Drosophila olfactory sensory hairs ("sensilla") typically house two olfactory receptor neurons (ORNs) which can laterally inhibit each other via electrical ("ephaptic") coupling. ORN pairing is highly stereotyped and genetically determined. Thus, olfactory signals arriving in the Antennal Lobe (AL) have been pre-processed by a fixed and shallow network at the periphery. To uncover the functional significance of this organization, we developed a nonlinear phenomenological model of asymmetrically coupled ORNs responding to odor mixture stimuli. We derived an analytical solution to the ORNs’ dynamics, which shows that the peripheral network can extract the valence of specific odor mixtures via transient amplification. Our model predicts that for efficient read-out of the amplified valence signal there must exist specific patterns of downstream connectivity that reflect the organization at the periphery. Analysis of AL→Lateral Horn (LH) fly connectomic data reveals evidence directly supporting this prediction. We further studied the effect of ephaptic coupling on olfactory processing in the AL→Mushroom Body (MB) pathway. We show that stereotyped ephaptic interactions between ORNs lead to a clustered odor representation of glomerular responses. Such clustering in the AL is an essential assumption of theoretical studies on odor recognition in the MB. Together our work shows that preprocessing of olfactory stimuli by a fixed and shallow network increases sensitivity to specific odor mixtures, and aids in the learning of novel olfactory stimuli. Work led by Palka Puri, in collaboration with Chih-Ying Su and Shiuan-Tze Wu.