<PAGE>

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


                                  FORM 10-Q


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

               For the quarterly period ended September 30, 1997

                                      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 October 31, 1997 was 16,486,276.

-------------------------------------------------------------------------------
<PAGE>
                                       
                              ODS NETWORKS, INC.

                                     INDEX

                        PART I - FINANCIAL INFORMATION

                                                                    PAGE
Item 1.  Financial Statements                                       ----

Condensed Consolidated Balance Sheets as of September 30, 1997
     and December 31, 1996 . . . . . . . . . . . . . . . . . . .      3

Condensed Consolidated Statements of Operations for the three
     months ended September 30, 1997 and September 30, 1996. . .      4

Condensed Consolidated Statements of Operations for the nine
     months ended September 30, 1997 and September 30, 1996. . .      5

Condensed Consolidated Statements of Cash Flows for the nine
     months ended September 30, 1997 and September 30, 1996. . .      6

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

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition. . . . . . . . . . .      8-13

                                       
                        PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . .     14

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .     15








                                      -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)


                                                Sept. 30,     Dec. 31,
                                                  1997          1996
                                               -----------    --------
                                               (Unaudited)

                                     ASSETS

Current Assets:
   Cash and cash equivalents                     $ 9,356      $ 6,565
   Short-term investments                         20,863       13,790
   Accounts receivable (net)                      15,118       16,573
   Income taxes receivable                            -            85
   Inventories                                    15,525       25,573
   Deferred tax assets                             3,698        1,499
   Other assets                                    1,222          840
                                                 -------      -------
Total current assets                              65,782       64,925

Property and equipment (net)                      12,157       11,739
Long-term investments                              4,673        5,050
Other assets                                         208          221
                                                 -------      -------

TOTAL ASSETS                                     $82,820      $81,935
                                                 -------      -------
                                                 -------      -------

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                              $ 6,509      $ 5,440
   Accrued expenses                                3,578        3,242
   Deferred revenue                                1,202        1,714
   Income taxes payable                              856            -
                                                 -------      -------
Total current liabilities                         12,145       10,396

Deferred tax liabilities                             693          601

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 - 16,486
      in 1997 and 16,328 in 1996                     165          163
   Additional paid-in capital                     19,488       18,908
   Retained earnings                              50,490       51,969
   Foreign currency translation adjustments         (161)        (102)
                                                 -------      -------
Total stockholders' equity                        69,982       70,938
                                                 -------      -------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $82,820      $81,935
                                                 -------      -------
                                                 -------      -------

                            See accompanying notes.

                                      -3-
<PAGE>

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


                                                     Three Months Ended
                                                  ------------------------
                                                  Sept. 30,      Sept. 30,
                                                    1997           1996
                                                  --------       ---------
Net sales                                          $26,231        $31,303
Cost of sales                                       15,702         16,410
                                                   -------        -------
     Gross profit                                   10,529         14,893

Operating expenses:
     Sales and marketing                             7,845          6,415
     Research and development                        2,638          2,989
     General and administrative                      1,187            895
                                                   -------        -------
Operating income (loss)                             (1,141)         4,594

Interest income, net                                   446            205
                                                   -------        -------
Income (loss) before income taxes                     (695)         4,799

Income tax (benefit) provision                        (264)         1,823
                                                   -------        -------
Net income (loss)                                  $  (431)       $ 2,976
                                                   -------        -------
                                                   -------        -------
Net income (loss) per share                        $ (0.03)       $  0.18
                                                   -------        -------
                                                   -------        -------
Weighted average common and common
 equivalent shares outstanding                      16,475         16,816
                                                   -------        -------
                                                   -------        -------

                      See accompanying notes.

                                       -4-

<PAGE>

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

                                                     Nine Months Ended
                                                  ------------------------
                                                  Sept. 30,      Sept. 30,
                                                    1997           1996
                                                  ---------      ---------
Net sales                                          $74,260        $91,815
Cost of sales                                       42,943         47,190
                                                   -------        -------
     Gross profit                                   31,317         44,625

Operating expenses:
     Sales and marketing                            22,863         18,739
     Research and development                        8,291          7,598
     General and administrative                      3,707          2,654
                                                   -------        -------
Operating income (loss)                             (3,544)        15,634

Interest income, net                                 1,157            667
                                                   -------        -------
Income (loss) before income taxes                   (2,387)        16,301

Income tax (benefit) provision                        (907)         6,194
                                                   -------        -------
Net income (loss)                                  $(1,480)       $10,107
                                                   -------        -------
                                                   -------        -------
Net income (loss) per share                        $ (0.09)       $  0.60
                                                   -------        -------
                                                   -------        -------
Weighted average common and common
 equivalent shares outstanding                      16,420         16,826
                                                   -------        -------
                                                   -------        -------



                      See accompanying notes.

                                       -5-

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

                                                      Nine Months Ended
                                                  -------------------------
                                                  Sept. 30,       Sept. 30,
                                                    1997            1996
                                                  ---------       ---------
Operating Activities:
Net income (loss)                                 $ (1,480)       $ 10,107
Adjustments to reconcile net income (loss) to
 net cash provided (used) by operating activities:
   Depreciation                                      2,364           1,821
   Deferred income taxes                            (2,107)           (362)
   Provision for doubtful accounts and returns          96              30
Changes in operating assets and liabilities:
      Accounts receivable                            1,359          (6,949)
      Inventories                                   10,048          (7,311)
      Other assets                                    (369)            (74)
      Accounts payable and accrued expenses          1,405          (1,387)
      Deferred revenue                                (512)              8
      Income taxes payable                             968            (276)
                                                  --------        --------

Net cash provided by (used in)
    operating activities                            11,772          (4,393)
                                                  --------        --------
Investing Activities:
  Purchases of short-term investments              (17,967)        (13,776)
  Maturities of short-term investments              15,911          14,600
  Purchases of long-term investments                (4,656)            -
  Maturities of long-term investments                   16             -
  Purchases of property and equipment               (2,782)         (3,870)
                                                  --------        --------
Net cash used in investing activities               (9,478)         (3,046)
                                                  --------        --------

Financing Activities:
  Exercise of warrants and employee stock options      556             600
                                                  --------        --------
Net cash provided by financing activities              556             600
                                                  --------        --------

Effect of foreign currency translation
 adjustment on cash and cash equivalents               (59)              9
                                                  --------        --------

Net increase (decrease) in cash and cash
 equivalents                                         2,791          (6,830)

Cash and cash equivalents at beginning of
 period                                              6,565          10,397
                                                  --------        --------
Cash and cash equivalents at end of period        $  9,356        $  3,567
                                                  --------        --------
                                                  --------        --------

Supplemental disclosure of income taxes paid      $    310        $  6,815
                                                  --------        --------
                                                  --------        --------

Supplemental schedule of non cash activities:
   Tax benefit of stock options exercised
     and sold                                     $     27        $    541
                                                  --------        --------
                                                  --------        --------


                            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.  In the opinion of management, 
all the adjustments (consisting of normal recurring adjustments) considered 
necessary for fair presentation have been included.

In February 1997, the Financial Accounting Standards Board issued Statement 
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31, 
1997. At that time, the Company will be required to change the method 
currently used to compute earnings per share and to restate all prior 
periods.  Under the new requirements for calculating primary earnings per 
share, the dilutive effect of stock options will be excluded.  The change in 
method is expected to have no effect on primary earnings per share for the 
quarter or nine months ended September 30, 1997.  The change in method is 
expected to have no effect on primary earnings per share for the quarter 
ended September 30, 1996 and an increase in primary earnings per share for 
the nine months ended September 30, 1996 of $0.02 per share.  The impact of 
Statement 128 on the calculation of fully diluted earnings per share for 
these quarters is not expected to be significant.

The results of operations for the nine month period ending September 30, 1997 
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, 1996.

Note B - Inventories (in Thousands)

Inventories consist of:
                                        Sept. 30,       Dec. 31,
                                           1997           1996
                                        ---------       --------
   Raw materials                         $ 4,475        $ 6,138
   Work in process                         2,334          2,308
   Finished products                       5,347         13,530
   Demonstration systems                   3,369          3,597
                                         -------        -------
                                         $15,525        $25,573
                                         -------        -------
                                         -------        -------

Note C - Accrued Expenses (in Thousands)

Included in accrued expenses are the following:

                                        Sept. 30,       Dec. 31,
                                           1997           1996
                                        ---------       --------
      Accrued sales commissions           $  865         $  681
      Accrued property taxes                 573            631
      Accrued vacation expense               815            538
      Other (individually less than
       5% of current liabilities)          1,325          1,392
                                          ------         ------
                                          $3,578         $3,242
                                          ------         ------
                                          ------         ------

                                      -7-
<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, including 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:

                                   Three Months Ended   Nine Months Ended
                                   ------------------   -----------------
                                      September 30,       September 30,
                                      -------------       -------------
                                      1997    1996        1997    1996
                                      ----    ----        ----    ----
Net sales                             100.0%  100.0%     100.0%  100.0%
Cost of sales                          59.9    52.4       57.8    51.4
                                      -----   -----      -----   -----
Gross profit                           40.1    47.6       42.2    48.6
Sales and marketing expenses           29.9    20.5       30.8    20.4
Research and development expenses      10.0     9.5       11.2     8.3
General and administrative expenses     4.5     2.9        5.0     2.9
                                      -----   -----      -----   -----
Operating income (loss)                (4.3)   14.7       (4.8)   17.0
Interest income, net                    1.7     0.6        1.6     0.7
                                      -----   -----      -----   -----
Income (loss) before income taxes      (2.6)   15.3       (3.2)   17.7
Income taxes                           (1.0)    5.8       (1.2)    6.7
                                      -----   -----      -----   -----
Net income (loss)                      (1.6)%   9.5%      (2.0)%  11.0%
                                      -----   -----      -----   -----
                                      -----   -----      -----   -----

Switching product sales                41.3%   14.9%      37.7%   11.4%
Shared bandwidth hub sales             50.2    78.2       55.4    81.9
Other sales                             8.5     6.9        6.9     6.7
                                      -----   -----      -----   -----
Net sales                             100.0%  100.0%     100.0%  100.0%
                                      -----   -----      -----   -----
                                      -----   -----      -----   -----


Domestic sales                         71.0%   85.6%      72.0%   86.1%
Export sales to:
  Europe                                7.5     7.7        8.3     7.7
  Canada                                3.7     2.7        3.6     3.0
  Asia                                 16.5     3.2       13.9     2.5
  Latin America                         1.3     0.8        2.2     0.7
                                      -----   -----      -----   -----
Net sales                             100.0%  100.0%     100.0%  100.0%
                                      -----   -----      -----   -----
                                      -----   -----      -----   -----

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

RESULTS OF OPERATIONS

     NET SALES.  Net sales for the quarter and nine months ended September 
30, 1997 decreased to $26.2 million and $74.3 million, respectively, compared 
to $31.3 million and $91.8 million, respectively, for the same periods of 
1996 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.

                                      -8-
<PAGE>

     Export sales for the quarter and nine months ended September 30, 1997 
increased to $7.6 million and $20.8 million, respectively, compared to $4.5 
million and $12.7 million, respectively, for the same periods of 1996 
primarily due to growth in export sales to the Asian region.

     Sales to Electronic Data Systems Corporation ("EDS") were 17.1% and 
15.4%, respectively, of net sales during the quarter and nine months ended 
September 30, 1997, compared to 10.5% and 20.9%, respectively, of net sales 
for the same periods of 1996. Sales to Sapura Holdings Sdn. Bhd. ("Sapura") 
were 12.3% and 9.6%, respectively, of net sales during the quarter and nine 
months ended September 30, 1997.  Sales to AT&T Corp. ("AT&T") were 1.9% and 
2.6%, respectively, of net sales during the quarter and nine months ended 
September 30, 1997, compared to 17.3% and 14.8%, respectively, of net sales 
for the same periods of 1996.  Direct net sales to various agencies of the 
U.S. Government were 14.0% and 12.5%, respectively, of net sales during the 
quarter and nine months ended September 30, 1997, compared to 20.2% and 
13.8%, respectively, of net sales for the same periods of 1996.  In addition, 
a portion of the Company's sales to EDS, AT&T and other corporations were 
resold by those organizations to various agencies of the U.S. Government.

     GROSS PROFIT.  Gross profit decreased to $10.5 million or 40.1% of net 
sales for the third quarter of 1997 compared to $14.9 million or 47.6% of net 
sales for the third quarter of 1996.  Gross profit decreased to $31.3 million 
or 42.2% of net sales for nine months ended September 30, 1997 compared to 
$44.6 million or 48.6% of net sales for the same period of 1996.  Gross 
profit as percentages of net sales in the quarter and nine months ended 
September 30, 1997 were impacted by several factors, including a decline in 
the net realizable value of certain prior generation products, product mix 
and lower sales volumes.  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 $7.8 
million or 29.9% of net sales for the third quarter of 1997 from $6.4 million 
or 20.5% of net sales for the third quarter of 1996.  Sales and marketing 
expenses increased to $22.9 million or 30.8% of net sales for nine months 
ended September 30, 1997 compared to $18.7 million or 20.4% of net sales for 
the same period of 1996.  The increase in sales and marketing expense was 
primarily due to higher levels of staffing in sales, marketing and technical 
support and associated costs.  The Company 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 decreased 
to $2.6 million or 10.0% of net sales for the third quarter of 1997 from $3.0 
million or 9.5% of net sales for the third quarter of 1996. Research and 
development expenses in the third quarter of 1996 were impacted by the 
development and testing of new switching products introduced by the Company 
in September of 1996.
     
     Research and development expenses increased to $8.3 million or 11.2% of 
net sales for nine months ended September 30, 1997 compared to $7.6 million 
or 8.3% of net sales for the same period of 1996.  The increase in research 
and development expense was primarily due to an increase in the number of 
development personnel and increased costs related to the development and 
testing of additional switching products.  The Company expects to continue to 
invest in research and development activities in the future in an effort to 
broaden its family of switching products.

                                      -9-
<PAGE>

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses 
increased to $1.2 million or 4.5% of net sales for the third quarter of 1997 
from $0.9 million or 2.9% of net sales for the third quarter of 1996. General 
and administrative expenses increased to $3.7 million or 5.0% of net sales 
for nine months ended September 30, 1997 compared to $2.7 million or 2.9% of 
net sales for the same period of 1996.  As the Company continues to expand 
its domestic and foreign operations, general and administrative expenses are 
expected to increase in amount, but may vary as a percentage of net sales in 
the future.

     INTEREST.  Net interest income increased to $0.4 million and $1.2 
million, respectively, for the quarter and nine months ended September 30, 
1997 compared to $0.2 million and $0.7 million, respectively, for the same 
periods of 1996. 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 remained constant 
at 38.0% for the quarter and nine months ended September 30, 1997 compared to 
the same periods of 1996.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of liquidity at September 30, 1997 were 
$9.4 million of cash and cash equivalents, $20.9 million of short-term 
investments, $4.7 million of highly liquid investments with a stated maturity 
beyond one year and an available line of credit.  As of September 30, 1997, 
working capital was $53.6 million compared to $54.5 million as of December 
31, 1996.

     Cash flows provided by operations for the first nine months of 1997 were 
$11.8 million, primarily due to a decrease in inventory and accounts 
receivable balances and an increase in payables partially offset by a net 
loss for the period.  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 nine months of 1997 
consisted of net purchases of short-term and long-term investments of $6.7 
million, and property and equipment purchases of $2.8 million.

     Cash provided by financing activities in the first nine months of 1997 
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 1997 the Company funded its operations 
solely through cash flow from operations.  In April 1997, the Company renewed 
its unsecured bank line of credit agreement and increased the maximum 
available borrowings under the credit facility to $15.0 million.  Borrowings 
under this line are subject to certain limitations and conditions, including 
the maintenance of certain financial ratios such as debt-to-equity and fixed 
charge coverage ratios. Borrowings on this line accrue interest at prime with 
interest due monthly and principal due April 12, 1999.  As of September 30, 
1997, the Company had no borrowings outstanding under its bank credit 
facility.

     The Company believes that its cash, cash equivalents and investment 
balances, cash expected to be generated from operations and the availability 
of borrowings under its bank credit facility will provide sufficient cash 
resources 

                                     -10-
<PAGE>

to finance its operations and currently projected capital expenditures 
through at least the next twelve months.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

As noted above, the foregoing discussions may include forward-looking 
statements that involve risks and uncertainties.  In addition to those 
factors discussed elsewhere in this 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 and switches 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 
and switches 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 products will gain market acceptance.  Many networking companies, 
including Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. 
("Cabletron"), Bay Networks, Inc.("Bay Networks"), FORE Systems, Inc. ("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.  In addition, 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.  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.

Cisco, Cabletron, Bay Networks, FORE Systems and other competitors have 
recently acquired several networking 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 

                                     -11-
<PAGE>

have the effect of limiting the Company's access to commercially significant 
technologies.  Further, the business combinations and acquisitions in the 
networking 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.

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 Company believes that the market for 
shared bandwidth intelligent hubs, sales of which have represented the 
majority of the Company's net sales over the past several years, decreased 
over the past several quarters 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 key 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 often 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 an adverse effect on 
the Company's business and operating results.

THIRD-PARTY PRODUCTS.  The Company believes that it is beneficial to work 
with third parties with complementary technologies to broaden the appeal of 
the Company's switches and intelligent hub 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 and 
ATM switches from FORE Systems.  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 in order to offer fully integrated solutions 
to ODS customers.

DEPENDENCE ON KEY CUSTOMERS.  A relatively small number of customers has 
accounted for a significant portion of the Company's revenue. U.S. Government 
agencies and strategic network integrators, such as EDS, which purchase the 
Company's products for internal use and offer the Company's products for 
resale, 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 and 

                                     -12-
<PAGE>

others for U.S. Government networking projects and corporate networking 
installations.  Any meaningful 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 29% of 
the Company's revenue for the three months ended September 30, 1997.  The 
Company intends to expand its international presence and 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 between January 1, 1997 and September 30, 1997 in 
Malaysia and certain other countries could adversely affect demand for the 
Company's products in those countries.  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 are 
dependent, in part, upon its proprietary technology.  The Company does not 
hold any issued patents and currently relies on a combination of contractual 
rights, trade secrets and copyright laws to establish and protect its 
proprietary rights in its products.  There can be no assurance that the steps 
taken by the Company to protect its intellectual property will be adequate to 
prevent misappropriation of its technology or that the Company's competitors 
will not independently develop technologies that are substantially equivalent 
or superior to the Company's technology.

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.

GENERAL.  Sales of networking products fluctuate, from time to time, based on 
numerous factors, including customers' capital spending levels and general 
economic conditions.  There can be no assurance as to the rate or extent of 
the growth of the market for network intelligent hubs and switches 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.

                                     -13-
<PAGE>
                                       
                        PART II - OTHER INFORMATION

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, 1997.


                                       -14-
<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: November 13, 1997         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)










                                     -15-
<PAGE>

                                 EXHIBIT INDEX

EXHIBIT
-------
     11   Schedule of Computation of Per Share Earnings

     27   Financial Data Schedule