
Systems, Inc. ("Cisco"), Cabletron Systems, Inc. ("Cabletron"), Lucent
Technologies ("Lucent"), Nortel Networks ("Nortel"), 3Com Corporation ("3Com"),
FORE Systems, Inc. ("FORE Systems"), Alcatel USA, Inc. ("Alcatel"),
International Business Machines Corporation ("IBM"), Axent Technologies, Inc.
("Axent"), Security Dynamics Technologies, Inc. ("Security Dynamics"), Internet
Security Systems, Inc. ("ISS"), and Network Associates, Inc. Several of the
Company's 


                                      11
<PAGE>

competitors have substantially greater financial, technical, sales and 
resources, better name recognition and a larger customer base than the 
Company.

In addition, many of the Company's competitors offer customers a broader product
line which provides a more comprehensive networking and security solution than
the Company currently offers. Even if the Company does introduce advanced
products which meet evolving customer requirements in a timely manner, there can
be no assurance that the new Company products will gain market acceptance.

Certain companies in the networking and security industry have expanded their
product lines or technologies in recent years as a result of acquisitions.
Further, more companies have developed products which conform to existing and
emerging industry standards and have sought to compete on the basis of price.
The Company anticipates increased competition from large telecommunication
equipment vendors which are expanding their capabilities in the data networking
market. For example, Lucent and Nortel have acquired several networking
companies to enhance their capabilities in data networking. Further the Company
anticipates increased competition from private "start-up" companies that have
developed or are developing advanced network switching and security products.
Increased competition in the networking and security industry could result in
significant price competition, reduced profit margins or loss of market share,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition.

There can be no assurance that the Company will be able to compete successfully
in the future with current or new competitors.

The Company is pursuing a strategy to increase the percentage of its revenue
generated through indirect sales channels including value added resellers,
system integrators, original equipment manufacturers and network service
providers. There can be no assurance that the Company's products will gain
market acceptance in these indirect sales channels. Further, competition among
networking and security companies to sell products through these indirect sales
channels could result in significant price competition and reduced profit
margins.

The Company is also pursuing a strategy to broaden and further differentiate its
product line by introducing complementary network switching, management and
security products and incorporating new technologies into its existing product
line. There can be no assurance that the Company will successfully introduce
these products or that such products will gain market acceptance. The Company
anticipates competition from networking companies, network security companies
and others in each of its product lines. The Company anticipates that profit
margins will vary among its product lines and that product mix fluctuations
could have an adverse effect on the Company's overall profit margins.

Acquisitions. Cisco, Cabletron, FORE Systems, Lucent, Nortel and other
competitors have recently acquired several networking and security companies
with complementary technologies, and the Company anticipates that such
acquisitions will continue in the future. These acquisitions may permit such
competitors to accelerate the development and commercialization of broader
product lines and more comprehensive networking solutions than the Company
currently offers. In the past, the Company has relied upon a combination of
internal product development and partnerships with other networking and security
vendors to provide competitive solutions to customers. Certain of the recent and
future acquisitions by the Company's competitors may have the effect of limiting
the Company's access to commercially significant technologies. Further, the
business combinations and acquisitions in the networking and security industry
are creating companies with larger market shares, customer bases, sales forces,
product offerings and 


                                      12
<PAGE>

technology and marketing expertise. There can be no assurance that the 
Company will be able to compete successfully in such an environment.

On May 7, 1998, the Company acquired Essential Communication Corporation, a
privately held company based in Albuquerque, New Mexico. Essential designs and
manufactures high-speed computer network equipment. In September 1998, the
Company completed an acquisition of certain assets of the Computer Misuse and
Detection System ("CMDS") Division from Science Applications International
Corporation ("SAIC"), a privately held company in San Diego, California. The
Company may, in the future, acquire or invest in additional companies, business
units, product lines, or technologies to accelerate the development of products
and sales channels complementary to the Company's existing products and sales
channels. Acquisitions involve numerous risks, including difficulties in
assimilation of operations, technologies, and products of the acquired
companies; risks of entering markets in which the Company has no or limited
direct prior experience and where competitors in such markets have stronger
market positions; the potential loss of key employees of the acquired company;
and the diversion of management's attention from normal daily operation of the
Company's business. There can be no assurance that any potential acquisition or
investment will be consummated or that such acquisition or investment will be
realized.

Product Transitions. Once current networking and security products have been in
the market place for a period of time and begin to be replaced by higher
performance products (whether of the Company's or a competitor's design), the
Company expects the net sales of such products to decrease. In order to achieve
revenue growth in the future, the Company will be required to design, develop
and successfully commercialize higher performance products in a timely manner.
For example, the market for shared bandwidth intelligent hubs, sales of which
represented the majority of the Company's net sales over the past several years,
decreased in 1998 and may continue to decrease as switching products with
enhanced price/performance characteristics gain market acceptance. There can be
no assurance that the Company will be able to introduce new products and gain
market acceptance quickly enough to avoid adverse revenue transition patterns
during current or future product transitions. Nor can there be any assurance
that the Company will be able to respond effectively to technological changes or
new product announcements by competitors, which could render portions of the
Company's inventory obsolete.

The Company's sales of commodity LAN switches and hubs have declined over the
past two years as certain of the Company's large competitors gained market
share. The Company's goal is to transition an increasing proportion of its
revenues to growing markets in which the Company offers differentiated products,
such as data security solutions and high performance switches. The Company's
ability to achieve its revenue objectives over the next several quarters will
largely depend upon the extent to which growth in these differentiated product
lines compensates for the expected decline in the commodity LAN switch and hub
product lines.


Manufacturing and Suppliers. All of the materials used in the Company's products
are purchased under contracts or purchase orders with third parties. While the
Company believes that many of the materials used in the production of its
products are generally readily available from a variety of sources, certain
components such as microprocessors and ASICs are available from one or a limited
number of suppliers. The lead times for delivery of components vary
significantly and exceed twelve weeks for certain components. If the Company
should fail to forecast its requirements accurately for components, it may
experience excess inventory or shortages of certain components which could have
an adverse effect on the Company's business and operating results. Further, any
interruption in the supply of any of these components, or the inability of the
Company to procure these 


                                      13
<PAGE>

components from alternative sources at acceptable prices, within a reasonable 
time, could have an adverse effect on the Company's business and operating 
results.

The Company's operational strategy relies on outsourcing product assembly and
certain other operations. There can be no assurance that the Company will
effectively manage its third-party contractors or that these contractors will
meet the Company's future requirements for timely delivery of products of
sufficient quality or quantity. Further, the Company intends to introduce a
number of new products and product enhancements in 1999 which will require that
the Company rapidly achieve volume production of those new products by
coordinating its efforts with those of its suppliers and contractors. The
inability of the third-party contractors to provide ODS with adequate supplies
of high-quality products could cause a delay in the Company's ability to fulfill
orders and could have an adverse effect on the Company's business and operating
results.

Third-Party Products. The Company believes that it is beneficial to work with
third parties with complementary technologies to broaden the appeal of the
Company's switches and network security products. These alliances allow ODS to
provide integrated solutions to its customers, combining ODS developed
technology with third-party products. As the Company also competes with these
technology partners in certain segments of the market, there can be no assurance
that the Company will have access to all of the third-party products which may
be desirable to offer fully integrated solutions to ODS customers.

Dependence on Key Customers. A relatively small number of customers have
accounted for a significant portion of the Company's revenue. U.S. Government
agencies and strategic network integrators are expected to continue to account
for a substantial portion of the Company's net revenue. The Company continuously
faces competition from Cisco, Cabletron, Lucent, Nortel, FORE Systems, Alcatel,
3Com, Axent, Security Dynamics, ISS and others for U.S. Government networking
and security projects and corporate networking and security installations. Any
reduction or delay in sales of the Company's products to these customers could
have a material adverse effect on the Company's operating results.

International Operations. The Company's international operations may be affected
by changes in demand resulting from fluctuations in currency exchange rates and
local purchasing practices, including seasonal fluctuations in demand, as well
as by risks such as increases in duty rates, difficulties in distribution,
regulatory approvals and other constraints upon international trade. For
example, the fluctuation in currency exchange rates and adverse economic
developments in Malaysia, South Korea and certain other countries adversely
affected demand for the Company's products in those countries in 1998 and may
continue to adversely affect demand for the Company's products in those
countries in 1999. The Company's sales to foreign customers are subject to
export regulations. In particular, certain sales of the Company's high
performance networking and data security products require clearance and export
licenses from the U.S. Department of Commerce. Any inability to obtain
clearances or any required foreign regulatory approvals on a timely basis could
have a material adverse effect on the Company's operating results.

Intellectual Property and Licenses. The Company's success and its ability to
compete are dependent, in part, upon its proprietary technology. The Company
does not hold any issued patents and currently relies on a combination of
contractual rights, trade secrets and copyright laws to establish and protect
its proprietary rights in its products. There can be no assurance that the steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not 


                                      14
<PAGE>

independently develop technologies that are substantially equivalent or 
superior to the Company's technology.

There are many patents held by companies which relate to the design and
manufacture of data security and networking systems. Potential claims of
infringement could be asserted by the holders of those patents. The Company
could incur substantial costs in defending itself and its customers against any
such claim regardless of the merits of such claims. In the event of a successful
claim of infringement, the Company may be required to obtain one or more
licenses from third parties. There can be no assurance that the Company could
obtain the necessary licenses on reasonable terms.

GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS:

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.

Based on assessments, the Company determined that it was necessary to implement
upgrades to financial information systems software so that these systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that the necessary upgrades and related modifications of existing software are
complete and that the Year 2000 Issue has been mitigated. However, if such
modifications and replacements are not complete, the Year 2000 Issue could have
a material impact on the operations of the Company.

The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. The Company
further classified all information technology systems as mission critical and
non-mission critical based on the potential for the Company's operations to be
significantly affected by an IT systems ability to process Year 2000 dates
properly. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particularly the
general ledger, billing, payroll, and inventory systems. That assessment also
indicated that software and hardware (embedded chips) used in production and
manufacturing systems (hereafter also referred to as operating equipment) also
are at risk. Based on a review of its product line, the Company has determined
that most of the products it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Accordingly, the Company does not believe
that the Year 2000 presents a material exposure as it relates to the Company's
products. In addition, the Company has gathered and continues to gather
information about the Year 2000 compliance status of its significant suppliers
and subcontractors and continues to monitor their compliance.

STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT. For its information
technology exposures, to date, the Company is 100% complete on all phases with
respect to all mission critical systems that could be significantly affected by
the Year 2000. The assessment phase on non-mission critical systems are 100%
complete with 75% of non-mission critical systems through the remediation phase.
The implementation phase for all non-mission critical systems is expected to be
complete in the second quarter of 1999. If the completed and planned
modifications for mission critical and non-mission critical IT systems are
inadequate, the Year 2000 Issue could have a material impact on the operations
of the Company.


                                      15
<PAGE>

The assessment phase on the Company's products did not identify any significant
use of any real time clocks that would be affected by the Year 2000 Issue.
Therefore, the Company's Year 2000 activities with respect to the Company's
products are 100% complete. If management's assessment with respect to the
Company's products is incorrect, the Company may not be able to manufacture and
ship products, fill customer orders or comply with contractual obligations.
Management believes, based on its assessment, that the Company is not at
significant risk with respect to Year 2000 compliance of the Company's products.

For operating equipment, generally considered non-critical to the Company's
operations, the Company is 90%, 90% and 90% complete in the remediation,
testing, and implementation phases, respectively. The Company expects to
complete its remediation efforts by the end of the third quarter of 1999.
Testing and implementation of affected equipment is expected to be complete by
the third quarter of 1999.

NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000. The Company's payroll application is processed directly by a third-party
vendor. The Company has obtained and evaluated representations from the
third-party vendor to ensure that the Company's outsourced payroll application
is Year 2000 compliant.

There are no significant third party vendors that interface directly with the
Company's information systems. The Company has started but not completed queries
of its significant customers, suppliers and subcontractors that do not share
information systems with the Company (external agents). To date, the Company is
not aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity or capital resources.
However, the Company has no means of ensuring that external agents will be Year
2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable.

COSTS. The Company utilizes both internal and external resources to reprogram,
or replace, test and implement the software and operating equipment for Year 
2000 modifications. The total cost of the Year 2000 project is estimated at 
$0.3 million to $0.4 million and has been funded through operating cash flows 
and working capital. To date, the Company has expensed approximately $0.25 
million related to all phases of the Year 2000 project. The remaining $0.05 
to $0.15 million relates to completing assessment, remediation, testing and 
implementation with respect to non-critical operating equipment and ongoing 
evaluation of third- party representations of Year 2000 readiness. The 
remaining Year 2000 Issue costs will be expensed as incurred.

The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continuous availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

RISKS. Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has completed all necessary phases of the Year 2000 program with respect to
mission- critical information technology and the Company's products. Further, as
noted 


                                      16
<PAGE>

above, the Company continues the assessment, remediation, testing and 
implementation phases with respect to non-mission-critical IT systems and 
operating equipment, and continues to gather and evaluate representations 
from other third parties. In the event that the Company has not fully 
completed all phases with respect to each category of Year 2000 exposure, the 
Company could be unable to take customer orders, manufacture and ship 
products, invoice customers or collect payments. In addition, disruptions in 
the economy generally resulting from Year 2000 issues could also materially 
adversely affect the Company. The Company could be subject to litigation for 
computer systems product failure, equipment shutdown or failure to properly 
date business records. The amount of potential liability and lost revenue 
cannot be reasonably estimated at this time.

The Company has contingency plans for certain critical applications and is
working on plans for others. These contingency plans involve, among other
actions, manual workarounds, increasing inventories, adjusting staffing
strategies and restoring systems with backup copies of Company software and data
and backdating operating systems until Year 2000 issues are resolved.

General. Sales of networking products fluctuate, from time to time, based on
numerous factors, including customers' capital spending levels and general
economic conditions. While certain industry analysts believe that there is a
significant market for network intelligent hubs, switches, management and
security products, there can be no assurance as to the rate or extent of the
growth of such market or the potential adoption of alternative technologies.
Future declines in networking and security product sales as a result of general
economic conditions, adoption of alternative technologies or any other reason
could have a material adverse effect on the Company's business, operating
results and financial condition.

Due to the factors noted above and elsewhere in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors should not use historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue and earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of the Company's
common stock in any given period. Also, the Company participates in a highly
dynamic industry which often results in volatility of the Company's common stock
price.


                                      17
<PAGE>

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange. The Company's revenue originating outside the U.S. in the
quarters ended March 31, 1999, 1998 and 1997 were 16.2%, 19.4% and 21.6% of
total revenues, respectively. Revenues generated from the European region in the
quarters ended March 31, 1999, 1998 and 1997 were 12.3%, 12.2% and 10.2% of
total revenues, respectively. International sales are made mostly from the
Company's foreign sales subsidiaries in the local countries and are typically
denominated in U.S. dollars. These subsidiaries incur most of their expenses in
the local currency.

The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely affected by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company in 1999, 1998 and 1997 was not material.

Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits, fixed rate obligations of
corporations, municipalities, and state and national governmental entities and
agencies. These investments are denominated in U.S. dollars. Cash balances in
foreign currencies overseas are operating balances and are invested in
short-term time deposits of the local operating bank.

Interest income on the Company's investments is carried in "Interest income,
net." The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash
equivalents and short-term investments are treated as available-for-sale under
SFAS 115.

Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely affected due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of expectations
due to changes in interest rates or the Company may suffer losses of principal
if forced to sell securities which have seen a decline in market value due to
changes in interest rates. The Company's investment securities are held for
purposes other than trading. Certain of the investment securities had maturities
in excess of one year. The weighted-average interest rate on investment
securities at March 31, 1999 was 6.0%. The fair value of investments held at
March 31, 1999 approximate amortized cost.


                                      18
<PAGE>

PART II - OTHER INFORMATION


Item 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         (A.)     EXHIBITS.  The following exhibits are included herein:

                    (27)  Financial Data Schedule

         (B.)     FORM 8-K.  The Registrant filed no reports on Form 8-K and 
                             none were required to be filed during the three 
                             months ended March 31, 1999.




                                      19
<PAGE>

                               S I G N A T U R E S




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


                                    ODS NETWORKS, INC.
                                        (Company)



Date: May 14, 1999         By: /s/ TIMOTHY W. KINNEAR
                           -----------------------------------
                                  Timothy W. Kinnear
                                Chief Operating Officer and
                                Chief Financial Officer
                              (Principal Financial Officer)



                              By: /s/ JAY R. WIDDIG
                              --------------------------------
                                      Jay R. Widdig
                               Corporate Controller
                              (Principal Accounting Officer)




                                      20
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
-------

        27    Financial Data Schedule