<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 March 31, 1997

                                      or

    ( )        Transition Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

            For the transition period from __________ to __________

                          COMMISSION FILE 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)

                        300 CRESCENT COURT, SUITE 1200
                             DALLAS, TEXAS  75201
         (Address of principal executive offices, including zip code)

                                (214) 981-1100
             (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 April 30, 1997
----------------------------             ---------------------------------------
Common Stock, $.01 par value                            89,375,000

                                      -1-
<PAGE>
 
                        PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

                         Index to Financial Statements

                                                                            Page
                                                                            ----
 
Sterling Commerce, Inc. Consolidated Balance Sheets at March 31, 1997 and
  September 30, 1996.....................................................     3
 
Sterling Commerce, Inc. Consolidated Statements of Income for the Three 
  and Six Months Ended March 31, 1997 and 1996...........................     4
 
Sterling Commerce, Inc. Consolidated Statements of Stockholders' 
  Equity for the Six Months Ended March 31, 1997 and 1996................     5
 
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for 
  the Six Months Ended March 31, 1997 and 1996...........................     6
 
Sterling Commerce, Inc. Notes to Consolidated Financial Statements.......     7
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
  AND RESULTS OF OPERATIONS..............................................    11
 

                          PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS...............................................    16
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............    16
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K................................    17

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

                                  A S S E T S
<TABLE>
<CAPTION>
                                                      MARCH 31      SEPTEMBER 30
                                                        1997            1996
                                                     -----------    ------------
                                                     (UNAUDITED)
<S>                                                  <C>            <C>
Current assets:
 Cash and cash equivalents........................    $346,314        $ 23,484
 Marketable securities............................     149,574          21,203
 Accounts and notes receivable, net...............      58,921          61,292
 Amounts due from Sterling Software...............       4,370          35,134
 Deferred income taxes............................       3,537           3,087
 Prepaid expenses and other current assets........      10,439           5,794
                                                      --------        --------
  Total current assets............................     573,155         149,994
                                                                   
Property and equipment, net of accumulated              
  depreciation of $33,861 at March 31, 1997 
  and $27,027 at September 30, 1996...............      51,700          43,199
                                                                   
Computer software, net of accumulated amortization     
 of $44,890 at March 31, 1997 and $42,110              
 at September 30, 1996............................      37,585          34,404
                                                                   
Excess cost over net assets acquired, net of            
 accumulated amortization of $3,596 at March 31,        
 1997 and $3,382 at September 30, 1996............      10,130           9,789
Other assets......................................       8,196           4,294
                                                      --------        --------
                                                      $680,766        $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.........    $ 31,207        $ 34,317
 Income taxes payable.............................       2,473        
 Deferred revenue.................................      40,677          38,518
                                                      --------        --------
   Total current liabilities......................      74,357          72,835
                                                                      
 Deferred income taxes............................      25,424          23,135
Other noncurrent liabilities......................       8,326           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; 89,375,000 shares issued                         
  and outstanding at March 31, 1997;                                  
  75,000,000 shares issued and outstanding at
  December 31, 1996...............................         894             750
 Additional paid-in capital.......................     498,043          98,111
 Retained earnings................................      73,722          39,326
                                                      --------        --------
   Total stockholders' equity.....................     572,659         138,187
                                                      --------        --------
                                                      $680,766        $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         SIX MONTHS
                                           ENDED MARCH 31      ENDED MARCH 31
                                          -----------------  ------------------
                                            1997     1996      1997      1996
<S>                                       <C>       <C>      <C>       <C>
Revenue:                                
 Products...............................  $23,121   $19,145  $ 45,310  $ 35,208
 Product support........................   16,752    13,784    32,301    27,261
 Services...............................   33,673    24,463    66,090    47,590
 Royalties from affiliated companies....    5,988     4,684    10,602     8,167
                                          -------   -------  --------  --------
                                           79,534    62,076   154,303   118,226
                                        
Costs and expenses:                     
 Cost of sales:                         
  Products and product support..........    8,293     7,077    16,285    13,411
  Services..............................    8,099     6,259    15,842    11,841
                                          -------   -------  --------  --------
                                           16,392    13,336    32,127    25,252
                                        
 Product development and enhancement....    6,191     3,777    11,262     7,065
 Selling, general and administrative....   29,371    22,904    58,321    43,160
                                          -------   -------  --------  --------
                                           51,954    40,017   101,710    75,477
                                          -------   -------  --------  --------
Income before other income (expense)       
 and income taxes.......................   27,580    22,059    52,593    42,749
                                        
Other income (expense)..................    2,815               3,873      (209)
                                          -------   -------  --------  --------
Income before income taxes..............   30,395    22,059    56,466    42,540
Provision for income taxes..............   11,578     8,824    21,589    17,016
                                          -------   -------  --------  --------
Net income..............................  $18,817   $13,235  $ 34,877  $ 25,524
                                          =======   =======  ========  ========
Income per common share:                

 Net income:                             
  Primary...............................     $.23      $.18      $.44      $.34
                                          =======   =======  ========  ========
  Fully diluted.........................     $.23      $.18      $.44      $.34
                                          =======   =======  ========  ======== 
Average common shares outstanding.......   80,111    73,734    77,527    73,466
                                          =======   =======  ========  ========
</TABLE>
                 See accompanying notes.

                                      -4-
<PAGE>
 
                            STERLING COMMERCE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   SIX MONTHS ENDED MARCH 31, 1997 AND 1996
                                (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>            
Balance at September 30, 1995......                                                           $ 53,187        $ 53,187
 Formation transactions............     73,200        $732      $ 53,871                       (54,603) 
 Net proceeds from initial public                                            
  offering.........................      1,800          18        40,100                                        40,118
                                                                                
 Net cash distributed to Sterling                                            
  Software.........................                                                            (17,819)        (17,819)
                                                                                  
 Net income........................                                             $ 6,289         19,235          25,524
                                        ------        ----      --------        -------        -------        --------
Balance at March 31, 1996..........     75,000        $750      $ 93,971        $ 6,289           -           $101,010
                                        ------        ----      --------        -------        -------        --------
                                                                           
                                                                             
Balance at September 30, 1996......     75,000        $750      $ 98,111        $39,326                       $138,187
 Net income........................                                              34,877                         34,877
 Stock offering proceeds...........     14,375         144       400,263                                       400,407
 Other.............................                                 (331)          (481)                          (812)
                                        ------        ----      --------        -------                       --------
Balance at March 31, 1997..........     89,375        $894      $498,043        $73,722                       $572,659
                                        ------        ----      --------        -------                       -------- 
</TABLE>
                            See accompanying notes.

                                      -5-
<PAGE>
 
                            STERLING COMMERCE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                               SIX MONTHS
                                             ENDED MARCH 31
                                          -------------------- 
                                             1997       1996
                                          ----------  --------
<S>                                       <C>         <C>
Operating activities:
 Net income.............................  $  34,877   $ 25,524
 Adjustments to reconcile net income to
  net cash provided by operating
  activities:
   Depreciation and amortization........     13,890     10,282
   Provision for losses on accounts     
    receivable..........................        780        499
   Provision for deferred income taxes..      1,839      1,765
   Changes in operating assets and
    liabilities:
      Decrease (increase) in accounts   
       and notes receivable.............      1,025     (2,196)
      Decrease (increase) in amounts         
       due from Sterling Software.......     30,764     (1,192)
      Increase in prepaids and other    
       assets...........................     (8,132)    (3,612)
      (Decrease) increase in accounts
       payable, accrued liabilities and 
       income taxes payable.............     (1,716)       749
      Increase in deferred revenue......      1,131      3,560
      Other.............................      1,049        335
                                          ---------   --------
       Net cash provided by operating   
        activities......................     75,507     35,714

Investing activities:
 Purchases of property and equipment....    (15,840)   (10,599)
 Purchases and capitalized cost of           
  development of computer software......     (6,504)    (5,742)

 Purchases of investments...............   (135,362)
 Sales of investments...................     10,003
 Business acquisitions, net of cash       
    acquired............................     (4,247)      (185)
                                          ---------   --------
       Net cash used in investing        
        activities......................   (151,950)   (16,526)

Financing activities:
 Net proceeds from stock issuance.......    400,407     40,118
 Net cash distributed to Sterling                      
  Software..............................               (17,819)
 Other..................................     (1,134)      (397)
                                          ---------   --------
       Net cash  provided by financing  
        activities......................    399,273     21,902
                                          ---------   -------- 
Increase in cash and cash equivalents...    322,830     41,090
 
Cash and cash equivalents at beginning   
 of period..............................     23,484        395
                                          ---------   --------

Cash and cash equivalents at end of       
 period.................................  $ 346,314   $ 41,485
                                          =========   ========
</TABLE>
                            See accompanying notes.

                                      -6-
<PAGE>
 
                            STERLING COMMERCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1997
                                  (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 March 31, 1997 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.

                                      -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, results of operations and cash flow 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 ("Common Stock")  on March 13,
1996.  Pursuant to the Offering, the Company sold to the public 1,800,000
previously unissued shares of Common Stock and Sterling Software sold to the
public 12,000,000 of the 73,200,000 shares of Common 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 Common Stock held by Sterling Software on September 30, 1996,
payable pro rata to the holders of record of Sterling Software's common stock,
$.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.

    Follow-on Public Offering

      On February 28, 1997, the Company completed a public offering (the
"Follow-on Offering") of 14,375,000 previously unissued shares of Common Stock.
The net proceeds of $400,407,000 have been added to the Company's working
capital and will be used for general corporate purposes, which may include
acquisitions.  Pending such use, the funds are invested in investment grade debt
securities and other marketable securities.

  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 

                                      -8-
<PAGE>
 
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.

      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 

                                      -9-
<PAGE>
 
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.

4.    BUSINESS ACQUISITIONS

      In February 1997, the Company acquired for cash all of the outstanding
common stock of Comfirst S.A. ("Comfirst") a Paris, France based provider of
communication and file transfer software.  The acquisition has been accounted
for under the purchase method of accounting.  The operating results of Comfirst
have been included in the Company's consolidated results of operations from the
date of acquisition.

     The Company has entered into a letter of intent to acquire Automated
Catalogue Services, L.P. ("ACS").  ACS creates and publishes business-related
product information databases delivered via CD-ROM and over the internet, and
creates customized electronic catalogues for manufacturers and distributors.
The acquisition, which is subject to the execution of a definitive agreement, is
expected to close in May 1997 and will be accounted for under the purchase
method of accounting.

5.   EARNINGS PER SHARE

      In February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128, "Earnings Per Share" ("FASB No. 128").  The Company will be
required to adopt FASB No. 128 for periods ending after December 15, 1997.
Until that time, the Company intends to continue to apply the requirements of
APB No. 25 for earnings per share.

Pro forma earnings per share as calculated under FASB No. 128 would be: basic
earnings per share of $.23 and $.45 for the three- and six-month periods,
respectively, ended  March 31, 1997; and diluted earnings per share of $.23 and
$.44 for the three- and six-month periods, respectively, ended March 31, 1997.

                                      -10-
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997 AND 1996

      Total revenue increased $17,458,000, or 28%, in the second quarter of 1997
over the same period of 1996 due to a 21% increase in products revenue, a 22%
increase in product support revenue, a 38% increase in services revenue and a
28% 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 March 31, 1997, 51%
of the Company's software product revenue was for products that run on hardware
platforms other than mainframe hardware.  This compares to 48% for the three
months ended March 31, 1996. 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 $11,937,000, or 30%, on revenue growth
of 28%.  The percentage increase in total costs and expenses is primarily due to
a 28% increase in selling, general and administrative costs and to a lesser
extent a 64% increase in product development and enhancement expense compared
with the same period of last year.

      Cost of sales increased $3,056,000, or 23%, when compared with the same
period of last year, primarily 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 $2,414,000, or 64%,
when compared with the same period of last year. Product development and
enhancement expense of $6,191,000 for the second quarter of 1997 is net of
$3,104,000 of capitalized software development costs. This compares to product
development and enhancement expense of $3,777,000 for the second quarter of
1996, which is net of $2,807,000 of capitalized software development costs for
the same period. The increase in product development and enhancement expense is
due to the increased investment in developing new and enhanced products
primarily to address new technologies including client-server and the internet.
Total software development costs capitalized during the second quarter of 1997
and 1996 represent 33% and 43% of total product development and enhancement
expense for the quarter ended March 31, 1997 and 1996, respectively. Software
amortization expense is $2,835,000 and $2,719,000 for the second quarter of 1997
and 1996, respectively.

                                      -11-
<PAGE>
 
      Selling, general and administrative expense increased $6,467,000, or 28%,
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 $2,815,000 in the second 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.

SIX MONTHS ENDED MARCH 31, 1997 AND 1996

      Total revenue increased $36,077,000, or 31%, in the first six months of
1997 over the same period of 1996 due to a 29% increase in products revenue, an
18% increase in product support revenue, a 39% increase in services revenue and
a 30% 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 six months ended March 31, 1997, 51% of
the Company's software product revenue was for products that run on hardware
platforms other than mainframe hardware.  This compares to 54% for the six
months ended March 31, 1996. 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 $26,233,000, or 35%, on revenue growth
of 31%.  The percentage increase in total costs and expenses is primarily due to
a 35% increase in selling, general and administrative costs and to a lesser
extent a 59% increase in product development and enhancement expense compared
with the same period last year.

      Cost of sales increased $6,875,000, or 27%, when compared with the same
period of last year, primarily 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 $4,197,000, or 59%,
when compared with the same period of last year. Product development and
enhancement expense of $11,262,000 for the first six months of 1997 is net of
$6,336,000 of capitalized software development costs. This compares to product
development and enhancement expense of $7,065,000 for the first six months of
1996, which is net of $5,741,000 of capitalized software development costs for
the same period. The increase in product development and enhancement expense is
due to the increased investment in developing new and enhanced products
primarily to address new technologies including client-server and the internet.
Total software development costs capitalized during the first six months of 1997
and 1996 represent 36% and 45% of total product development and enhancement
expense for the period ended March 31, 1997 and 1996,
                                      -12-
<PAGE>
 
respectively. Software amortization expense is $5,823,000 and $4,902,000 for the
first six months of 1997 and 1996, respectively.

      Selling, general and administrative expense increased $15,161,000, or 35%,
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 $4,082,000 in the first six months 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

      On February 28, 1997, the Company completed the Follow-on Offering of
14,375,000 shares of Common Stock. The net proceeds of $400,407,000 have been
added to the Company's working capital and will be used for general corporate
purposes, which may include acquisitions. Pending such use, the funds are
invested in investment grade debt securities and other marketable securities.

      The Company had $498,798,000 of working capital at March 31, 1997,
including $346,314,000 of cash and cash equivalents and $149,574,000 of
marketable securities.  Days sales outstanding, measured on a quarterly basis,
improved from 76 days for the quarter ended December 31, 1996 to 72 days for the
quarter ended March 31, 1997.  Net cash flows from operations increased
$39,793,000 to $75,507,000 in the first six months of 1997 as compared to the
first six months of 1996, primarily due to collection of amounts due from
Sterling Software combined with higher operating profits.  Cash flows from
operations were used to fund operations and capital expenditures including
capitalized software.  Property and equipment purchases of $15,840,000 in the
first six 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 March 31, 1997.

                                      -13-
<PAGE>
 
  At March 31, 1997, 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. The Company has no significant committments for future
capital expenditures. However, the Company will be required to make capital
expenditures related to the acquisition of ACS (see Note 4 to the Consolidated
Financial Statements in Item 1 of this report) if and when such acquisition is
consummated. 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 Company's working
capital requirements relating to its existing operations for the foreseeable
future.

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 development and other risks and uncertainties including, in addition to
any uncertainties specifically identified in the text surrounding such
statements, uncertainties with respect to 

                                      -14-
<PAGE>
 
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 1.  LEGAL PROCEEDINGS

   On February 20, 1997, David B. Shaev, who alleges he is a stockholder of the
Company, filed a derivative action in the Chancery Court in the State of
Delaware against the Company and each of the Company's directors, Sam Wyly,
Charles J. Wyly, Jr., Evan A. Wyly, Sterling L. Williams, Warner C. Blow, Honor
R. Hill and Robert E. Cook, alleging that such directors breached their
fiduciary duties by approving grants of excessive stock options to the
individual defendants.  The plaintiff seeks rescission of such grants of stock
options, injunctive relief prohibiting the exercise of the options, the award of
damages to the Company and attorneys' fees and costs.  The defendants have
denied the allegations in the complaint and intend to vigorously defend this
action.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  The Company held its Annual Meeting of Stockholders on February 27, 1997, at
which meeting the stockholders of the Company elected two Class A directors for
terms expiring at the Company's Annual Meeting of Stockholders in 2000.
 
The vote was as follows:
 
     NAME                   FOR              WITHELD
     -------------          ---              -------
     Honor R. Hill          62,761,588       4,489,766
     Evan A. Wyly           62,688,062       4,563,292

                                      -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:

       11.1  --  Computation of Earnings Per Share

       27.1  --  Financial Data Schedule

   (b) Reports on Form 8-K.

           The Company did not file any reports on Form 8-K during the three-
       month period ended March 31, 1997.

                                      -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:  May 6,  1997                              /s/  Warner C. Blow
                                             --------------------------
                                                    Warner C. Blow
                                                 President and Chief
                                                  Executive Officer
                                                 (Principal Executive
                                                       Officer)
                                         
                                         
                                         
                                         
                                         
Date:  May 6,  1997                             /s/  Steven P. Shiflet
                                             --------------------------
                                                  Steven P. Shiflet
                                                Senior Vice President
                                                         and
                                               Chief Financial Officer
                                                 (Principal Financial
                                               and Accounting Officer)
 
 

                                      -18-