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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 September 30, 1996

                                          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 

                                   *  *  *  *  *  *

                              OPTICAL DATA SYSTEMS, 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, former address and former fiscal year, 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 October 31, 1996 was 16,324,497.

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                              OPTICAL DATA SYSTEMS, INC.

                                        INDEX

                            PART I - FINANCIAL INFORMATION

                                                                    PAGE
Item 1. Financial Statements                                        ----
 
Condensed Consolidated Balance Sheets as of September 30, 1996
     and December 31, 1995 . . . . . . . . . . . . . . . . . . . .    3

Condensed Consolidated Statements of Income for the three months
     ended September 30, 1996 and September 30, 1995 . . . . . . .    4

Condensed Consolidated Statements of Income for the nine months
     ended September 30, 1996 and September 30, 1995 . . . . . . .    5

Condensed Consolidated Statements of Cash Flows for the nine
     months ended September 30, 1996 and September 30, 1995. . . .    6

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

Item 2.  Management's Discussion and Analysis of Results of
     Operations and Financial Condition. . . . . . . . . . . . . .    8-14


                             PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . .   15

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . .   16




                                     -2-

<PAGE>

                     OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                       (In thousands, except par value amounts)
                                 (Unaudited)
 
                                                Sept. 30,    Dec. 31,
                                                  1996        1995
                                                ---------  ----------
                                        ASSETS

Current Assets:
   Cash and cash equivalents                     $ 3,567   $ 10,397
   Short term investments                         14,504     15,328
   Accounts receivable (net)                      22,157     15,238
   Income taxes receivable                           205        -
   Inventories                                    26,685     19,374
   Deferred tax assets                             1,335        951
   Other assets                                      830        837
                                                 -------    -------
Total current assets                              69,283     62,125

Property and equipment (net)                      11,507      9,458
Other assets                                         183        102
                                                 -------    -------

TOTAL ASSETS                                     $80,973    $71,685
                                                 -------    -------
                                                 -------    -------

                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable and accrued expenses         $10,488    $11,867
   Income taxes payable                              -          612
                                                 -------    -------
Total current liabilities                         10,488     12,479
Deferred tax liabilities                             530        508

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 - 16,314
      in 1996 and 16,150 in 1995                     163        162
   Additional paid-in capital                     18,869     17,729
   Foreign currency translation adjustments         (102)      (111)
   Retained earnings                              51,025     40,918
                                                 -------    -------
Total stockholders' equity                        69,955     58,698
                                                 -------    -------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $80,973    $71,685
                                                 -------    -------
                                                 -------    -------


                               See accompanying notes.



                                    -3-

<PAGE>

                     OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                       (In thousands, except per share amounts)
                                   (Unaudited)


                                                     Three Months Ended    
                                                  ------------------------ 
                                                  Sept. 30,      Sept. 30, 
                                                    1996           1995    
                                                  ---------      --------- 
Net sales                                          $31,303       $31,597 
Cost of sales                                       16,410        15,465 
                                                   -------       ------- 
     Gross profit                                   14,893        16,132 

Operating expenses: 
     Sales and marketing                             6,415         6,226 
     Research and development                        2,989         2,043 
     General and administrative                        895         1,198 
                                                   -------       ------- 

Operating income                                     4,594         6,665 

Interest income (net)                                  205           241 
                                                   -------       ------- 

Income before income taxes                           4,799         6,906 

Income taxes                                         1,823         2,662 
                                                   -------       ------- 

Net income                                         $ 2,976       $ 4,244 
                                                   -------       ------- 
                                                   -------       ------- 

Net income per share                               $   .18       $   .25 
                                                   -------       ------- 
                                                   -------       ------- 

Weighted average common and common
 equivalent shares outstanding                      16,816        17,018 
                                                   -------       ------- 
                                                   -------       ------- 











                            See accompanying notes.


                                       -4- 
<PAGE>

                     OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES 
                     CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
                       (In thousands, except per share amounts)  
                                   (Unaudited)


                                                     Nine Months Ended     
                                                  ------------------------ 
                                                  Sept. 30,      Sept. 30, 
                                                    1996           1995    
                                                  ---------      --------- 
Net sales                                          $91,815       $86,969 
Cost of sales                                       47,190        43,708 
                                                   -------       ------- 
     Gross profit                                   44,625        43,261 

Operating expenses:
     Sales and marketing                            18,739        16,547 
     Research and development                        7,598         6,198 
     General and administrative                      2,654         3,218 
                                                   -------       ------- 

Operating income                                    15,634        17,298 

Interest income (net)                                  667           680 
                                                   -------       ------- 

Income before income taxes                          16,301        17,978 

Income taxes                                         6,194         6,904 
                                                   -------       ------- 

Net income                                         $10,107       $11,074 
                                                   -------       ------- 
                                                   -------       ------- 

Net income per share                               $   .60       $   .66 
                                                   -------       ------- 
                                                   -------       ------- 

Weighted average common and common 
 equivalent shares outstanding                      16,826        16,869 
                                                   -------       ------- 
                                                   -------       ------- 














                               See accompanying notes.

                                       -5- 
<PAGE>


                     OPTICAL DATA SYSTEMS, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (In thousands)
                                    (Unaudited)


                                                     Nine Months Ended    
                                                  ----------------------- 
                                                  Sept. 30,     Sept. 30, 
                                                    1996          1995    
                                                  ---------     --------- 
Operating Activities:
Net income                                        $ 10,107      $ 11,074 
Adjustments to reconcile net income to
 net cash provided by operating activities:
   Depreciation                                      1,821         1,439 
   Deferred income taxes                              (362)       (1,018)
   Changes in operating assets and liabilities:
      Accounts receivable                           (6,919)       (4,063)
      Inventories                                   (7,311)       (2,984)
      Other current assets                               7            60 
      Other assets                                     (81)           (7)
      Accounts payable and accrued expenses         (1,379)          226 
      Income taxes payable                            (276)        1,774 
                                                  --------       ------- 
Net cash (used) provided by 
 operating activities                               (4,393)        6,501 
                                                  --------      -------- 
Investing Activities:
  Purchases of short-term investments              (13,776)      (16,817)
  Sale of short-term investments                       -           1,499 
  Maturities of short-term investments              14,600        13,630 
  Purchases of property and equipment               (3,870)       (2,885)
                                                  --------      -------- 
Net cash used in investing activities               (3,046)       (4,573)
                                                  --------      -------- 
Financing Activities:
  Exercise of employee stock options                   600           828 
                                                  --------      -------- 
Net cash provided by financing activities              600           828 
                                                  --------      -------- 
Effect of foreign currency translation 
 adjustment on cash and cash equivalents                 9           (13)
                                                  --------      -------- 
Net increase (decrease) in cash and cash
 equivalents                                        (6,830)        2,743 
Cash and cash equivalents at beginning of
 period                                             10,397         6,251 
                                                  --------      -------- 
Cash and cash equivalents at end of period        $  3,567      $  8,994 
                                                  --------      -------- 
                                                  --------      -------- 
Supplemental disclosure of income taxes paid      $  6,815      $  6,131 
                                                  --------      -------- 
                                                  --------      -------- 
Supplemental schedule of non cash activities:
  Tax benefit of stock options exercised 
    and sold                                      $    541      $    860 
                                                  --------      -------- 
                                                  --------      -------- 





                             See accompanying notes.

                                       -6- 
<PAGE>

OPTICAL DATA SYSTEMS, 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.  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 nine month periods ending
September 30, 1996 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
Registrant's annual report on Form 10-K for the year ended December 31, 1995.


Note B - Inventories (in thousands)

Inventories consist of:

                                         Sept. 30,      Dec. 31, 
                                           1996           1995   
                                         ---------      -------- 
   Raw materials                         $ 4,971        $ 4,080 
   Work in process                         3,167          2,724 
   Finished products                      18,547         12,570 
                                         -------        ------- 
                                         $26,685        $19,374 
                                         -------        ------- 
                                         -------        ------- 

Note C - Accounts Payable and Accrued Expenses (in thousands)

Included in accounts payable and accrued expenses are the following:

                                         Sept. 30,      Dec. 31, 
                                           1996           1995   
                                         ---------      -------- 
      Trade accounts payable              $ 5,413        $ 5,317 
      Accrued sales commissions               710            934 
      Accrued incentive bonus                   -          1,178 
      Accrued warranty expense                525            600 
      Accrued vacation expense                602            468 
      Deferred maintenance revenue          1,389          1,397 
      Other (individually less than
       5% of current liabilities)           1,849          1,973 
                                          -------        ------- 
                                          $10,488        $11,867 
                                          -------        ------- 
                                          -------        ------- 


                                     -7- 
<PAGE>

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


The following table sets forth items from the Registrant's condensed
consolidated statements of income as percentages of net sales:

                              Three Months Ended            Nine Months Ended 
                            ----------------------     ---------------------- 
                            Sept. 30,    Sept. 30,     Sept. 30,   Sept. 30, 
                              1996         1995          1996        1995    
                            ---------    ---------     ---------   --------- 
Sales                        100.0%       100.0%        100.0%       100.0% 
Cost of sales                 52.4         48.9           51.4        50.3 
                             -----        -----          -----       ----- 
Gross profit                  47.6         51.1           48.6        49.7 
Sales and marketing
 expenses                     20.5         19.7           20.4        19.0 
Research and development 
 expenses                      9.5          6.5            8.3         7.1 
General and  
 administrative expenses       2.9          3.8            2.9         3.7 
                             -----        -----          -----       ----- 
Operating income              14.7         21.1           17.0        19.9 
Interest income                0.6          0.7            0.7         0.8 
                             -----        -----          -----       ----- 
Income before taxes           15.3         21.8           17.7        20.7 
Income taxes                   5.8          8.4            6.7         8.0 
                             -----        -----          -----       ----- 
Net income                     9.5%        13.4%          11.0%       12.7%
                             -----        -----          -----       ----- 
                             -----        -----          -----       ----- 

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RESULTS OF OPERATIONS

  THIRD QUARTER OF 1996 COMPARED WITH THIRD QUARTER OF 1995

    NET SALES.  Net sales for the third quarter ended September 30, 1996 
decreased slightly to $31.3 million compared to $31.6 million for the third 
quarter ended September 30, 1995.

    Ethernet sales were $19.9 million or 63.6% of net sales for  the third 
quarter of 1996 compared to $19.8 million or 62.7% of net sales for the third 
quarter of 1995.  Token Ring sales were $4.2 million or 13.5% of net sales 
for the third quarter of 1996 compared to $5.3 million or 16.8% of net sales 
for the third quarter of 1995.  FDDI sales were $5.1 million or 16.3% of net 
sales for the third quarter of 1996 compared to $5.3 million or 16.9% of net 
sales for the third quarter of 1995.  ATM sales for the third quarter of 1996 
were $1.4 million or 4.3% of net sales compared to $0.8 million or 2.6% of 
net sales for the third quarter of 1995.  Sales of other data communications 
products and services were $0.7 million or 2.3% of net sales for the third 
quarter of 1996 compared to $0.3 million or 1.0% of net sales for the
comparable period in 1995. 

    International sales increased to $4.5 million or 14.4% of net sales for 
the third quarter of 1996 from $3.1 million or 9.7% of net sales for the 
third quarter of 1995.

                                     -8- 
<PAGE>

    During the third quarter of 1996, 17.3% of net sales were to AT&T 
Corp.("AT&T")compared to 6.3% of net sales in the third quarter of 1995.  
Sales to Electronic Data Systems Corporation("EDS") represented 10.5% of net 
sales in the third quarter of 1996 compared to 28.5% of net sales in the 
third quarter of 1995.  Direct net sales to various agencies of the U.S. 
Government in the aggregate amounted to 20.2% of net sales for the third 
quarter 1996 compared to 9.2% of net sales for the third quarter of 1995.  In 
addition, a portion of the Company's sales to AT&T, EDS, and other 
corporations were resold by those organizations to various agencies of the 
U.S. Government.

    GROSS PROFIT.  Gross profit decreased to $14.9 million or 47.6% of net 
sales for the third quarter of 1996 compared to $16.1 million or 51.1% of net 
sales for the third quarter of 1995.  Gross profit in the third quarter of 
1996 was impacted by a $1.0 million increase in reserves for slow-moving 
inventory. Gross profit margins in future periods may be affected by several 
factors such as sales volume, shifts in product mix, fluctuation in 
manufacturing costs, pricing strategies of the Registrant 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 slightly to 
$6.4 million or 20.5% of net sales for the third quarter of 1996 from $6.2 
million or 19.7% of net sales for the third quarter of 1995.  The increase in 
sales and marketing expense was primarily due to expansion of sales and 
marketing personnel and associated costs.  The Registrant expects sales and 
marketing expenses to continue to increase in amount, but may vary as a 
percentage of net sales in the future.

    RESEARCH AND DEVELOPMENT.  Research and development expenses increased to 
$3.0 million or 9.5% of net sales for the third quarter of 1996 from $2.0 
million or 6.5% of net sales for the third quarter of 1995.  The increase in 
research and development expenses in 1996 was primarily due to an increase in 
the number of development personnel, additional product development expenses 
and increased costs related to the final development and testing of new 
switching products.  The Registrant expects to continue to invest in research 
and development activities in the future in order to broaden its family of 
switching products.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses 
decreased slightly to $0.9 million or 2.9% of net sales for the third quarter 
of 1996 from $1.2 million or 3.8% of net sales for the third quarter of 1995. 
As the Registrant continues to expand its domestic and foreign sales force, 
increase its marketing activities and invest in research and development 
efforts, general and administrative expenses are expected to increase in 
amount. 

    INTEREST.  Net interest income remained constant at $0.2 million for both 
the third quarter of 1996 and the third quarter of 1995. 

    INCOME TAXES.  The Registrant's effective income tax rate remained 
relatively consistent at 38.0% for the third quarter of 1996 compared to 
38.5% for the third quarter of 1995.

                                     -9- 
<PAGE>

FIRST NINE MONTHS OF 1996 COMPARED WITH FIRST NINE MONTHS OF 1995

    NET SALES.  Net sales for the first nine months of 1996 increased by 5.6% 
to $91.8 million from $87.0 million for the first nine months of 1995.

    Ethernet sales were $58.6 million or 63.9% of net sales for the first 
nine months of 1996 compared to $55.0 million or 63.2% of net sales for the 
first nine months of 1995.  Token Ring sales were $14.4 million or 15.7% of 
net sales for the first nine months of 1996 compared to $12.8 million or 
14.7% of net sales for the first nine months of 1995.  FDDI sales were $13.8 
million or 15.0% of net sales for the first nine months of 1996 compared to 
$15.5 million or 17.8% of net sales for the first nine months of 1995.  ATM 
sales were $3.3 million or 3.6% of net sales for the first nine months of 
1996 compared to $2.8 million or 3.2% of net sales for the first nine months 
of 1995.  Sales of other data communications products and services were $1.7 
million or 1.9% of net sales for the first nine months of 1996 compared to 
$1.0 million or 1.1% of net sales for the first nine months of 1995.

    International sales increased to $12.7 million or 13.9% of net sales for 
the first nine months of 1996 compared to $9.1 million or 10.5% for the first 
nine months of 1995.

    During the first nine months of 1996, 20.9% of net sales were to EDS 
compared to 27.0% of net sales in the first nine months of 1995.  Sales to 
AT&T represented 14.8% of net sales in the first nine months of 1996 compared 
to 13.5% of net sales in the first nine months of 1995.  Direct net sales to 
various agencies of the U.S. Government in the aggregate amounted to 13.8% of 
net sales for the first nine months of 1996 compared to 6.2% of net sales for 
the first nine months of 1995.   In addition, a portion of the Company's 
sales to AT&T, EDS, and other corporations were resold by those organizations 
to various agencies of the U.S. Government.

    GROSS PROFIT.  Gross profit increased in amount to $44.6 million for the 
first nine months of 1996 compared to $43.3 million for the first nine months 
of 1995, but decreased as a percentage of net sales to 48.6% of net sales for 
the first nine months of 1996 compared to 49.7% of net sales for the first 
nine months of 1995.  Gross profit for the first nine months of 1996 was 
impacted by a $1.0 million increase in reserves for slow-moving inventory.  
Gross profit margins in future periods may be affected by several factors 
such as sales volume, variations in product mix, fluctuations in 
manufacturing costs, pricing strategies of the Registrant 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 $18.7 
million or 20.4% of net sales for the first nine months of 1996 from $16.5 
million or 19.0% of net sales for the first nine months of 1995.  The 
increase in  sales and marketing expense primarily reflects higher levels of 
staffing in sales, marketing and technical support in the first nine months 
of 1996.

    RESEARCH AND DEVELOPMENT.  Research and development expenses increased to 
$7.6 million or 8.3% of net sales for the first nine months of 1996 from $6.2 
million or 7.1% of net sales for the first nine months of 1995.   The 
increase in research and development expenses in 1996 was primarily due to an 
increase in the number of 

                                     -10- 
<PAGE>

development personnel, additional product development expenses and increased 
costs related to the final development and testing of new switching products. 
The Registrant expects to continue to invest in research and development 
activities in the future in order to broaden its family of switching products.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses 
decreased to $2.7 million or 2.9% of net sales for the first nine months of 
1996 from $3.2 million or 3.7% of net sales for the first nine months of 
1995.  As the Registrant continues to expand its domestic and foreign sales 
force, increase its marketing activities and invest in research and 
development efforts, general and administrative expenses are expected to 
increase in amount. 

    INTEREST.  Net interest income remained constant at $0.7 million for the
first nine months of 1996 and 1995, respectively.

    INCOME TAXES.  The Registrant's effective tax rate remained relatively 
consistent at 38.0% for the first nine months of 1996 compared to 38.4% for 
the first nine months of 1995.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

TECHNOLOGICAL CHANGES.  The market for the Registrant's products is 
characterized by frequent product introductions, rapidly changing technology 
and continued evolution of new industry standards. The market for network 
intelligent hubs and switches requires the Registrant'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 Registrant'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 Registrant will be able to identify, develop, 
manufacture, market and support new or enhanced products successfully in a 
timely manner. Further, the Registrant or its competitors may introduce new 
products or product enhancements that shorten the life cycle of or obsolete 
the Registrant's existing product lines which could have a material adverse 
effect on the Registrant's business, operating results and financial 
condition.

COMPETITION AND MARKET ACCEPTANCE.  The market for network intelligent hubs 
and switches is intensely competitive and subject to frequent product 
introductions with improved price/performance characteristics.  Even if the 
Registrant does introduce advanced products which meet evolving customer 
requirements in a timely manner, there can be no assurance that the new 
Registrant products will gain market acceptance.  Many networking companies, 
including Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. 
("Cabletron"), Bay Networks, Inc.("Bay Networks") and others, have 
substantially greater financial, technical, sales and marketing resources, 
better name recognition and a larger customer base than the Registrant.  In 
addition, many of the Registrant's large competitors offer customers a 
broader product line which provides a more comprehensive networking solution 
than the Registrant currently offers.  Increased competition in the 
networking industry could result in significant price competition, 

                                     -11- 
<PAGE>

reduced profit margins or loss of market share, any of which could have a 
material adverse effect on the Registrant's business, operating results and 
financial condition.

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 Registrant's or a competitor's design), 
the Registrant expects the net sales of such networking products to decrease. 
In order to continue to maintain its then current levels of revenue growth, 
if any, the Registrant will therefore be required to design, develop and 
successfully commercialize higher performance products in a timely manner.  
For example, the Registrant believes that the market for shared bandwidth 
intelligent hubs, sales of which have represented the vast majority of the 
Registrant's net sales over the past several years, will decrease as 
switching products with enhanced price/performance characteristics gain 
market acceptance.  Although the Registrant has introduced network switching 
products which it believes offer competitive price/performance 
characteristics and is committed to future product development efforts, there 
can be no assurance that the Registrant will be able to introduce new 
products quickly enough to avoid adverse revenue transition patterns during 
current or future product transitions.

MANUFACTURING AND AVAILABILITY OF COMPONENTS.  The Registrant's manufacturing 
operations consist primarily of final assembly, testing and quality control 
of subassemblies and finished units.  Materials used by the Registrant in its 
manufacturing processes include semiconductors such as microprocessors, 
memory chips and application specific integrated circuits, printed circuit 
boards, power supplies and enclosures.  All of the materials used in the 
Registrant's products are purchased under contracts and purchase orders with 
third parties. While the Registrant 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.  The lead times for delivery of components vary 
significantly and exceed ten weeks for certain components.  If the Registrant 
fails to forecast its requirements accurately for components, then it may 
experience excess inventory or shortages of certain components which could 
have an adverse effect on the Registrant's business and operating results.  
Further, any interruption in the supply of any of these components, or the 
inability of the Registrant to procure these components from alternative 
sources at acceptable prices within a reasonable time, could have an adverse 
effect on the Registrant's business and operating results.

DEPENDENCE OF KEY CUSTOMERS.  Although there is a large number of end-users 
of the Registrant's products, a relatively small number of customers have 
accounted for a significant portion of the Registrant's revenue. U.S. 
Government agencies and strategic network integrators, such as EDS, AT&T and 
GTE, Inc., which purchase the Registrant's products for internal use and 
offer the Registrant's products for resale are expected to continue to 
account for a substantial portion of the Registrant's net revenue.  The 
Registrant continuously faces competition from Cisco, Cabletron, Bay Networks 
and others for U.S. Government networking projects and corporate networking 
installations.  Any reduction or delay in sales of the Registrant's products 
to these U.S. Government agencies or strategic network integrators could have 
a material adverse effect on the Registrant's operating results.

                                     -12- 
<PAGE>

INTERNATIONAL OPERATIONS.  International sales accounted for approximately 
13.9% of the Registrant's revenue for the nine months ended September 30, 
1996. The Registrant intends to expand its international presence and expects 
that international sales will represent a significant portion of its business 
in the future.  While the Registrant'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 Registrant's 
operating results. Additionally, the Registrant'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 constraints upon international trade.

INTELLECTUAL PROPERTY.  The Registrant's success and its ability to compete 
is dependent, in part, upon its proprietary technology.  The Registrant 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 Registrant to protect its intellectual property will be 
adequate to prevent misappropriation of its technology or that the 
Registrant's competitors will not independently develop technologies that are 
substantially equivalent or superior to the Registrant's technology.

The Registrant is also subject to the risk of adverse claims and litigation 
alleging infringement of intellectual property rights of others.  The 
Registrant 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 Registrant may be 
required to obtain one or more licenses from third parties.  There can be no 
assurance that the Registrant could obtain the necessary licenses or obtain 
such licenses on reasonable terms.

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 and switches, there can be no 
assurance as to the rate or extent of the growth of this 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 Registrant's business, operation 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 Registrant'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 Registrant's common stock in any given period.  Also, 
the Registrant participates in a highly dynamic industry which often results 
in volatility of the Registrant's common stock price.

                                     -13-

<PAGE>

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995

With the exception of historical information, the matters discussed in this 
quarterly report are forward-looking statements that involve risks and 
uncertainties including but not limited to, economic conditions, trends in 
the networking market, product acceptance and demand, competitive products 
and pricing, new product development, availability of competitive components 
and other risks indicated in this filing and prior filings with the 
Securities and Exchange Commission. 

LIQUIDITY AND CAPITAL RESOURCES

    The Registrant's principal sources of liquidity at September 30, 1996 
were $3.6 million of cash and cash equivalents, $14.5 million of short-term 
investments and an available line of credit.  As of September 30, 1996, 
working capital was $58.8 million compared to $49.6 million as of December 
31, 1995.

    Cash flows used by operations for the first nine months of 1996 were $4.4 
million, primarily due to increases in accounts receivable and inventory 
balances partially offset by net income.  The increase in accounts receivable 
reflects the increase in net sales to $31.3 million during the third quarter 
of 1996 compared to $24.5 million during the fourth quarter of 1995.  The 
increase in inventory reflects the continued support of the Registrant's 
intelligent hub product line and the ramp in  inventory of its switching 
products.

    Future fluctutations 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 Registrant's 
strategy as to building inventory in advance of receiving orders from 
customers, and the accuracy of the Registrant's forecasts of product demand 
and component requirements.

    Cash used in investing activities in the first nine months of 1996 
consisted of purchases of property and equipment of $3.9 million  partially 
offset by maturities of short-term investments of $0.8 million. 

    Cash provided by financing activities in the first nine months of 1996 
was $0.6 million, which consisted of the issuance of common stock relating to 
the exercise of certain warrants and employee stock options.

    During the first nine months of 1996 the Registrant funded its operations 
solely through cash flow from operations.  The Registrant's revolving bank 
credit facility provides an unsecured line of credit of up to $5.0 million, 
subject to certain limitations and conditions.  At September 30, 1996, the 
Registrant had no borrowings outstanding under its bank credit facility, and 
had $5.0 million available for allowable borrowings at an applicable interest 
rate of 8.25% per annum.

    The Registrant believes that its cash, cash equivalent and short-term 
investment balances, cash expected to be generated from operations and the 
availability of borrowings under its bank credit facility will provide 
sufficient cash resources to finance its operations and currently projected 
capital expenditures through the remainder of 1996.

                                     -14-

<PAGE>

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

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

              (11) Schedule of Computation of Per Share Earnings

              (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
                        September 30, 1996.





                                     -15-

<PAGE>

                               S I G N A T U R E


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

                                   OPTICAL DATA SYSTEMS, INC.
                                        (Registrant)



Date: November 14, 1996            By: /s/ TIMOTHY W. KINNEAR 
                                      -----------------------------
                                            Timothy W. Kinnear
                                         Chief Financial Officer
                                      (Principal Financial Officer)



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





                                     -16-

<PAGE>

                                 EXHIBIT INDEX

EXHIBIT

    11   Schedule of Computation of Per Share Earnings

    27   Financial Data Schedule





                                     -17-