<PAGE>

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                                   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, 1998

                                          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 31, 1998 was 16,887,233.

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<PAGE>

                                  ODS NETWORKS, INC.

                                        INDEX

                             PART I - FINANCIAL INFORMATION

<TABLE>
                                                                    PAGE
                                                                    ----
<S>                                                                 <C>
Item 1.  Financial Statements 
            
Condensed Consolidated Balance Sheets as of June 30, 1998  
     and December 31, 1997 . . . . . . . . . . . . . . . . . . .      3

Condensed Consolidated Statements of Operations for the three
     months ended June 30, 1998 and June 30, 1997. . . . . . . .      4

Condensed Consolidated Statements of Operations for the six
     months ended June 30, 1998 and June 30, 1997. . . . . . . .      5

Condensed Consolidated Statements of Cash Flows for the six       
     months ended June 30, 1998 and June 30, 1997. . . . . . . .      6

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

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition. . . . . . . . . . .      10

 
                  PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders . .     18

Item 5.  Other Information . . . . . . . . . . . . . . . . . . .     18

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . .     18

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .     19
</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)

<TABLE>
<CAPTION>
                                                 June 30,     Dec. 31,
                                                   1998         1997
                                               -----------    -------
                                               (Unaudited)
<S>                                            <C>            <C>
                               ASSETS

Current Assets:
   Cash and cash equivalents                     $12,343      $17,911
   Short-term investments                          8,960       14,667
   Accounts receivable (net)                      14,876        8,668
   Income taxes receivable                           527        3,159
   Inventories                                    16,217       14,671
   Deferred tax assets                             2,524        1,721  
   Other assets                                    1,181        1,221
                                                 -------      -------
Total current assets                              56,628       62,018

Property and equipment (net)                      11,912       11,836
Long-term investments                              2,756        3,168
Intangibles, net                                   3,982            -
Equity investments                                 1,835            -
Other assets                                         164          156
                                                 -------      -------

TOTAL ASSETS                                     $77,277      $77,178
                                                 -------      -------
                                                 -------      -------


                LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                              $ 7,875      $ 5,381
   Accrued expenses                                3,896        3,328
   Deferred revenue                                1,990        1,462
                                                 -------      -------
Total current liabilities                         13,761       10,171

Deferred tax liabilities                           2,091          628
Capital lease obligations                             12            -

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 - 16,887
      in 1998 and 16,486 in 1997                     169          165
   Additional paid-in capital                     22,698       19,488
   Retained earnings                              38,849       47,032
   Foreign currency translation adjustments         (303)        (306)
                                                 -------      -------
Total stockholders' equity                        61,413       66,379
                                                 -------      -------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $77,277      $77,178
                                                 -------      -------
                                                 -------      -------
</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,
                                                     1998           1997    
                                                   -------        -------
<S>                                                <C>            <C>
Net sales                                          $25,215        $27,868 
Cost of sales                                       14,389         16,076
                                                   -------        -------

     Gross profit                                   10,826         11,792

Operating expenses: 
     Sales and marketing                             8,134          7,877
     Research and development                        2,932          2,823
     In-process research and development             5,300              -
     General and administrative                      1,491          1,258
                                                   -------        -------

Operating loss                                      (7,031)          (166)

Interest income, net                                   356            374 
                                                   -------        -------

Income (loss) before income taxes                   (6,675)           208

Income tax (benefit) provision                        (538)            79
                                                   -------        -------

Income (loss) before equity in affiliate            (6,137)           129  

Equity in net income (loss) of affiliate               (72)             -  
                                                   -------        -------

Net income (loss)                                  $(6,209)       $   129
                                                   -------        -------
                                                   -------        -------

Basic and Diluted income (loss) per share          $ (0.37)       $   .01
                                                   -------        -------
                                                   -------        -------

Weighted average common shares outstanding          16,739         16,423
                                                   -------        -------
                                                   -------        -------

Weighted averages shares outstanding assuming
  dilution                                          16,739         16,753
                                                   -------        -------
                                                   -------        -------
</TABLE>

                            See accompanying notes.



                                      -4-

<PAGE>

                        ODS NETWORKS, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                       (In thousands, except per share amounts)
                                   (Unaudited)
<TABLE>
                                                      Six Months Ended    
                                                   -----------------------
                                                   June 30,       June 30,
                                                    1998           1997   
                                                   -------        -------
<S>                                                <C>            <C>
Net sales                                         $ 43,428        $48,029
Cost of sales                                       24,587         27,241
                                                  --------        -------
     Gross profit                                   18,841         20,788

Operating expenses: 
     Sales and marketing                            15,936         15,018
     Research and development                        5,599          5,653
     In-process research and development             5,300            -
     General and administrative                      2,654          2,520
                                                  --------        -------
Operating loss                                     (10,648)        (2,403)

Interest income, net                                   795            711 
                                                  --------        -------
Loss before income taxes                            (9,853)        (1,692)

Income tax (benefit) provision                      (1,742)          (643)
                                                  --------        -------
Loss before equity in affiliate                     (8,111)        (1,049)  

Equity in net income (loss) of affiliate               (72)            -  
                                                  --------        -------
Net loss                                          $ (8,183)       $(1,049)
                                                  --------        -------
                                                  --------        -------
Basic and Diluted loss per share                  $  (0.49)       $ (0.06)
                                                  --------        -------
                                                  --------        -------
Weighted average common shares outstanding          16,625         16,392  
                                                  --------        -------
                                                  --------        -------
Weighted averages shares outstanding assuming
   dilution                                         16,625         16,392  
                                                  --------        -------
                                                  --------        -------
</TABLE>
                               See accompanying notes.

                                         -5-

<PAGE>

                         ODS NETWORKS, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (In thousands)
                                     (Unaudited)
<TABLE>
                                                      Six Months Ended    
                                                  ------------------------
                                                   June 30,       June 30,
                                                    1998           1997   
                                                  ---------      ---------
<S>                                               <C>            <C>
Operating Activities:
Net loss                                          ($ 8,183)      ($ 1,049)
Adjustments to reconcile net income (loss) to
 net cash provided (used) by operating activities:
   In-process research and development               5,300             -
   Depreciation                                      1,692          1,530 
   Amortization                                        182             -
   Equity in net loss of affiliate                      72             -
   Deferred income taxes                              (680)        (1,265)
   Provision for doubtful accounts and returns          -              35
   Changes in operating assets and liabilities:
      Accounts receivable                           (5,349)         2,571
      Inventories                                   (1,200)         6,631 
      Other assets                                       9            (39)
      Accounts payable and accrued expenses          2,170           (403)
      Deferred revenue                                 (12)          (337)
      Income taxes                                   2,632            460 
                                                  --------        -------
Net cash provided by (used in) 
    operating activities                            (3,367)         8,134
                                                   -------        -------
Investing Activities:
  Payments for corporate acquisition 
     (net of cash acquired)                         (5,604)            -
  Equity Investment in Blue Ridge Networks          (1,250)            -
  Purchases of short-term investments               (2,437)       (10,849) 
  Maturities of short-term investments               9,151         10,932
  Purchases of long-term investments                  (600)        (2,495)
  Maturities of long-term investments                    5             13
  Purchases of property and equipment               (1,340)        (1,943)
                                                   -------        -------
Net cash used in investing activities               (2,075)        (4,342)
                                                   -------        -------
Financing Activities:                                     
  Repayment of Essential Communication Corp.
      line of credit                                  (400)            -     
  Exercise of warrants and employee stock options      271            465
                                                   -------        -------
Net cash provided by (used in) financing 
  activities                                          (129)           465   
                                                   -------        -------
Effect of foreign currency translation 
 adjustment on cash and cash equivalents                 3             (8)
                                                   -------        -------
Net increase (decrease) in cash and cash
 equivalents                                        (5,568)         4,249
Cash and cash equivalents at beginning of
 period                                             17,911          6,565
                                                   -------        -------
Cash and cash equivalents at end of period         $12,343        $10,814
                                                   -------        -------
                                                   -------        -------
Supplemental disclosure of income taxes paid       $   -          $   239
                                                   -------        -------
                                                   -------        -------
Supplemental schedule of non cash activities:
   Tax benefit of stock options exercised
     and sold                                      $   -          $    27
                                                   -------        -------
                                                   -------        -------
</TABLE>
                            See accompanying notes.

                                       -6-
<PAGE>

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

Note A - 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, 1997 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 
six month period ended June 30, 1998 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, 1997.

Computation of Net Income Per Share

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 
128 on December 31, 1997 and has restated all EPS data presented.  Under SFAS 
No. 128 the Company is required to report two separate earnings per share 
numbers, basic EPS and diluted EPS.  Diluted EPS is essentially the same 
number the Company has previously reported as primary earnings per share and 
includes the dilutive impact of employee stock options and warrants.

Equity Investment

In March 1998, the Company invested $1.25 million in Blue Ridge Networks, 
Inc., a privately-held company which provides secure remote access products 
for local and wide area virtual private networks.  This investment was 
accounted for using the equity method of accounting.  The Company's share of 
earnings or losses of Blue Ridge Networks, Inc. is reported in the income 
statement of the Company.

Business Combinations

On May 7, 1998, the Company acquired Essential Communication Corporation 
("Essential"), a privately-held company based in Albuquerque, New Mexico. 
Essential designs and manufactures high-speed computer network equipment. The 
Company exchanged a combination of $5.8 million of cash and approximately 
305,000 shares of the Company's common stock for all outstanding shares of 
Essential capital stock, and the Company issued 104,000 stock options in 
exchange for all unexpired and unexercised options to acquire Essential 
capital stock. In connection with the acquisition, the Company recognized a 
one-time charge of $5.3 million, or $0.32 per share, for in-process 
technology in the second quarter of 1998.  Essential's operations have been 
included in the Company's condensed consolidated financial statements since 
May 7, 1998, and the acquisition was accounted for using the purchase method 
of accounting.  The total purchase price of $9.0 million was allocated to the 
net assets acquired based on their estimated fair market value, which 
included approximately $4.1 million of intangible assets to be amortized over 
five years on a straight-line basis; and approximately $5.3 million of 
in-process research and development. The in-process research and development 
was expensed at the date of the acquisition.  Pro forma financial information 
has not been presented. The acquisition of Essential does not meet the 
reporting requirements for a significant subsidiary. 

                                       -7-

<PAGE>

Exchange of Stock Options in First Quarter 1998

     On January 21, 1998, the Compensation Committee of the Board of 
Directors approved a stock option exchange program (the Exchange Program), 
pursuant to which certain employees and officers holding incentive stock 
options (i) awarded under the Company's 1987 Incentive Stock Option Plan in 
1997 and (ii) awarded prior to December 31, 1997, under the Company's 1995 
Stock Option Plan (the 1995 Plan), were given the opportunity to exchange 
such options (Existing Options) for new options (New Options), based on the 
fair market value of the Company's Common Stock at the close of business on 
January 30, 1998.  All directors of the Company, including  the President and 
Chief Executive Officer and the Senior Vice President, were ineligible to 
participate in the Exchange Program.

     As a result of significant declines in the market value of the Company's 
Common Stock since issuance of the Existing Options, the Existing Options 
were exercisable at prices which substantially exceeded the market value of 
the Common Stock.  In approving the Exchange Program and in keeping with the 
Company's philosophy of utilizing equity incentives to motivate and retain 
qualified employees, the Compensation Committee acknowledged that retention 
and attraction of qualified employees are critical to the Company's success 
and its ability to continue to meet its performance objectives.  
Additionally, recognizing that stock options constitute a significant 
component of the Company's compensation structure, the Compensation Committee 
deemed it important to regain the incentive intended to be provided by the 
New Options to purchase shares of the Company's Common Stock and therefore 
serve as a significant factor in the Company's ability to continue to attract 
and retain the services of superior quality personnel.

     Pursuant to the Exchange Program, holders of the Existing Options were 
offered the opportunity to exchange, on a share-for-share basis, such options 
for New Options having an exercise price of $7.50 per share, the fair market 
value of the Company's Common Stock on the exchange date of January 30, 1998. 
Each New Option was awarded under the 1995 Plan and vests and is exercisable 
with respect to 20% of the shares covered thereby on each anniversary date 
thereof. Eligible employees holding Existing Options for an aggregate of 
646,800 shares of Common Stock with an average per share exercise price of 
approximately $15.87 elected to participate in the Exchange Program and were 
issued New Options covering the same aggregate number of underlying shares as 
they had held pursuant to their respective Existing Options.  Other than the 
new exercise price and the commencement of a new vesting schedule, the option 
agreements relating to the New Options are substantially identical to the 
option agreements of the Existing Options they replaced. 

                                       -8-

<PAGE>

Note B - Inventories (in Thousands)

Inventories consist of:
<TABLE>
                                          June 30,       Dec. 31,
                                           1998           1997   
                                         ---------      ---------
   <S>                                   <C>            <C>
   Raw materials                         $ 5,846        $ 4,077
   Work in process                         1,884          2,004
   Finished products                       6,007          6,593
   Demonstration systems                   2,480          1,997
                                         -------        -------
                                         $16,217        $14,671
                                         -------        -------
                                         -------        -------
</TABLE>

Note C - Accrued Expenses (in Thousands)

Included in accrued expenses are the following:
<TABLE>
                                          June 30,       Dec. 31, 
                                           1998           1997    
                                         --------        --------
      <S>                                <C>            <C>
      Accrued sales commissions          $   897        $   563
      Accrued property taxes                 365            689
      Accrued vacation expense               881            724
      Accrued warranty expense               475            475
      Other (individually less than
       5% of current liabilities)          1,278            877
                                         -------        -------
                                         $ 3,896        $ 3,328
                                         -------        -------
                                         -------        -------
</TABLE>

Note D - Earnings per Share (in Thousands, except per share amounts)

<TABLE>
                            Three Months Ended June 30,  Six Months Ended June 30,
                            ---------------------------  -------------------------
                                  1998         1997           1998         1997   
                                -------       -------       -------     --------  
<S>                             <C>           <C>           <C>         <C>   
Numerator:
Net income (loss)               $(6,209)      $   129       $(8,183)    $ (1,049) 
                                -------       -------       -------     --------  
Numerator for basic and diluted
   earnings per share           $(6,209)      $   129       $(8,183)    $ (1,049)
Denominator:

Denominator for basic earnings
    per share - weighted average
    common shares outstanding    16,739        16,423        16,625       16,392 
Effect of dilutive securities:
    Stock options and warrants        0           330             0            0
Denominator for diluted earnings
    per share - adjusted weighted
    average common shares out-
    standing                     16,739        16,753        16,625       16,392  
                                -------       -------       -------     --------  
                                -------       -------       -------     --------  
Basic income (loss) per share    $(0.37)        $ .01        $(0.49)      $(0.06) 
                                -------       -------       -------     --------  
                                -------       -------       -------     --------  
Diluted income (loss) per share  $(0.37)        $ .01        $(0.49)      $(0.06)
                                -------       -------       -------     --------  
                                -------       -------       -------     --------  
</TABLE>

                                       -9-

<PAGE>

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

This quarterly report, other than historical information, may include 
forward-looking statements with respect to financial results, product 
introductions, market demand, industry trends, sufficiency of cash resources 
and certain other matters. These statements are made under the "safe harbor" 
provisions of the Private Securities Litigation Reform Act of 1995 and 
involve risks and uncertainties which could cause actual results to differ 
materially from those in the forward-looking statements, including those 
discussed in the section entitled "Factors That May Affect Future Results of 
Operations" and elsewhere in this filing, as well as those discussed in the 
Company's Annual Report on Form 10-K and other filings with the Securities 
and Exchange Commission.

The following table sets forth, for the periods indicated, certain financial 
data as a percentage of net sales:

<TABLE>
                                   THREE MONTHS ENDED JUNE 30,   SIX MONTHS ENDED JUNE 30,
                                   ---------------------------   -------------------------
                                        1998         1997           1998         1997
                                       ------       ------         ------       ------
<S>                                    <C>          <C>            <C>          <C>
Net sales                              100.0%       100.0%         100.0%       100.0% 
Cost of sales                           57.1         57.7           56.6         56.7 
                                       ------       ------         ------       ------
Gross profit                            42.9         42.3           43.4         43.3
Sales and marketing expenses            32.2         28.3           36.7         31.3
Research and development expenses       11.5         10.1           12.9         11.8
In-process research and development     21.1          -             12.2           -
General and administrative expenses      5.9          4.5            6.1          5.2
                                       ------       ------         ------       ------
Operating income (loss)                (27.8)        (0.6)         (24.5)        (5.0)
Interest income, net                     1.4          1.3            1.8          1.5
                                       ------       ------         ------       ------
Income (loss) before income taxes      (26.4)         0.7          (22.7)        (3.5)
Income tax (benefit) provision          (2.1)         0.3           (4.0)        (1.3)
                                       ------       ------         ------       ------
Income (loss) before equity in         
 affiliate                             (24.3)         0.4          (18.7)        (2.2)
Equity in net income (loss) of         
 affiliate                              (0.3)          -            (0.1)         -  
                                       ------       ------         ------       ------
Net income (loss)                      (24.6)%        0.4%         (18.8)%       (2.2)%
                                       ------       ------         ------       ------
                                       ------       ------         ------       ------
                                       
Switching product sales                 52.1%        42.3%          47.5%        35.7%
Shared bandwidth hub sales              40.7         52.3           44.5         58.3
Other sales                              7.2          5.4            6.0          6.0
                                       ------       ------         ------       ------
Net sales                              100.0%       100.0%         100.0%       100.0%
                                       ------       ------         ------       ------
                                       ------       ------         ------       ------

Domestic sales                          75.8%        68.3%          77.7%        72.5
Export sales to:
  Europe                                14.1          7.7           13.3          8.7
  Canada                                 2.7          2.3            3.5          3.6
  Asia                                   7.2         18.6            5.1         12.5
  Latin America                           .2          3.1             .4          2.7
                                       ------       ------         ------       ------
Net sales                              100.0%       100.0%         100.0%       100.0%
                                       ------       ------         ------       ------
                                       ------       ------         ------       ------
</TABLE>

                                      -10-
<PAGE>

RESULTS OF OPERATIONS

     NET SALES.  Net sales for the quarter and six months ended June 30, 1998 
decreased to $25.2 million and $43.4 million, respectively, compared to $27.9 
million and $48.0 million, respectively, for the same periods of 1997 as 
sales of the Company's new network switching products did not increase 
quickly enough to offset the decrease in sales of its prior generation shared 
bandwidth intelligent hubs.
                                                                    
     Export sales for the quarter and six months ended June 30, 1998 
decreased to $6.1 million and $9.7 million, respectively, compared to $8.8 
million and $13.2 million, respectively, for the same periods of 1997 
primarily due to adverse economic developments in Malaysia and South Korea.

     Sales to FORE Systems, Inc. ("FORE Systems") were 15.4% and 10.8%, 
respectively, of net sales during the quarter and six months ended June 30, 
1998.  Direct net sales to various agencies of the U.S. Government were 15.0% 
and 14.5%, respectively, of net sales during the quarter and six months ended 
June 30, 1998, compared to 13.2% and 11.6%, respectively, of net sales for 
the same periods of 1997.  Sales to Electronic Data Systems Corporation 
("EDS") were 2.2% and 7.0%, respectively, of net sales during the quarter and 
six months ended June 30, 1998, compared to 14.6% and 14.5%, respectively, of 
net sales for the same periods of 1997. Sales to Sapura Holdings Sdn. Bhd. 
("Sapura") were 5.0% and 3.1%, respectively, of net sales during the quarter 
and six months ended June 30, 1998, compared to 13.9% and 8.1%, respectively, 
of net sales for the same periods of 1997. 

     GROSS PROFIT.  Gross profit decreased to $10.8 million or 42.9% of net 
sales for the second quarter of 1998 compared to $11.8 million or 42.3% of 
net sales for the second quarter of 1997.  Gross profit decreased to $18.8 
million or 43.4% of net sales for six months ended June 30, 1998 compared to 
$20.8 million or 43.3% of net sales for the same period of 1997. 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 increased to $8.1 
million or 32.2% of net sales for the second quarter of 1998 from $7.9 
million or 28.3% of net sales for the second quarter of 1997.  Sales and 
marketing expenses increased to $15.9 million or 36.7% of net sales for six 
months ended June 30, 1998 compared to $15.0 million or 31.3% of net sales 
for the same period of 1997.  The increase in sales and marketing expense was 
primarily due to the acquisition of Essential on May 7, 1998 and increased 
marketing efforts.  Sales and marketing expenses may vary as a percentage of 
net sales in the future.

     RESEARCH AND DEVELOPMENT.  Research and development expenses, excluding 
the one-time charge for in-process research and development, increased to $2.9 
million or 11.5% of net sales for the second quarter of 1998 from $2.8 
million or 10.1% of net sales for the second quarter of 1997. Research and 
development expenses, excluding the one-time charge for in-process research 
and development, decreased to $5.6 million or 12.9% of net sales for six 
months ended June 30, 1998 compared to $5.7 million or 11.8% of net sales for 
the same period of 1997. The Company expects to continue to invest in 
research and development activities in the future in order to broaden its 
family of network switching, management and security products.

                                      -11-
<PAGE>

     IN-PROCESS RESEARCH AND DEVELOPMENT.  During the second quarter of 1998, 
the Company incurred a one-time charge associated with the acquisition of 
Essential of $5.3 million to expense the purchased in-process research and 
development that had not reached technological feasibility. 

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses 
increased to $1.5 million or 5.9% of net sales for the second quarter of 1998 
from $1.3 million or 4.5% of net sales for the second quarter of 1997. 
General and administrative expenses increased to $2.7 million or 6.1% of net 
sales for six months ended June 30, 1998 compared to $2.5 million or 5.2% of 
net sales for the same period of 1997.  The increase in general and 
administrative expenses for the second quarter of 1998 was primarily due to 
the amortization of intangibles related to the acquisition of Essential on 
May 7, 1998. General and administrative expenses may vary as a percentage of 
net sales in the future.

     INTEREST.  Net interest income remained relatively constant at $0.4 
million and $0.8 million, respectively, for the quarter and six months ended 
June 30, 1998 compared to $0.4 million and $0.7 million, respectively, for 
the same periods of 1997.  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's effective income tax rate was 8% and 17.7%, 
respectively, for the quarter and six months ended June 30, 1998 compared to 
the 38.0% for the same periods of 1997.   The effective tax rate represented 
by the Company's provision for income taxes in the second quarter ended June 
30, 1998 would have been approximately 37.1%, disregarding the expenses 
associated with the Company's write-off of purchased research and development 
costs which were not deductible for tax purposes. 

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of liquidity at June 30, 1998 were $12.3 
million of cash and cash equivalents, $9.0 million of short-term investments, 
$2.8 million of highly liquid investments with a stated maturity beyond one 
year and an available line of credit.  As of June 30, 1998, working capital 
was $42.9 million compared to $51.8 million as of December 31, 1997.

     Cash flows used in operations for the first six months of 1998 were $3.4 
million, primarily due to an increase in inventory and accounts receivable 
balances and a net loss for the period partially offset by an increase in 
accounts payable.  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 first six months of 1998 was 
$2.1 million, primarily due to property and equipment purchases of $1.3 
million, an equity investment in Blue Ridge Networks, Inc. of $1.25 million 
and cash used in the acquisition of Essential Communications Corporation 
of $5.6 million offset by net maturities of short-term and long-term 
investments of $6.1 million. 

     Cash used in financing activities in the first six months of 1998 was 
$0.1 million, due to the repayment of Essential's line of credit in the 
amount of $0.4 million offset by the issuance of Common Stock relating to the 
exercise of certain employee stock options in the amount of $0.3 million.

     During the first six months of 1998 the Company funded its operations 
solely 

                                      -12-
<PAGE>

through cash flows from operations.  The Company has a bank line of credit 
agreement with $15.0 million of maximum available borrowings.  Borrowings 
under this line are secured by the Company's accounts receivable and 
inventory and are subject to certain limitations and conditions, including 
the maintenance of certain financial ratios and minimum net tangible worth 
amounts.  Borrowings on this line accrue interest at prime with interest due 
monthly and principal due April 12, 1999.  As of June 30, 1998, the Company 
had no borrowings outstanding under its bank credit facility and had $15.0 
million available for allowable borrowings at an applicable interest rate of 
8.5% per annum.     

     The Company intends to seek 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 such acquisitions will be 
made or that the Company will be able to successfully integrate any acquired 
business.  In order to finance such 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.
          
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

As noted above, this report includes foregoing discussions including 
forward-looking statements that involve risks and uncertainties.  In addition 
to those factors discussed elsewhere in this quarterly report and those 
discussed in the Company's annual report on Form 10-K and other filings with 
the Securities and Exchange Commission, the Company identifies the following 
factors which could affect the Company's actual results and cause actual 
results to differ materially from those in the forward-looking statements.

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, 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 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 intelligent hubs,
switches, management and security products is intensely competitive and subject
to frequent product introductions with improved price/performance
characteristics.  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 

                                      -13-
<PAGE>

products will gain market acceptance.  Many networking companies, including 
Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. ("Cabletron"), Bay 
Networks, Inc. ("Bay Networks"), FORE Systems, Xylan Corporation ("Xylan")  
and others, have substantially greater financial, technical, sales and 
marketing resources, better name recognition and a larger customer base than 
the Company.  Many of the Company's large competitors offer customers a 
broader product line which provides a more comprehensive networking solution 
than the Company currently offers.  The Company anticipates increased 
competition from large telecommunication equipment vendors which are 
expanding their capabilities in the data networking market.  For example, 
Lucent Technologies 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 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. 

     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, Bay Networks, FORE Systems, Lucent 
Technologies, 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 vendors to provide competitive networking 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 technology and marketing expertise.  There can be no assurance that the 
Company will be able to compete successfully in such an environment.

In March 1998, the Company invested $1.25 million in Blue Ridge Networks, 
Inc. a private corporation which provides secure remote access products for 
local and wide area virtual private networks.  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. The Company may, in the future, acquire or invest 
in additional companies, business units, product lines, or technology to 
accelerate the development 

                                      -14-
<PAGE>

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 anticipated 
benefits of such acquisition or investment will be realized.

PRODUCT TRANSITIONS.  Once current networking 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 networking 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 the first half of 1998 
compared to the same period of 1997 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.
          
MANUFACTURING AND AVAILABILITY OF COMPONENTS.  The Company's manufacturing 
operations consist primarily of final assembly, testing and quality control 
of subassemblies and finished units.  Materials used by the Company in its 
manufacturing processes include semiconductors such as microprocessors, 
memory chips and application specific integrated circuits ("ASICs"), printed 
circuit boards, power supplies and enclosures.  All of the materials used in 
the Company's products are purchased under contracts and 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 are available from one or a limited number of 
suppliers.  For example, certain ASICs designed into the Company's 
InfiniteSwitch products are supplied by FORE Systems (see "Factors That May 
Affect Future Results of Operations -Competition and Market Acceptance").  
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 components from alternative sources at 
acceptable prices within a reasonable time, could have additional 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, intelligent hub and network security products. These 
alliances allow ODS to provide integrated solutions to its customers, 
combining ODS developed technology with third-party products such as certain 
routers from Cisco, ATM switches from FORE Systems and Gigabit Ethernet 
switch technology from Lucent Technologies.  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.

                                      -15-

<PAGE>
          
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, Bay Networks, FORE 
Systems, Xylan and others for U.S. Government networking projects and 
corporate networking 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.  Export sales accounted for approximately 24.3% of 
the Company's revenue in the second quarter of 1998.  The Company expects 
that export sales will represent a significant portion of its business in the 
future.  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 and 
other constraints upon international trade.  For example, the fluctuations 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 the fourth quarter of 1997 and the first half 
of 1998.  These conditions may continue to adversely affect demand for the 
Company's products in those countries throughout 1998.  Additionally, while 
the Company's current products are designed to meet relevant regulatory 
requirements of the foreign markets in which they are sold, any inability to 
obtain any required foreign regulatory approvals on a timely basis could have 
a material adverse effect on the Company's operating results. 

INTELLECTUAL PROPERTY.  The Company's success and its ability to compete is 
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.

The Company is also subject to the risk of adverse claims and litigation 
alleging infringement of intellectual property rights of others.  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.
     
IMPACT OF YEAR 2000.   Some of the Company's older computer programs were 
written using two digits rather than four to define the applicable year. As a 
result, those computer programs have time-sensitive software that recognize a 
date using "00" as the year 1900 rather than the year 2000. Accordingly the 
date January 1, 2000 could cause 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.
     
The Company has completed an assessment and will have to modify or replace 
portions of its software so that its computer systems will function properly 
with respect to dates in the year 2000 and thereafter.  The total Year 2000 
project cost is estimated to be immaterial.
          
                                     -16-
<PAGE>

The Company has initiated communications with all of its significant 
suppliers and large customers to determine the extent to which the Company's 
interface systems are vulnerable to those third parties' failure to remediate 
their own Year 2000 issues.  There can be no guarantee that the systems of 
other companies on which the Company's systems rely will be timely converted 
and would not have an adverse effect on the Company's systems.  The Company 
has determined it has immaterial exposure to contingencies related to the 
Year 2000 issue for the products it has sold.  
 
The Company's Year 2000 project is estimated to be completed not later than 
December 31, 1998, which is prior to any anticipated impact on its operating 
systems.  The Company believes that with modifications to existing software 
and conversions to new software, the Year 2000 issue will not pose 
significant operational problems for its computer systems.  However, if such 
modifications and conversions are not made, or are not completed timely, the 
Year 2000 issue could have a material impact on the operations of the Company.
          
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.
          
The Company is concerned that many enterprises will be devoting a substantial 
portion of their information systems spending to resolving this upcoming year 
2000 problem.  This may result in spending being diverted from networking 
solutions over the next two years.  The year 2000 issue could lower demand 
for the Company's products. This factor, while not quantified, could have a 
material adverse impact on the Company's financial results.
          
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 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>

                            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, 1998 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 five (5) directors to serve until the next Annual
                Meeting of Stockholders and until their respective successors 
                are duly elected and qualified.

<TABLE>
                                               FOR             WITHHELD  
                                               ---             --------
<S>                                         <C>                <C>
                G. Ward Paxton              14,979,571         140,512
                Robert Anderson             14,979,121         140,962
                J. Fred Bucy                14,982,825         137,258
                T. Joe Head                 14,985,320         134,763
                Donald M. Johnston          14,986,070         134,013
</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, 1998.

<TABLE>
                                FOR           AGAINST          WITHHELD  
                                ---           -------          --------
<S>                          <C>              <C>              <C>
                             15,062,577       19,969           37,537
</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 1999 Annual 
Meeting of Stockholders, such proposals must be received by the Company not 
later than November 20, 1998. Such proposals should be directed to ODS 
Networks, Inc., 1101 East Arapaho Road, Richardson, Texas 75081, Attention: 
Secretary (telephone: (972) 234-1467; telecopy: (972) 234-1467.

Pursuant to 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 
1999 annual meeting of stockholders does not notify the Company of such 
proposal on or prior to February 3, 1999, 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 1999 proxy statement.

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

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

                (10.13)    First Amendment Agreement to Third Amended and 
                           Restated Revolving Credit Loan Agreement, dated 
                           April 30, 1998, between NationsBank of Texas,
                           N.A. (formerly, NCNB Texas National Bank) and the
                           Company.

                (10.14)    Amendment to the ODS 401(K) Savings Plan, Effective
                           May 29, 1998
               
                (27)       Financial Data Schedule

          (B.)  FORM 8-K.  On May 21, 1998, the Company filed a report on 
                           Form 8-K (Item 2) to announce the acquisition of 
                           Essential Communications Corporation.

                                   -18-
<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 14, 1998         BY: /s/ TIMOTHY W. KINNEAR 
                                  --------------------------------------
                                      Timothy W. Kinnear
                                      Chief Financial Officer
                                      (Principal Financial Officer)



                              BY: /s/ KANDIS TATE THOMPSON 
                                  --------------------------------------
                                  Kandis Tate Thompson
                                  Controller - Finance and Accounting
                                  (Principal Accounting Officer)

                                         -19-
<PAGE>

                                    EXHIBIT INDEX

<TABLE>
    EXHIBIT 
    -------
<S>            <C>
     10.13     First Amendment Agreement to Third Amended and Restated Revolving
               Credit Loan Agreement, dated April 30, 1998, between NationsBank
               of Texas, N.A. (formerly NCNB Texas National Bank) and the 
               Company.
      
      10.14    Amendment to the ODS 401(K) Savings Plan, Effective May 29, 1998.

      27     Financial Data Schedule
</TABLE>

                                         -20-