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

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

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

                                   FORM 10-Q


         (Mark One)
[ 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 NO. 0-11630

                     INTELECT COMMUNICATIONS SYSTEMS LIMITED
             (Exact name of registrant as specified in its charter)


                    BERMUDA                                     N/A
          (State or other jurisdiction of                    (IRS Employer
           incorporation or organization)                 Identification No.)

                          REID HOUSE, 31 CHURCH STREET
                                HAMILTON, BERMUDA
                                      HM12
               (Address of principal executive offices, zip code)

                                 (441) 295-8639
              (Registrant's telephone number, including area code)

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

     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 __

     There were 14,132,617  shares of the  registrant's  Common Stock, par value
     $.01 per share, outstanding on October 31, 1996.

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

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




                     INTELECT COMMUNICATIONS SYSTEMS LIMITED

                                      INDEX



<TABLE>
<CAPTION>

                                                                                                              PAGE
      <S>        <C>                                                                                             <C>
      PART I     FINANCIAL INFORMATION

      ITEM 1     FINANCIAL STATEMENTS

                 Consolidated Balance Sheets of the Company                                                       2
                  at September 30, 1996 (unaudited) and December 31, 1995

                 Consolidated Statements of Operations of the Company                                             3
                  (unaudited) for the three and nine months ended September 30, 1996 and 1995

                 Consolidated Statements of Cash Flows of the Company                                             4
                  (unaudited) for the nine months ended September 30, 1996 and 1995

                 Notes to the Consolidated Financial Statements                                                   5

      ITEM 2     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                                                8
                  CONDITION AND RESULTS OF OPERATIONS

      PART II    OTHER INFORMATION

      ITEM 6     EXHIBITS AND REPORTS ON FORM 8-K                                                                12

                 SIGNATURES                                                                                      12

</TABLE>



 


PART I - FINANCIALINFORMATION


<TABLE>
<CAPTION>
                                   INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
                                                  CONSOLIDATED BALANCE SHEETS

                                                                                         (Thousands of U.S. Dollars)
                                                                                 (Unaudited)
                                                                                 SEPTEMBER 30                    December 31
                                                                                     1996                           1995
                                                                              -------------------             ------------------
<S>                                                                            <C>                             <C>             
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                 $           4,079               $         15,039
     Marketable securities                                                                    93                              -
     Accounts receivable                                                                   2,260                          1,375
     Inventories                                                                           3,052                          2,537
     Prepaid expenses                                                                        394                            406
     Other current assets                                                                    429                              -
     Loan receivable                                                                           -                            600
                                                                              -------------------             ------------------
                                                                                          10,307                         19,957
PROPERTY AND EQUIPMENT - NET                                                               5,151                          1,839 
EXCESS OF COST OVER NET ASSETS OF COMPANIES ACQUIRED                                      18,720                          8,685
SOFTWARE DEVELOPMENT COSTS                                                                 3,386                              -
DEFERRED FINANCING COSTS                                                                   1,854                              -
DEFERRED INCOME TAXES                                                                        818                              -
 OTHER INTANGIBLE ASSETS                                                                   4,603                            758
                                                                              -------------------             ------------------
                                                                               $          44,839              $          31,239
                                                                              ===================             ==================


LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                          $           2,482               $          1,680
     Accrued liabilities                                                                   1,639                          1,989
     Net liabilities of discontinued operations                                              400                            476
     Current installments of obligations under capital leases                                126                            145
     Current maturities of long-term debt                                                  3,848                          1,041
                                                                              -------------------             ------------------
                                                                                           8,495                          5,331

LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES,
     net of current maturities                                                               195                            200
LONG-TERM DEBT, net of current maturities                                                  3,730                            168
CONVERTIBLE DEBENTURES                                                                    10,128                              -
                                                                              -------------------             ------------------
                                                                                          22,548                          5,699
                                                                              -------------------             ------------------

SHAREHOLDERS' EQUITY:
     Common shares, $0.01 par value,
          80,000,000 shares authorized.
          13,794,055 issued and outstanding at September 30,
          1996; (December 31,1995 - 11,385,117)                                              138                            114
     Share premium                                                                        23,724                         11,673
     Unrealized gain on marketable securities                                                 39                              -
     Retained earnings (deficit) - since November 1, 1992                                 (1,610)                        13,753
                                                                              -------------------             ------------------
                                                                                          22,291                         25,540
                                                                              -------------------             ------------------
                                                                               $          44,839               $         31,239
                                                                              ===================             ==================
</TABLE>



                                       2




<TABLE>
<CAPTION>
                                   INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                         (Thousands of U.S. Dollars, except share data)
                                                                                           (Unaudited)
                                                                       Three Months Ended                Nine Months Ended
                                                                          September 30                     September 30
                                                                  -----------------------------     ----------------------------
                                                                      1996             1995             1996               1995
                                                                      ----             ----             ----               ----
<S>                                                                <C>              <C>              <C>             <C>       
STATEMENT OF OPERATIONS
REVENUES:
     Net sales                                                     $       445      $    1,176       $     3,670     $    1,789
     Services                                                            1,470               -             3,533              -
     Interest and other income                                             126              52               417             99
                                                                  -------------     -----------     -------------    -----------
                                                                         2,041           1,228             7,620          1,888
                                                                  -------------     -----------     -------------    -----------
COSTS AND EXPENSES:
     Cost of sales                                                       2,616             846             7,616          1,350
     Selling, general and administrative                                 5,131           1,183            12,662          1,786 
     Engineering and development                                         1,114             821             3,107          1,311
     Interest                                                              459              39               626             41
     Equity in loss of investee                                              -               -                 -            280
                                                                  -------------     -----------     -------------    -----------
                                                                         9,320           2,889            24,011          4,768
                                                                  -------------     -----------     -------------    -----------

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                    (7,279)          (1,661)          (16,391)        (2,880)

INCOME TAX BENEFIT (VALUATION ALLOWANCE)                               (1,215)               -             1,046              -
                                                                  -------------     -----------     -------------    -----------
LOSS FROM CONTINUING OPERATIONS                                        (8,494)          (1,661)          (15,345)        (2,880)
                                                                       
DISCONTINUED OPERATIONS:
     Income (loss) from discontinued operations                           (9)            1,233               (18)         2,307
                                                                  -------------     -----------     -------------    -----------
LOSS BEFORE EXTRAORDINARY ITEM                                         (8,503)            (428)          (15,363)          (573)
                                                                                                            

EQUITY IN EXTRAORDINARY GAIN OF INVESTEE                                    -               -                 -             646
                                                                  -------------     -----------     -------------    -----------
NET INCOME (LOSS) FOR PERIOD                                      $    (8,503)      $     (428)      $   (15,363)    $       73
                                                                  =============     ===========     =============    ===========

EARNINGS PER SHARE
PRIMARY AND FULLY DILUTED EARNINGS
     INCOME (LOSS) PER SHARE

          Continuing operations                                   $     (0.63)      $   (0.14)      $     (1.14)     $    (0.25)
                                                                                           
          Discontinued operations                                 $         -       $    0.10       $         -      $     0.20
                                                                  -------------     -----------     -------------    -----------

          Loss before extraordinary item                          $     (0.63)      $   (0.04)      $     (1.14)     $    (0.05)
                                                                  -------------     -----------     -------------    -----------

          Extraordinary item                                      $         -       $        -      $          -     $     0.06
                                                                  -------------     -----------     -------------    -----------

          Net income (loss) for period                            $      (0.63)     $   (0.04)      $     (1.14)     $     0.01
                                                                  =============     ===========     =============    ===========
WEIGHTED AVERAGE NUMBER OF SHARES AND COMMON STOCK
     EQUIVALENTS OUTSTANDING (IN THOUSANDS)                             13,547          11,939            13,499         11,616
                                                                  =============     ===========     =============    ===========

</TABLE>

                                       3




<TABLE>
<CAPTION>
                   INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                      (Thousands of U.S. Dollars, except share data)
                                                                                                       (Unaudited)
                                                                                              Nine Months Ended September 30
                                                                                   -------------------------------------------------
                                                                                              1996                    1995
                                                                                              ----                    ----
<S>                                                                                      <C>                       <C>           
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for period                                                             $       (15,363)          $          73
                                                                                                                   
Adjustments to reconcile net income to net cash used in operating activities:
     Equity in income of investee - net                                                                 -                   (366)
     Depreciation and amortization                                                                 2,525                     367
     Deferred tax benefit                                                                         (1,046)                      -
     (Income) loss from discontinued operations                                                       18                  (2,722)
     Foreign exchange translation                                                                     14                       -
     Noncash compensation                                                                            380                       -
     Noncash financing costs                                                                         207                       -
     Noncash compensation on acquisition of Mosaic Information Technologies Inc.                     500                       -
     Noncash interest                                                                                251                     (35)
                                                                                                                            
Changes in operating assets and liabilities:
     Accounts receivable                                                                           (251)                    (208)
     Inventories                                                                                   (208)                    (678)
     Other assets                                                                                  (362)                    (106)
     Software development costs                                                                  (3,392)                      -
     Deferred financing  costs                                                                   (1,201)                      -
     Accounts payable and accrued liabilities                                                       (24)                     387
     Net liabilities of discontinued operations                                                     (76)                       9
     Noncash adjustment to goodwill                                                                 (41)                     294
                                                                                      -------------------     -------------------
Net cash used in operating activities                                                           (16,869)                  (2,985)
                                                                                      -------------------     -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Investment in discontinued operation                                                              -                    (678)
     Capital expenditures                                                                        (3,338)                    (230)
     Purchase of marketable securities                                                              (55)                       -
     Investment in and advances to Intelect                                                           -                     (499)
     Investment in other assets                                                                  (1,582)                    (406)
     Loan receivable                                                                                600                        -
     Proceeds on sale of fixed assets                                                                57                        2
     Acquisition of Intelect, Inc.                                                                    -                     (632)
     Acquisition of Intelect Europe Limited.                                                          -                     (391)
     Acquisition of DNA Enterprises, Inc.                                                        (3,010)                       -
     Acquisition of Mosaic Information Technologies Inc.                                         (2,004)                       -
                                                                                       -------------------     -------------------
Net cash used in investing activities                                                            (9,332)                  (2,834)
                                                                                       -------------------     -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of convertible debentures, net of deferred financing
     costs                                                                                       13,799                        -
     Proceeds from issuance of notes payable                                                          -                    9,880
     Payments on notes payable                                                                     (880)                  (6,430)
     Proceeds from issuance of capital leases                                                        55                       10
     Payments on capital lease obligations                                                          (84)                     (44)
     Payment of long-term debt                                                                     (122)                       -
     Proceeds from issuance of common shares                                                       2,473                     665
     Quasi-reorganization                                                                              -                      45
                                                                                      -------------------     -------------------
Net cash provided by financing activities                                                         15,241                   4,126
                                                                                      -------------------     -------------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                                        (10,960)                 (1,693)
CASH AND CASH EQUIVALENTS, beginning of period                                                    15,039                   2,555
                                                                                      -------------------     -------------------
CASH AND CASH EQUIVALENTS, end of period                                              $            4,079      $              862
                                                                                      ===================     ===================
</TABLE>


                                       4


                     INTELECT COMMUNICATIONS SYSTEMS LIMITED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 1996


BASIS OF PRESENTATION

     The accompanying  consolidated  financial  statements have been prepared by
the Company  without  audit in accordance  with  generally  accepted  accounting
principles for interim  financial  statements and with instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management,  all adjustments
(consisting only of normal recurring accruals)  considered  necessary for a fair
presentation have been included.

     The accompanying  consolidated  financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting  principles and,  therefore,  should be read in conjunction  with the
audited financial statements included in the Company's Transition Report on Form
10-K as at December 31, 1995.

RESTATEMENTS

     During  1995,  the Company  changed its fiscal year end to December 31 from
October 31. Accordingly,  the Company has filed a Transition Report on Form 10-K
for the  transition  period  from  November  1, 1995 to  December  31, 1995 (the
"Transition  Period").  Going  forward,  the Company will report results for the
quarters ending March 31, June 30, September 30 and December 31.

     On  October  31,  1995 the  Company  sold  its  prior  principal  operating
subsidiary,  Savage Corporation  ("Savage").  Accordingly,  Savage's results are
accounted  for  as  discontinued   operations  in  the  accompanying   financial
statements.

INCOME TAXES

     The  Company  provides  for income  taxes in interim  periods  based on the
estimated  effective  income tax rate of the complete fiscal year. An income tax
benefit is computed on the pre-tax loss of  consolidated  entities  according to
applicable taxing  jurisdictions based on current tax law. Deferred taxes result
from the future tax consequences  associated with temporary  differences between
the amount of assets and liabilities  recorded for tax and financial  accounting
purposes.  A  valuation  allowance  for  deferred  tax assets is recorded to the
extent the  Company  cannot  determine,  in  accordance  with the  provision  of
Statement of  Financial  Accounting  Standards  No. 109  "Accounting  for Income
Taxes", that the ultimate  realization of net deferred tax assets against income
is more likely than not.

OTHER INTANGIBLE ASSETS

     Other Intangible Assets include licensed  technology of $3,500,000 which is
carried at its present value with an imputed interest rate of 7% on the deferred
balance  and will be  amortized  over a three year  period to cost of goods sold
based on anticipated revenue generation.

ACQUISITIONS

     The Company concluded the acquisitions of DNA Enterprises,  Inc. ("DNA") on
February 13, 1996 and Mosaic Information  Technologies Inc.  ("Mosaic") on March
29, 1996. Both acquisitions have been accounted for as purchases and accordingly
the accompanying financial statements include the results of DNA and Mosaic from
their  respective  acquisition  dates.  The  excess of  purchase  price over the
estimated fair values of the net assets  acquired has been recorded as goodwill,
which is being amortized over ten years.



                                       5


     The  estimated  fair  values of assets  and  liabilities  of Mosaic and DNA
acquired are  summarized  below.  Adjustments  made during the second quarter to
certain Mosaic assets and Goodwill are included (thousands of U.S. Dollars):

<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30
                                                                            -------------------------------------
                                                                                MOSAIC                 DNA
                                                                                ------                 ---
              <S>                                                           <C>                   <C>
              Cash                                                          $            27       $            3
              Accounts receivable
                                                                                         55                  621
              Inventory
                                                                                        245                    -
              Property and equipment
                                                                                         81                  502
              Goodwill
                                                                                      4,640                7,280
              Accounts payable and accruals
                                                                                      (285)                (214)
              Debt
                                                                                       (16)                (180)
                                                                            ----------------     ----------------
                                                                                         
                                                                            $         4,747      $         8,012
                                                                            ================     ================

LONG-TERM DEBT (thousands of U.S. Dollars)

                                                                             SEPTEMBER 30          December 31
                                                                            ----------------     ----------------
                                                                                 1996                 1995
                                                                                 ----                 ----
              Subordinated debentures - at 6% due in five equal
                   annual installments commencing June 1996                  $          215      $           224
              Deferred purchase price payment due in
                   installments on February 1997 and 1998 (i)                         5,000                    -
              Present value of license technology installment
                   payments due in quarterly amounts of $325,000 (ii)                 2,363                    -
              Other                                                                       -                  985
                                                                            ----------------     ----------------
                                                                                      7,578                1,209
              Less:  current installments
                                                                                    (3,848)              (1,041)
                                                                            ----------------     ----------------
                                                                             $        3,730      $           168
                                                                            ================     ================
</TABLE>

              Notes:

              (i)     Deferred purchase price payments relate to the acquisition
                      of DNA  Enterprises,  Inc., as follows:  (a) $1,000,000 in
                      cash  on  February  13,  1997;  (b)  $400,000  in  cash on
                      February  13,  1998;   (c)  Warrants   issued  to  certain
                      shareholders  of DNA to purchase  300,000 Common Shares at
                      $5.00 per share  February 13, 1996; and (d) Warrants to be
                      issued  to  certain  shareholders  of DNA to  purchase  an
                      additional  300,000  Common  Shares  at $7.00 per share on
                      February  13, 1998.  The Company has agreed to  repurchase
                      the Common  Shares issued  pursuant to the warrants  under
                      (c) and (d) above at prices of $5.00,  $5.50 and $6.00 per
                      share  on the  first,  second  and  third  anniversary  of
                      Closing,  respectively,  at  the  option  of  the  selling
                      shareholders  and  a  liability  of  $3,600,000  has  been
                      accrued in anticipation of this put option.

              (ii)    $3,500,000  of which  $325,000  and  $625,000  was paid in
                      September  and June,  1996,  respectively.  The balance is
                      payable quarterly, in arrears, in installments of $325,000
                      and has been recorded at present value based on an imputed
                      interest rate of 7%.

CONVERTIBLE DEBENTURES

     During  the  second  quarter  ended  June  30,  1996,  the  Company  issued
Convertible Debentures (the "June Debentures") in the aggregate principal amount
of  $5,000,000.  The June  Debentures  were fully  converted into 773,515 Common
Shares as at September 30, 1996.

     During the third  quarter  ended  September  30, 1996,  the Company  issued
Convertible  Debentures  (the "August  Debentures")  in the aggregate  principal
amount of $10,000,000  bearing interest at 7.5%,  payable  quarterly in arrears.
The August  Debentures  mature on August 8, 1998, are redeemable for cash at the
Company's  option  after  August 8, 1997 at 125% of par value for six months and
thereafter at 120% of par value or if the Nasdaq  trading price of the Company's
Common Shares falls below the fixed  conversion  price of $11.0825,  the Company
can redeem at any time for the sum of the product of the number of common shares
of the Company's  U.S.$0.01 par value per share (the "Common  Shares")  issuable
upon conversion at the current Nasdaq trading price.  The August  Debentures are
convertible at the holder's  option into the Common Shares of the Company at the
lower of (i) 85% of the Nasdaq five day closing bid  trailing  average  price of
the  Common  Shares  prior to the  Notice of  Conversion  date or (ii) the fixed
conversion price of $11.0825.  The August Debentures are convertible into Common
Shares at the rate of one-third after October 7, 1996,  one-third after November
6, 1996, and one-third after December 6, 1996.


                                       6


SOFTWARE DEVELOPMENT COSTS

     Capitalization   of   software   development   cost   commences   upon  the
establishment  of   technological   feasibility.   Both  the   establishment  of
technological  feasibility  and the  ongoing  assessment  of  recoverability  of
capitalized  development  costs involve  judgment by management  with respect to
certain external  factors,  including,  but not limited to,  anticipated  future
revenues,  estimated  economic  life and possible  developments  in software and
hardware  technologies.  The  Company  has not  capitalized  any  costs in prior
periods because eligible amounts were immaterial for those periods.  The Company
believes that  technological  feasibility  and future revenue  potential has now
been  established  for  the  Company's  SONETLYNX(TM)  and  CS4  product  lines.
Accordingly,  relevant and eligible  expenditures  for these  products have been
capitalized in the accompanying financial statements.

INVENTORIES

     The components of inventories are as follows (thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30          December 31
                                                                            ----------------     ----------------
                                                                                 1996                 1995
                                                                                 ----                 ----
              <S>                                                           <C>                  <C>
              Raw materials                                                 $         2,187      $         1,554
              Work in progress                                                          232                  544
              Finished goods                                                          1,298                1,169
                                                                            ----------------     ----------------
                                                                                      3,717                3,267
              Less:  allowance for obsolescence                                         665                  730
                                                                            ----------------     ----------------
                                                                            $         3,052      $         2,537
                                                                            ================     ================
</TABLE>

ACCOUNTING FOR WARRANTS

     In October,  1995 the Financial Accounting Standards Board issued Statement
123 ("FAS  123")  "Accounting  for  Stock-Based  Compensation",  which  requires
companies to value all options and  warrants  issued for  compensation  at their
"fair  value" at the date of  issuance.  FAS 123  affects  all  companies  whose
financial  years begin after  December 15, 1995. FAS 123  establishes  financial
accounting and reporting  standards for stock based employee  compensation plans
and encourages,  but does not require,  all entities to adopt a fair value based
method of accounting for employee stock option plans. The Company has elected to
continue  accounting  for  its  stock-based   employee   compensation  plans  in
accordance with the intrinsic value based method of accounting.

     The effect of this new  accounting  standard  is twofold  (i) all  employee
stock options must be valued and disclosed on a pro-forma  basis in note form in
the year end financial  statements and (ii) all warrants and options granted for
services  must be valued on a call option  basis and expensed  accordingly.  The
pricing model used in this calculation,  the Black-Scholes  Model, makes certain
assumptions about the underlying  stock-based  primarily on its past performance
in order to determine future performance.

     During the third quarter of 1996, the Company  issued  certain  warrants to
third parties as partial  payment of financial  advisory fees in connection with
the  issuance  of the August  Debentures.  These  warrants  were  issued as part
payment of a finders  fee and  entitle the holders to purchase a total of 70,063
and 125,000 of the Common  Shares at a price of  $8.56375  per share and $9.5625
per share,  respectively.  Using the  prescribed  Black-Scholes  Model the value
placed on these warrants is $453,000 and $561,000,  respectively. These amounts,
together  with  other debt  issue  costs of  $985,000,  are being  amortized  to
financing  expense over the life of the August  Debentures  or until  conversion
takes place at which time these costs will be debited to paid-in capital.

SUBSEQUENT EVENTS

     On October 7, 1996,  the Company  reached an  agreement  with the  previous
owners of Intelect,  Inc.  (the  "Vendors"),  under which the Vendors  exchanged
their rights to future  "earn-out"  payments of up to $4,000,000  and Debentures
with a remaining  value of $215,000 in exchange for 169,986  Common  Shares plus
$140 cash in lieu of fractional  shares.  This transaction will be accounted for
in  the  fourth   quarter  and  will  result  in  an  increase  in  Goodwill  of
approximately $1,039,000.

     On October 15, 1996 (the "Issuance  Date") the Company issued an additional
$10,000,000 in Convertible  Debentures (the "October Debentures") to the holders
of the June  Debentures.  The October  Debentures  are due on October 15,  1998,
bearing  interest  at 7%, are  redeemable  for cash at the  Company's  option at
117.5% of their face  value and are  convertible  at the  holder's  option  into
common  shares in equal  one-third  amounts of principal  sixty,  ninety and one
hundred  twenty days after the  Issuance  Date at 82.5% of the average  five day
closing bid price on Nasdaq prior to the notice of conversion date.


                                       7


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                     FOR THE PERIOD ENDED SEPTEMBER 30, 1996


RESULTS OF OPERATIONS

     The  Company  is  transitioning  through  a  period  of  consolidating  and
integrating  newly  acquired  operations,  bringing  to  market  innovative  new
products,  implementing  extensive  development  and engineering of advanced new
products,  and expanding Company wide marketing and sales efforts. The costs and
other effects of these programs and activities are adversely  impacting  current
results for the intended purpose of improving  revenues,  operating  performance
and financial results in future reporting periods.

     During the period ended  September  30,  1995,  the Company  completed  its
purchase of Intelect,  Inc. and included the results of Intelect,  Inc. from the
date of acquisition  (April 24, 1995), but had not yet acquired DNA Enterprises,
Inc. ("DNA") or Mosaic Information Technologies Inc., which was renamed Intelect
Visual  Communications  Corp. ("IVC") in October 1996.  Accordingly,  management
does not believe that  comparisons  of the current  period to the same period in
1995 would be meaningful in determining a trend.

     The  following  table  shows the  results  of  operations  for the  periods
indicated as a percentage of net sales, services and other revenues:


<TABLE>
<CAPTION>
                                                                                      (Unaudited)
                                                                Three Months Ended                     Nine Months Ended
                                                                   September 30                          September 30
                                                       -------------------------------------  ------------------------------------
                                                             1996               1995                1996               1995
                                                       -------------------------------------  ------------------------------------
     <S>                                                <C>                <C>                  <C>                <C>
     Net sales, services and other revenues             100.0%             100.0%               100.0%             100.0%
     Cost of sales                                      128.2%              68.9%                99.9%              71.2%
                                                       ------------------ ------------------  -----------------  -----------------
     Gross profit (loss)                                (28.2%)             31.1%                  .1%              28.8%
     Selling, general and administrative                180.6%              77.4%               133.1%              75.3%
     Engineering and development                         54.6%              66.8%                40.8%              69.0%
     Interest expense                                    22.5%               3.2%                 8.2%               2.2%
     Amortization and depreciation                       70.9%              19.0%                33.0%              19.3%
     Equity in loss of investee                            .0%                .0%                  .0%              14.8%
                                                       ------------------ ------------------  -----------------  -----------------
     Operating loss before income taxes                (356.8%)           (135.3%)             (215.2%)           (151.8%)
     Income (loss) from discontinued operations           (.4%)            100.4%                 (.2%)            121.6%
                                                       ------------------ ------------------  -----------------  -----------------
     Loss before extraordinary item                    (357.2%)            (34.9%)             (215.4%)            (30.2%)
     Equity in extraordinary gain of investee              .0%                .0%                  .0%              34.0%
                                                       ------------------ ------------------  -----------------  -----------------
                                                      
     Income (loss) before income taxes                 (357.2%)            (34.9%)             (215.4%)              3.8%
                                                       ------------------ ------------------  -----------------  -----------------

</TABLE>
NET SALES AND SERVICES

     Net sales and services  revenue for the three months  ended  September  30,
1996  increased  62.8% to $1,915,000  from  $1,176,000 in the three month period
ended September 30, 1995. For the three months ended September 30, 1996 and 1995
respectively,  these  sales were  comprised  of (i)  SONETLYNX(TM)  fiber  optic
multiplexer  product 11.8% and 0%, (ii) S4(TM) product of 5.3% and 39.5%,  (iii)
videoconferencing  sales of 2.2% and 0% through IVC from the date of acquisition
(March 29, 1996);  (iv)  engineering  service fees of 76.8% and 0%, for services
provided by DNA; (v) information security products 2.5% and 7.1%, distributed by
the Company's U.K. based value added reseller,  and (vi) other products 1.5% and
53.4%,  consisting  primarily  of  analog  air  traffic  control  communications
switching systems.

     Initial  releases of the  Company's  new  SONETLYNX(TM)  product  line were
introduced during the second quarter of 1996. Customer demonstrations, tests and
initial  orders of the OC-1 version are  underway  into the second half of 1996.
Primary emphasis is being placed upon establishing distribution arrangements and
sales channels. Increased sales are currently expected during the fourth quarter
of 1996 and upon completion of the OC-3 version  targeted for release during the
fourth quarter of 1996.

     The sales cycle for the Company's new digital switch product line,  S4(TM),
effectively  commenced with customer  acceptance for its first major  commercial
installation in Iceland.  This installation went "live" during the third week of
July and is functioning on a stand alone basis,  controlling  North Atlantic air
traffic in a 4.2 million square mile air space.


                                       8


     The Company released its LANScape(TM)  videoconferencing product on October
17,  1996.  Installations  are being  made at  client  locations  in the  fourth
quarter,  initially as Beta sites.  Reseller  agreements have been signed with a
number of large and  experienced  network  systems  integrators  and value added
re-sellers to distribute and install this product line.  The Company  expects to
release its second product, named Vubridge(TM), in the fourth quarter of 1996.

     Engineering  services  continued at a level similar to the second  quarter.
DNA  announced  its first  hardware  products,  two board level  digital  signal
processing (DSP) systems. In October a global OEM agreement was announced with a
leading  company  in the DSP  accelerator  board  market in order to  provide an
immediate sales channel for the products.

     Information  security  products are sold primarily to the military  market,
which is influenced by unpredictable  events and budgetary  constraints that can
cause  significant  variances  in sales  from  quarter  to  quarter.  Due to the
unpredictability  of these  product  sales,  the  Company has decided to curtail
selling activity in this area and, accordingly, the Company has refocused its UK
operation  to be a  support  organization  for its core  products  for  European
markets.

GROSS PROFIT

     The Company's  gross loss of $575,000 or (28.2%) for the three months ended
September  30,  1996 was a decrease of  $957,000  compared to a gross  margin of
$382,000 or 31.1% for the three  months  ended  September  30,  1995.  The third
quarter 1996 result was below normal operating  margins due to  under-absorption
of  operating  costs and the initial  placement  or sale of new products as test
modules  with  low  or  negative  margins.  In  addition,  the  anticipation  of
increasing  sales in the  short-term and the  development  of scheduled  product
releases has  necessitated  the hiring and maintenance of core personnel in both
operations  (manufacturing)  and sustaining  engineering.  Management  currently
expects that higher sales  volumes in future  quarters  should  result in higher
margins.

     The Company's  hardware and software design and development  subsidiary DNA
has  currently  committed  over  one-half  of  its  personnel  resources  to the
Company's  CS4 project in order to expedite the  completion  of a  demonstration
prototype of the CS4,  scheduled  for  November,  1996.  DNA's profit on the CS4
project is eliminated on consolidation.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A)

     For the three months ended September 30, 1996 SG&A expenses,  not including
Amortization and Depreciation (below) were up $2,735,000 at $3,685,000 or 180.6%
from $950,000 or 77.4% compared with the three months ended  September 30, 1995.
This  increase is due in part to the  acquisitions  of new  business,  financing
costs and ramp up in staffing for the selling,  marketing and  manufacturing  of
the  Company's  products.  Selling and  marketing  expenses for the three months
ended September 30, 1996 increased  284.4% to $1,795,000  compared with $467,000
for the same period in 1995. G&A expenses were up 163.96% at $1,890,000 compared
with $716,000 for the same period 1995.

     Marketing and selling expenses relating to the rollout of the SONETLYNX(TM)
product line and initial  marketing for the CS4 in advance of sales  amounted to
$957,000.   Marketing   and  selling   expenses   relating   to  the   Company's
videoconferencing  product  line in  advance  of  sales  amounted  to  $673,000.
Marketing  and  selling  expenses  relating  to the  market  development  of the
Company's  products into the European market  amounted to $165,000.  Included in
the  marketing  and  selling  expenses  above,  are  $86,000  and  $262,000  for
advertising and trade shows, respectively.

     Prior year  administrative  expenses  reflect  traditional  costs primarily
associated  with the Company's  status as a publicly  traded company and related
reporting  requirements.  However,  legal  and  audit  expenses  have  increased
substantially  from prior years and are expected to continue at a similar level.
Deferred  financing  costs  associated  with the Company's  issuance of the June
Debentures and August Debentures amounted to $328,000 and $985,000, respectively
in cash expenditures, and $1,058,000 and $1,014,000 in non-cash costs related to
the issuance of warrants pursuant to FAS 123, which are being amortized over the
life of the June  Debentures and August  Debentures.  The June  Debentures  were
fully converted by September 30, 1996 and all  un-amortized  finance and warrant
costs totaling $1,211,000 have been debited to paid-in capital.

INTEREST EXPENSE

     Interest  expense  increased  to $459,000 or 22.5% from $39,000 or 3.2% for
the three months ended September 30, 1996 and 1995  respectively.  The amount of
interest  expense in the current  quarter  represents  interest on (i) a line of
credit of $300,000 to finance receivables which bears interest at 12% generating
$4,000;  (ii) Debentures owed to the previous  owners of Intelect,  Inc.,  which
bear interest at 6% generating  $9,000,  (iii) Convertible  Debentures issued by
the Company in June and August,  1996,  which bear  interest at 7.5%  generating
$183,000;  (iv)  licensed  technology  at a net present  value of 7%  generating
$46,000;  (v) non-cash interest of $83,000 being the 17.5% redemption premium on
the balance of the June  Debentures,  which were  converted in full by September
30, 1996 with the redemption  amount credited to paid-in capital;  (vi) non-cash
interest of $128,000 (the redemption premium of the


                                       9


August  Debentures),  which is the sum of the  product  of the  number of common
shares issuable upon  conversion at the quarter end Nasdaq trading price,  which
is being  amortized over the life of the August  Debentures  pursuant to APB 21;
and (vii) capital leases of $6,000.

AMORTIZATION AND DEPRECIATION

     Amortization  and  depreciation is included in SG&A and is comprised of the
following (thousands of U.S. Dollars):

<TABLE>
<CAPTION>
                                                                          Three Months Ended              Nine Months Ended
                                                                             September 30                   September 30
                                                                     ------------------------------ ------------------------------
                                                                         1996            1995           1996            1995
                                                                         ----            ----           ----            ----

              <S>                                                    <C>            <C>            <C>              <C>          
              Depreciation of Property & Equipment                   $         199  $           79 $          539   $         106
              Amortization of Goodwill                                       1,212             154          1,901             261
              Technology Amortization
                                                                                35               -             85               -

                                                                     -------------- --------------- --------------  --------------
                                                                     $       1,446  $          223  $       2,525   $         367
                                                                     ============== =============== ==============  ==============

</TABLE>

     Depreciation  of property and  equipment  has  increased in part due to the
recent  acquisitions.  Goodwill is amortized over periods from 10 - 15 years and
has  also  increased  due  to  the  acquisitions  of  DNA  and  IVC.  Technology
amortization relates to intellectual properties purchased in 1995 and 1996.

     During the third  quarter  1996,  the  Company  wrote off its  goodwill  in
Intelect Europe Limited ("IEL") totaling $779,000. A significant  contraction in
the market for military electronic  equipment in the UK dramatically reduced the
viability of the Company's information security product lines. Accordingly,  the
Company  has  downsized  its  operations  (based  in  Chesterfield,  Derbyshire,
England) and is exploring several disposition  strategies  including the sale of
the product lines to third parties.  The net assets of IEL at September 30, 1996
amounted to  $1,420,000  and the final  disposition  of either the product lines
and/or the net assets may result in an adjustment to this carrying value.

ENGINEERING AND DEVELOPMENT (E&D)

     E&D expenses for the three months ended  September 30, 1996 were $1,114,000
or 54.6% up from  $821,000 or 66.9% for the three  months  ended  September  30,
1995.  The current  quarter  expense is  comprised  primarily of labor costs for
hardware  development and software design not capitalizable under FAS 86 for the
CS4  ($475,000) and  SONETLYNX(TM)  ($388,000)  products in accordance  with the
Company's  policies.  The balance of $251,000 relates to further  development of
the Company's videoconferencing  ($207,000) and S4(TM), ($44,000) products. This
compares with E&D expenses for the same period in 1995 of $553,000  and $268,000
on the S4(TM) and SONETLYNX(TM) products, respectively.

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

     The Company sold Savage  Corporation  ("Savage")  on October 31, 1995.  The
results of Savage are accounted for as discontinued operations and, accordingly,
comparative presentations reflect the Company's equity in the earnings of Savage
for the relevant periods.  This disposition  accounts for the decrease in income
in the three months ended  September 30, 1996 to $9,000 from  $1,233,000 for the
same period in 1995.

INCOME TAX BENEFIT

     The  Company  recorded  a  valuation  allowance  during the  quarter  ended
September  30, 1996 of  $1,215,000  on the U.S.  based  operations  due to sales
activity  falling  below  prior  anticipated  levels.  In light of recent  sales
results, the Company has determined that a valuation allowance is appropriate.

     The  remaining  tax  benefit  reflects a tax rate of 34% and the  Company's
current belief that future  taxable income will be realizable  from reversals of
existing taxable temporary  differences and sales of new and existing  products.
The timing and amount of such future  taxable income may be impacted by a number
of factors,  including those discussed below under "Additional  Factors That May
Affect Future  Results".  To the extent that  estimates of future taxable income
are  reduced or not  realized,  the amount of such  deferred  tax assets and the
Company's effective tax rate may be adversely affected.



                                       10


LIQUIDITY AND CAPITAL RESOURCES

     The Company's working capital  decreased  $12,814,000 at September 30, 1996
to $1,812,000  compared with  $14,626,000  at December 31, 1995 due primarily to
the Company's  acquisitions of DNA and Mosaic and to the funding of E&D programs
and  operating   losses.   The  Company   regularly  reviews  its  cash  funding
requirements  on a  consolidated  basis and attempts to meet those  requirements
through a combination of cash on hand,  cash provided by operations and possible
future public or private debt and/or equity  offerings.  The Company  utilizes a
centralized  corporate  strategy for its cash management  activities and invests
its excess cash in investment grade, short-term, money market instruments.

     The Company believes that the cash proceeds from the issuance of the August
Debentures  and October  Debentures  will be  sufficient  to meet its  operating
capital requirements for the next six months.  However, the Company is dependent
on the sales of its products at normal profit margins  (projected to commence in
the first quarter of fiscal 1997) to produce  positive cash flow from operations
and to fund its future cash  requirements.  Until such sales are  achieved,  the
Company is dependent on the continued sale of its Common Shares (or  convertible
debentures  which can be converted  into Common  Shares) to fund its  short-term
cash needs.  Sales of substantial  amounts of Common  Shares,  or the perception
that these sales could occur,  could adversely affect  prevailing  market prices
for the Common  Shares  and could  impair  the  ability of the  Company to raise
additional  capital  through the sale of its equity  securities  or through debt
financing and may lead to additional dilution of current shareholder  interests,
particularly in the area of earnings per share.

CONTINGENT LIABILITIES

     The  Company is  contingently  liable  for  certain  potential  liabilities
relating  to  its  discontinued  operations.   Specifically,   the  Company  has
indemnified  the  purchaser  of  Savage  against   certain  product   liability,
environmental  clean up  costs  and  other  contractual  liabilities,  including
certain asserted successor liability claims,  customarily assumed on the sale of
a business.  In particular,  the Company has been notified that the purchaser of
Savage  seeks  indemnification  in  connection  with certain  product  liability
claims.  Although the Company believes that it has several defenses available to
it in such a claim, the outcome of such claim cannot be predicted with certainty
at this time. The Company has reserved for all known liabilities and has insured
itself  against  certain  of  the  product  liability  claims.  However,  should
indemnified  claims exceed the related  insurance  coverage  and/or the existing
reserves,  the  Company's  results of operations  and/or its financial  position
could be adversely affected.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

     This Form 10-Q  contains  certain  forward  looking-statements  within  the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the  Securities  Exchange Act of 1934 as amended.  Actual  events and results
could differ materially from those set forth in the forward-looking  statements.
Certain factors that may cause such differences  include worldwide  economic and
political  conditions,  industry  specific  factors,  the  Company's  ability to
maintain access to external financing sources and its financial  liquidity,  the
Company's ability to timely develop and produce  commercially viable products at
competitive  prices,  the  availability  and cost of  components,  the Company's
ability to manage expense levels,  the Company's  ability to manage growth,  the
continued financial strength of the Company's dealers and distributors,  and the
Company's ability to accurately anticipate customer demand.

     The  Company's  future  success  is highly  dependent  upon its  ability to
develop, produce and market products that incorporate new technology, are priced
competitively  and  achieve  significant  market  acceptance.  There  can  be no
assurance  that  the  Company's  products  will be  commercially  successful  or
technically advanced due to the rapid improvements in information technology and
resulting product obsolescence. There is also no assurance that the Company will
be able to deliver commercial quantities of new products in a timely manner. The
success  of new  product  introductions  is  dependent  on a number of  factors,
including market  acceptance,  the Company's  ability to manage risks associated
with product  transitions,  the effective management of inventory levels in line
with  anticipated  product  demand and the timely  manufacturing  of products in
appropriate quantities to meet anticipated demand. Specifically, the Company has
committed approximately $10 million to the development of an advanced generation
of its S4(TM) product for application in public telecommunications networks (the
"CS4").  The Company  currently  estimates  that the CS4 will be  available  for
shipment in the third  quarter of 1997.  The Company  believes that the expected
potential customers for the CS4 include InterExchange  Carriers,  Local Exchange
Carriers,   Wireless,   Personal  Communications  Service,   Competitive  Access
Providers  and, in general,  operators  of Advanced  Intelligent  Networks.  The
Company will be competing with established equipment  manufacturers with greater
financial  resources and more developed channels of distribution.  No assurances
can be given  that the  Company  will be  successful  in  completing  the CS4 on
schedule,  that the Company will be successful in competing in this  environment
or that it will be able to sell sufficient  quantities of the CS4 to recover its
investment or to realize profits.  In addition,  no prediction can be made as to
the affect,  if any, that future sales of common  shares issued  pursuant to the
June and August  Debentures  will have on the market price of the common  shares
prevailing from time to time.


                                       11


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(A)  EXHIBITS.

     4(i)     Form of 7.5% Convertible  Debenture due August 8, 1998 of Intelect
              Communications Systems Limited

     4(ii)    Form of 7%, Series A,  Convertible  Debenture due October 15, 1998
              of Intelect Communications Systems Limited

     4(iii)   Form of 7%, Series B,  Convertible  Debenture due October 15, 1998
              of Intelect Communications Systems Limited

     10(i)    Convertible  Securities  Agreement  dated  August  8,  1996  among
              Intelect Communications Systems Limited and certain
              Investors

     10(ii)   Registration   Rights  Agreement  among  Intelect   Communications
              Systems Limited and certain Investors

     10(iii)  Convertible  Securities  Agreement  dated  October  15, 1996 among
              Intelect  Communications  Systems Limited and Infinity  Investors,
              Ltd. and Seacrest Capital Limited

     10(iv)   Registration   Rights  Agreement  dated  October  15,  1996  among
              Intelect  Communications  Systems Limited and Infinity  Investors,
              Ltd. and Seacrest Capital Limited

     10(v)    Book Entry  Transfer  Agent  Agreement  by and among the  Company,
              Infinity  Investors,  Ltd.,  Seacrest Capital Limited and American
              Stock Transfer & Trust Company

     10(vi)   Offer to  Purchase  the Five Year Six  Percent  (6%)  Subordinated
              Debentures of Intelect, Inc. for an Aggregate of 170,000 Shares of
              Common Stock, $0.01 Par Value, of Intelect  Communications Systems
              Limited  and the  payment  of  Certain  Amounts in Lieu of Issuing
              Fractional Shares, Dated September 6, 1996

     10(vii)  Letter of  Transmittal  to  Accompany  Five Year Six Percent  (6%)
              Subordinated Debentures of Intelect, Inc.

     10(viii) Form of Release in Consideration of Exchange of Property

     11       Calculation of Earnings Per Share

     27       Financial Data Schedule

(B)  REPORTS ON FORM 8-K:

     None

                                   SIGNATURES

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.

                                         INTELECT COMMUNICATIONS SYSTEMS LIMITED
                                                     (Registrant)


Date:      November 13, 1996                       /s/      RHIANON M. PEDRO
           -----------------                       -------------------------
                                                   Rhianon M. Pedro
                                                   Chief Financial Officer
                                                   (principal financial officer)


Date:      November 13, 1996                       /s/      PETER G. LEIGHTON
           -----------------                       --------------------------
                                                   Peter G. Leighton
                                                   President



                                       12