<PAGE>
 
                                 UNITED STATES
                      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 December 31, 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. 1-14196

                            STERLING COMMERCE, INC.
            (Exact name of registrant as specified in its charter)

           DELAWARE                                         75-2623341
(State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization)                      Identification Number)

                   8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100
                             DALLAS, TEXAS  75206
         (Address of principal executive offices, including zip code)

                                (214) 891-8680
             (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
                     -----                  -----       

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

            Title                      Shares Outstanding as of January 15, 1997
----------------------------           -----------------------------------------
Common Stock, $.01 par value                           75,000,000

                                     - 1 -
<PAGE>
 
                         PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

                         Index to Financial Statements

                                                                            Page
                                                                            ----
Sterling Commerce, Inc. Consolidated Balance Sheets at 
        December 31, 1996 and September 30, 1996.........................     3
 
Sterling Commerce, Inc. Consolidated Statements of Income for the 
        Three Months Ended December 31, 1996 and 1995....................     4
 
Sterling Commerce, Inc. Consolidated Statements of Stockholders' 
        Equity for the Three Months Ended December 31, 1996 and 1995.....     5
 
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for the 
        Three Months Ended December 31, 1996 and 1995....................     6
 
Sterling Commerce, Inc. Notes to Consolidated Financial Statements.......     7
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS.......................................    12
 

                          PART II - OTHER INFORMATION

ITEM 5.  OTHER INFORMATION...............................................    16

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K................................    17

                                     - 2 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                   (IN THOUSANDS, EXCEPT SHARE INFORMATION)
                                  (UNAUDITED)

                                  A S S E T S
<TABLE>
<CAPTION>
                                     DECEMBER 31         SEPTEMBER 30
                                        1996                 1996
                                     -----------         ------------
<S>                                  <C>                 <C>
Current assets:
 Cash and cash equivalents.........    $ 79,060            $ 23,484
 Marketable securities.............      11,200              21,203
 Accounts and notes                                                 
  receivable, net..................      59,027              61,292 
 Amounts due from Sterling                                          
  Software.........................       3,050              35,134 
 Deferred income taxes.............       2,507               3,087
 Prepaid expenses and                                               
  other current assets.............       8,133               5,794 
                                       --------            --------
  Total current assets.............     162,977             149,994
                                                  
Property and equipment,                           
 net of accumulated                                                 
 depreciation of $29,872 at                       
December 31, 1996 and                             
 $27,027 at September 30,                         
 1996..............................      47,373              43,199 
                                                  
Computer software, net of                         
 accumulated amortization                                           
 of $45,092 at                                    
December 31, 1996 and                             
 $42,110 at September 30,                         
 1996..............................      34,673              34,404 
                                                  
Excess cost over net                              
 assets acquired, net of                                            
 accumulated amortization                         
 of $3,489 at December 31,                        
 1996 and $3,382 at                               
 September 30, 1996................       9,682               9,789 
                                                  
                                                  
Other assets.......................       5,182               4,294
                                       --------            --------
                                       $259,887            $241,680
                                       ========            ========
 
L I A B I L I T I E S  A N D  S T O C K H O L D E R S '  E Q U I T Y
 
Current liabilities:
 Accounts payable and                                               
  accrued liabilities..............    $ 29,512            $ 34,317 
 Income taxes payable..............       8,509        
 Deferred revenue..................      37,163              38,518
                                       --------            --------
   Total current                                                    
    liabilities....................      75,184              72,835 
                                                      
Deferred income taxes..............      23,420              23,135
Other noncurrent                                                    
 liabilities.......................       7,420               7,523            
                                                      
Stockholders' equity:                                 
 Preferred stock, $.01 par                            
  value; 50,000,000 shares                            
  authorized; no shares                               
  issued and outstanding...........        
 Common stock, $.01 par                               
  value; 150,000,000                 
  shares authorized;                                  
  75,000,000 shares issued                            
  and outstanding..................         750                 750
                                                      
 Additional paid-in capital........      97,780              98,111 
 Retained earnings.................      55,333              39,326  
                                       --------            --------  
   Total stockholders'                                                
    equity.........................     153,863             138,187   
                                       --------            --------   
                                       $259,887            $241,680  
                                       ========            ========   
</TABLE> 

                            See accompanying notes.

                                     - 3 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                             THREE MONTHS
                                          ENDED DECEMBER 31
                                          ------------------
                                            1996      1995
                                          --------  --------
<S>                                       <C>       <C>
Revenue:
 Products...............................   $22,189  $16,063
 Product support........................    15,549   13,477
 Services...............................    32,417   23,127
 Royalties from affiliated companies....     4,614    3,483
                                           -------  -------
                                            74,769   56,150
 
Costs and expenses:
 Cost of sales:
  Products and product support..........     7,992    6,348
  Services..............................     7,743    5,568
                                           -------  -------
                                            15,735   11,916
 
 Product development and enhancement....     5,071    3,288
 Selling, general and administrative....    28,950   20,255
                                           -------  -------
                                            49,756   35,459
                                           -------  -------
 
Income before other income (expense)                        
 and income taxes.......................    25,013   20,691 
 
Other income (expense)..................     1,058     (210)
                                           -------  -------
 
Income before income taxes..............    26,071   20,481
Provision for income taxes..............    10,011    8,192
                                           -------  -------
Net income..............................   $16,060  $12,289
                                           =======  =======
 
Income per common share:
Net income:
 Pro forma..............................              $0.17
                                                    =======
 Primary................................     $0.21
                                           =======         
 Fully diluted..........................     $0.21
                                           =======         
 
Weighted average and pro forma common                       
 shares outstanding.....................    75,000   73,200 
                                           =======  =======
</TABLE>

                See accompanying notes.

                                     - 4 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
                                (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                             COMMON STOCK
                                           -----------------
                                            NUMBER            ADDITIONAL            SHAREHOLDERS'     TOTAL
                                              OF       PAR     PAID-IN    RETAINED      NET        STOCKHOLDERS'
                                            SHARES    VALUE    CAPITAL    EARNINGS   INVESTMENT       EQUITY
                                           --------  -------  ----------  --------  -------------  -------------
<S>                                        <C>       <C>      <C>         <C>       <C>            <C>
Balance at September 30, 1995...........                                               $53,187        $ 53,187
 Net income.............................                                                12,289          12,289
 Net cash distributed to Sterling
  Software..............................                                                (6,189)         (6,189)
  Other.................................                                                   315             315
                                                                                       -------        --------
Balance at December 31, 1995............                                               $59,602        $ 59,602
                                                                                       =======        ========

Balance at September 30, 1996...........    75,000     $750    $98,111    $39,326                     $138,187
 Net income.............................                                   16,060                       16,060
 Other..................................                          (331)       (53)                       (384)
                                            ------     ----    -------    -------                    --------
Balance at December 31, 1996............    75,000     $750    $97,780    $55,333                    $153,863
                                            ======     ====    =======    =======                    ========
</TABLE>

                            See accompanying notes.

                                     - 5 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                             THREE MONTHS
                                          ENDED DECEMBER 31
                                          ------------------
                                            1996      1995
                                          --------  --------
<S>                                       <C>       <C>
Operating activities:
 Net income.............................   $16,060   $12,289
 Adjustments to reconcile net income to
  net cash provided by operating
  activities:
   Depreciation and amortization........     6,747     4,887
   Provision for losses on accounts                          
    receivable..........................       743       153 
   Provision for deferred income taxes..       865       921
   Changes in operating assets and
    liabilities:
      Decrease in accounts and notes      
       receivable.......................       366       108        
      Decrease in amounts due from         
       Sterling Software................    32,084   
      Increase in prepaids and other       
       assets...........................    (2,279)   (2,202)    
      Increase in accounts payable,
       accrued liabilities and income       
       taxes payable....................     3,713       279    
 
      (Decrease) increase in deferred      
       revenue..........................    (1,355)      221   
      Other.............................        18       123
                                           -------   -------
       Net cash provided by operating      
        activities......................    56,962    16,779   
 
Investing activities:
 Purchases of property and equipment....    (7,584)   (4,597)
 Purchases and capitalized cost of         
  development of computer software......    (3,257)   (2,935)    
   Sales of investments, net............    10,003
   Other................................                (185)
                                           -------   -------
       Net cash used in investing          
        activities......................      (838)   (7,717)      
 
Financing activities:
 Other..................................      (548)      259
                                           -------   -------
       Net cash (used in)  provided by     
        financing activities............      (548)      259     
Net cash distributed to Sterling                     
 Software...............................              (6,189)
                                           -------   -------
 
Increase in cash and cash equivalents...    55,576     3,132
 
Cash and cash equivalents at beginning   
 of period..............................    23,484       395      
                                           -------   -------
 
Cash and cash equivalents at end of                          
 period.................................   $79,060   $ 3,527 
                                           =======   =======
</TABLE>

                            See accompanying notes.

                                     - 6 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996
                                  (UNAUDITED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Basis of Presentation

          The consolidated financial statements include the accounts of Sterling
Commerce, Inc. and its wholly owned subsidiaries (collectively the "Company")
after elimination of all significant intercompany balances and transactions.
Certain amounts for periods ended prior to December 31, 1996 have been
reclassified to conform to the current year presentation.  The financial
statements have been prepared in conformity with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from the assumptions used by management in preparation
of the financial statements.

          Revenue

          Revenue from license fees for software products is recognized when the
software is delivered, provided no significant future vendor obligations exist
and collection is probable.  If software product transactions include the right
to receive future products, a portion of the software product revenue is
deferred and recognized as products are delivered.  Services revenue and revenue
from products involving installation or other services are recognized as the
services are performed. Royalties revenue represents royalties earned from
Sterling Software, Inc. and certain of its subsidiaries (collectively "Sterling
Software") acting as international distributors of certain of the Company's
products outside of the United States and Canada.

          Product support contracts entitle the customer to telephone support,
bug fixing and the right to receive software updates as they are released.
Revenue from product support contracts, including product support included in
initial license fees, is recognized ratably over the contract period.  All
significant costs and expenses associated with product support contracts are
expensed as incurred, which approximates ratable expenses over the contract
period.

          When products, product support and services are billed prior to the
time the related revenue is recognized, deferred revenue is recorded and related
costs paid in advance are deferred.

          Earnings Per Share

          Pro forma net income per common share is calculated as though there
were 73,200,000 shares outstanding throughout the period presented.  Primary and
fully diluted income per common share is calculated as though there were
75,000,000 shares outstanding together with common stock equivalents.

                                     - 7 -
<PAGE>
 
2.  UNAUDITED INTERIM FINANCIAL STATEMENTS

          The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments
(consisting only of normal recurring entries) necessary for a fair presentation
of the financial position and results of operations for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year.

3.  GENERAL INFORMATION

    Initial Public Offering and Distribution

          The Company was incorporated in December 1995 as a subsidiary of
Sterling Software.  The Company completed its initial public offering (the
"Offering") of Common Stock, $.01 par value, of the Company ("Commerce Stock")
on March 13, 1996.  Pursuant to the Offering, the Company sold to the public
1,800,000 previously unissued shares of Commerce Stock and Sterling Software
sold to the public 12,000,000 of the 73,200,000 shares of Commerce Stock then
owned by it.

          In contemplation of the Offering, among other things: (i) Sterling
Software caused to be transferred to the Company certain assets relating to the
electronic commerce business previously conducted by Sterling Software, and (ii)
the Company entered into contractual arrangements with Sterling Software related
to, among other things, tax allocation, international marketing,
indemnification, space sharing and certain services. See "Shared Management and
Contractual Arrangements with Sterling Software."

          On September 23, 1996, the Board of Directors of Sterling Software
declared a special dividend consisting of the distribution (the "Distribution")
of all shares of Commerce Stock held by Sterling Software on September 30, 1996,
payable pro rata to the holders of record of Sterling Software's common stock,
$0.10 par value, as of the close of business on such date.  As a result,
effective September 30, 1996, the Company ceased to be a subsidiary of Sterling
Software.

    Shared Management and Contractual Arrangements with Sterling Software.

    Management

          The Board of Directors of the Company (the "Board") currently has
seven members. Messrs. Sam Wyly, Charles J. Wyly, Jr. and Evan A. Wyly are
directors of the Company and are also directors of Sterling Software.  Mr.
Sterling L. Williams serves as Chairman of the Board of the Company and as
President and Chief Executive Officer and a member of the Board of Directors of
Sterling Software. In addition, Jeannette P. Meier serves as Executive Vice
President, General Counsel and Secretary of both companies and the Chief
Financial Officer of Sterling Software, and Phillip A. Moore serves as an
Executive Vice President of both companies. Neither the specific time period nor
the capacity or capacities in which such executive officers may continue to
serve either the Company or Sterling Software (or both) has been determined as
of the date of this report.

                                     - 8 -
<PAGE>
 
          The Company and Sterling Software have significant contractual and
other ongoing relationships as discussed below under "Intercompany Agreements."
Conflicts of interest may arise between the Company and Sterling Software in a
number of areas relating to such ongoing relationships, including potential
competitive business activities, international marketing functions, tax and
employee benefit matters, indemnity arrangements, and the continued service of
certain directors and executive officers of each of the Company and Sterling
Software as directors and executive officers of the other company.  The Board
will utilize such procedures in evaluating the terms and provisions of any
material transactions between the Company and Sterling Software and their
respective affiliates as the Board may determine appropriate in light of its
fiduciary duties under applicable state law.


    Intercompany Agreements

          In anticipation of the Offering, the Company and Sterling Software
entered into a number of agreements (the "Intercompany Agreements") for the
purpose of defining certain relationships between them.  As a result of Sterling
Software's then-existing ownership interest in the Company, the terms of such
agreements were not the result of arm's-length negotiation. The Intercompany
Agreements include an International Marketing Agreement, a Tax Allocation
Agreement, an Indemnification Agreement and a Space Sharing Agreement. The
International Marketing Agreement defines the terms pursuant to which Sterling
Software acts as the exclusive distributor through March 1999 of certain of the
Company's products in markets outside the United States and Canada. The
International Marketing Agreement provides for the payment of royalties by
Sterling Software to the Company equal to 50% of the revenue that Sterling
Software derives from licenses of the Company's interchange and communications
software products and related product support services. The Tax Allocation
Agreement provides that for periods during which the Company and/or its
subsidiaries were included in Sterling Software's consolidated federal income
tax returns or consolidated, combined or unitary state tax returns,  the Company
is required to pay to or is entitled to receive from Sterling Software its
allocable portion of the consolidated, federal and state income tax liability or
refunds, respectively. Additionally, the Tax Allocation Agreement contains
provisions for the handling of tax controversies. The Indemnification Agreement
provides that the Company will indemnify Sterling Software and its directors,
officers, employees, agents and representatives for any liabilities resulting
from or arising out of certain acts, failures to act or the provision of
incorrect factual information by the Company in connection with the Internal
Revenue Service ruling request that would cause the Distribution to be taxable
to Sterling Software or its stockholders. The Indemnification Agreement also
provides that each party will indemnify the other party for certain other
liabilities, including those relating to the business, operations or assets
conducted or owned by the indemnifying party. The Space Sharing Agreement
defines the terms pursuant to which the Company and Sterling Software are
allowed to utilize a portion of certain of each other's office facilities for a
fee.

                                     - 9 -
<PAGE>
 
4.  CHANGE IN CONTROL AND SEVERANCE AGREEMENTS

          As of December 31, 1996, the Company had change-in-control agreements
with fourteen officers that provide for payments, based on each such officer's
respective salary, bonus and cash incentive compensation, and certain other
benefits in the event a change in control (as defined) of the Company occurs and
such officer's employment is terminated. In addition, pursuant to the change-in-
control agreements with such officers and separate agreements with two
directors, if any payments (including payments under the change-in-control
agreements) to any such individual are determined to be "excess parachute
payments" under the Internal Revenue Code of 1986, as amended (the "Code"), such
individual would be entitled to receive an additional payment to compensate such
individual for the excise tax imposed by the Code on such payments. (See Item 5
of Part II of this report)  As of December 31, 1996, the maximum liability for
amounts payable under all of these agreements would have been approximately
$35,500,000.

          As of December 31, 1996, the Company had severance agreements with
thirteen officers of the Company that provide for payments, based on each such
officer's respective salary and bonus, and for continuation of certain benefits.
In addition, the Company has entered into an agreement with the Chairman of the
Board of the Company that provides for an annual base salary plus agreed-upon
bonuses and benefits, which agreement converts to a seven-year consulting
agreement upon the occurrence of certain events. (See Item 5 of Part II of this
report)  As of December 31, 1996, the aggregate commitment for future salaries,
bonuses and benefits under all of these agreements would have been approximately
$18,600,000.

5.  RIGHTS PLAN

          On December 18, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each share of Commerce Stock
of the Company outstanding at the close of business on December 31, 1996 (the
"Record Date"), pursuant to the terms of a Rights Agreement, dated as of
December 18, 1996 (the "Rights Plan").  The Rights Plan also provides, subject
to specified exceptions and limitations, that shares of Commerce Stock issued
after the Record Date will be entitled to and accompanied by Rights.  Pursuant
to the Rights Plan, one Right to purchase 1/100th of a share of Series A Junior
Participating Preferred Stock ("Junior Preferred Share") (structured so as to be
substantially the equivalent of a share of Commerce Stock) is attached to each
issued and outstanding share of Commerce Stock.  Subject to certain conditions,
each Right entitles the holder to purchase 1/100th of a Junior Preferred Share
at a price (the "Purchase Price") of $200.00 per 1/100th of a Junior Preferred
Share (subject to adjustment).

                                     - 10 -
<PAGE>
 
          In general, the Rights will not become exercisable, or transferable
apart from the shares of Commerce Stock, unless a person or group of affiliated
or associated persons becomes the beneficial owner of, or commences a tender
offer that would result in beneficial ownership of, 15% or more of the
outstanding shares of Commerce Stock (any such person or group of persons being
referred to in the Rights Plan as an "Acquiring Person"). Thereafter, under
certain circumstances, each Right (other than any Rights that are or were
beneficially owned by an Acquiring Person, which Rights will be void) could
become exercisable to purchase at the Purchase Price a number of shares of
Commerce Stock (or, in certain circumstances, the common stock of a company into
which the Company is merged or consolidated or to which the Company sells all or
substantially all of its assets) having a market value equal to two times the
Purchase Price.  The Rights will expire on December 31, 2006, unless earlier
redeemed by the Company at a redemption price of $.01 per Right (subject to
adjustment), or otherwise exchanged or amended in accordance with the terms of
the Rights Plan.

6.  SUBSEQUENT EVENT

          The Company has filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission for the purpose of effecting a public
offering of 12,500,000 shares of Commerce Stock, plus up to an additional
1,875,000 shares of Commerce Stock issuable pursuant to an over-allotment option
to be granted to the underwriters by the Company.  The net proceeds of such
proposed offering will be added to the Company's working capital and used for
general corporate purposes, which may include acquisitions. Pending such use,
the Company currently intends to invest the proceeds in short-term, investment
grade debt securities and other marketable securities. Such proposed offering is
presently expected to be completed in the second quarter of 1997.

                                     - 11 -
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995

          Total revenue increased $18,619,000, or 33%, in the first quarter of
1997 over the same period of 1996 due to a 38% increase in products revenue, a
15% increase in product support revenue, a 40% increase in services revenue and
a 32% increase in royalties from Sterling Software.  The increase in products
revenue is primarily the result of increased sales of communications and
interchange software products.  For the three months ended December 31, 1996,
51% of the Company's software product revenue was for products that run on
hardware platforms other than mainframe hardware.  This compares to 62% for the
three months ended December 31, 1995.  This deviation from prior trends was
caused primarily by increased sales of mainframe communications software to the
federal government in the current quarter compared to the same quarter of the
prior year where, due in part to the federal government shutdowns, there were no
significant sales to the federal government. Product support revenue increased
primarily as a result of an increase in the installed customer base across all
product lines.  The increase in services revenue is primarily due to an increase
in the commerce services customer base, increases in the processing volume for
existing customers and certain price increases applied to processed
transactions.  The increase in royalties revenue is the result of an increase in
product sales and product support revenue outside of the United States and
Canada.

          Total costs and expenses increased $14,297,000, or 40%, on revenue
growth of 33%.  The percentage increase in total costs and expenses is primarily
due to a 43% increase in selling, general and administrative costs and to a
lesser extent a 54% increase in product development and enhancement expense.

          Cost of goods sold increased $3,819,000, or 32%, when compared with
the same period of last year due to increases in depreciation and amortization.
These increases are the result of an increase in property and equipment
purchases as well as the amortization associated with the release of new
software products. In addition, cost of sales increased commensurately with
higher levels of products, product support and services revenue.

          Product development and enhancement expense increased $1,783,000, or
54%, when compared with the same period of last year. Product development and
enhancement expense of $5,071,000 for the first quarter of 1997 is net of
$3,232,000 of capitalized software development costs.  This compares to product
development and enhancement expense of $3,288,000 for the first quarter of 1996,
which is net of $2,934,000 of capitalized software development costs for the
same period.  Total software development costs capitalized during the first
quarter of 1997 and 1996 represent 39% and 47% of total product development and
enhancement expense for the quarter ended December 31, 1996 and 1995,
respectively.  Software amortization expense is $2,988,000 and $2,183,000 for
the first quarter of 1997 and 1996, respectively.

                                     - 12 -
<PAGE>
 
          Selling, general and administrative expense increased $8,695,000, or
43%, when compared with the same period of last year primarily due to an
increase in sales, marketing and administrative support activities needed to
support the revenue growth and also due to higher administrative expenses
associated with being a separate public company.

          Other income increased $1,268,000 in the first quarter of 1997 over
the same period of 1996 primarily due to an increase in investment income
resulting from a higher average balance of investments in cash, cash equivalents
and marketable securities.


LIQUIDITY AND CAPITAL RESOURCES

          The Company had $87,793,000 of working capital at December 31, 1996,
including $79,060,000 of cash and cash equivalents. Days sales outstanding,
measured on a quarterly basis, remained virtually unchanged at 76 days for the
quarter ended December 31, 1996, when compared with 75 days for the quarter
ended September 30, 1996. Net cash flows from operations increased $40,183,000
to $56,962,000 in the first three months of 1997 as compared to the first three
months of 1996, primarily due to collection of amounts due from Sterling
Software combined with higher operating profits and higher non-cash charges.
Cash flows from operations were used to fund operations and capital expenditures
including capitalized software. Property and equipment purchases of $7,584,000
in the first three months of 1997 include purchases made for equipment upgrades
for processing systems and computer equipment purchases to support the
continuing growth in revenue.

          Effective October 1, 1996, the Company entered into a Revolving Credit
and Term Loan Agreement ("Loan Agreement") with a domestic borrowing capacity of
$20,000,000. The Loan Agreement also provides for an additional $10,000,000
international borrowing capacity. The Loan Agreement is unsecured and contains
various restrictions on the Company, including limitations on additional
borrowings, payment of dividends, acquisitions and capital expenditures. The
Loan Agreement also requires that the Company maintain certain financial ratios.
Borrowings under the Loan Agreement bear interest at the higher of the lender's
prime rate, the Federal Funds Effective Rate plus one-half percent (1/2%) or
LIBOR plus one and three-quarters percent (1 3/4%). Borrowings, if any,
outstanding on October 1, 1998 will convert to a term loan requiring four
payments in substantially equal installments due at the end of each subsequent
quarter. There were no amounts borrowed or outstanding under the Loan Agreement
as of December 31, 1996. At December 31, 1996, after utilization of
approximately $300,000 for standby letters of credit, approximately $29,700,000
was available for borrowing on the Loan Agreement.

          At December 31, 1996, the Company's capital resource commitments
consisted of commitments under lease arrangements for office space and
equipment. The Company presently intends to meet such obligations from
internally generated funds and available cash balances. No significant
commitments exist for future capital expenditures. The Company believes
available balances of cash, cash equivalents and short term investments combined
with cash flows from operations and amounts available under the Loan Agreement
are sufficient to meet the 

                                     - 13 -
<PAGE>
 
Company's working capital requirements relating to its existing operations for
the foreseeable future.

          The Company has filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission for the purpose of effecting a public
offering of 12,500,000 shares of Commerce Stock, plus up to an additional
1,875,000 shares of Commerce Stock issuable pursuant to an over-allotment option
to be granted to the underwriters by the Company. The net proceeds of such
proposed offering will be added to the Company's working capital and used for
general corporate purposes, which may include acquisitions. Pending such use,
the Company currently intends to invest the proceeds in short-term, investment
grade debt securities and other marketable securities. Such proposed offering is
presently expected to be completed in the second quarter of 1997.

OTHER MATTERS

          Demand for many of the Company's products tends to improve with
increased inflation as customers strive to increase employee productivity and
reduce costs. However, the effect of inflation on the Company's relatively 
labor-intensive cost structure could adversely affect its results of operations
to the extent the Company is not able to recover increased operating costs
through increased prices and product licensing.

          The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its currency exposure
through decentralized sales, marketing and support operations in which all costs
are local currency based.

          The Company maintains a strategy of seeking to acquire businesses and
products to fill strategic market niches. This acquisition strategy contributes
in part to the Company's growth in revenue and operating profit. The impact of
any future acquisitions on continued growth in revenue and operating profit
cannot presently be determined.

FORWARD LOOKING INFORMATION

          This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in SEC Filings, words such as "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan" and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the industries served by the Company, the
costs of product 

                                     - 14 -
<PAGE>
 
development and other risks and uncertainties including, in addition to any
uncertainties specifically identified in the text surrounding such statements,
uncertainties with respect to changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances and conditions
and actions taken or omitted to be taken by third parties, including the
Company's stockholders, customers, suppliers, business partners, competitors and
legislative, regulatory, judicial and other governmental authorities and
officials. Should one or more of these risks or uncertainties materialize, or
should the underlying estimates or assumptions prove incorrect, actual results
or outcomes may vary significantly from those anticipated, believed, estimated,
expected, intended or planned.

                                     - 15 -
<PAGE>
 
                          PART II - OTHER INFORMATION

ITEM 5.  OTHER INFORMATION.

          The Company has amended (i) the agreement (the "Chairman Agreement")
with Sterling L. Williams (Chairman of the Board), which converts to a
consulting agreement and provides certain employment and other benefits in the
event the Company or, in certain circumstances, Mr. Williams terminates his
employment as Chairman of the Board of the Company, (ii) the agreements
("Severance Agreements") with each of Warner C. Blow (President and Chief
Executive Officer), Jeannette P. Meier (Executive Vice President, General
Counsel and Secretary) and Steven P. Shiflet (Senior Vice President and Chief
Financial Officer), which provide certain compensation and benefits in the event
the Company terminates such executive officers' employment with the Company, and
(iii) the agreements (the "Change-in-Control Agreements") with each of Sterling
L. Williams, Warner C. Blow, Jeannette P. Meier and Steven P. Shiflet, which
provide certain compensation and benefits in the event of the termination of
such executive officers' employment with the Company following a change in
control (as defined).  Copies of the Chairman Agreement and the forms of
Severance Agreement and Change-in-Control Agreement have been filed as exhibits
to the Company's Annual Report on Form 10-K for the year ended September 30,
1996 and are incorporated herein by this reference.  The amendments referred to
above, in general, increase the amount of compensation and benefits which such
executive officers would be entitled to receive following the termination of
their employment with the Company from five years (or five times) to seven years
(or seven times), respectively, for Mr. Williams; from four years (or four
times) to five years (or five times), respectively, for Mr. Blow; from three
years (or three times) to four years (or four times), respectively, for Ms.
Meier; and from one year (or one time) to two years (or two times),
respectively, for Mr. Shiflet.

          The Company has also entered into an agreement with each of Sam Wyly
and Charles J. Wyly, Jr., directors of the Company (the "Director Agreements").
The Director Agreements provide that if any amounts paid or payable by the
Company to such directors following a change in control (as defined) are
determined to be "excess parachute payments" under the Code, such directors
would be entitled to receive an additional payment to compensate such directors
for the excise tax imposed by the Code on such payments.

          The foregoing descriptions of (i) the amendments to the Chairman
Agreement and (ii) the Director Agreements, are qualified in their entirety by
reference to the copies of such agreements, which are filed as exhibits to this
report and incorporated herein by this reference.

          Effective January 31, 1997, the Company and Sterling Software entered
into an amendment to the International Marketing Agreement which, in part,
confirms the right of the Company's International Group to market, only in
connection with its services offerings, certain GENTRAN PC products that enable
and facilitate usage of such services.

                                     - 16 -
<PAGE>
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  The following exhibits are filed as part of this Quarterly Report 
         on Form 10-Q:

          3.1 -- Certificate of Incorporation of the Company, as amended
                 (incorporated by reference to Exhibit 4.1 to the Company's
                 Registration Statement on Form S-3 (Registration No. 333-
                 20565))
          4.1 -- Rights Agreement, dated December 18, 1996, by and between the
                 Company and The First National Bank of Boston, as Rights Agent
                 (incorporated by reference to Exhibit 1 to the Company's
                 Current Report on Form 8-K dated December 18, 1996)
         10.1 -- Revolving Credit and Term Loan Agreement dated as of October 1,
                 1996 among the Company and The First National Bank of Boston,
                 as agent, and Bank One, Texas, National Association
                 (incorporated by reference to Exhibit 10.17 to the Company's
                 Annual Report on Form 10-K for the year ended September 30,
                 1996)
         10.2 -- Amendment No. 1 to the International Distributor Agreement
                 dated as of January 31, 1997, between Sterling Commerce B.V.
                 and Sterling Software International, Inc. (a/k/a the
                 International Marketing Agreement)
         10.3 -- Form of Director Agreement dated as of January 27, 1997,
                 between the Company and each of Sam Wyly and Charles J. Wyly,
                 Jr.
         10.4 -- Amendment to CEO Agreement dated as of December 1, 1996,
                 between the Company and Sterling L. Williams
         11.1 -- Computation of Earnings Per Share
         27   -- Financial Data Schedule

    (b)  Reports on Form 8-K.

             During the three-month period ended December 31, 1996, the Company
         filed Current Reports on Form 8-K, dated September 30, 1996 and
         December 18, 1996. Each such report included information requested
         under Item 5--Other Events.

                                     - 17 -
<PAGE>
 
                                   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.

                                      STERLING COMMERCE, INC.
 
 
 
 
Date:  January 31,  1997                       /s/  Warner C. Blow
                                    --------------------------------------------
                                                    Warner C. Blow
                                       President and Chief Executive Officer
                                             (Principal Executive Officer)


Date:  January 31,  1997                     /s/  Steven P. Shiflet
                                    --------------------------------------------
                                                  Steven P. Shiflet
                                              Senior Vice President and
                                               Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                                     - 18 -
<PAGE>
 
                                 INDEX TO EXHIBITS


        3.1 -- Certificate of Incorporation of the Company, as amended
               (incorporated by reference to Exhibit 4.1 to the Company's
               Registration Statement on Form S-3 (Registration No. 333-20565))
        4.1 -- Rights Agreement, dated December 18, 1996, by and between the
               Company and The First National Bank of Boston, as Rights Agent
               (incorporated by reference to Exhibit 1 to the Company's Current
               Report on Form 8-K dated December 18, 1996)
       10.1 -- Revolving Credit and Term Loan Agreement dated as of October 1,
               1996 among the Company and The First National Bank of Boston, as
               agent, and Bank One, Texas, National Association (incorporated by
               reference to Exhibit 10.17 to the Company's Annual Report on Form
               10-K for the year ended September 30, 1996)
       10.2 -- Amendment No. 1 to the International Distributor Agreement dated
               as of January 31, 1997, between Sterling Commerce B.V. and
               Sterling Software International, Inc. (a/k/a the International 
               Marketing Agreement)
       10.3 -- Form of Director Agreement dated as of January 27, 1997, between
               the Company and each of Sam Wyly and Charles J. Wyly, Jr.
       10.4 -- Amendment to CEO Agreement dated as of December 1, 1996, between
               the Company and Sterling L. Williams
       11.1 -- Computation of Earnings Per Share
       27   -- Financial Data Schedule