<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 June 30, 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 July 30, 1999 was 18,568,629.
--------------------------------------------------------------------------------


<PAGE>


                               ODS NETWORKS, INC.

                                      INDEX

                         PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                                                 PAGE
                                                                                 ----
<S>                                                                              <C>
Item 1.  Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 1999
     and December 31, 1998 . . . . . . . . . . . . . . . . . . .                  3

Condensed Consolidated Statements of Operations for the three
     months ended June 30, 1999 and June 30, 1998 . . . . . . .                   4

Condensed Consolidated Statements of Operations for the six
     months ended June 30, 1999 and June 30, 1998 . . . . . . .                   5

Condensed Consolidated Statements of Cash Flows for the six
     months ended June 30, 1999 and June 30, 1998 . . . . . . .                   6

Notes to Condensed Consolidated Financial Statements . . . . . .                  7-8

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition . . . . . . . . . .                   9-19

Item 3.  Quantitative and Qualitative Disclosures About Market
         Risk . . . . . . . . . . . . . . . . . . . . . . . . .                   20


                           PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders . .                  21

Item 5.  Other Information . . . . . . . . . . . . . . . . . . .                  21

Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . .                 22

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .                  23

</TABLE>


                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS.

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

<TABLE>
<CAPTION>

                                                 June 30,    Dec. 31,
                                                   1999        1998
                                                 --------    --------
<S>                                              <C>         <C>

                                     ASSETS
Current Assets:
   Cash and cash equivalents                     $16,605      $16,791
   Short-term investments                          5,805        4,760
   Accounts receivable, net of allowance          12,499        6,265
      for doubtful accounts and returns
      of $1,076 in 1999 and $880 in 1998
   Income taxes receivable                           -          4,749
   Inventories, net                                6,996        9,262
   Other assets                                      808          759
                                                 -------      -------
Total current assets                              42,713       42,586

Property and equipment, net                        7,044        7,627
Long-term investments                                998          -
Equity investment                                    700          700
Goodwill and intangible assets, net                9,851       10,614
Other assets                                         164          183
                                                 -------      -------
TOTAL ASSETS                                     $61,470      $61,710
                                                 -------      -------
                                                 -------      -------

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable and accrued expenses         $ 9,558      $ 7,700
   Deferred revenue                                2,084        3,123
                                                 -------      -------
Total current liabilities                         11,642       10,823

Deferred tax liabilities                           2,258        1,361
Capital lease obligation                              13           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 - 18,569
      in 1999 and 18,513 in 1998                     186          185
   Additional paid-in capital                     29,724       29,551
   Retained earnings                              19,179       21,282
   Note receivable from stockholder               (1,184)      (1,189)
   Foreign currency translation adjustments         (348)        (323)
                                                 --------     --------
Total stockholders' equity                        47,557       49,506
                                                 -------      -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $61,470      $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
                                                   ----------------------
                                                   June 30,       June 30,
                                                    1999            1998
                                                   --------       -------
<S>                                                <C>            <C>
Net sales                                          $18,505        $25,215
Cost of sales                                        9,152         14,389
                                                   --------       -------
Gross profit                                         9,353         10,826

Operating expenses:
     Sales and marketing                             4,971          8,134
     Research and development                        2,759          2,932
     In process research and development                 -          2,300
     General and administrative                      1,315          1,311
     Amortization of intangibles                       373            180
                                                   --------       -------
Operating loss                                         (65)        (4,031)

Interest income, net                                   211            356
Other expense                                          -              (72)
                                                   --------       --------
Income (loss) before income taxes                      146         (3,747)

Income tax benefit                                     -             (538)
                                                   --------       --------
Net income (loss)                                  $   146        $(3,209)
                                                   --------       -------
                                                   --------       -------
Basic and diluted income (loss) per share          $  0.01        $ (0.19)
                                                   --------       -------
                                                   --------       -------
Weighted average common shares
   outstanding                                      18,550         16,739
                                                   --------       -------
                                                   --------       -------
Weighted average shares outstanding
   assuming dilution                                18,773         16,739
                                                   --------       -------
                                                   --------       -------

</TABLE>


                             See accompanying notes.


                                       4
<PAGE>



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


<TABLE>
<CAPTION>

                                                       Six Months Ended
                                                  ------------------------
                                                   June 30,       June 30,
                                                     1999           1998
                                                   ----------    ---------
<S>                                                <C>           <C>
Net sales                                          $32,570        $43,428
Cost of sales                                       17,042         24,587
                                                   --------       --------
Gross profit                                        15,528         18,841

Operating expenses:
     Sales and marketing                             9,664         15,936
     Research and development                        5,089          5,599
     In process research and development               -            2,300
     General and administrative                      2,574          2,474
     Amortization of intangibles                       764            180
                                                   --------       -------
Operating loss                                      (2,563)        (7,648)

Interest income, net                                   460            795
Other expense                                          -              (72)
                                                   --------       --------
Loss before income taxes                            (2,103)        (6,925)

Income tax benefit                                     -           (1,742)
                                                   --------       --------
Net loss                                           $(2,103)       $(5,183)
                                                   --------       -------
                                                   --------       -------
Basic and diluted loss per share                   $ (0.11)       $ (0.31)
                                                   --------       -------
                                                   --------       -------

Weighted average common shares
   outstanding                                      18,540         16,625
                                                   --------       -------
                                                   --------       -------
Weighted average shares outstanding
   assuming dilution                                18,540         16,625
                                                   --------       -------
                                                   --------       -------

</TABLE>


                             See accompanying notes.


                                       5
<PAGE>


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

<TABLE>
<CAPTION>
                                                        Six Months Ended
                                                   ------------------------
                                                    June 30,       June 30,
                                                      1999           1998
                                                   ---------      ---------
<S>                                                <C>            <C>
Operating Activities:
Net loss                                           $ (2,103)      $ (5,183)
Adjustments to reconcile net loss to net cash
 provided by (used in) operating activities:
   In process research and development                  -            2,300
   Depreciation and amortization                      1,755          1,874
   Equity in net loss of affiliate                      -               72
   Deferred income taxes                                897           (680)
 Changes in operating assets and liabilities:
      Accounts receivable                            (6,234)        (5,349)
      Income taxes receivable                         4,749          2,632
      Inventories                                     2,266         (1,200)
      Other assets                                      (30)             9
      Accounts payable and accrued expenses           1,858          2,170
      Deferred revenue                               (1,039)           (12)
                                                   ---------      ---------

Net cash provided by (used in) operating
 activities                                           2,119         (3,367)
                                                   ---------      ---------

Investing Activities:
  Payments for corporate acquisition
         (net of cash acquired)                         -           (5,604)
  Equity investment in affiliate                        -           (1,250)
  Purchases of short-term investments                (2,045)        (2,437)
  Maturities of short-term investments                1,000          9,151
  Purchases of long-term investments                   (998)          (600)
  Maturities of long-term investments                   -                5
  Purchases of property and equipment                  (409)        (1,340)
                                                   ---------      ---------
Net cash used in investment activities               (2,452)        (2,075)
                                                   ---------      ---------

Financing Activities:
  Repayment of Essential Communications Corp.
         line of credit                                 -             (400)
  Exercise of warrants and employee stock
   options                                              174            271
  Net repayment of capital leases                        (7)            -
  Payments on stockholder loan                            5             -
                                                   ---------      ----------
Net cash provided by (used in) financing
 activities                                             172           (129)
                                                   ---------      ---------

Effect of foreign currency translation
 adjustment on cash and cash equivalents                (25)             3
                                                   ---------      ----------

Net decrease in cash and cash equivalents              (186)        (5,568)

Cash and cash equivalents at beginning of
 period                                              16,791         17,911
                                                   ---------      --------
Cash and cash equivalents at end of period         $ 16,605       $ 12,343
                                                   ---------      --------
                                                   ---------      --------
</TABLE>

                             See accompanying notes.

                                       6
<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 and six month periods ending June 30, 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. Certain prior year information has
been reclassified to conform with current year presentation.

2. Inventories (In thousands)

Inventories consist of:

<TABLE>
<CAPTION>

                                           June 30,       Dec. 31,
                                             1999            1998
                                           -----------------------
   <S>                                     <C>            <C>
   Raw materials                            $ 1,011        $ 1,845
   Work in process                              964            401
   Finished products                          3,557          5,669
   Demonstration systems                      1,464          1,347
                                            -------        -------
                                            $ 6,996        $ 9,262
                                            -------        -------
                                            -------        -------

</TABLE>

3. Goodwill and Intangibles (In thousands)

Included in goodwill and intangibles are the following:

<TABLE>
<CAPTION>

                                        June 30,       Dec. 31,
                                          1999           1998
                                        --------        -------
   <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                1,731            968
                                         -------        -------
                                         $ 9,851        $10,614
                                         -------        -------
                                         -------        -------

</TABLE>

                                       7
<PAGE>


4. Accounts Payable and Accrued Expenses (In thousands)

Included in accounts payable and accrued expenses are the following:

<TABLE>
<CAPTION>

                                         June 30,       Dec. 31,
                                           1999           1998
                                         --------       --------
      <S>                                <C>            <C>
      Accounts payable                   $ 5,299        $ 3,345
      Accrued sales commissions              701            768
      Accrued property taxes                 150            494
      Accrued vacation expense               799            776
      Accrued incentive bonus                200            406
      Accrued warranty expense               475            475
      Accrued payroll expense                814             30
      Other (individually less than
       5% of current liabilities)          1,120          1,406
                                         -------        -------
                                         $ 9,558        $ 7,700
                                         -------        -------
                                         -------        -------
</TABLE>


5. Note Receivable from Stockholder

Note receivable from stockholder of $1.2 million at June 30, 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         Six Months Ended
                                            ---------------------    ---------------------
                                            June 30,    June 30,     June 30,     June 30,
                                              1999        1998         1999         1998
                                            ---------------------    ---------------------
<S>                                         <C>         <C>          <C>          <C>
Numerator:
Net income (loss)                           $    146     $ (3,209)   $ (2,103)    $ (5,183)
                                            ---------    --------    ---------    ---------
Numerator for basic and diluted
   earnings per share                       $    146     $ (3,209)   $ (2,103)    $ (5,183)

Denominator:
Denominator for basic earnings
   per share - weighted average
   common shares outstanding                  18,550       16,739      18,540       16,625
Effect of dilutive securities:
   Stock options and warrants                    223            0           0            0
                                            ---------    --------    --------     --------
Denominator for diluted earnings
   per share - adjusted weighted
   average common shares out-
   standing                                   18,773       16,739      18,540       16,625
                                            ---------    --------    --------     --------

Basic income (loss) per share               $   0.01     $  (0.19)   $  (0.11)    $  (0.31)
                                            ---------    --------    --------     --------
                                            ---------    --------    --------     --------
Diluted income (loss) per share             $   0.01     $  (0.19)   $  (0.11)    $  (0.31)
                                            ---------    --------    --------     --------
                                            ---------    --------    --------     --------

</TABLE>

Options to purchase 926,188 shares of common stock at a range of $3.88 to $36.25
per share and warrants to purchase 1,500,000 shares of common stock at $8.00 to
$10.50 per share were outstanding at June 30, 1999 but were not included in the
computation of diluted earnings per share because the exercise price was greater
than the average market price of the common shares during the three months ended
June 30, 1999 and, therefore, the effect would be antidilutive.


                                       8
<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     Six Months Ended
                                              -------------------   ------------------
                                              June 30,   June 30,   June 30,  June 30,
                                                1999      1998       1999      1998
                                              -------------------   ------------------
<S>                                           <C>        <C>        <C>       <C>
Net sales                                      100.0%     100.0%     100.0%     100.0%
Cost of sales                                   49.5       57.1       52.3       56.6
                                              ------      -----      -----      -----
Gross profit                                    50.5       42.9       47.7       43.4
Operating expenses:
  Sales and marketing expenses                  26.9       32.2       29.7       36.7
  Research and development expenses             14.9       11.5       15.6       12.9
  In process research and development            --         9.1        --         5.3
  General and administrative expenses            7.1        5.2        7.9        5.7
  Amortization of intangibles                    2.0        0.7        2.4        0.4
                                              ------      -----      -----      -----
Operating loss                                  (0.4)     (15.8)      (7.9)     (17.6)
Interest income, net                             1.2        1.4        1.4        1.8
Other expense                                    --        (0.3)       --        (0.1)
                                              ------      -----      -----      -----
Income (loss) before income taxes                0.8      (14.7)      (6.5)     (15.9)
Income tax (benefit) provision                   --        (2.1)       --        (4.0)
                                              ------      -----      -----      -----
Net income (loss)                                0.8%     (12.6)%     (6.5)%    (11.9)%
                                              ------      -----      -----      -----
                                              ------      -----      -----      -----
Switching product sales                         50.8%      52.1%      53.3%      47.5%
Shared bandwidth hub sales                      20.0       40.7       21.5       44.5
Security, service and other sales               29.2        7.2       25.2        8.0
                                              ------      -----      -----      -----
Net sales                                      100.0%     100.0%     100.0%     100.0%
                                              ------      -----      -----      -----
                                              ------      -----      -----      -----

Domestic sales                                  92.8%      75.8%      88.9%      77.7%
Export sales to:            Europe               5.1       14.1        8.2       13.3
                            Canada               0.7        2.7        1.2        3.5
                            Asia                 1.3        7.2        1.2        5.1
                            Latin America        0.1        0.2        0.5        0.4
                                              ------      -----      -----      -----
Net sales                                      100.0%     100.0%     100.0%     100.0%
                                              ------      -----      -----      -----
                                              ------      -----      -----      -----
</TABLE>

                                       9
<PAGE>


Net Sales. Net sales for the quarter and six months ended June 30, 1999
decreased to $18.5 million and $32.6 million, respectively, compared to $25.2
million and $43.4 million, respectively, for the same periods 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 and six months ended June 30, 1999 decreased to
$1.3 million and $3.6 million, respectively, compared to $6.1 million and
$9.7 million, respectively, for the same periods of 1998. 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 AT&T Corp. ("AT&T") were 17.1% and 10.8%, respectively, of net sales
during the quarter and six months ended June 30, 1999, compared to 4.8% and
3.6%, respectively, of net sales for the same periods of 1998. Sales to SGI,
Inc. ("SGI") were 14.8% and 16.4%, respectively, of net sales during the
quarter and six months ended June 30, 1999. Direct net sales to various
agencies of the U.S. Government were 5.9% and 10.8%, respectively, of net
sales for the quarter and six months ended June 30, 1999, compared to 15.0%
and 14.5%, respectively, of net sales during the same periods of 1998. In
addition, a portion of the Company's sales to SGI and other corporations were
resold by those organizations to various agencies of the U.S. Government.

Gross Profit. Gross profit decreased to $9.4 million or 50.5% of net sales
for the quarter ended June 30, 1999 compared to $10.8 million or 42.9% of net
sales for the quarter ended June 30, 1998. Gross profit decreased to $15.5
million or 47.7% of net sales for the six months ended June 30, 1999 compared
to $18.8 million or 43.4% of net sales for the six months ended June 30,
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 $5.0 million
or 26.9% of net sales for the quarter ended June 30, 1999 compared to $8.1
million or 32.2% of net sales for the quarter ended June 30, 1998. Sales and
marketing expenses decreased to $9.7 million or 29.7% of net sales for the
six months ended June 30, 1999 compared to %15.9 million or 36.7% of net
sales for the same period of 1998. Sales and marketing expenses decreased in
the three and six month periods ending June 30, 1999 compared to the same
periods of 1998 based on the Company's restructuring and expense reduction
programs implemented in the fourth quarter of 1998. Sales and marketing
expenses may vary as a percentage of net sales in the future.

Research and Development. Research and development expenses, excluding in
process research and development, decreased to $2.8 million or 14.9% of net
sales for the quarter ended June 30,1999 compared to $2.9 million or 11.5% of
net sales for the


                                       10
<PAGE>


quarter ended June 30, 1998. Research and development expenses, excluding in
process research and development, decreased to $5.1 million or 15.6% of net
sales for the six months ended June 30, 1999 compared to $5.6 million or
12.9% of net sales for the same period of 1998. The Company's research and
development costs are expensed in the period incurred. Research and
development expenses decreased in the first six months of 1999 compared to
the same period of 1998 based on the Company's restructuring and expense
reduction programs implemented in the fourth quarter of 1998.

In Process Research and Development. During the second quarter of 1998, the
Company incurred a one-time charge associated with the acquisition of
Essential Communication Corporation ("Essential") of $2.3 million to
write-off acquired in process research and development that had not reached
technological feasibility.

General and Administrative. General and administrative expenses remained
unchanged at $1.3 million or 7.1% of net sales for the quarter ended June 30,
1999 compared to $1.3 million or 5.2% of net sales for the quarter ended June
30, 1998. General and administrative expenses increased to $2.6 million or
7.9% of net sales for the six months ended June 30, 1999 compared to $2.5
million or 5.7% of net sales for the same period of 1998. General and
administrative expense may vary as a percentage of net sales in the future.

Amortization. Amortization expenses increased to $0.4 million or 2.0% of net
sales for the quarter ended June 30, 1999 compared to $0.2 million or 0.7% of
net sales for the quarter ended June 30, 1998. Amortization increased to $0.8
million or 2.4% of net sales for the six months ended June 30, 1999 compared
to $0.2 million or 0.4% of net sales for the same period of 1998. This
amortization expense is primarily associated with the amortization of
intangible assets related to the acquisition of Essential in the quarter
ending June 30, 1998 and the acquisition of certain assets of the Computer
Misuse and Detection System ("CMDS") Division from Science Applications
International Corporation ("SAIC") in the quarter ending September 30, 1998.

Interest. Net interest income decreased to $0.2 million and $0.5 million,
respectively, during the quarter and six months ended June 30, 1999, compared
to $0.4 million and $0.8 million, respectively, for the same periods of 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 six
months ended June 30, 1999 related to its net operating losses which can be
carried forward to offset taxable income in future periods.

Earnings per Share. The Company's earnings per share is calculated in accordance
with Financial Accounting Standards No. 128, "Earnings Per Share". This method
requires calculation of both earnings per share and earnings per share, assuming
dilution. Earnings per share excludes the dilutive effect of common stock
equivalents such as stock options, while earnings per share, assuming dilution
includes such dilutive effects. Future weighted-average shares outstanding
calculations will be impacted by the following factors: (i) the ongoing issuance
of common stock associated with stock options exercises; (ii) the issuance of
common stock associated with the Company's employee stock purchase program;
(iii) any fluctuations in the Company's stock price, which could cause changes
in the number of common stock equivalents included in the earnings per share
assuming dilution computation; and (iv) the issuance of common stock to effect
business combinations should the Company enter into such transactions.


                                       11
<PAGE>


Liquidity and Capital Resources

The Company's principal sources of liquidity at June 30, 1999 were $16.6
million of cash and cash equivalents, $5.8 million of short-term investments
and $1.0 million of highly liquid investments with a stated maturity beyond
one year. As of June 30, 1999, working capital was $31.1 million compared to
$31.8 million as of December 31, 1998.

Cash flows provided by operations for the six months ended June 30, 1999 were
$2.1 million, primarily due to a decrease in inventories, a decrease in income
taxes receivable and a decrease in accounts payable, partially offset by an
increase in accounts receivable and a decrease in deferred revenue. 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 in investing activities in the six months ended June 30, 1999
consisted of net purchases of short-term investments of $1.0 million, purchases
of long-term investments of $1.0 million and equipment purchases of $0.4
million.

Cash provided by financing activities in the six months ended June 30, 1999 was
$0.2 million, which primarily consisted of the issuance of common stock upon the
exercise of employee stock options.

At June 30, 1999, the Company did not have any material commitments for capital
expenditures.

During the six months ended June 30, 1999, the Company funded its operations
through cash flows from operations.

The Company believes that its cash, cash equivalents, investment balances and
potential cash flow from operations 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. Any material acquisition could result in a decrease to working
capital depending on the amount, timing and nature of the consideration to be
paid. In order to finance acquisitions, it may be necessary for the Company
to raise 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.


                                       12


<PAGE>

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"),
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. ("Network Associates"). Several of the Company's competitors
have substantially greater financial, technical, sales and resources, better
name recognition and a larger customer base than the Company.


                                       13
<PAGE>


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, 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


                                       14
<PAGE>


shares, customer bases, sales forces, product offerings and 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, 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 the CMDS division from 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 in the first six months of 1999
compared to the same periods of previous years 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


                                       15
<PAGE>


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 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, 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 the
first six months of 1999 and may continue to adversely affect demand for the
Company's products in those countries in the second half of 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.


                                       16
<PAGE>


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 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 system's 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.


                                       17
<PAGE>


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 80% of non-mission critical systems through
the remediation phase and 66% of non-mission critical systems through the
implementation phase. The implementation phase for all non-mission critical
systems is expected to be complete in the third 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.

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% complete in the remediation, testing, and
implementation phases. 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 costs associated with the Company's Year 2000 project have been
expensed as incurred, have not been significant and have been funded through
operating cash flows and working capital. The remaining Year 2000 Issue costs
are not expected to be significant and 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.


                                       18
<PAGE>


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 above, the Company continues the 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. Additionally, Year 2000 concerns
by customers may adversely affect sales of networking and security products
for the remainder of 1999.

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.


                                       19
<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 June 30, 1999, 1998 and 1997 were 7.2%, 24.2% and 31.7% of
total revenues, respectively. Revenue originating outside the U.S. in the six
months ended June 30, 1999, 1998 and 1997 were 11.1%, 22.3% and 27.5% 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.

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. One of the investment securities had a maturity in
excess of one year. The weighted-average interest rate on investment securities
at June 30, 1999 was 5.67%. The fair value of investments held at June 30, 1999
approximate amortized cost.


                                       20
<PAGE>


                           PART II - OTHER INFORMATION


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Annual Meeting of Stockholders was held on April 21, 1999 at the Holiday Inn
Richardson Select in Richardson, Texas. The following is a brief description of
each matter voted upon by stockholders, including number of votes cast for,
against, or withheld with regard to each matter of nominee.

(1)      Election of seven (7) directors to serve until the next Annual
         Meeting of Stockholders and until their respective
         successors are duly elected and qualified.

<TABLE>
<CAPTION>

                                                      FOR                    WITHHELD
                                                   ----------                --------
             <S>                                   <C>                       <C>
             G. Ward Paxton                        17,429,253                 207,322
             J. Fred Bucy                          17,444,703                 191,872
             T. Joe Head                           17,432,103                 204,472
             Donald M. Johnston                    17,447,653                 188,922
             Timothy W. Kinnear                    17,438,652                 197,923
             William A. Roper, Jr.                 17,456,852                 179,723
             Douglas M. Schrier                    17,454,082                 182,493

</TABLE>

(2)      Ratification and approval of selection by the Board of Directors
         Of Ernst & Young LLP as independent auditors of the
         Registrant for the fiscal year ending December 31, 1999.

<TABLE>
<CAPTION>

                                    FOR             AGAINST          ABSTAIN
                                 ----------         -------          -------
                                 <S>                <C>              <C>
                                 17,548,483          48,303          39,789

</TABLE>

Item 5.  OTHER INFORMATION.

Stockholder Proposals.

Stockholders may submit proposals on matters appropriate for stockholder
action at subsequent annual meetings of the stockholders consistent with Rule
14a-8 promulgated under the Exchange Act. For such proposals to be considered
for inclusion in the Proxy Statement and Proxy relating to the 2000 Annual
Meeting of Stockholders, such proposals must be received by the Company no
later than November 21, 1999. Such proposals should be directed to ODS
Networks, Inc., 1101 East Arapaho Road, Richardson, Texas 75081, Attention:
Secretary (telephone: (972) 234-6400; telecopy: (972) 234-1467).

Pursuant to the new amendments to Rule 14a-4(c) of the Securities Exchange Act
of 1934, as amended, if a stockholder who intends to present a proposal at the
2000 annual meeting of stockholders does not notify the Company of such proposal
on or prior to February 4, 2000, then management proxies would be allowed to use
their discretionary voting authority to vote on the proposal when the proposal
is raised at the annual meeting, even though there is no discussion of the
proposal in the 2000 proxy statement.


                                       21
<PAGE>


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 June 30, 1999.


                                       22
<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: August 12, 1999               /s/ Timothy W. Kinnear
                               ---------------------------
                                     Timothy W. Kinnear
                                Chief Operating Officer and
                                  Chief Financial Officer
                               (Principal Financial Officer)



                                    /s/ Jay R. Widdig
                               ---------------------------
                                     Jay R. Widdig
                                    Corporate Controller
                               (Principal Accounting Officer)


                                       23