<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

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


                For the quarterly period ended December 29, 1996
                                               -----------------


                         Commission File Number 0-18238



                             SEQUOIA SYSTEMS, INC.
                             ---------------------
             (Exact Name of Registrant as Specified in its Charter)


        DELAWARE                                        04-2738973
        --------                                        ----------
(State or Other Jurisdiction                          (I.R.S. Employer
of Incorporation or Organization)                    Identification No.)


5959 Corporate Drive, Houston, Texas                        77036
------------------------------------                        -----
(Address of Principal Executive Offices)                  (Zip Code)


Registrant's telephone number, including area code      (713) 541-8200
                                                        --------------



     Indicate by check mark whether 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.

           Class                           Outstanding at January 31, 1997
           -----                           -------------------------------
Common Stock, $.40 par value                         14,367,986
<PAGE>
 
PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS              SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES

<TABLE> 
<CAPTION> 
                                                             (in thousands)
                                                  
ASSETS                                             December 29,      June 30,
                                                       1996           1996
                                                   (unaudited)
                                                   --------------------------
<S>                                                <C>               <C> 
Current Assets:                                   
  Cash and cash equivalents                         $11,759          $12,287
  Accounts receivable, net of allowance           
   for doubtful accounts of $1,027 at             
   December 29, 1996 and $1,018 at                
   June 30, 1996                                      8,498           13,371
  Inventories                                         8,654           13,491
  Other current assets                                3,925            1,923
                                                    ------------------------
      Total current assets                           32,836           41,072
                                                    ------------------------
Equipment and Improvements, at cost:              
  Computer equipment                                  3,232           12,473
  Machinery and equipment                             3,678            5,293
  Equipment under capital lease                          --            2,337
  Furniture and fixtures                                976            1,504
  Leasehold improvements                                968            1,683
                                                    ------------------------
                                                      8,854           23,290
  Less--Accumulated depreciation and amortization     5,495           18,603
                                                    ------------------------
                                                      3,359            4,687
                                                    ------------------------
Other Assets                                            229              592
                                                    ------------------------
Total Assets                                        $36,424          $46,351
                                                    ========================
LIABILITIES AND STOCKHOLDERS' EQUITY            
                                                
Current Liabilities:                            
  Accounts payable                                  $ 3,997          $ 4,743
  Accrued expenses                                    5,145            9,203
  Deferred revenue                                       --              558
  Current portion of capital lease obligations           --               56
                                                    ------------------------
      Total current liabilities                       9,142           14,560
                                                    ------------------------
                                                
Commitments and Contingencies                   
                                                
Stockholders' Equity:
  Preferred stock, $.40 par value:              
    Authorized--12,500 shares at                
     December 29, 1996 and June 30, 1996        
     Issued--none                                        --               --
  Common stock, $.40 par value:                 
    Authorized--35,000 shares at                
     December 29, 1996 and June 30, 1996        
     Issued--15,643 shares at December 29, 1996,
     and 15,579 shares at June 30, 1996               6,257            6,232
  Additional paid-in capital                         80,314           80,207
  Accumulated deficit                               (56,820)         (54,805)
  Treasury stock, at cost, 1,114 shares at      
   December 29, 1996                                 (2,588)              --
  Cumulative translation adjustment                     119              157
                                                    ------------------------
      Total stockholders' equity                     27,282           31,791
                                                    ------------------------
Total Liabilities and Stockholders' Equity          $36,424          $46,351
                                                    ========================
</TABLE> 
The accompanying notes are an integral part of these consolidated financial 
statements.

                                       2


<PAGE>
 
CONSOLIDATED STATEMENTS OF OPERATIONS     SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)

<TABLE> 
<CAPTION> 
                                           For the three months ended,                    For the six months ended,
                                      December 29, 1996      December 31, 1995      December 29, 1996     December 31, 1995
                                      -----------------      -----------------      -----------------     -----------------
                                                             (in thousands, except per share data)
<S>                                   <C>                    <C>                    <C>                   <C> 
Revenues                              
  Product                                $14,550                 $24,382                $29,657                $48,268
  Service and Other                          390                   3,556                  3,932                  7,155
                                         -------                 -------                -------                -------
    Total revenues                        14,940                  27,938                 33,589                 55,423
                                      
Cost of Revenues                      
  Product                                 10,489                  14,898                 20,742                 29,130
  Service and Other                          198                   1,900                  1,846                  3,784
                                         -------                 -------                -------                -------
    Total cost of revenues                10,687                  16,798                 22,588                 32,914
                                      
    Gross profit                           4,253                  11,140                 11,001                 22,509
                                      
Research and Development Expenses          1,693                   3,270                  4,768                  6,388
Selling, General and Administrative
 Expenses                                  3,539                   6,558                  8,421                 13,134
                                         -------                 -------                -------                -------
    Total operating expenses               5,232                   9,828                 13,189                 19,522
                                     
    Income (loss) from operations           (979)                  1,312                 (2,188)                 2,987
                                     
Interest Income                              163                     211                    257                    402
Other Income (Expense)                       (24)                     10                    (13)                    18
                                         -------                 -------                -------                -------
    Income (loss) before provision   
     for income taxes                       (840)                  1,533                 (1,944)                 3,407
                                     
Provision for Income Taxes                    38                     108                     64                    242
                                         -------                 -------                -------                -------
    Net income (loss)                    $  (878)                $ 1,425                $(2,008)               $ 3,165
                                         =======                 =======                =======                =======
                                     
Net Income (Loss) Per Common and     
 Common Share Equivalent                 $ (0.06)                $  0.09                $ (0.13)               $  0.20
                                         =======                 =======                =======                =======
                                     
Weighted Average Number of Common and
 Common Share Equivalents Outstanding     15,135                  15,987                 15,366                 16,048
                                         =======                 =======                =======                =======
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                       3

<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS     SEQUOIA SYSTEMS, INC. AND SUBSIDIARIES
(Unaudited)

<TABLE> 
<CAPTION> 
                                                 For the six months ended,  
                                            December 29,           December 31,
                                                1996                   1955
                                            ------------           ------------ 
                                                      (in thousands)
<S>                                         <C>                    <C>  
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                             $(2,008)                $ 3,165
Adjustments to reconcile net income (loss)
 to net cash provided by (used in)
 operating activities--
  Depreciation                                    917                     979
  Amortization                                    131                     333
  Provision for inventories                     1,093                     761
  Provision for bad debts                          (2)                   (240)
  Provision for deferred taxes                     --                    (168)
  Changes in assets and liabilities:
    Accounts receivable                         3,295                  (4,649)
    Inventories                                   431                  (2,699)
    Income taxes                                   --                     297
    Other current assets                          246                     307
    Accounts payable                               18                   1,481
    Accrued expenses                           (1,657)                   (266)
    Deferred revenue                              510                      (2)
                                              -------------------------------
Net cash provided by (used in) operating
 activities                                     2,974                    (701)
                                              -------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of equipment and improvements         (500)                   (871)
  Increase in other assets                       (498)                   (350)
                                              -------------------------------
Net cash used in investing activities            (998)                 (1,221)
                                              -------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of obligations under capital
   leases                                         (33)                    (61)
  Proceeds from issuance of common stock          152                     580
  Purchase of treasury stock                   (2,614)                     --
                                              -------------------------------
Net cash provided by (used in) financing
 activities                                    (2,495)                    519
                                              -------------------------------
Effect of exchange rates on cash                   (9)                     31
                                              -------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS        (528)                 (1,372)

CASH AND CASH EQUIVALENTS, BEGINNING OF
 PERIOD                                        12,287                  15,317
                                              -------------------------------

CASH AND CASH EQUIVALENTS, END OF PERIOD      $11,759                 $13,945
                                              ===============================
Supplemental Disclosure of Cash Flow
 Information:
  Cash paid during the period for:
    Interest                                  $     2                 $    11
    Income taxes paid (refunds received)          (71)                    117
</TABLE> 

The accompanying notes are an integral part of these consolidated financial 
statements.

                                       4


<PAGE>
 

Notes to Consolidated Financial Statements 
Sequoia Systems, Inc. and Subsidiaries
           (unaudited)


NOTE 1 - BASIS OF PRESENTATION
------

The financial statements included herein have been prepared by Sequoia Systems,
Inc. (the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that the
disclosures made are adequate to make the information not misleading. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's latest audited
financial statements, which are contained in the Company's Annual Report on 
Form 10-K for the year ended June 30, 1996, filed with the Commission on 
September 25, 1996, as amended by Amendment No. 1 on Form 10-K/A, filed with 
the Commission on October 28, 1996. Certain items in the fiscal 1996 periods 
have been reclassified to conform to the fiscal 1997 presentation.

This information includes all adjustments (consisting of normal, recurring
adjustments) which the Company considers necessary for a fair presentation of
such information. The results of operations for the three and six months ended
December 29, 1996 are not necessarily indicative of results to be expected for
the entire year.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

NOTE 2 - DISPOSITION OF ASSETS
------

On October 11, 1996, the Company completed the sale of substantially all of the
net assets of its Sequoia Enterprise Systems business unit (SES), which markets
the Sequoia brand, to General Automation, Inc. for approximately $11,000,000 of
consideration in General Automation, Inc. common stock, warrants and deferred
payments. SES markets fault tolerant and business critical systems and upgrade
products for on-line transaction processing and other interactive applications,
in which system availability, fast response times and data integrity are
critical. Results of operations, assets, and liabilities related to the
operations sold are included in the Company's consolidated financial statements
through October 11, 1996. The effects of this transaction are reflected in other
current assets as of December 29, 1996 and did not affect second quarter of
fiscal 1997 earnings. The amount of consideration exceeding the net book value
of the net assets sold and the expenses incurred related to the transaction,
which approximates $5,075,000, was not recognized as a gain in the current
period due to the uncertainty of realizing the deferred payments. As
consideration is received


                                       5

<PAGE>
 
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
          (unaudited)


exceeding $5,075,000, the Company will recognize the consideration as a gain 
related to the disposition.


NOTE 3 - OTHER CHARGES
------

During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. As a result of management's actions, the Company
recorded other charges of $3,010,000 in the third quarter of fiscal 1996 related
to severance costs and other asset write-downs. These other charges included:
$2,401,000 of severance and related costs, $284,000 to write off other current
and long term assets which were no longer to be used and $325,000 for other
contractual obligations related to these actions. The workforce reductions
comprised approximately 10%, or 43 personnel, and were across all functions.
Payments of approximately $417,000, $775,000 and $1,195,000 were made in
connection with these charges during the three and six months ended December 29,
1996 and the year ended June 30, 1996, respectively. Remaining liabilities of
$614,000 at December 29, 1996 predominantly consisted of severance and related
costs which are expected to be paid out by June 30, 1997.


NOTE 4 - INVENTORIES
------

Inventories including materials, labor and manufacturing overhead consisted of 
the following:


                                      (in thousands)
                                 December 29,     June 30,
                                    1996            1996 
                                ----------------------------
Raw material                       $6,996        $ 9,884     
Work-in-progress                      769          2,057
Finished goods                        889          1,550
                                ----------------------------
                                   $8,654        $13,491
                                ----------------------------


NOTE 5 - NET INCOME (LOSS) PER SHARE
------

Primary and fully diluted net income (loss) per share are not separately stated
as they are substantially the same. Net income (loss) per share was based on the
weighted average number of common and common share equivalents outstanding
during the period, computed in accordance with the treasury stock method. For
loss periods, weighted average common share equivalents are excluded from the
calculation as their effect would be antidilutive.

                                       6
<PAGE>
 
Notes to Consolidated Financial Statements
Sequoia Systems, Inc. and Subsidiaries
            (unaudited)


NOTE 6 - IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
------

Effective July 1, 1996, the Company adopted the Statement of Financial 
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of 
Long-Lived Assets and Long-Lived Assets to be Disposed Of". The adoption of SFAS
No. 121 did not have an impact on the Company's financial position or results of
operations as it is consistent with existing Company policy.


NOTE 7 - COMMON STOCK
------

On September 10, 1996, the Board of Directors authorized the repurchase of up to
two million shares of the Company's common stock, on the open market or in 
negotiated transactions, during the fiscal year ending June 30, 1997. During the
six months ended December 29, 1996, the Company repurchased 1,125,000 shares of 
its common stock at an average price of $2.32 per share for an aggregate 
purchase price of approximately $2,614,000.


NOTE 8 - LINE OF CREDIT
------

The Company maintained a line of credit with Texas Commerce Bank, National 
Association (TCB), which expired on October 31, 1996. The Company is currently 
negotiating a new $5,000,000 line-of-credit facility with TCB.


                                       7

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

The Company is a provider of specialized microcomputers targeted at specific
vertical markets.  Under the Texas Micro brand, the Company provides highly
reliable microcomputer systems and single board computers ("SBCs") for the
industrial and communications markets. The Company operates in one segment,
computer systems, and is a leading supplier of highly reliable microcomputers.

On October 11, 1996, the Company completed the sale of substantially all of the
net assets of its Sequoia Enterprise Systems business unit (SES), which markets
the Sequoia brand, to General Automation, Inc. for approximately $11,000,000 of
consideration in General Automation, Inc. common stock, warrants and deferred
payments.  SES markets fault tolerant and business critical systems and upgrade
products for on-line transaction processing and other interactive applications,
in which system availability, fast response times and data integrity are
critical.  Results of operations, assets, and liabilities related to the
operations sold are included in the Company's consolidated financial statements
through October 11, 1996.  The effects of this transaction are reflected in
other current assets as of December 29, 1996 and did not affect the second
quarter of fiscal year 1997 earnings.  The amount of consideration exceeding the
net book value of the net assets sold and the expenses incurred related to the
transaction, which approximates $5,075,000, was not recognized as a gain in the
current period due to the uncertainty of realizing the deferred payments.  As
consideration is received exceeding $5,075,000, the Company will recognize a
gain related to the disposition.



RESULTS OF OPERATIONS

The following table summarizes the effect of the disposition of SES on
consolidated revenues and gross profit.


                         For the three months ended,   For the six months ended
                         December 29,   December 31,   December 29, December 31,
                             1996          1995            1996        1995    
                         -------------------------------------------------------
                                             (in thousands)                    
                                                                               
                                                                               
Consolidated Revenues      $14,940       $27,938        $33,589      $55,423   
Less Disposed Operations                                                       
 of SES                        664         9,078          5,585       18,077 
                         ---------      --------       --------     --------
Revenues from Ongoing                                                          
 Operations                $14,276       $18,860        $28,004      $37,346  
                         =========      ========       ========     ======== 

Consolidated Gross Profit  $ 4,253       $11,140        $11,001      $22,509   
Less Disposed Operations                                                       
 of SES                        258         4,283          2,497        8,655
                         ---------      --------       --------     -------- 
Gross Profit from Ongoing  
 Operations                $ 3,995       $ 6,857        $ 8,504      $13,854 
                         =========      ========       ========     ======== 
           

                                       8
<PAGE>
 
REVENUES
--------

The Company's revenues for the second quarter of fiscal 1997 of $14,940,000
decreased 47% from $27,938,000 for the second quarter of fiscal 1996.  The
revenue decline was due to the disposition of SES and a decrease in ongoing
product revenues.  Revenues from ongoing operations for the second quarter of
1997 were $14,276,000, which decreased 24% from $18,860,000 for the second
quarter of 1996. During the second quarter of 1997, units shipped from ongoing
operations decreased 14% and the average unit selling price declined 12% as
compared with the second quarter of 1996.

The Company's revenues for the first six months of fiscal 1997 of $33,589,000
decreased 39% from $55,423,000 for the first six months of fiscal 1996.  The
revenue decline was due to the disposition of SES and a decrease in ongoing
product revenues.  Revenues from ongoing operations for the first six months of
1997 were $28,004,000, which decreased 25% from $37,346,000 for the first six
months of 1996. During the first six months of 1997, units shipped from ongoing
operations decreased 11% and the average unit selling price declined 16% as
compared with the first six months of 1996.  Sales to the top five customers
represented only 19% of total revenues from ongoing operations for the first six
months of fiscal 1997 compared to 29% of total revenues from ongoing operations
for the year ago period.

Revenues from ongoing operations for both the three and six months ended
December 29, 1996 are lower than the comparable periods a year ago due to the
decrease in orders from certain significant customers.  Even though sales to
these significant customers are continuing and in certain instances have
increased from the three months ended September 29, 1996 to the three months
ended December 29, 1996, it is unlikely in the short-term that sales volumes to
these customers will return to the prior year levels.

Sales from ongoing operations outside the United States for the second quarter
of  fiscal 1997 increased to $4,482,000 or 31% of total revenues, from
$3,704,000 or 20% of total revenues for the second quarter of fiscal 1996.  For
the six months ended December 29, 1996, sales from ongoing operations outside
the United States comprised $9,466,000, or 34% of total revenues, as compared to
$7,411,000, or 20%, for the comparable period a year ago.


GROSS MARGIN
------------

Gross margin of 28% for the second quarter of  fiscal 1997 reflected a decline
of 12 percentage points from 40% in the second quarter of fiscal 1996.  The
decline in gross margin reflects the disposition of the higher profit margin
revenues associated with the SES business unit as well as a decline in the gross
margin of the ongoing business. Excluding the effect of SES, gross margin was
28% for the second quarter of 1997 compared to 36% in the second quarter of
fiscal 1996.

                                       9
<PAGE>
 
Gross margin of 33% for the first six months of fiscal 1997 reflected a decline
of 8 percentage points from 41% for the first six months of fiscal 1996. The
decline in gross margin reflects the disposition of the higher profit margin
revenues associated with the SES business unit as well as a decline in the gross
margin of the ongoing business. Excluding the effect of SES, gross margin was
30% for the first six months of 1997 compared to 37% for the first six months of
1996.

This decrease in product margin over the prior year periods was substantially
caused by a shift in the mix of sales to a higher proportion of lower margin
highly reliable products.

Continued fluctuations in future margin levels may result from the mix of
product revenues.


RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------

The Company's research and development expenses of $1,693,000 for the second
quarter of fiscal 1997 decreased 48% from $3,270,000 for the second quarter of
fiscal 1996.  As a percent of revenues, research and development expenses
decreased to 11% for the second quarter of 1997, as compared to 12% for the
second quarter of 1996.

The Company's research and development expenses of $4,768,000 for the first six
months of fiscal 1997 decreased 25% from $6,388,000 for the first six months of
fiscal 1996.  As a percent of  revenues, research and development expenses
increased to 14% for the six months of 1997 from 12% for the first six months of
1996, which is a result of the reduction in revenues.

The decrease in research and development expenses from the year ago periods was
primarily due to the sale of SES, as well as, the completion of certain research
and development projects.  Additionally, the first six months of 1996 included
research and development costs incurred for the introduction of the HARDBODYtm.


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------

Selling, general and administrative expenses decreased 46% to $3,539,000, or 24%
of revenues, for the second quarter of fiscal 1997 from $6,558,000, or 23% of
revenues, for the second quarter of fiscal 1996.

Selling, general and administrative expenses decreased 36% to $8,421,000, or 25%
of revenues, for the first six months of fiscal 1997 from $13,134,000, or 24% of
revenues, for the first six months of fiscal 1996.

The significant decline in spending from the prior year periods was a result of
the sale of SES, the reduction in corporate expenses and the actions taken in
fiscal 1996 to refine the business strategy, including reducing the workforce
and relocating the corporate office to Houston.

                                       10
<PAGE>
 
OPERATING INCOME (LOSS)
-----------------------

The Company reported a loss from operations of $979,000 and $2,188,000 for the
second quarter  and first six months of fiscal 1997, compared to income from
operations of $1,312,000 and $2,987,000 for the second quarter and first six
months of fiscal 1996.  The decrease in operating income resulted from the
significant decline in revenues as well as the decrease in gross margin.


OTHER INCOME
------------

The Company generated other income, primarily interest income, of $139,000 and
$244,000 during the three and six months ended December 29, 1996, as compared to
$221,000 and $420,000 for the comparable periods a year ago.  The decrease in
other income resulted primarily from a decrease in cash and cash equivalents.


INCOME TAXES
------------

The Company recorded provisions for income taxes of $38,000 and $64,000 during
the three and six months ended December 29, 1996, as compared to $108,000 and
$242,000 for the comparable periods a year ago.  The provisions are primarily
for state income taxes and the decrease from the comparable prior year period
resulted from losses incurred during the current year.


LIQUIDITY AND CAPITAL RESOURCES

At December 29, 1996, the Company had cash and cash equivalents of $11,759,000
and working capital of $23,694,000.  This compared to cash and cash equivalents
of $12,287,000 and working capital of $26,512,000 at June 30, 1996.

Cash generated from operations was $2,974,000 for the six months ended December
29, 1996.  Cash provided from operations was favorably impacted by the
significant decrease in accounts receivable.

During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. As a result of management's actions, the Company
recorded other charges of $3,010,000 in the third quarter of fiscal 1996.
Payments of approximately $775,000 were made in connection with these charges
during the six months ended December 29, 1996.  Remaining liabilities of
$614,000 at December 29, 1996 predominantly consisted of severance and related
costs which are expected to be paid out by June 30, 1997.

                                       11
<PAGE>
 
The Company's capital expenditures during the six months ended December 29, 1996
were held to a minimum in response to the Company's current operating results.
Capital expenditures during the second half of fiscal 1997 are expected to
continue at a comparable level.

On September 10, 1996, the Board of Directors authorized the repurchase of up to
two million shares of the Company's common stock, on the open market or in
negotiated transactions, during the fiscal year ending June 30, 1997. During the
six months ended December 29, 1996, the Company repurchased 1,125,000 shares of
common stock at an average price of $2.32 per share for an aggregate purchase
price of approximately $2,614,000.

The Company maintained a line of credit with Texas Commerce Bank, National
Association (TCB), which expired on October 31, 1996.  The Company is currently
negotiating a new $5,000,000 line-of-credit facility with TCB.

The Company believes that its present cash flow and cash balances are adequate
for its operating needs, capital expenditures and stock repurchases through
fiscal 1997 as well as the expected cash requirement to settle its remaining
severance and related obligations, resulting from the other charges recorded in
fiscal 1996.

Effective July 1, 1996, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of".  The adoption of SFAS No.
121 did not have an impact on the Company's financial position or results of
operations as it is consistent with existing Company policy.

Effective July 1, 1996, the Company adopted only the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation".  The Company has
elected to continue utilizing the accounting for stock issued to employees
prescribed by APB No. 25.  Therefore, the adoption of SFAS No. 123 did not have
an impact on the Company's financial position or results of operations.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties.  There are a number of factors that
could cause the Company's actual results to differ materially from those
forecasted or projected in such forward-looking statements.  Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof.  The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or changed circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Quarterly Report on Form 10-Q and presented elsewhere by management from time to
time:

                                       12
<PAGE>
 
The markets for the Company's products for the industrial market are
characterized by rapidly changing technology and user needs, requiring
significant investment for product development. The Company believes that a
large part of its ability to increase revenue in the future will depend upon its
ability to develop, manufacture and market new and differentiated products,
which meet new market requirements and changing user needs in a cost-effective
and timely manner. There can be no assurance that these efforts will be
successful.

The Company competes against a wide range of companies. The Company believes
that it competes effectively based on its engineering responsiveness to special
needs and the price/performance characteristics of its products. However, the
computer marketplace is highly competitive. Many of the Company's competitors
have significantly greater financial, marketing and technological resources.
There can be no assurance that the Company will have the resources necessary to
compete successfully in the future.

The Company purchases most of the components of its products and virtually all
of its peripheral devices from a limited number of suppliers. Although the
Company believes that alternate sources of these items could be developed in a
short period of time if required, future shortages of such components or
peripherals could result in production delays. Certain microprocessors used in
the highly reliable product lines are available only from Intel Corporation and
Sun Microsystems, Inc., and changes in the availability of these components at
any time could adversely affect the Company's operations.

A substantial portion of the Company's revenue in each quarter generally results
from orders received in that quarter. Therefore, differences in the receipt of
customer orders in any quarter may produce significant fluctuations in quarterly
revenue and profits. This pattern is likely to continue and makes the Company's
quarterly financial results difficult to predict.

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<PAGE>
 
PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is from time to time a party to various lawsuits arising in the
ordinary course of business.  The Company knows of no pending litigation which
is reasonably likely to have a material adverse impact on its financial
condition or its results of operations.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a)  Exhibits

         27  Financial Data Schedule

         b)  Reports on Form 8-K

         On October 25, 1996, the Company filed with the SEC Form 8-K and
         disclosed under Item 2 that on October 11, 1996, the Company completed
         the sale of substantially all of the net assets of its Sequoia
         Enterprise Systems business unit to General Automation, Inc.  The
         report included unaudited pro forma consolidated statements of
         operations for the fiscal year ended June 30, 1996 and for the three
         month period ended September 29, 1996, and a unaudited pro forma
         consolidated balance sheet at September 29, 1996.
 

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<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.


                              SEQUOIA SYSTEMS, INC.

Date:  February 10, 1997      By: /s/ J. Michael Stewart
                                  ----------------------
                                  J. Michael Stewart
                                  President and Chief Executive Officer

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