STERLING SOFTWARE INC, DEF 14A, 1996-04-24

STERLING SOFTWARE INC
DEF 14A, 1996-04-24
PREPACKAGED SOFTWARE

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SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

STERLING SOFTWARE, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Payment of Filing Fee (Check the appropriate box):

[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.

[_] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[X] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
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STERLING SOFTWARE, INC.
8080 NORTH CENTRAL EXPRESSWAY
SUITE 1100
DALLAS, TX 75206

Dear Stockholder:

We are pleased to provide you with the enclosed Proxy Statement for our
upcoming Annual Meeting of Stockholders. The agenda for this year's meeting
has two important items for your consideration, in addition to the election of
Class C Directors.

The first item on the agenda is the proposed distribution to Sterling
Software's stockholders of shares of Sterling Commerce, Inc. owned by Sterling
Software. Sterling Commerce is a leading provider of electronic commerce
products and services in the rapidly expanding electronic commerce market.
Formerly a wholly owned subsidiary of Sterling Software, Sterling Commerce is
now a publicly traded company following the sale of 18.4% of its outstanding
common stock to the public last month.

The second item on the agenda is the 1996 Stock Option Plan. Your Board
believes that stock options, which align the economic interests of the
grantees with those of the stockholders, are an extremely effective form of
incentive compensation. The Board further believes that our success in
building value over the years is due in large part to our incentive
compensation philosophy.

Your Board strongly recommends approval of the 1996 Stock Option Plan since
substantially all of the options under Sterling Software's existing option
plans have been issued. Due to the importance of maintaining an incentive
compensation program following the spin-off of Sterling Commerce, the
distribution of the Sterling Commerce stock is conditioned upon approval of
the 1996 Stock Option Plan.

Your vote at the Annual Meeting is important, no matter how many shares you
own. Enclosed for your convenience is a proxy card and a postage paid return
envelope. After you have had a chance to review the enclosed Proxy Statement,
please sign, date and return the proxy card with your vote. If you have any
questions, or require any assistance in voting your shares, please call our
proxy solicitor, Georgeson & Company, toll free at 1-800-223-2064.

Sterling Software, Inc.

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STERLING SOFTWARE, INC.
8080 NORTH CENTRAL EXPRESSWAY
SUITE 1100
DALLAS, TEXAS 75206

April 24, 1996

Dear Stockholder:

You are cordially invited to attend the Annual Meeting of Stockholders of
Sterling Software, Inc. ("Sterling Software") to be held at the Doubletree
Hotel, 8250 North Central Expressway, Dallas, Texas, on Wednesday May 29,
1996, at 10:00 a.m., local time. All stockholders of record as of April 22,
1996, are entitled to vote at the Annual Meeting. I urge you to be present in
person or represented by proxy at this important Annual Meeting.

In addition to the election of Directors, at the Annual Meeting you will be
asked to consider and vote upon a proposal to distribute to Sterling
Software's stockholders, as a special dividend, shares of common stock (the
"Commerce Stock") of Sterling Commerce, Inc. ("Sterling Commerce") owned by
Sterling Software (the "Distribution") and to approve the adoption of a new
stock option plan for Sterling Software (the "1996 Option Plan").

Sterling Commerce was formed in December 1995 to own and operate the
electronic commerce businesses historically conducted by Sterling Software's
Electronic Commerce Group. In March 1996, Sterling Commerce completed an
initial public offering (the "Offering"). Approximately 18.4% of the
outstanding shares of Commerce Stock were sold in the Offering. Sterling
Commerce is now a public company and the shares of Commerce Stock are listed
and traded on the New York Stock Exchange.

Sterling Commerce is a leading provider of electronic commerce products and
services worldwide in the rapidly expanding electronic commerce market. The
Board of Directors of Sterling Software believes that the Distribution will
enhance Sterling Commerce's ability to fully realize its potential for further
growth in this market.

Your Board strongly recommends approval of the 1996 Stock Option Plan since
substantially all of the options under Sterling Software's existing option
plans have been issued. The Board believes that stock options, which align the
economic interests of the grantees with those of the stockholders, are an
extremely effective form of incentive compensation. We believe our success in
building value over the years is due in large part to our incentive
compensation philosophy. Due to the importance of maintaining an incentive
compensation program following the Distribution of the Commerce Stock, the
Distribution is conditioned upon approval of the 1996 Stock Option Plan.

Information with respect to the proposed Distribution and the other matters
to be considered at the Annual Meeting is set forth in the accompanying Proxy
Statement. Sterling Software's Board of Directors believes that a favorable
vote on each of the matters to be considered at the Annual Meeting is in the
best interests of Sterling Software and its stockholders and unanimously
recommends a vote "FOR" each such matter. Accordingly, we urge you to review
the accompanying material carefully and return the enclosed proxy promptly.

Directors and officers of Sterling Software will be present at the Annual
Meeting to respond to any questions that our stockholders may have. I hope you
will be able to attend. Even if you expect to attend the Annual Meeting,
please sign, date and return the enclosed proxy without delay. If you attend
the Annual Meeting, you may vote in person even if you have previously mailed
a proxy.

Sincerely,

Sam Wyly
Chairman of the Board
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STERLING SOFTWARE, INC.
8080 NORTH CENTRAL EXPRESSWAY
SUITE 1100
DALLAS, TEXAS 75206

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 29, 1996

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of Sterling Software, Inc. ("Sterling Software") will be held at
the Doubletree Hotel, 8250 North Central Expressway, Dallas, Texas, on
Wednesday May 29, 1996, at 10:00 a.m., local time. A Proxy and a Proxy
Statement for the Meeting are enclosed.

The Meeting is for the purpose of considering and acting upon the following
matters:

1. Approval of a special dividend, if declared by the Board of Directors,
consisting of the distribution (the "Distribution") to the holders of
Sterling Software's then outstanding shares of common stock, par value
$0.10 per share (the "Software Stock"), on a pro rata basis, of shares
of common stock, par value $0.01 per share (the "Commerce Stock"), of
Sterling Software's subsidiary, Sterling Commerce, Inc. ("Sterling
Commerce" or "Commerce"), and ratification of the Intercompany
Agreements described in the accompanying Proxy Statement ("Proposal I");

2. Approval of the adoption of the Sterling Software, Inc. 1996 Stock
Option Plan (the "1996 Stock Option Plan"), to provide continued
employment and performance incentives for Sterling Software's executive
officers, directors, employees, advisors and consultants ("Proposal
II");

3. The election of three Class C directors of Sterling Software for terms
expiring in 1999 ("Proposal III"); and

4. Such other matters as may properly come before the Meeting or any
adjournments thereof.

THE EFFECTIVENESS OF PROPOSAL I IS CONDITIONED UPON THE APPROVAL OF PROPOSAL
II AND CERTAIN ADDITIONAL CONDITIONS DISCUSSED IN THE ACCOMPANYING PROXY
STATEMENT. ACCORDINGLY, FAILURE OF THE STOCKHOLDERS TO APPROVE PROPOSAL II MAY
RESULT IN PROPOSAL I NOT BECOMING EFFECTIVE.

The close of business on April 22, 1996 has been fixed as the record date
for determining stockholders entitled to notice of and to vote at the Meeting
or any adjournments thereof. For a period of at least ten days prior to the
Meeting, a complete list of stockholders entitled to vote at the Meeting will
be open to the examination of any stockholder during ordinary business hours
at the offices of Sterling Software at 8080 North Central Expressway, Suite
1100, Dallas, Texas 75206.

Information concerning the matters to be acted upon at the Meeting is set
forth in the accompanying Proxy Statement.

YOUR VOTE IS IMPORTANT. STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE
MEETING IN PERSON ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES.

By Order of the Board of Directors

Jeannette P. Meier
Secretary

Dallas, Texas

April 24, 1996
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TABLE OF CONTENTS

<TABLE>
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PROXY STATEMENT SUMMARY................................................... 1
ANNUAL MEETING OF STOCKHOLDERS............................................ 11
RECORD DATE AND VOTING SECURITIES......................................... 11
QUORUM AND VOTING......................................................... 11
PROPOSAL I--THE DISTRIBUTION.............................................. 12
Background and Reasons for the Distribution............................. 12
Conditions to the Distribution.......................................... 13
Manner of Effecting the Distribution.................................... 13
Federal Income Tax Aspects of the Distribution.......................... 14
No Fractional Shares.................................................... 15
No Appraisal Rights..................................................... 15
CERTAIN CONSIDERATIONS.................................................... 15
Certain Operating Considerations........................................ 15
Certain Tax Considerations.............................................. 16
Relationship between Sterling Software and Commerce; Conflicts of Inter-
est.................................................................... 16
Ability to Attract Qualified Personnel.................................. 17
Listing and Trading of Commerce Stock................................... 17
Listing and Trading of Software Stock................................... 17
Dividend Policies....................................................... 18
Accounting Treatment.................................................... 18
Certain Provisions of Commerce's Certificate of Incorporation and By-
laws................................................................... 18
RELATIONSHIP BETWEEN STERLING SOFTWARE AND COMMERCE
AFTER THE DISTRIBUTION................................................... 18
Future Management of the Separate Companies............................. 18
Intercompany Agreements................................................. 19
Conflicts of Interest................................................... 21
SELECTED FINANCIAL AND OPERATING DATA OF COMMERCE......................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF COMMERCE.................................... 23
Overview................................................................ 23
Results of Operations................................................... 24
Three Months Ended December 31, 1995 and 1994........................... 24
Years Ended September 30, 1995 and 1994................................. 25
Years Ended September 30, 1994 and 1993................................. 26
Quarterly Results of Operations......................................... 28
Liquidity and Capital Resources......................................... 29
Other Matters........................................................... 30
DESCRIPTION OF COMMERCE CAPITAL STOCK..................................... 30
General................................................................. 30
Commerce Stock.......................................................... 30
Commerce Preferred Stock................................................ 30
Certain Corporate Governance Matters.................................... 31
Indemnification of Directors and Officers of Commerce................... 32
MANAGEMENT OF COMMERCE.................................................... 33
Executive Officers and Directors........................................ 33
Board Committees........................................................ 36
</TABLE>

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<TABLE>
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PAGE
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<S> <C>
Director Nomination Procedures.......................................... 37
Director Compensation................................................... 37
Security Ownership of Management and Certain Stockholders............... 38
Executive Compensation.................................................. 40
Benefit Plans and Agreements............................................ 40
Board and Committee Interlocks and Insider Participation................ 44
BUSINESS OF COMMERCE...................................................... 45
Electronic Commerce..................................................... 45
The Commerce Solution................................................... 47
Strategy................................................................ 48
Products and Services................................................... 49
Sales and Marketing..................................................... 51
Customers............................................................... 52
Product Licenses and Product Support.................................... 52
Product Development..................................................... 53
Competition............................................................. 53
Intellectual Property Rights............................................ 54
Employees............................................................... 54
Facilities.............................................................. 54
Governmental Regulations................................................ 55
Legal Proceedings....................................................... 55
SELECTED HISTORICAL FINANCIAL DATA OF STERLING SOFTWARE................... 56
PRO FORMA FINANCIAL DATA OF STERLING SOFTWARE............................. 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF STERLING SOFTWARE................. 63
Pro Forma Results of Operations Three Months Ended December 31, 1995 and
1994................................................................... 63
Liquidity and Capital Resources......................................... 64
BUSINESS OF STERLING SOFTWARE............................................. 65
General................................................................. 65
Systems Management Group................................................ 66
Applications Management Group........................................... 66
Federal Systems Group................................................... 67
International Group..................................................... 68
Competition............................................................. 68
Employees............................................................... 69
Legal Proceedings....................................................... 69
MANAGEMENT OF STERLING SOFTWARE........................................... 70
Executive Officers...................................................... 70
Directors............................................................... 72
MARKET FOR STERLING SOFTWARE STOCK........................................ 72
PROPOSAL II--APPROVAL OF THE 1996 STOCK OPTION PLAN....................... 73
Background.............................................................. 73
Description of the 1996 Stock Option Plan............................... 73
1996 Stock Option Plan Board Committees................................. 74
Certain Federal Income Tax Consequences................................. 75
Grants under the 1996 Stock Option Plan................................. 75
</TABLE>

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<TABLE>
<CAPTION>
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<S> <C>
PROPOSAL III--ELECTION OF DIRECTORS....................................... 75
Nominees for Director................................................... 75
Current Directors....................................................... 77
Board of Directors and Committees....................................... 78
SECURITY OWNERSHIP OF STERLING SOFTWARE MANAGEMENT AND CERTAIN
STOCKHOLDERS............................................................. 79
COMPENSATION OF STERLING SOFTWARE MANAGEMENT.............................. 81
Summary Compensation Table.............................................. 81
Option Grants in Fiscal 1995............................................ 82
Option Exercises in Fiscal 1995 and Fiscal Year-End Option Values....... 82
Compensation of Directors............................................... 83
Employment and Change-in-Control Agreements............................. 83
Executive Compensation.................................................. 85
Report of the Executive and Stock Option Committees on Executive Compen-
sation................................................................. 85
Employee Stock Ownership Plan........................................... 87
Executive and Stock Option Committee Interlocks and Insider Participa-
tion................................................................... 87
Stock Performance Chart................................................. 89
Pension Plan Table...................................................... 90
SECTION 16 REQUIREMENTS................................................... 90
INDEPENDENT AUDITORS...................................................... 91
STOCKHOLDER PROPOSALS..................................................... 91
OTHER MATTERS............................................................. 91
MISCELLANEOUS............................................................. 91
AVAILABLE INFORMATION..................................................... 92
FORWARD-LOOKING INFORMATION............................................... 92
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 92
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF COMMERCE.................... F-1
ANNEX I--STERLING SOFTWARE, INC. 1996 STOCK OPTION PLAN................... I-1
</TABLE>

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PROXY STATEMENT SUMMARY

The following is a summary of certain information contained in this Proxy
Statement. This summary is included for convenience only and should not be
considered complete. This summary is qualified in its entirety by the more
detailed information and financial statements contained elsewhere in this Proxy
Statement. Certain capitalized terms used in this summary are defined elsewhere
in this Proxy Statement.

THE ANNUAL MEETING

Date, Time and Place of
Meeting........................ The Annual Meeting (the "Meeting") of the
stockholders of Sterling Software, Inc.
("Sterling Software") will be held at the
Doubletree Hotel, 8250 North Central
Expressway, Dallas, Texas, on Wednesday May
29, 1996, at 10:00 a.m., local time.

Matters to be Considered at the At the Meeting, the stockholders of Sterling
Meeting........................ Software will be asked to consider and vote
upon:

1. Approval of a special dividend, if
declared by the Board of Directors of
Sterling Software (the "Software Board"),
consisting of the distribution (the
"Distribution") to the holders of Sterling
Software's then-outstanding shares of
common stock, par value $0.10 per share
(the "Software Stock"), on a pro rata
basis, of shares of common stock, par
value $0.01 per share (the "Commerce
Stock"), of Sterling Software's
subsidiary, Sterling Commerce, Inc.
("Sterling Commerce" or "Commerce"), and
ratification of the Intercompany
Agreements described in this Proxy
Statement ("Proposal I");

2. Approval of the adoption of the Sterling
Software, Inc. 1996 Stock Option Plan (the
"1996 Stock Option Plan"), to provide
continued employment and performance
incentives for Sterling Software's
executive officers, directors, employees,
advisors and consultants ("Proposal II");

3. The election of three Class C directors of
Sterling Software for terms expiring in
1999 ("Proposal III"); and

4. Such other matters as may properly come
before the Meeting or any adjournments
thereof.

The effectiveness of Proposal I is
conditioned upon the approval of Proposal II
and certain additional conditions described
herein. Accordingly, failure of the
stockholders to approve Proposal II may
result in Proposal I not becoming effective.

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For a description of the reasons for and the
conditions to the Distribution, see "The
Distribution--Background and Reasons for the
Distribution." For a description of the
reasons for the adoption of the 1996 Stock
Option Plan, see "Proposal II--Approval of
the 1996 Stock Option Plan--General."

Record Date and Voting
Securities..................... The close of business on April 22, 1996 is
the record date for determining the
stockholders entitled to vote at the Meeting.
The Software Stock constitutes the only
outstanding voting securities of Sterling
Software entitled to be voted at the Meeting.

Quorum and Voting............... The presence at the Meeting, in person or by
proxy, of the holders of a majority of the
outstanding shares of Software Stock is
necessary to constitute a quorum. Each share
of Software Stock is entitled to one vote
with respect to each proposal (including the
election of directors) to be voted on at the
Meeting. Cumulative voting is not permitted
with respect to any proposal to be acted upon
at the Meeting.

Under Delaware law, which governs the
Distribution, a vote of stockholders is not
required in connection with the Distribution.
Sterling Software is seeking stockholder
approval because of the importance of the
Distribution. Because no stockholder vote is
required, the Software Board has determined,
consistent with Sterling Software's Bylaws,
that the affirmative vote of the holders of a
majority of the shares of Software Stock
present in person or by proxy at the Meeting
will constitute approval of the Distribution.

Approval of the stockholders is also not
required by Delaware law in connection with
the adoption of the 1996 Stock Option Plan.
Sterling Software is seeking such approval in
order to (i) qualify the 1996 Stock Option
Plan under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act"), (ii) ensure that
compensation pursuant to the 1996 Stock
Option Plan will not be subject to certain
deduction limits under the Internal Revenue
Code of 1986, as amended (the "Code"), and
(iii) comply with the rules of the New York
Stock Exchange ("NYSE"). See "Proposal II--
Approval of the 1996 Stock Option Plan--
Background." In order to constitute
stockholder approval for purposes of Rule
16b-3 of the Exchange Act, approval of the
1996 Stock Option Plan requires the
affirmative vote of the holders of a majority
of the Software Stock present in person or by
proxy and entitled to vote at the Meeting.
Further, under the rules of the NYSE, at
least a majority of the outstanding Software
Stock must be voted with respect to Proposal
II and approval of such Proposal requires the
affirmative vote of the holders of a majority
of the Software Stock so voted.

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To be elected, each nominee must receive the
affirmative vote of the holders of a majority
of the shares of Software Stock present at
the Meeting, in person or by proxy, provided
that a quorum is present.

THE DISTRIBUTION

Background and Reasons for the The Software Board believes that the
Distribution................... Distribution will allow each of Sterling
Software and Sterling Commerce to concentrate
exclusively on its own business objectives.
The Software Board also believes that the
Distribution will facilitate potential
acquisitions of other electronic commerce
businesses by Sterling Commerce through the
creation of a "pure play" electronic commerce
equity security (i.e., the Commerce Stock)
for possible use as a "currency" in such
transactions. This should provide Sterling
Commerce greater flexibility to pursue
business opportunities, including
acquisitions or other business combinations.
The Software Board also believes that the
Distribution will facilitate the
implementation of an effective equity
incentive compensation plan for each of
Sterling Software and Sterling Commerce
through the creation of separate equity
securities that will be more closely linked
to the separate businesses of the two
companies. Accordingly, the Distribution is
expected to enhance the ability of both
companies to attract, retain and motivate key
personnel.

Conditions to the The Software Board has conditioned the
Distribution................... Distribution upon, among other things, (i)
the approval of both the Distribution and the
1996 Stock Option Plan by Sterling Software's
stockholders, and (ii) the declaration by the
Software Board of a dividend of the shares of
Commerce Stock then owned by Sterling
Software.

The declaration of the dividend by the
Software Board to effect the Distribution is
conditioned upon, among other things, the
receipt of a favorable ruling from the
Internal Revenue Service (the "IRS") as to
the tax-free nature of the Distribution and
the absence of any change in market
conditions or other circumstances that would
cause the Software Board to conclude that the
Distribution is not in the best interests of
the stockholders of Sterling Software. See
"Proposal I--The Distribution--Conditions to
the Distribution."

If Sterling Software's stockholders approve
Manner of Effecting the the Distribution and the 1996 Stock Option
Distribution.............. Plan and all other conditions thereto are
satisfied (or waived by the Software Board),
Sterling Software anticipates that the
Software Board will establish a record date
(the "Distribution Record Date") and

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a payment date (the "Distribution Date")
following the Meeting. On the Distribution
Date, all or substantially all shares of
Commerce Stock owned by Sterling Software
will be delivered to The First National Bank
of Boston (the "Distribution Agent"). As soon
as practicable thereafter, certificates
therefor will be mailed by the Distribution
Agent to holders of record of Software Stock
as of the Distribution Record Date on the
basis of approximately 1.59564 shares of
Commerce Stock for every one share of
Software Stock held on that date (assuming
all presently outstanding options and
warrants to purchase Software Stock are
exercised prior to the Distribution Record
Date). The actual number of shares of
Commerce Stock to be distributed with respect
to each outstanding share of Software Stock
will depend upon the number of shares of
Software Stock outstanding on the
Distribution Record Date, the number of
shares of Commerce Stock owned by Sterling
Software on such date and the number of
shares of Commerce Stock, if any, which may
be required to be retained by Sterling
Software to honor certain warrant
obligations, if such warrants are not
exercised prior to the Distribution Record
Date. In any event, in excess of 99% of the
shares of Commerce Stock owned by Sterling
Software will be included in the
Distribution. All such shares of Commerce
Stock will be fully paid and nonassessable
and the holders thereof will not be entitled
to preemptive rights. It is currently
anticipated that the Distribution Date will
occur prior to September 30, 1996.

Federal Income Tax Aspects of
the Distribution............... The declaration of the dividend by the
Software Board to effect the Distribution is
conditioned upon, among other things, the
receipt of a ruling from the IRS to the
effect that the Distribution will qualify as
a tax free spin-off under Section 355 of the
Code, and that, for federal income tax
purposes: (i) no gain or loss will be
recognized by (and no amount will be included
in the income of) a holder of Software Stock
upon the receipt of Commerce Stock in the
Distribution; (ii) the aggregate basis of the
Software Stock and the Commerce Stock in the
hands of the stockholders of Sterling
Software immediately after the Distribution
will be the same as the aggregate basis of
the Software Stock held immediately before
the Distribution, allocated in proportion to
the fair market value of each security; (iii)
the holding period of the Commerce Stock
received by Sterling Software's stockholders
will include the holding period of the
Software Stock with respect to which the
Distribution will be made, provided that such
stockholder held the Software Stock as a
capital asset on the Distribution Date; and
(iv) no gain or loss will be recognized by
Sterling Software upon the Distribution.
Application has been made to the IRS for a
ruling to the

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foregoing effect. As of the date hereof, the
IRS has not issued a ruling, and there can be
no assurance that the IRS will issue a
favorable ruling. See "The Distribution--
Federal Income Tax Aspects of the
Distribution" and "Certain Considerations--
Certain Tax Considerations."

No Fractional Shares............ No certificates or scrip representing
fractional shares of Commerce Stock will be
issued to Sterling Software's stockholders in
the Distribution. The Distribution Agent will
aggregate fractional shares into whole shares
and sell such shares in the open market at
then prevailing prices on behalf of holders
who otherwise would be entitled to receive
fractional share interests, and such persons
will receive a cash payment in the amount of
their pro rata share of the total sale
proceeds.

CERTAIN CONSIDERATIONS

Certain Operating
Considerations................. Following the Distribution, Sterling Software
will be a smaller and less diversified
company than prior to the Distribution. The
initial public offering of Commerce Stock
(the "Offering") was completed in March 1996.
As a result, Commerce has a very limited
history as a separate company. Each of
Sterling Software and Commerce is engaged in
highly competitive markets.

Relationship Between Sterling
Software and Commerce;
Conflicts of Interest.......... Following the Distribution, Sterling Software
and Commerce will continue to have certain
common executive officers and directors.
Conflicts of interest may arise between
Sterling Software and Commerce following the
Distribution as a result of such common
officers and directors, certain existing
contractual arrangements between Sterling
Software and Commerce and their engaging in
businesses that may in some circumstances be
competitive.

Listing and Trading of Software
Stock and Commerce Stock....... It is expected that the Software Stock and
the Commerce Stock will each continue to be
listed and traded on the NYSE after the
Distribution. The Commerce Stock began
trading on the NYSE on March 8, 1996. The
combined trading prices of the Software Stock
and the Commerce Stock after the Distribution
may be less than, equal to or greater than
the trading price of the Software Stock prior
to the Distribution. See "Certain
Considerations--Listing and Trading of
Commerce Stock" and "--Listing and Trading of
Software Stock."

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Dividend Policies............... Commerce presently intends to retain
available earnings for use in the operation
and expansion of Commerce's business.
Accordingly, Commerce does not anticipate
paying cash dividends on the Commerce Stock
in the foreseeable future.

Following the Distribution, Sterling Software
intends to continue its policy of retaining
available earnings for use in the operation
and expansion of its businesses. Accordingly,
Sterling Software does not anticipate paying
cash dividends on Software Stock in the
foreseeable future.

RELATIONSHIP BETWEEN STERLING SOFTWARE AND COMMERCE
AFTER THE DISTRIBUTION

Future Management of the
Separate Companies............. The Board of Directors of Commerce (the
"Commerce Board") currently has six members,
four of whom are also directors and executive
officers of Sterling Software and one of whom
is a former director of Sterling Software who
resigned from the Software Board upon
completion of the Offering.

Certain of Commerce's executive officers are
also executive officers of Sterling Software
and will continue to serve in such dual
capacities for some period following the
Distribution.

Intercompany Agreements......... In anticipation of the Offering, Sterling
Software and Commerce have entered into a
number of agreements for the purpose of
defining their ongoing relationship following
the Offering. The terms of such agreements
were not the result of arm's length
negotiations. See "Relationship Between
Sterling Software and Commerce after the
Distribution--Intercompany Agreements."

BUSINESS OF COMMERCE

In anticipation of the Offering, Sterling Commerce was formed in December
1995 to own and operate the electronic commerce businesses historically
conducted by Sterling Software's Electronic Commerce Group. Commerce is a
leading provider of electronic data interchange and other electronic commerce
products and services worldwide. Sterling Commerce develops, markets and
supports electronic commerce software products and provides electronic commerce
network services that enable businesses to engage in business-to-business
electronic communications and transactions. See "Business of Commerce."

BUSINESS OF STERLING SOFTWARE

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1996 STOCK OPTION PLAN

The Software Board has adopted the 1996 Stock Option Plan and directed that
it be submitted for approval at the Meeting. The 1996 Stock Option Plan is
intended to provide incentive compensation to certain of Sterling Software's
executive officers, directors, employees, advisors and consultants. Pursuant to
the 1996 Stock Option Plan, the Sterling Software 1996 Stock Option Committee
and the Sterling Software 1996 Special Stock Option Committee will be
authorized to grant stock options ("1996 Plan Options") to certain executive
officers, directors, employees, advisors and consultants of Sterling Software
and its subsidiaries (estimated to be approximately 200 persons in the
aggregate at the time the Distribution is completed). The 1996 Stock Option
Plan also provides for automatic awards of 1996 Plan Options to members of the
Sterling Software 1996 Special Stock Option Committee. The total number of
shares of Software Stock presently available for issuance under the 1996 Stock
Option Plan is 7,750,000. However, on the last day of any fiscal quarter of
Sterling Software, that number is subject to adjustment to increase the shares
available (including shares issued upon exercise of 1996 Plan Options and
including outstanding options) to 20% of the total number of shares of Software
Stock then outstanding or issuable upon the exercise, conversion or exchange of
outstanding options, warrants or any other securities convertible into or
exchangeable for shares of Software Stock. See "Proposal II--Approval of the
1996 Stock Option Plan--Description of the 1996 Stock Option Plan."

7
<PAGE>

SUMMARY FINANCIAL AND OPERATING DATA OF COMMERCE
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary financial and operating data set forth below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Commerce" and the Consolidated Financial
Statements and the Notes thereto of Commerce contained elsewhere herein. The
data for the years ended September 30, 1993, 1994 and 1995 have been derived
from the audited Consolidated Financial Statements of Commerce appearing
elsewhere in this Proxy Statement. The data for the three months ended December
31, 1994 and 1995 have been derived from unaudited consolidated interim
financial statements of Commerce appearing elsewhere in this Proxy Statement.
The unaudited consolidated financial statements have been prepared by Commerce
on a basis consistent with the Consolidated Financial Statements of Commerce
appearing elsewhere herein and, in the opinion of Commerce's management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such data.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,(1) DECEMBER 31,(2)
----------------------------- -------------------
1993 1994 1995 1994 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................... $117,813 $155,916 $203,578 $45,096 $56,150
Cost of sales.............. 27,557 36,282 41,550 9,592 11,916
Product development and en-
hancement................. 6,478 12,497 14,807 3,599 3,288
Income before restructuring
charge, other expense and
income taxes.............. 29,001 46,405 72,028 14,602 20,691
Income before income tax-
es........................ 25,323 46,255 71,550 14,543 20,481
Net income................. 15,194 27,753 42,930 8,726 12,289
Pro forma earnings per com-
mon share(3).............. $ 0.59 $ 0.17
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital(5).................................... $ 6,361 $ 46,861
Total assets.......................................... 137,546 178,046
Stockholder's net investment.......................... 59,602 --
Stockholders' equity(6)............................... -- 100,102
</TABLE>
- --------

(1) Commerce's operations have historically been included in consolidated
income tax returns filed by Sterling Software. Income tax expense has been
computed assuming Commerce filed separate income tax returns.
(2) Results of operations for interim periods are not necessarily indicative of
results of operations for the entire fiscal year.
(3) Assumes that 73,200,000 shares of Commerce Stock were outstanding for the
periods presented.
(4) Adjusted to give effect to the 75,000,000 shares of Commerce Stock
outstanding after the Offering and the receipt by Commerce of approximately
$40,500,000 of net proceeds from the sale by Commerce of 1,800,000 shares
of Commerce Stock pursuant to the Offering.
(5) Prior to the completion of the Offering, substantially all of the excess
cash generated by Commerce's operations was regularly remitted to Sterling
Software pursuant to Sterling Software's centralized cash management
program.

(6) Excludes the effects of the possible future issuance of 17,399,400 shares
of Commerce Stock presently available for issuance pursuant to Commerce's
1996 Stock Option Plan. See "Management of Commerce--Benefit Plans and
Agreements."

8
<PAGE>

SUMMARY FINANCIAL AND OPERATING DATA OF STERLING SOFTWARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary financial and operating data set forth below should be read in
conjunction with Sterling Software's Consolidated Financial Statements and
Notes thereto and the Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in Sterling Software's Annual
Report on Form 10-K, as amended, for the fiscal year ended September 30, 1995
(the "Software Form 10-K"), and Sterling Software's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1995 (the "Software Form 10-Q"),
which are incorporated herein by reference. See "Incorporation of Certain
Documents by Reference."

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,(1)
--------------------------- --------------------
1993(2) 1994 1995 1994 1995
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA(3)(4):
Revenue..................... $416,114 $473,393 $588,167 $126,418 $148,652
Cost of sales............... 172,105 171,745 190,563 42,510 49,663
Product development and en-
hancement.................. 27,397 33,002 42,509 9,446 9,360
Income before restructuring
charge, purchased research
and development, other
income (expense), income
taxes, extraordinary item
and cumulative effect of a
change in accounting
principal.................. 46,432 95,534 132,350 25,447 30,697
Income (loss) applicable to
common stockholders........ (38,106) 58,143 9,129 (61,704) 21,307
Net income per common share
Primary................... (2.18) 2.54 .39 (2.87) .72
Fully diluted............. (2.18) 2.31 .39 (2.87) .66
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $233,092
Total assets................................................ 702,497
Long-term debt.............................................. 116,647
Other noncurrent liabilities................................ 25,708
Stockholders' equity........................................ 359,123
</TABLE>
- --------
(1) Results of operations for interim periods are not necessarily indicative of
results of operations for the entire fiscal year.
(2) The 1993 operating results reflect the costs of the combination of Sterling
Software and Systems Center, Inc. ("Systems Center") in the amount of
$91,260,000, including transaction costs and charges relating to the
elimination of duplicate facilities and equipment, severance costs and
write-off of costs related to certain software products not actively
marketed by Sterling Software. See Note 3 of Notes to Consolidated
Financial Statements in the Software Form 10-K.
(3) On November 30, 1994, Sterling Software acquired KnowledgeWare, Inc.
("KnowledgeWare") in a stock-for-stock acquisition accounted for as a
purchase. Accordingly, the operating results of KnowledgeWare are included
in Sterling Software's results of operations from the date of the
acquisition. The results of operations include $62,000,000 of purchased
research and development costs, which is the portion of the purchase price
attributable to in-process research and development and which was charged
to expense in accordance with purchase accounting guidelines. The 1995
results of operations also include a charge for restructure costs of
$19,512,000 to integrate KnowledgeWare's business into Sterling Software's
operations. The restructure charge includes employee termination costs,
costs related to the elimination of duplicate facilities, the write-off of
costs related to certain software products which were not actively marketed
and other out of pocket costs related to the reorganization. Cash costs and
expenses directly related to the acquisition of KnowledgeWare and unrelated
to the restructuring of Sterling Software are accounted for as a cost of
the acquisition. See Note 2 of Notes to Consolidated Financial Statements
in the Software Form 10-K.
(4) In August 1994, Sterling Software acquired American Business Computer
Company ("ABC") in a stock-for-stock acquisition accounted for as a pooling
of interests. In July 1993, Sterling Software acquired Systems Center in a
stock-for-stock acquisition accounted for as a pooling of interests.
Sterling Software's consolidated financial statements have been
retroactively adjusted to include the results of ABC and Systems Center for
all periods presented. See Note 2 of Notes to Consolidated Financial
Statements in the Software Form 10-K.

9
<PAGE>

SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA OF STERLING SOFTWARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary pro forma financial and operating data set forth below should be
read in conjunction with Sterling Software's Consolidated Financial Statements
and Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Software Form 10-K and the
Software Form 10-Q, which are incorporated by reference, and "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations of Sterling Software" contained elsewhere herein. The data
illustrate the effects of the receipt of net proceeds from the Offering, the
proceeds and estimated tax benefit from the exercise of stock options through
March 31, 1996, the conversion and redemption of Sterling Software's 5.75%
Convertible Subordinated Debentures ("Debentures") and the proposed
Distribution. The pro forma adjustments are estimates based upon available
information and upon certain assumptions that Sterling Software's management
believes are reasonable in the circumstances. Actual results may vary from
these estimates. See "Incorporation of Certain Documents By Reference."

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -------------------
1994 1995(1) 1994(1) 1995
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DA-
TA(2)
Revenue............................... $325,903 $396,311 $ 83,596 $ 95,985
Cost of sales......................... 143,889 160,735 35,192 41,230
Product development and enhancement... 20,505 27,702 5,847 6,072
Income (loss) before income taxes..... 49,458 (15,544) (70,976) 12,673
Income (loss) from continuing opera-
tions................................ 32,453 (31,789) (69,859) 9,540
Pro forma income (loss) from
continuing operations per share...... 1.20 (1.15) (2.74) 0.28
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
PRO FORMA BALANCE SHEET DATA(2)(3)(4)
Working capital............................................. $526,533
Total assets................................................ 923,975
Long-term debt.............................................. 304
Other noncurrent liabilities................................ 7,288
Stockholders' equity........................................ 692,561
</TABLE>
- --------
(1) On November 30, 1994 Sterling Software acquired Knowledgeware in a stock-
for-stock acquisition accounted for as a purchase. Accordingly, the
operating results of Knowledgeware are included in Sterling Software's
results of operations from the date of the acquisition. The results of
operations include $62,000,000 of purchased research and development costs,
which is the portion of the purchase price attributable to in-process
research and development and which was charged to expense in accordance
with purchase accounting guidelines. The 1995 results of operations also
include a charge for restructure costs of $19,512,000 to integrate
Knowledgeware's business into Sterling Software's operations. The
restructure charge includes employee termination costs, costs related to
the elimination of duplicate facilities, the write-off of costs related to
certain software products which were not actively marketed and other out of
pocket costs related to the reorganization. Cash costs and expenses
directly related to the acquisition of Knowledgeware and unrelated to the
restructuring of Sterling Software are accounted for as a cost of the
acquisition. See Note 2 of Notes to Consolidated Financial Statements in
the Software Form 10-K.
(2) Adjusted to give effect to the conversion and redemption of the outstanding
Debentures. On December 20, 1995, Sterling Software gave notice of the
redemption of all of the $114,922,000 then outstanding principal amount of
the Debentures. The effective date of the redemption was February 12, 1996.
The Debentures were convertible into shares of Software Stock.
Approximately $114,912,000 principal amount of the Debentures was presented
for conversion. In addition, approximately $78,000 principal amount of the
Debentures had been converted prior to the announcement of the redemption.
Approximately 4,056,000 shares of Software Stock were issued upon
conversion of the Debentures. Approximately $10,000 principal amount of
Debentures was redeemed for cash on February 12, 1996.

(3) Adjusted to give effect to the receipt of net proceeds of approximately
$267,000,000 from the sale of Commerce Stock in the Offering. Based upon
certain assumptions and current estimates, Sterling Software presently
expects to record a gain, net of tax, of approximately $125,000,000 from
the sale of Commerce Stock in the Offering.

(4) In connection with the Offering, Sterling Software accelerated the vesting
of substantially all outstanding options granted under Sterling Software's
existing stock option plans. The pro forma balance sheet has been adjusted
to give effect to the receipt of proceeds of $109,180,000 from the exercise
of 4,242,000 employee stock options for the period from January 1, 1996 to
March 31, 1996. If all remaining outstanding options and warrants to
purchase Software Stock at March 31, 1996 were exercised, 4,214,496
additional shares of Software Stock would be issued and outstanding,
resulting in additional proceeds to Sterling Software of $152,154,000.

10
<PAGE>

STERLING SOFTWARE, INC.
8080 NORTH CENTRAL EXPRESSWAY
SUITE 1100
DALLAS, TEXAS 75206

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 29, 1996

This Proxy Statement is being first mailed on or about April 24, 1996 to
stockholders of Sterling Software by the Software Board to solicit proxies
(the "Proxies") for use at the Meeting to be held at the Doubletree Hotel,
8250 North Central Expressway, Dallas, Texas, on Wednesday May 29, 1996, at
10:00 a.m. local time, or at such other time and place to which the Meeting
may be adjourned.

At the Meeting, the stockholders of Sterling Software will be asked to
consider and vote upon the following matters: (i) approval of the
Distribution, if declared by the Software Board; (ii) approval of the adoption
of the 1996 Stock Option Plan; (iii) the election of three Class C directors
of Sterling Software; and (iv) such other matters as may properly come before
the Meeting or any adjournments thereof.

All shares represented by valid Proxies, unless the stockholder otherwise
specifies, will be voted FOR (i) the proposal to approve the Distribution;
(ii) the proposal to adopt the 1996 Stock Option Plan; (iii) the election of
the three persons named under "Proposal III--Election of Directors" as
nominees for election as Class C directors for terms expiring in 1999; and
(iv) at the discretion of the Proxy holders, with regard to any other matter
that may properly come before the Meeting or any adjournments thereof. Where a
stockholder has appropriately specified how a Proxy is to be voted, it will be
voted accordingly.

THE EFFECTIVENESS OF PROPOSAL I IS CONDITIONED UPON THE APPROVAL OF PROPOSAL
II AND CERTAIN ADDITIONAL CONDITIONS DESCRIBED IN THIS PROXY STATEMENT.
ACCORDINGLY, FAILURE OF THE STOCKHOLDERS TO APPROVE PROPOSAL II MAY RESULT IN
PROPOSAL I NOT BECOMING EFFECTIVE.

A Proxy may be revoked at any time by providing written notice of such
revocation to The First National Bank of Boston, P.O. Box 1628, Boston,
Massachusetts 02105-9903, which notice must be received prior to the Meeting.
If notice of revocation is not received prior to the Meeting, a stockholder
may nevertheless revoke a Proxy if he or she attends the Meeting and desires
to vote in person.

RECORD DATE AND VOTING SECURITIES

The close of business on April 22, 1996 is the record date (the "Record
Date") for determining the stockholders entitled to vote at the Meeting, at
which time Sterling Software had issued and outstanding approximately
34,800,000 shares of Software Stock. The Software Stock constitutes the only
outstanding voting securities of Sterling Software entitled to be voted at the
Meeting.

QUORUM AND VOTING

The presence at the Meeting, in person or by Proxy, of the holders of a
majority of the outstanding shares of Software Stock is necessary to
constitute a quorum. Each share of Software Stock represented at the Meeting,
in person or by Proxy, will be counted toward a quorum. If a quorum should not
be present, the Meeting may be adjourned from time to time until a quorum is
obtained. Each share of Software Stock is entitled to one vote

11
<PAGE>

with respect to each proposal (including the election of directors) to be
voted on at the Meeting. Cumulative voting is not permitted with respect to
any proposal to be acted upon at the Meeting.

The accompanying proxy card is designed to permit each stockholder of record
at the close of business on the Record Date to vote in the election of
directors and on the proposals described in this Proxy Statement. The proxy
card provides space for a stockholder to vote in favor of or to withhold
voting for any or all nominees for election to the Software Board, to vote for
or against any proposal to be considered at the Meeting or to abstain from
voting for any proposal if the stockholder chooses to do so.

To be elected, each nominee must receive the affirmative vote of the holders
of a majority of the shares of Software Stock present at the Meeting, in
person or by Proxy.

Under Delaware law, which governs the Distribution, a vote of stockholders
is not required in connection with the Distribution. Sterling Software is
seeking the approval of its stockholders because of the importance of the
Distribution. Because no stockholder vote is required, the Software Board has
determined, consistent with Sterling Software's Bylaws, that the affirmative
vote of the holders of a majority of the shares of Software Stock present, in
person or by proxy, at the Meeting will constitute approval of the
Distribution.

Approval of the stockholders is also not required by Delaware law in
connection with the adoption of the 1996 Stock Option Plan. Sterling Software
is seeking such approval in order to (i) qualify the 1996 Stock Option Plan
under Rule 16b-3 of the Exchange Act, (ii) ensure that compensation pursuant
to the 1996 Stock Option Plan will not be subject to certain deduction limits
under the Code, and (iii) comply with the rules of the NYSE. See "Proposal
II--Approval of the 1996 Stock Option Plan--Background." In order to
constitute stockholder approval for purposes of Rule 16b-3 of the Exchange
Act, approval of the 1996 Stock Option Plan requires the favorable vote of the
holders of a majority of the Software Stock present, in person or by proxy,
and entitled to vote at the Meeting. Further, under the rules of the NYSE, at
least a majority of the outstanding Software Stock must be voted with respect
to Proposal II and approval of such Proposal requires the affirmative vote of
the holders of a majority of the Software Stock so voted.

Shares subject to abstentions and broker non-votes will be treated as shares
present at the Meeting for purposes of determining whether a quorum is present
but, because such shares are not actually voted, will have the effect of a
vote against Proposal I and Proposal II.

PROPOSAL I--THE DISTRIBUTION

BACKGROUND AND REASONS FOR THE DISTRIBUTION

Sterling Software is a recognized worldwide supplier of software products
and services within the electronic commerce, systems management and
applications management software markets and also provides technical
professional services to certain sectors of the federal government. Consistent
with Sterling Software's decentralized operating style, each major market is
served by independently operated business groups which consist of units that
focus on specific business niches within those markets. Sterling Software's
former Electronic Commerce Group (the business of which is now conducted by
Sterling Commerce), is a leading provider of electronic commerce products and
services worldwide in the rapidly expanding electronic commerce market.

In late 1995, Sterling Software's management began exploring various
alternatives to enhance the ability of the Electronic Commerce Group to fully
realize its potential for further growth in the electronic commerce market.

In December 1995, the Software Board authorized Sterling Software to form
Sterling Commerce to own and operate the electronic commerce businesses
historically conducted by its Electronic Commerce Group. The Software Board
also authorized Sterling Software to pursue the Offering to be followed by the
Distribution.

12
<PAGE>

In March 1996, Sterling Commerce completed the Offering. Of the 13,800,000
shares of Commerce Stock sold in the Offering, 12,000,000 shares were sold by
Sterling Software and 1,800,000 shares were sold by Sterling Commerce. The
proceeds to Sterling Software and Sterling Commerce from the sale of the
shares of Commerce Stock in the Offering were approximately $267,000,000 and
$40,500,000, respectively, based upon the initial public offering price of
$24.00 per share of Commerce Stock and after deducting underwriting discounts
and other Offering expenses.

The Software Board believes that the Distribution will allow each of
Sterling Software and Sterling Commerce to concentrate exclusively on its own
business objectives. The Software Board also believes that the Distribution
will facilitate potential acquisitions of other electronic commerce businesses
by Sterling Commerce through the creation of a "pure play" electronic commerce
equity security (i.e., the Commerce Stock) for possible use as a "currency" in
such transactions. This should provide Sterling Commerce greater flexibility
to pursue business opportunities, including acquisitions or other business
combinations. The Software Board also believes that the Distribution will
facilitate the implementation of an effective equity incentive compensation
plan for each of Sterling Software and Sterling Commerce through the creation
of separate equity securities that will be more closely linked to the separate
businesses of the two companies. Accordingly, the Distribution is expected to
enhance the ability of both companies to attract, retain, and motivate key
personnel.

In addition, the Software Board believes that the Distribution will maximize
the business opportunities and potential for Sterling Commerce's electronic
commerce business and those businesses that will continue to be conducted by
Sterling Software, thereby enhancing the market recognition of each company.

CONDITIONS TO THE DISTRIBUTION

The Software Board has conditioned the Distribution upon, among other
things, (i) the approval of both the Distribution and the 1996 Stock Option
Plan by Sterling Software's stockholders, and (ii) the declaration by the
Software Board of a dividend of the shares of Commerce Stock then owned by
Sterling Software.

The declaration of the dividend by the Software Board to effect the
Distribution is conditioned upon, among other things, the receipt of a
favorable ruling from the IRS as to the tax-free nature of the Distribution
and the absence of any change in market conditions or other circumstances that
would cause the Software Board to conclude that the Distribution is not in the
best interests of the stockholders of Sterling Software. Sterling Software has
applied to the IRS for a ruling as to the tax-free nature of the Distribution.
See "--Federal Income Tax Aspects of the Distribution."

As discussed under "Quorum and Voting" above, stockholder approval of the
Distribution is not required, although Sterling Software is seeking such
approval because of the importance of the Distribution to its stockholders.
The Software Board has retained the discretion to waive the conditions to the
Distribution described above and further, even if stockholder approval of both
the Distribution and the 1996 Stock Option Plan is obtained and all other
conditions to the Distribution are satisfied, to abandon, defer or modify the
Distribution. However, if the Software Board takes any such action, it will be
on the basis that such action is in the best interests of Sterling Software
and its stockholders.

Sterling Software presently anticipates that the Distribution will occur
prior to September 30, 1996. Under existing NYSE requirements, Sterling
Software will make a public announcement of the special dividend to effect the
Distribution at least 10 calendar days prior to the Distribution Record Date.

MANNER OF EFFECTING THE DISTRIBUTION

If Sterling Software's stockholders approve the Distribution and the 1996
Stock Option Plan and all other conditions thereto are satisfied (or waived by
the Software Board), Sterling Software anticipates that the Software Board
will establish the Distribution Record Date and Distribution Date following
the Meeting. On the Distribution Date, all or substantially all shares of
Commerce Stock owned by Sterling Software will be delivered to the
Distribution Agent. As soon as practicable thereafter, certificates
representing shares of Commerce Stock

13
<PAGE>

will be mailed by the Distribution Agent to holders of record of Software
Stock as of the Distribution Record Date on the basis of approximately 1.59564
shares of Commerce Stock for every one share of Software Stock held on that
date (assuming all presently outstanding options and warrants to purchase
Software Stock are exercised prior to the Distribution Record Date). The
actual number of shares of Commerce Stock to be distributed with respect to
each outstanding share of Software Stock will depend upon the number of shares
of Software Stock outstanding on the Distribution Record Date, the number of
shares of Commerce Stock owned by Sterling Software on such date and the
number of shares of Commerce Stock, if any, which may be required to be
retained by Sterling Software to honor certain warrant obligations, if such
warrants are not exercised prior to the Distribution Record Date. In any
event, in excess of 99% of the shares of Commerce Stock owned by Sterling
Software will be included in the Distribution. All such shares of Commerce
Stock will be fully paid and nonassessable and the holders thereof will not be
entitled to preemptive rights. See "Description of Commerce Capital Stock."

No holder of Software Stock will be required to pay any cash or other
consideration for the shares of Commerce Stock received in the Distribution or
to surrender or exchange shares of Software Stock in order to receive Commerce
Stock.

Sterling Software has received a response to a no-action request filed with
the Securities and Exchange Commission (the "Commission") to the effect that
the Distribution may be effected without the registration of the Commerce
Stock under the Securities Act of 1933, as amended (the "Securities Act"), and
that the shares of Commerce Stock distributed to stockholders in the
Distribution will be freely transferable, except for securities received by
persons who may be deemed to be "affiliates" of Sterling Software within the
meaning of Rule 144 of the Securities Act. Persons who are affiliates of
Sterling Software within the meaning of Rule 144 are subject to such rule,
except for the holding period requirement, and may not publicly offer or sell
the Commerce Stock received in connection with the Distribution except
pursuant to a registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act.

FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION

The declaration of the dividend by the Software Board to effect the
Distribution is conditioned upon, among other things, the receipt of a ruling
from the IRS to the effect that the Distribution will qualify as a tax free
spin-off under Section 355 of the Code and that for federal income tax
purposes:

. No gain or loss will be recognized by (and no amount will be included in
the income of) a holder of Software Stock upon the receipt of Commerce
Stock in the Distribution.

. The aggregate basis of the Software Stock and the Commerce Stock in the
hands of the stockholders of Sterling Software immediately after the
Distribution will be the same as the aggregate basis of the Software
Stock held immediately before the Distribution, allocated in proportion
to the fair market value of each security.

. The holding period of the Commerce Stock received by the stockholders of
Sterling Software will include the holding period of the Software Stock
with respect to which the Distribution will be made, provided that such
stockholder held the Software Stock as a capital asset on the
Distribution Date.

. No gain or loss will be recognized by Sterling Software upon the
Distribution.

Application has been made to the IRS for a ruling to the foregoing effect.
As of the date hereof, the IRS has not issued such a ruling. Sterling Software
believes that the positions asserted by Sterling Software in requesting the
ruling are consistent with the Code and the rules and regulations promulgated
thereunder. However, there is no certainty that the IRS will issue a favorable
ruling. If such ruling is not obtained, the Software Board will determine what
action, if any, to take with respect to the Distribution at that time. See
"Certain Considerations--Certain Tax Considerations." The Software Board may
waive the receipt of such a ruling as a condition to consummation of the
Distribution. Sterling Software will make a public announcement but will not
provide stockholders with prior notice if receipt of the tax ruling is waived
as a condition to consummation of the Distribution; however (i) the Software
Board will waive such condition only if the Software Board believes that

14
<PAGE>

the receipt of shares of Commerce Stock by holders of Software Stock will be
tax free and (ii) Sterling Software will notify stockholders if Sterling
Software either receives an unfavorable ruling from the IRS, or withdraws its
request for such ruling, prior to the Meeting. See "The Distribution--
Conditions to the Distribution." For a description of the consequences to
Sterling Software, Commerce and the stockholders if the Distribution were not
to qualify as tax free, see "Certain Considerations--Certain Tax
Considerations."

THE FOREGOING DISCUSSION OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE APPLICABILITY AND EFFECT OF
STATE, LOCAL AND FOREIGN TAX LAWS, AND OF PROPOSED CHANGES IN APPLICABLE TAX
LAWS.

For a description of the Tax Allocation Agreement entered into between
Sterling Software and Commerce in connection with the Offering, see
"Relationship Between Sterling Software and Commerce after the Distribution--
Intercompany Agreements."

NO FRACTIONAL SHARES

No certificates or scrip representing fractional shares of Commerce Stock
will be issued to Sterling Software's stockholders in the Distribution. The
Distribution Agent will aggregate fractional shares into whole shares and sell
such shares in the open market at then prevailing prices on behalf of holders
who otherwise would be entitled to receive fractional share interests and such
persons will receive a cash payment in the amount of their pro rata share of
the total sale proceeds. Such sales are expected to be made as soon as
practicable after the mailing of the certificates evidencing shares of
Commerce Stock to Sterling Software's stockholders. Sterling Software will
bear the cost of commissions and other expenses incurred in connection with
such sales.

NO APPRAISAL RIGHTS

Stockholders are not entitled to appraisal rights under Delaware law in
connection with the Distribution or any other matter to be considered at the
Meeting.

CERTAIN CONSIDERATIONS

CERTAIN OPERATING CONSIDERATIONS

Although Commerce together with its subsidiaries and predecessors has been
providing electronic commerce solutions for over 20 years, Commerce has a
limited operating history as a separate company. Prior to the Offering, each
of Sterling Software and Commerce had access to the cash flow generated by the
other and to Sterling Software's credit, which was based on the combined
assets of Sterling Software and Commerce.

Prior to the completion of the Distribution, Sterling Software will continue
to provide cash management services to Commerce on an interim basis pursuant
to an agreement that will automatically terminate on the occurrence of the
Distribution and is otherwise terminable by either party on or after September
30, 1996. Such agreement provides, among other things, for Sterling Software
to advance Commerce funds sufficient to meet its daily cash requirements.
Commerce is in negotiations with a bank lender to provide a two-year,
unsecured revolving credit facility that will permit borrowings of up to
$20,000,000. Commerce presently expects to enter into a loan agreement for
this credit facility effective as of the Distribution. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Commerce--Liquidity and Capital Resources." Although Commerce does not expect
to have any difficulty in this regard, there can be no assurance that Commerce
will be able to obtain such credit facility on the terms or in the timeframe
described above.

Each of Sterling Software and Commerce is a smaller and less diversified
company than historically was the case with respect to Sterling Software prior
to the Offering. In addition, the Distribution will result in the termination
of Sterling Software's ownership of a majority interest in Commerce. Such
termination may result in some temporary dislocation and inefficiencies to the
business operations, as well as the organization and personnel structure, of
each company.

15
<PAGE>

The businesses in which each of Sterling Software and Commerce and each of
their respective operating groups engages are highly competitive. Each of
Sterling Software and Commerce competes with both large companies having
substantially greater resources and small specialized companies that compete
in a particular geographic region or market niche. See "Business of Commerce--
Competition" and "Business of Sterling Software--Competition." Following the
Distribution, each of Sterling Software and Commerce will be required to
compete with such other companies without the capital resources and other
assets of the other.

CERTAIN TAX CONSIDERATIONS

The declaration of the dividend by the Software Board to effect the
Distribution is conditioned upon, among other things, the receipt of a ruling
from the IRS as to the tax-free nature of the Distribution, although the
Software Board may waive receipt of the ruling as a condition to consummation
of the Distribution. See "The Distribution--Conditions to the Distribution"
and "--Federal Income Tax Aspects of the Distribution." Such rulings, while
generally binding upon the IRS, are subject to certain factual representations
and assumptions. If such factual representations and assumptions were
incorrect in a material respect, the rights of taxpayers to rely on such
ruling would be jeopardized. Sterling Software is not aware of any facts or
circumstances which would cause such representations and assumptions to be
untrue.

The IRS has not issued a ruling letter and there can be no assurance that
the IRS will issue a ruling prior to the Distribution. If the Distribution
were not to qualify as a tax-free spin-off under Section 355 of the Code,
then, in general, a corporate tax (which would be very substantial) would be
payable by Sterling Software based upon the difference between (i) the fair
market value of the distributed Commerce Stock and (ii) the adjusted basis of
such Commerce Stock. In addition, under the consolidated tax return rules of
the Code, each member of Sterling Software's consolidated group (including
Commerce) would be severally liable for such tax liability. If the
Distribution occurred and it were not to qualify as a tax-free spin-off under
Section 355 of the Code, the resulting tax liability would have a material
adverse effect on the financial position, results of operations and cash flows
of Sterling Software and possibly Commerce.

Furthermore, if the Distribution were not to qualify as a tax-free spin-off,
each stockholder of Sterling Software who receives shares of Commerce Stock in
the Distribution would be treated as if such stockholder had received a
taxable distribution in an amount equal to the fair market value of Commerce
Stock received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Sterling Software's current and accumulated
earnings and profits, (ii) a reduction in such stockholder's basis in such
holder's shares of Software Stock to the extent that the amount received
exceeds such stockholder's share of earnings and profits and (iii) a gain from
the deemed sale or exchange of such shares of Software Stock to the extent the
amount received exceeds both such stockholder's share of earnings and profits
and such stockholder's basis in such shares of Software Stock. Finally, if the
Distribution does not occur, any future dispositions by Sterling Software of
any Commerce Stock would likely be taxable to Sterling Software. See "The
Distribution--Federal Income Tax Aspects of the Distribution."

RELATIONSHIP BETWEEN STERLING SOFTWARE AND COMMERCE; CONFLICTS OF INTEREST.

Conflicts of interest may arise between Sterling Software and Commerce in a
number of areas relating to their past and ongoing relationships, including
potential competitive business activities, international marketing functions,
tax and employee benefit matters, indemnity arrangements and the existence of
certain dual management capacities of executives who continue to serve both
companies. See "Relationship Between Sterling Software and Commerce After the
Distribution--Conflicts of Interest." Certain of Sterling Software's executive
officers are also executive officers of Commerce and will continue to serve in
such dual capacities for some period following the Distribution. Neither the
length of such period for any particular individual nor the capacity or
capacities in which he or she might serve either Sterling Software or Commerce
(or both) following the conclusion of such period has been determined as of
the date of this Proxy Statement. There can be no assurance regarding the
impact on each of Sterling Software and Commerce in the event any of such
executive officers is unable to continue to serve in such dual capacities. In
addition, currently four individuals are members of the

16
<PAGE>

Board of Directors of both Sterling Software and Sterling Commerce and one
other individual who is a director of Commerce is a former director of
Sterling Software. Directors or executive officers of Sterling Software who
are also directors or executive officers of Commerce may have conflicts of
interest with respect to matters potentially or actually involving or
affecting Sterling Software and Commerce. There can be no assurance that
conflicts will be resolved without detriment to the interests of one company
or the other. Further, although neither Sterling Software nor Sterling
Commerce presently intends to engage in the businesses presently conducted by
the other, neither company is contractually obligated not to do so. See
"Relationship between Sterling Software and Commerce After the Distribution--
Conflicts of Interest."

ABILITY TO ATTRACT QUALIFIED PERSONNEL

The businesses of each of Sterling Software and Commerce are dependent upon
each company's ability to attract and retain highly qualified managerial,
technical and sales personnel. Competition for such personnel is intense, and
following the Distribution Sterling Software and Commerce may compete with
each other as well as third parties for such personnel. There can be no
assurance regarding the impact of the Distribution on the ability of each of
Sterling Software and Commerce to retain its key managerial, technical and
sales personnel or to attract, assimilate or retain such personnel in the
future. The inability of either company to attract and retain such personnel
could have a material adverse effect on the business, results of operations
and financial condition of such company. See "Business of Commerce--Employees"
and "Business of Sterling Software--Employees."

LISTING AND TRADING OF COMMERCE STOCK

Commerce completed the Offering in March 1996. Of the 13,800,000 shares of
Commerce Stock sold in the Offering, 12,000,000 shares were sold by Sterling
Software and 1,800,000 shares were sold by Commerce. Sterling Software
presently owns 61,200,000 Shares of Common Stock, or 81.6% of the outstanding
shares of Commerce Stock.

The Commerce Stock is listed for trading on the NYSE under the symbol "SE"
and began trading on the NYSE on March 8, 1996. There was no public market for
the Commerce Stock prior to the Offering and there can be no assurance that an
active trading market in the Commerce Stock will be sustained. The market
price of the Commerce Stock is likely to be highly volatile, and there can be
no assurance that the price of the Commerce Stock will not decline below the
initial public offering price at any time prior to or following the completion
of the Distribution. In addition, there can be no assurance as to the effect
that the expectation that the Distribution will occur, the occurrence of the
Distribution or the failure of the Distribution to occur might have on the
market price of the Commerce Stock. Sterling Software believes factors such as
quarterly fluctuations in Commerce's financial results, changes in earnings
estimates by securities analysts and announcements of material events by
Commerce, its major customers or its competitors, as well as general industry
or economic conditions, may cause the market price of the Commerce Stock to
fluctuate, perhaps substantially.

The high and low sales prices for the Commerce Stock as reported on the NYSE
for the period from March 8, 1996 through April 22, 1996 are $33 7/8 and $28,
respectively. Following the Distribution, Commerce initially will have
approximately 1,250 stockholders of record based upon the number of
stockholders of record of each of Commerce and Sterling Software as of April
22, 1996.

LISTING AND TRADING OF SOFTWARE STOCK

It is expected that the Software Stock will continue to be listed and traded
on the NYSE after the Distribution. Following the Distribution, Commerce's
financial results will no longer be consolidated with those of Sterling
Software, and Sterling Software's assets and revenues will be substantially
lower than prior to the Distribution. See "Pro Forma Financial Data of
Sterling Software." Accordingly, as a result of the Distribution, the trading
price range of the Software Stock immediately after the Distribution may be
significantly lower than the trading price range of the Software Stock prior
to the Distribution. The combined trading prices of the Software Stock and the
Commerce Stock after the Distribution may be less than, equal to or greater
than the

17
<PAGE>

trading price of the Software Stock prior to the Distribution. The prices at
which the Software Stock trades after the Distribution will be determined by
the marketplace and may be influenced by many factors, including the
continuing depth and liquidity of the market for the Software Stock, investor
perception of Sterling Software's remaining software businesses, dividend
policy and general economic and market conditions. For information regarding
the historical trading prices of the Software Stock, see "Market for Sterling
Software Stock."

DIVIDEND POLICIES

Commerce intends to retain available earnings for use in the operation and
expansion of Commerce's business. Accordingly, Commerce does not anticipate
paying cash dividends on the Commerce Stock in the foreseeable future.

Sterling Software did not pay dividends on the Software Stock during the
three years ended September 30, 1995 and following the Distribution intends to
continue its policy of retaining available earnings for use in the operation
and expansion of its businesses. Moreover, under the terms of its existing
credit facility, Sterling Software is prohibited from making distributions in
the form of dividends on the Software Stock (except for the Distribution).
Accordingly, Sterling Software does not anticipate paying cash dividends on
Software Stock in the foreseeable future.

ACCOUNTING TREATMENT

Upon declaration by the Software Board of the special dividend effecting the
Distribution, Sterling Software expects to present the business of Commerce
and its subsidiaries as a discontinued operation to the extent financial
information for periods prior to the Distribution is required to be included
in Sterling Software's historical financial statements.

CERTAIN PROVISIONS OF COMMERCE'S CERTIFICATE OF INCORPORATION AND BYLAWS

Commerce's Certificate of Incorporation and Bylaws and applicable law
contain provisions that may have the effect of delaying, deterring or
preventing a change in control of Commerce. In addition, Commerce's
Certificate of Incorporation authorizes the issuance of up to 150,000,000
shares of Commerce Stock and 50,000,000 shares of preferred stock (the
"Commerce Preferred Stock"). The Commerce Board has the authority to determine
the price and terms under which any such additional capital stock may be
issued and to fix the terms of the Commerce Preferred Stock and stockholders
of Commerce do not have preemptive rights with respect thereto. See
"Description of Commerce Capital Stock."

RELATIONSHIP BETWEEN STERLING SOFTWARE
AND COMMERCE AFTER THE DISTRIBUTION

FUTURE MANAGEMENT OF THE SEPARATE COMPANIES

Commerce. Following the Distribution, Commerce presently intends to continue
to operate its businesses substantially in the manner in which such businesses
historically were operated by Sterling Software.

The Commerce Board currently has six members, four of whom (Messrs. Sterling
Williams, Sam Wyly, Charles Wyly and Evan A. Wyly) are also directors and
executive officers of Sterling Software. The other two directors of Commerce
are Robert E. Cook and Honor R. Hill. Mr. Cook served as a director of
Sterling Software from July 1993 until he resigned from the Software Board
upon completion of the Offering. See "Management of Commerce--Executive
Officers and Directors."

Certain of Commerce's executive officers are also executive officers of
Sterling Software and will continue to serve in such dual capacities for some
period following the Distribution. Sterling L. Williams serves as President
and Chief Executive Officer of Sterling Software and as Chairman of the Board
and Chief Executive Officer of Commerce; George H. Ellis serves as Executive
Vice President and Chief Financial Officer of both companies; Jeannette P.
Meier serves as Executive Vice President, Secretary and General Counsel of
both

18
<PAGE>

companies; and Phillip A. Moore serves as an Executive Vice President of both
companies. Neither the length of such period for any particular individual nor
the capacity or capacities in which he or she may serve either Sterling
Software or Commerce (or both) following the conclusion of such period has
been determined as of the date of this Proxy Statement and could be affected
by, among other things, any limitations that might be imposed as a condition
to the receipt of the ruling from the IRS described in "The Distribution--
Federal Income Tax Aspects of the Distribution." Although such executive
officers have severance agreements with Commerce, no minimum term of
employment with Commerce is required as a condition to the receipt of the
benefits and payments provided for thereunder. See "Management of Commerce--
Benefit Plans and Agreements."

Sterling Software. Following the Distribution, it is contemplated that
Sterling Software will continue to operate its remaining businesses
substantially in the manner in which they are currently operated. See
"Management of Sterling Software."

INTERCOMPANY AGREEMENTS

In anticipation of the Offering, Sterling Software and Commerce 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 ownership interest in Commerce, the terms of such agreements were
not the result of arm's-length negotiation. See "Certain Considerations--
Relationship between Sterling Software and Commerce; Conflicts of Interest."
As part of Proposal I, stockholders are being asked to ratify the Intercompany
Agreements described below.

Tax Allocation Agreement. Sterling Software and Commerce have entered into a
tax allocation agreement (the "Tax Allocation Agreement") to provide for (i)
the allocation of payments of taxes for periods during which Sterling Software
(or any of its affiliates other than Commerce and its subsidiaries) and
Commerce or any of its subsidiaries are included in the same consolidated
group for federal income tax purposes or the same consolidated, combined or
unitary returns for state, local or foreign tax purposes, (ii) the allocation
of responsibility for the filing of tax returns, (iii) the conducting of tax
audits and the handling of tax controversies, and (iv) various related
matters. For periods during which Commerce is included in Sterling Software's
consolidated federal income tax returns or state consolidated, combined or
unitary tax returns (which periods are expected to include the period between
the Offering and the Distribution), Commerce is required to pay to or entitled
to receive from Sterling Software its allocable portion of the consolidated
federal income and state tax liability or credits. Commerce is directly
responsible for separate state, local and foreign tax returns and related
liabilities for itself and its subsidiaries for all periods.

Indemnification Agreement. Sterling Software and Commerce have entered into
an indemnification agreement (the "Indemnification Agreement"). Under the
Indemnification Agreement, subject to limited exceptions, Commerce is required
to indemnify Sterling Software and its directors, officers, employees, agents
and representatives for liabilities under federal or state securities laws as
a result of the Offering or the Distribution, including liabilities arising
out of or based upon alleged misrepresentations in or omissions from the
registration statement or the prospectus pertaining to the Offering or any
disclosure documents prepared in connection with the Distribution, including
this Proxy Statement. The Indemnification Agreement also provides that each
party thereto (the "Indemnifying Party") will indemnify the other party
thereto and its directors, officers, employees, agents and representatives
(the "Indemnified Party") for liabilities that may be incurred by the
Indemnified Party relating to, resulting from or arising out of (i) the
businesses, operations or assets conducted or owned or formerly conducted or
owned by the Indemnifying Party and its subsidiaries (except, in the case
where Sterling Software is the Indemnifying Party, the businesses, operations
and assets of Commerce and its subsidiaries) or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with the Offering. In addition, the Indemnification Agreement provides that
Commerce 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 Commerce in connection with the IRS ruling request that
cause the Distribution to be taxable to Sterling Software or its stockholders.

19
<PAGE>

The Indemnification Agreement also provides that each party thereto (the
"Obligor Party") (i) will use reasonable efforts to obtain the release of the
other party thereto (the "Guarantor Party") from its obligation under or in
respect of all material guarantees, surety and performance bonds, letters of
credit and other arrangements guaranteeing or securing any liability or
obligation of the Obligor Party, (ii) will indemnify the Guarantor Party for
any liabilities incurred under such guarantees, bonds, letters of credit and
other arrangements, and (iii) will reimburse the Guarantor Party for its
direct costs (or, in certain circumstances, the Obligor Party's pro rata share
of such direct costs) of maintaining such guarantees, bonds, letters of credit
and other arrangements pending the release of the Guarantor Party thereunder.

International Marketing Agreement. A subsidiary of each of Sterling Software
and Commerce have entered into a marketing services agreement (the
"International Marketing Agreement") pursuant to which Sterling Software's
International Group acts as the exclusive distributor (directly and through
subdistributors) of Commerce's interchange and communications software
products in markets outside the United States and Canada and is responsible
for sales, marketing and first level support of such products in those
markets. The International Marketing Agreement, which expires in March 1999,
provides for the payment to Commerce of royalties equal to 50% of the net
revenue that the International Group derives from licenses of Commerce's
interchange and communications software products and related product support
services, with the balance of such net revenue to be retained by the
International Group as payment for the services provided by it under the
International Marketing Agreement. The International Marketing Agreement
obligates Sterling Software's International Group to use efforts in the
marketing of Commerce's software products and the provision of related
services comparable to those used by the International Group in connection
with the marketing of products and services on behalf of Sterling Software.
Although it is not anticipated that products and services offered by the
International Group on behalf of Sterling Software will be directly
competitive with the products and services offered by it on behalf of
Commerce, the International Marketing Agreement does not expressly prohibit
the International Group from offering such products and services on behalf of
Sterling Software (subject to the obligations described in the preceding
sentence).

Master Software License Agreement. Sterling Software, Commerce and certain
of their respective subsidiaries have entered into a master software license
agreement (the "Master Software License Agreement") pursuant to which (i)
certain subsidiaries of Sterling Software have confirmed the terms of software
licenses previously granted to certain subsidiaries of Commerce and (ii)
certain subsidiaries of Commerce have confirmed the terms of software licenses
previously granted to Sterling Software and certain of its subsidiaries. The
licenses reflected in the Master Software License Agreement are nonexclusive,
perpetual and royalty free, but (subject to certain exceptions) are otherwise
subject to and governed by the provisions of the standard form of agreement
(including prohibitions against external use and sublicensing) used by the
applicable licensor to license comparable software to third-party customers.

Data Processing Agreement. Sterling Software and Commerce have entered into
a data processing agreement (the "Data Processing Agreement") pursuant to
which Commerce provides to Sterling Software certain data processing services.
Under the Data Processing Agreement, Sterling Software pays Commerce a monthly
fee based on Commerce's costs that are directly attributable to the provision
of such services to Sterling Software and rates charged by third parties for
comparable services. The Data Processing Agreement is terminable by either
party on 90 days' prior written notice, except that no such written notice may
result in termination prior to September 30, 1996.

Space Sharing Agreement. Sterling Software and Commerce have entered into a
space sharing agreement (the "Space Sharing Agreement") providing for the
sharing by Sterling Software and Commerce of certain office facilities,
including the office facilities at which both Sterling Software's and
Commerce's principal executive offices are located (the "Headquarters
Facility"). Under the Space Sharing Agreement, the costs associated with
leasing and maintaining facilities are, in general, allocated between Sterling
Software and Commerce on a pro rata basis determined by the square footage
utilized by each company or the number of employees of each company at the
specific location, in accordance with historical practices. Sterling
Software's and Commerce's respective rights to use portions of the shared
facilities (including the Headquarters Facility) leased from third

20
<PAGE>

parties by the other, and the corresponding obligations to pay for such use,
may be terminated as to any such facility by either Sterling Software or
Commerce on 90 days' prior written notice.

CONFLICTS OF INTEREST

After the Distribution, Sterling Software and Commerce will have significant
contractual and other ongoing relationships as discussed above. Conflicts of
interest may arise between Sterling Software and Commerce 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 Sterling Software and Commerce as
directors and executive officers of the other company. Four executive officers
of Sterling Software are also executive officers of Commerce and will not
spend all of their professional time on behalf of either company. See "--
Future Management of the Separate Companies."

Commerce has advised Sterling Software that it does not intend to engage in
the business of developing, marketing or supporting products or services in
the applications management, systems management, federal systems or other
markets in which Sterling Software is presently engaged (excluding the
provision of electronic commerce products and services). Sterling Software
does not currently intend to engage in the business of developing, marketing
and supporting electronic commerce products and services except through its
ownership of Commerce Stock prior to the Distribution and contractual
relationships with Commerce (such as the International Marketing Agreement).
However, there are no contractual or other restrictions on the ability of
either Sterling Software or Commerce to engage in such activities.
Accordingly, circumstances could arise in which Sterling Software and Commerce
would engage in activities in competition with one another.

Sterling Software and Commerce may enter into material transactions and
agreements in the future in addition to those described above. The Software
Board and the Commerce Board will each utilize such procedures in evaluating
the terms and provisions of any material transactions between Sterling
Software or its affiliates and Commerce or its affiliates as each of the
Software Board and the Commerce Board may deem appropriate in light of its
fiduciary duties under state law. Depending on the nature and size of the
particular transaction, in any such evaluation, each of the Software Board and
the Commerce Board may rely on management's statements and opinions and may or
may not utilize outside experts or consultants or obtain independent
appraisals or opinions.

Directors or executive officers of Sterling Software who are also directors
or executive officers of Commerce may have conflicts of interest with respect
to matters potentially or actually involving or affecting Sterling Software
and Commerce, such as acquisitions, financings and other corporate
opportunities that may be suitable for both Sterling Software and Commerce. To
the extent that such opportunities arise, such directors and executive
officers may consult with their legal advisors and make a determination after
consideration of a number of factors, including whether such opportunity is
presented to any such director or executive officer in his or her capacity as
a director or executive officer of Sterling Software or Commerce, whether such
opportunity is within Sterling Software's or Commerce's line of business or
consistent with their respective strategic objectives and whether Sterling
Software or Commerce will be able to undertake or benefit from such
opportunity. In addition, determinations may be made by the Software Board or
the Commerce Board, when appropriate, by the vote of the disinterested
directors only. Notwithstanding the foregoing, there can be no assurance that
conflicts will be resolved without detriment to the interests of one company
or the other. See "Certain Considerations--Relationship between Sterling
Software and Commerce; Conflicts of Interest."

The directors and officers of Commerce are presently insured under insurance
policies maintained by Sterling Software against liability for actions taken
or omitted to be taken in their capacities as directors and officers of
Commerce, including actions or omissions that may be alleged to constitute
breaches of the fiduciary duties owed by such persons to Commerce and its
stockholders. Prior to the Distribution, Commerce intends to obtain insurance
coverage for its directors and officers in respect of such matters comparable
to that currently provided under Sterling Software's insurance policies. See
"Certain Considerations--Relationship between Sterling Software and Commerce;
Conflicts of Interest."

21
<PAGE>

SELECTED FINANCIAL AND OPERATING DATA OF COMMERCE

The selected financial and operating data set forth below should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Commerce," the Consolidated Financial
Statements and the Notes thereto of Commerce and other information contained
in this Proxy Statement. The data for the years ended September 30, 1993, 1994
and 1995 have been derived from the audited Consolidated Financial Statements
of Commerce appearing elsewhere in this Proxy Statement. The data for the
years ended September 30, 1991 and 1992 have been derived from unaudited
consolidated financial statements of Commerce not included in this Proxy
Statement. The data for the three months ended December 31, 1994 and 1995 have
been derived from unaudited consolidated interim financial statements of
Commerce appearing elsewhere in this Proxy Statement. The unaudited
consolidated financial statements have been prepared by Commerce on a basis
consistent with the Consolidated Financial Statements of Commerce appearing
elsewhere herein and, in the opinion of Commerce's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of such data.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,(1) DECEMBER 31,(2)
------------------------------------------- ------------------------
1991(3) 1992 1993 1994 1995 1994 1995
------- ------- ------- -------- -------- -------- --------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Products............... $28,451 $32,376 $43,509 $ 56,291 $ 71,603 $ 15,319 $ 17,403
Product support........ 18,317 23,268 29,875 37,953 46,190 10,466 13,477
Services............... 20,322 28,794 39,523 53,246 74,063 17,037 21,787
Royalties from affili-
ated companies........ 3,941 4,488 4,906 8,426 11,722 2,274 3,483
------- ------- ------- -------- -------- -------- --------
Total revenue......... 71,031 88,926 117,813 155,916 203,578 45,096 56,150
Costs and expenses:
Cost of sales:
Products and product
support............... 10,383 11,958 15,884 24,000 25,879 5,855 7,221
Services............... 4,203 8,635 11,673 12,282 15,671 3,737 4,695
------- ------- ------- -------- -------- -------- --------
Total cost of sales... 14,586 20,593 27,557 36,282 41,550 9,592 11,916
Product development and
enhancement........... 7,879 9,413 6,478 12,497 14,807 3,599 3,288
Selling, general and
administrative........ 35,090 43,987 54,777 60,732 75,193 17,303 20,255
Restructuring charge... -- -- 3,638 -- -- -- --
------- ------- ------- -------- -------- -------- --------
Total costs and ex-
penses............... 57,555 73,993 92,450 109,551 131,550 30,494 35,459
------- ------- ------- -------- -------- -------- --------
Income before other in-
come (expense) and in-
come taxes............. 13,476 14,933 25,363 46,405 72,028 14,602 20,691
Other income (expense).. 33 38 (40) (150) (478) (59) (210)
------- ------- ------- -------- -------- -------- --------
Income before income
taxes.................. 13,509 14,971 25,323 46,255 71,550 14,543 20,481
Provision for income
taxes.................. 5,404 5,988 10,129 18,502 28,620 5,817 8,192
------- ------- ------- -------- -------- -------- --------
Net income.............. $ 8,105 $ 8,983 $15,194 $ 27,753 $ 42,930 $ 8,726 $ 12,289
======= ======= ======= ======== ======== ======== ========
Pro forma earnings per
share(4)............... $ 0.59 $ 0.17
======== ========
<CAPTION>
SEPTEMBER 30,(1) DECEMBER 31, 1995
------------------------------------------- ------------------------
AS ADJUSTED(5)
1991 1992 1993 1994 1995 ACTUAL (UNAUDITED)
------- ------- ------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(6)..... $ 5,438 $ 2,485 $(3,438) $ 2,198 $ 3,692 $ 6,361 $ 46,861
Total assets........... 64,607 77,319 87,271 100,638 128,978 137,546 178,046
Other noncurrent lia-
bilities.............. 1,674 3,639 4,020 6,151 5,680 6,972 6,972
Stockholders' net in-
vestment.............. 37,762 38,650 37,498 43,051 53,187 59,602 --
Stockholders' equi-
ty(7)................. -- -- -- -- -- -- 100,102
</TABLE>
- -------

(1) Commerce's operations have historically been included in consolidated
income tax returns filed by Sterling Software. Income tax expense has been
computed assuming Commerce filed separate income tax returns.
(2) Results of operations for interim periods are not necessarily indicative
of results of operations for the entire fiscal year.
(3) On June 28, 1991, Sterling Software acquired the assets of the Redinet
Division from Control Data Corporation in an acquisition accounted for as
a purchase.
(4) Assumes that 73,200,000 shares of Commerce Stock were outstanding for the
periods presented.
(5) Adjusted to give effect to the 75,000,000 shares of Commerce Stock
outstanding after the Offering and the receipt by Commerce of
approximately $40,500,000 of net proceeds from the sale by Commerce of
1,800,000 shares of Commerce Stock pursuant to the Offering.
(6) Prior to the completion of the Offering, substantially all of the excess
cash generated by Commerce's operations was regularly remitted to Sterling
Software pursuant to Sterling Software's centralized cash management
program.
(7) Excludes the effects of the possible future issuance of 15,000,000 shares
of Commerce Stock initially available for issuance pursuant to Commerce's
1996 Stock Option Plan. See "Management of Commerce--Benefit Plans and
Agreements."

22
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COMMERCE

OVERVIEW

Commerce develops, markets and supports electronic commerce software
products and provides electronic commerce network services that enable
businesses to engage in business-to-business electronic communications and
transactions. Commerce has five principal groups: Network Services;
Communications Software; Interchange Software; Banking Systems; and
International. The Network Services Group generates substantially all of
Commerce's services revenue. The Communications Software, Interchange Software
and Banking Systems Groups generate products, product support and some
services revenue. The International Group generates services and some products
revenue.

Commerce generates revenue from four sources: services; products; product
support; and royalties. Services revenue consists primarily of transaction
fees for network services and is recognized at the time the service is
performed. Products revenue is derived from license fees from Commerce's four
software product groups--COMMERCE, CONNECT, GENTRAN and VECTOR--and is
recognized at the time of product delivery, provided no significant future
vendor obligations exist and collection is probable. Product support revenue
consists primarily of fees from product support agreements that provide
customers with updated or enhanced versions of Commerce's software products as
they become available and provide telephone access to Commerce's technical
personnel. Product support revenue is deferred and recognized ratably over the
term of the applicable product support agreement, which is generally one year.
Royalty revenue consists primarily of royalties relating to international
licenses of software products and product support agreements.

A majority of Commerce's software customers enter into product support
agreements and renew such agreements upon expiration. Moreover, although most
network service agreements are cancelable upon 30 days' notice, Commerce's
experience is that once customers initiate use of Commerce's network services,
they tend to continue to use such services. Accordingly, revenue from product
support and network services is considered recurring revenue. In 1995,
recurring revenue represented 59% of Commerce's total revenue.

As the number of participants in the electronic commerce industry has
increased, Commerce has acquired or developed new products or adapted existing
products to serve a wide variety of operating platforms. Accordingly, the
amount of Commerce's products revenue derived from the sale of non-mainframe
software products has increased in recent years from 25% in 1993 to 43% in
1995.

International licensing and marketing of software products and product
support services for Commerce's interchange and communications software are
provided by Sterling Software's International Group. Commerce receives
royalties from such sales. Commerce's International Group markets network
services and related products outside of North America, primarily in Europe.
Commerce's Banking Systems Group markets its software products and product
support services both in and outside of North America.

Sterling Software formed Commerce as a wholly owned subsidiary in December
1995. In contemplation of the Offering, among other things, Sterling Software
caused to be transferred to Commerce the direct and indirect subsidiaries
through which Sterling Software historically conducted its electronic commerce
business. The following discussion of Commerce's results of operations and
liquidity and capital resources is based upon, and should be read in
conjunction with, the Consolidated Financial Statements, including the Notes
thereto, of Commerce. See "Index to Consolidated Financial Statements of
Commerce."

23
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
consolidated statement of operations data expressed as a percentage of total
revenue.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------- --------------------
1993 1994 1995 1994 1995
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Products................ 36.9% 36.1% 35.2% 34.0% 31.0%
Product support......... 25.4 24.3 22.7 23.2 24.0
Services................ 33.5 34.2 36.3 37.8 38.8
Royalties from affili-
ated companies......... 4.2 5.4 5.8 5.0 6.2
-------- -------- -------- --------- ---------
Total revenue......... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of sales:
Products and product
support................ 13.5 15.4 12.7 13.0 12.9
Services................ 9.9 7.9 7.7 8.3 8.3
-------- -------- -------- --------- ---------
Total cost of sales... 23.4 23.3 20.4 21.3 21.2
Product development and
enhancement............ 5.5 8.0 7.3 8.0 5.9
Selling, general and ad-
ministrative........... 46.5 38.9 36.9 38.4 36.1
Restructuring charge.... 3.1 -- -- -- --
-------- -------- -------- --------- ---------
Total costs and ex-
penses............... 78.5 70.2 64.6 67.7 63.2
-------- -------- -------- --------- ---------
Income before other ex-
pense and income taxes... 21.5 29.8 35.4 32.3 36.8
Other expense............. -- 0.1 0.2 0.1 0.3
-------- -------- -------- --------- ---------
Income before income tax-
es....................... 21.5 29.7 35.2 32.2 36.5
Provision for income tax-
es....................... 8.6 11.9 14.1 12.9 14.6
-------- -------- -------- --------- ---------
Net income................ 12.9% 17.8% 21.1% 19.3% 21.9%
======== ======== ======== ========= =========
</TABLE>

THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994

Total revenue increased $11,054,000, or 25%, in the first quarter of 1996
over the same period of 1995. The revenue increase was due to a $4,750,000
increase in services revenue, a $2,084,000 increase in products revenue, a
$3,011,000 increase in product support revenue and a $1,209,000 increase in
royalties from affiliated companies. Services revenue increased 28%, primarily
from the growth in existing network services customer volume and the addition
of new customers, primarily in the grocery, hardlines and retail vertical
markets. The number of network services customers grew from approximately
9,600 at December 31, 1994 to approximately 11,900 at December 31, 1995.
Products revenue increased 14% and product support revenue increased 29% in
the first quarter of 1996 over the same period of 1995. All of Commerce's
product lines experienced growth in products revenue and product support
revenue due to the addition of new customers, new product offerings, certain
product price increases and a continuing expansion of the installed customer
base for product support. This growth was partially offset by a decline in
revenue from the federal government of $839,000, or 68%, due to the federal
government shutdown during the three months ended December 31, 1995. Recurring
revenue increased $7,761,000, or 28%, in the first quarter of 1996 over the
same period of 1995 and represented 63% and 61% of total revenue in the first
quarter of 1996 and the first quarter of 1995, respectively. For the first
quarter of 1996, 61% of Commerce's products revenue was for products that run
on operating platforms other than mainframe operating platforms, as compared
to 41% for the first quarter of 1995.

24
<PAGE>

of 1996 over the same period of 1995. As a percentage of total revenue, total
cost of sales remained unchanged at 21% in the first quarter of both 1996 and
1995. Cost of sales for services increased 26% due to higher network services
costs to support a growing customer base and greater customer volume. Cost of
sales for services, as a percentage of total revenue, remained unchanged at 8%
in the first quarter of both 1996 and 1995. Cost of sales for products and
product support increased $1,366,000 due to increased costs to support
expanding software sales, a larger installed customer base and higher
amortization costs of capitalized development for software products. Cost of
sales for products and product support, as a percentage of total revenue,
remained unchanged at 13% in the first quarter of both 1996 and 1995. Cost of
sales includes $3,542,000 and $3,383,000 of depreciation and amortization in
the first quarter of 1996 and 1995, respectively.

Product development and enhancement expense consists primarily of salaries
and other related expenses for product development personnel, together with
the cost of facilities and equipment. Product development and enhancement
expense for the first quarter of 1996 of $3,288,000, net of $2,934,000 of
amounts capitalized pursuant to Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" ("FAS No. 86"), decreased $311,000, or 9%, compared to
product development and enhancement expense for the first quarter of 1995 of
$3,599,000, net of $1,914,000 of amounts capitalized pursuant to FAS No. 86.
As a percentage of total revenue, product development and enhancement expense
decreased to 6% in the first quarter of 1996 from 8% in the same period of
1995. Total capitalized costs represented 47% and 35% of total development and
enhancement expense for the first quarter of 1996 and 1995, respectively.
Product development expense and the capitalization rate may fluctuate from
period to period depending in part upon the number and status of software
development projects that are in process.

Selling, general and administrative expense consists primarily of salaries,
commissions and other related expenses of sales, marketing, administrative,
executive and financial personnel as well as outside professional fees and
facilities and depreciation expenses. Selling, general and administrative
expense increased $2,952,000, or 17%, in the first quarter of 1996 over the
same period of 1995 due primarily to increases in personnel in sales,
marketing and administration in support of Commerce's revenue growth. As a
percentage of total revenue, selling, general and administrative expenses
decreased to 36% in the first quarter of 1996 from 38% in the first quarter of
1995.

Income before income taxes increased $5,938,000, or 41%, in the first
quarter of 1996 over the same period of 1995. As a percentage of total
revenue, income before income taxes increased to 37% in the first quarter of
1996 from 32% in the same period of 1995. Net income increased $3,563,000, or
41%, in the first quarter of 1996 over the same period of 1995. As a
percentage of total revenue, net income increased to 22% in the first quarter
of 1996 from 19% in the same period of 1995. The increases were primarily due
to a revenue increase of 25%, compared to an increase in total costs and
expenses of 16%.

YEARS ENDED SEPTEMBER 30, 1995 AND 1994

Total revenue increased $47,662,000, or 31%, in 1995 over 1994. The revenue
increase was due to a $20,817,000 increase in services revenue, a $15,312,000
increase in products revenue, an $8,237,000 increase in product support
revenue and a $3,296,000 increase in royalties from affiliated companies.
Services revenue increased 39% in 1995 over 1994, primarily from growth in
existing network services customer volume and the addition of new customers,
primarily in the healthcare, grocery, retail, hardlines and transportation
markets. The number of network services customers grew from approximately
9,000 at September 30, 1994 to approximately 11,300 at September 30, 1995.
Products revenue increased 27% and product support revenue increased 22% in
1995 over 1994. All of Commerce's product lines experienced growth in products
revenue and product support revenue due to the addition of new customers, new
product offerings, certain product price increases and a continuing expansion
of the installed customer base for product support. Recurring revenue
increased $29,054,000, or 32%, in 1995 over 1994 and represented 59% and 58%
of total revenue in 1995 and 1994, respectively. For 1995, 43% of Commerce's
products revenue was for products that run on operating platforms other than
mainframe operating platforms, as compared to 30% for 1994.

25
<PAGE>

Total cost of sales consists primarily of salaries and other related
expenses for product support, data center and communications personnel and
other related expenses for facilities, data center, communications, product
media, duplication, packaging and shipping. Total cost of sales increased
$5,268,000, or 15%, in 1995 over 1994. As a percentage of total revenue, total
cost of sales decreased to 20% in 1995 from 23% in 1994. Cost of sales for
services increased 28% due to higher network services costs to support a
growing customer base and greater customer volume. As a percentage of total
revenue, cost of sales for services remained unchanged at 8% in 1995 from
1994. Cost of sales for products and product support increased $1,879,000 due
to increased costs to support expanding software sales, a larger installed
customer base and higher amortization costs of capitalized development for
software products. Cost of sales for products and product support decreased as
a percentage of total revenue to 13% in 1995 from 15% in 1994. Cost of sales
includes $13,351,000 and $11,781,000 of depreciation and amortization in 1995
and 1994, respectively.

Product development and enhancement expense consists primarily of salaries
and other related expenses for product development personnel, together with
the cost of facilities and equipment. Product development and enhancement
expense for 1995 of $14,807,000, net of $10,051,000 of amounts capitalized
pursuant to FAS No. 86, increased $2,310,000, or 18%, compared to 1994 product
development and enhancement expense of $12,497,000, net of $9,221,000 of
amounts capitalized pursuant to FAS No. 86. The increase was primarily due to
the higher gross product development expense relating to products under
development during 1995. As a percentage of total revenue, product development
and enhancement expense decreased to 7% in 1995 from 8% in 1994. Total
capitalized costs represented 40% and 42% of total development and enhancement
expense for 1995 and 1994, respectively. Product development expense and the
capitalization rate may fluctuate from period to period depending in part upon
the number and status of software development projects that are in process.

Selling, general and administrative expense consists primarily of salaries,
commissions and other related expenses of sales, marketing, administrative,
executive and financial personnel as well as outside professional fees and
facilities and depreciation expenses. Selling, general and administrative
expense increased $14,461,000, or 24%, in 1995 over 1994 due primarily to
increases in personnel in sales, marketing and administration in support of
Commerce's revenue growth. As a percentage of total revenue, selling, general
and administrative expenses decreased to 37% in 1995 from 39% in 1994.

Income before income taxes increased $25,295,000, or 55%, in 1995 over 1994.
As a percentage of total revenue, income before income taxes increased to 35%
in 1995 from 30% in 1994. Net income increased $15,177,000, or 55%, in 1995
over 1994. As a percentage of total revenue, net income increased to 21% in
1995 from 18% in 1994. The increases were primarily due to a revenue increase
of 31%, compared to an increase in total costs and expenses of 20%.

YEARS ENDED SEPTEMBER 30, 1994 AND 1993

Total revenue increased $38,103,000, or 32%, in 1994 over 1993. The revenue
increase was due to a $13,723,000 increase in services revenue, a $12,782,000
increase in products revenue, an $8,078,000 increase in product support
revenue and a $3,520,000 increase in royalties from affiliated companies.
Services revenue increased 35% in 1994 over 1993, primarily from the growth in
existing network services customer volume and the addition of new customers,
primarily in the healthcare, grocery, retail, hardlines and transportation
markets. The number of network services customers grew from approximately
7,000 at September 30, 1993 to approximately 9,000 at September 30, 1994.
Products revenue increased 29% and product support revenue increased 27% in
1994 over 1993. All of Commerce's product lines experienced growth in products
revenue and product support revenue due to the addition of new customers, new
product offerings, certain product price increases and a continuing expansion
of the installed customer base for product support. Recurring revenue
increased $21,801,000, or 31%, in 1994 over 1993 and represented 58% of total
revenue in 1994 compared to 59% in 1993. For 1994, 30% of Commerce's product
revenue was for products that run on operating platforms other than mainframe
operating platforms, as compared to 25% for 1993.

Total cost of sales increased $8,725,000, or 32%, in 1994 over 1993. As a
percentage of total revenue, total cost of sales remained unchanged at 23% in
1994 from 1993. Cost of sales for services increased 5% due to

26
<PAGE>

higher network services costs to support a growing customer base and greater
customer volume. As a percentage of total revenue, cost of sales for services
decreased to 8% from 10%. Cost of sales for products and product support
increased $8,116,000 due to increased costs to support expanding software
sales, a larger installed customer base and higher amortization costs of
capitalized development for software products. Cost of sales for products and
product support increased as a percentage of total revenue to 15% in 1994 from
14% in 1993. Cost of sales includes $11,781,000 and $8,178,000 of depreciation
and amortization in 1994 and 1993, respectively.

Product development and enhancement expense for 1994 of $12,497,000, net of
$9,221,000 of amounts capitalized pursuant to FAS No. 86, increased
$6,019,000, or 93%, compared to 1993 product development and enhancement
expense of $6,478,000, net of $12,654,000 of amounts capitalized pursuant to
FAS No. 86. The increase was primarily due to a $2,586,000, or 14%, increase
in gross product development and enhancement expense and a $3,433,000, or 27%,
decrease in capitalized costs relating to products under development during
1994. As a percentage of total revenue, product development and enhancement
expense increased to 8% in 1994 from 6% in 1993. Total capitalized costs
represented 42% and 66% of total development and enhancement expense for 1994
and 1993, respectively. Product development expense and the capitalization
rate may fluctuate from period to period depending in part upon the number and
status of software development projects that are in process.

Selling, general and administrative expense increased $5,955,000, or 11%, in
1994 over 1993, primarily due to increases in personnel in sales, marketing
and administration in support of Commerce's revenue growth. As a percentage of
total revenue, selling, general and administrative expense decreased to 39% in
1994 from 47% in 1993. There were no restructuring charges in 1994 compared to
$3,638,000 of restructuring charges in 1993 resulting from the acquisition of
Systems Center.

Income before income taxes increased $20,932,000, or 83%, in 1994 over 1993.
As a percentage of total revenue, income before income taxes increased to 30%
in 1994 from 22% in 1993. Net income increased $12,559,000, or 83%, in 1994
over 1993. As a percentage of total revenue, net income increased to 18% in
1994 from 13% in 1993. The increases were primarily due to a total revenue
increase of 32%, compared to an increase in total costs and expenses
(excluding restructuring charges) of 23%.

27
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth Commerce's statement of operations data for
each of the nine quarters ended December 31, 1995, including such amounts
expressed as a percentage of total revenue. This unaudited quarterly
information has been prepared on the same basis as the Consolidated Financial
Statements of Commerce and, in the opinion of Commerce's management, reflects
all adjustments (consisting only of normal recurring entries) necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
DEC. 31, MAR. 31. JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1993 1994 1994 1994 1994 1995 1995 1995 1995
-------- -------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenue:
Products............... $11,754 $13,482 $13,274 $17,781 $15,319 $15,047 $17,350 $23,887 $17,403
Product support........ 8,944 9,419 9,719 9,871 10,466 11,367 11,872 12,485 13,477
Services............... 12,018 12,291 13,846 15,091 17,037 17,664 18,946 20,416 21,787
Royalties from
affiliated companies.. 1,677 1,586 2,332 2,831 2,274 2,197 3,469 3,782 3,483
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue......... 34,393 36,778 39,171 45,574 45,096 46,275 51,637 60,570 56,150
Costs and expenses:
Cost of sales:
Products and product
support............... 5,777 5,523 5,618 7,082 5,855 5,909 6,376 7,739 7,221
Services............... 2,927 2,836 3,289 3,230 3,737 3,739 3,857 4,338 4,695
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales... 8,704 8,359 8,907 10,312 9,592 9,648 10,233 12,077 11,916
Product development and
enhancement........... 2,470 3,594 3,045 3,388 3,599 4,032 3,706 3,470 3,288
Selling, general and
administrative........ 15,218 14,168 15,270 16,076 17,303 16,535 19,284 22,071 20,255
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............. 26,392 26,121 27,222 29,776 30,494 30,215 33,223 37,618 35,459
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before other
expense and income
taxes.................. 8,001 10,657 11,949 15,798 14,602 16,060 18,414 22,952 20,691
Other expense........... 47 32 51 20 59 113 171 135 210
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 7,954 10,625 11,898 15,778 14,543 15,947 18,243 22,817 20,481
Provision for income
taxes.................. 3,182 4,250 4,759 6,311 5,817 6,379 7,297 9,127 8,192
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 4,772 $ 6,375 $ 7,139 $ 9,467 $ 8,726 $ 9,568 $10,946 $13,690 $12,289
======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
DEC. 31, MAR. 31. JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1993 1994 1994 1994 1994 1995 1995 1995 1995
-------- -------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUE
Revenue:
Products............... 34.2% 36.7% 33.9% 39.0% 34.0% 32.5% 33.6% 39.5% 31.0%
Product support........ 26.0 25.6 24.8 21.7 23.2 24.6 23.0 20.6 24.0
Services............... 34.9 33.4 35.3 33.1 37.8 38.2 36.7 33.7 38.8
Royalties from
affiliated companies.. 4.9 4.3 6.0 6.2 5.0 4.7 6.7 6.2 6.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of sales:
Products and product
support............... 16.8 15.0 14.3 15.5 13.0 12.8 12.3 12.8 11.3
Services............... 8.5 7.7 8.4 7.1 8.3 8.1 7.5 7.2 9.9
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of sales... 25.3 22.7 22.7 22.6 21.3 20.9 19.8 20.0 21.2
Product development and
enhancement........... 7.2 9.8 7.8 7.4 8.0 8.7 7.2 5.7 5.9
Selling, general and
administrative........ 44.2 38.5 39.0 35.3 38.4 35.7 37.3 36.4 36.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............. 76.7 71.0 69.5 65.3 67.7 65.3 64.3 62.1 63.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before other
expense and income
taxes.................. 23.3 29.0 30.5 34.7 32.3 34.7 35.7 37.9 36.8
Other expense........... 0.1 0.1 0.2 0.1 0.1 0.2 0.4 0.2 0.3
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 23.2 28.9 30.3 34.6 32.2 34.5 35.3 37.7 36.5
Provision for income
taxes.................. 9.3 11.6 12.1 13.8 12.9 13.8 14.1 15.1 14.6
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 13.9% 17.3% 18.2% 20.8% 19.3% 20.7% 21.2% 22.6% 21.9%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

28
<PAGE>

Commerce's future quarterly operating results may vary and reduced levels of
earnings or losses could be experienced in one or more quarters. Fluctuations
in Commerce's quarterly operating results could result from a variety of
factors, including changes in the levels of revenue derived from sales of
software products and network services, the timing of new product and service
announcements by Commerce or its competitors, changes in pricing policies by
Commerce or its competitors, market acceptance of new and enhanced versions of
the products and services of Commerce or its competitors, the size and timing
of significant orders, changes in operating expenses, changes in Commerce's
strategy, the introduction of alternative technologies, the effect of
potential acquisitions and industry and general economic factors. Commerce has
limited or no control over many of these factors. In addition, a somewhat
greater portion of Commerce's revenues tend to be recognized in the fourth
fiscal quarter as a result of a number of factors, including, among others,
Commerce's incentive compensation structure.

LIQUIDITY AND CAPITAL RESOURCES

Prior to the completion of the Offering, Commerce participated in Sterling
Software's central cash management system, pursuant to which all cash in
excess of Commerce's daily cash requirements was transferred to Sterling
Software. Following the completion of the Offering, Commerce's principal
sources of liquidity consist of cash on hand, cash from operations and
borrowings under such credit facilities as may be available to Commerce from
time to time.

The net proceeds to Commerce from its sale of shares of Commerce Stock
pursuant to the Offering was approximately $40,500,000, reflecting an initial
public offering price of $24.00 per share and after deducting underwriting
discounts and commissions and Commerce's pro rata share of estimated Offering
expenses. Commerce intends to use such net proceeds for working capital and
general corporate purposes.

Net cash flows from operations were $58,298,000 and $41,749,000 for 1995 and
1994, respectively. A portion of Commerce's cash flow from operations during
1995 and 1994 was used to fund software additions and capital expenditures.
Software expenditures in 1995 were $10,244,000, the majority of which were
costs capitalized pursuant to FAS No. 86, compared to $9,624,000 in 1994. The
expenditures during 1995 were primarily for new products and enhancements of
existing products. Property and equipment purchases of $15,633,000 in 1995
included purchases made for equipment upgrades for network processing systems,
costs to add new network service features and computer and other equipment
purchases to support Commerce's growth.

Presently, Sterling Software continues to provide cash management services
to Commerce on an interim basis pursuant to an agreement (which will
automatically terminate on the occurrence of the Distribution and is otherwise
terminable by either party on or after September 30, 1996). Such agreement
provides, among other things, for Sterling Software to advance to Commerce
funds sufficient to meet its daily cash requirements. Commerce is presently in
negotiations with an agent for certain lending banks to provide a two-year,
unsecured revolving credit/letter of credit facility that will permit
borrowings of up to $20,000,000. It is anticipated that the loan agreement
would contain various restrictions on Commerce, including limitations on
additional borrowings, pledging of assets, payment of dividends, acquisitions
and capital expenditures, and would also require that Commerce maintain
certain financial ratios. Borrowings under the loan agreement are expected to
bear interest, at Commerce's option, at the lender's base rate or Eurodollar
rate plus 1.75%. Borrowings, if any, outstanding at the expiration of the two-
year term are expected to be repayable, at Commerce's option, either in full
upon such expiration or in four equal installments at the end of each
subsequent quarter. Commerce presently expects to enter into the loan
agreement for this facility effective as of the Distribution. Although
Commerce does not expect to have any difficulty in this regard, there can be
no assurance that Commerce will be able to obtain such credit facility on the
terms or in the timeframe described above.

At December 31, 1995, Commerce's capital resource commitments consisted of
commitments under lease arrangements for office space and equipment. Commerce
intends to meet such obligations from internally generated funds. Although no
significant commitments exist for future capital expenditures, Commerce has
budgeted capital expenditures of approximately $34,000,000 for fiscal 1996 (of
which approximately $14,000,000 is expected to consist of amounts capitalized
pursuant to FAS No. 86). Commerce believes that its sources of liquidity and
capital resources will be sufficient to satisfy its cash requirements for the
foreseeable future.

29
<PAGE>

Commerce's business strategy includes the selective acquisition of products
and businesses to facilitate the expansion of its operations. Such
acquisitions, if any, are expected to be funded from cash on hand, cash from
operations, bank borrowings or other capital markets transactions (including
possible private placements or public offerings of debt or equity securities)
or a combination of one or more of the foregoing. Commerce will not be
eligible to account for any acquisition as a pooling of interests for a period
of two years following the completion of the Distribution.

OTHER MATTERS

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

DESCRIPTION OF COMMERCE CAPITAL STOCK

GENERAL

Commerce's Certificate of Incorporation provides that the authorized capital
stock of Commerce consists of 150,000,000 shares of Commerce Stock and
50,000,000 shares of Commerce Preferred Stock. Currently, 75,000,000 shares of
Commerce Stock are issued and outstanding and no shares of Commerce Preferred
Stock are issued or outstanding.

COMMERCE STOCK

The holders of Commerce Stock are entitled to one vote per share owned of
record on all matters voted upon by stockholders. Subject to preferential
rights that may be applicable to any Commerce Preferred Stock outstanding,
holders of Commerce Stock are entitled to receive dividends if, as and when
declared by the Commerce Board out of funds legally available therefor. See
"Certain Considerations--Dividend Policies." In the event of a liquidation,
dissolution or winding-up of Commerce, holders of Commerce Stock are entitled
to share equally and ratably in the assets of Commerce, if any, remaining
after the payment of all liabilities of Commerce and the liquidation
preferences of any outstanding Commerce Preferred Stock. Holders of Commerce
Stock have no preemptive rights, no cumulative voting rights and no rights to
convert their Commerce Stock into any other securities, and there are no
redemption or sinking fund provisions with respect to the Commerce Stock.

The Commerce Stock is listed on the NYSE under the symbol "SE," and The
First National Bank of Boston acts as the transfer agent and registrar for the
Commerce Stock.

COMMERCE PREFERRED STOCK

The Commerce Board has the authority to issue the authorized shares of
Commerce Preferred Stock in one or more series and to fix the designations,
relative powers, preferences, rights, qualifications, limitations and
restrictions of all shares of each such series, including without limitation
dividend rates, conversion rights, voting rights, redemption and sinking fund
provisions, liquidation preferences and the number of shares constituting each
such series, without any further vote or action by the stockholders of
Commerce. The issuance of Commerce Preferred Stock could decrease the amount
of earnings and assets available for distribution to holders of Commerce Stock
or adversely affect the rights and powers, including voting rights, of the
holders of Commerce Stock. The issuance of Commerce Preferred Stock also could
have the effect of delaying, deterring or preventing a change in control of
Commerce without further action by the stockholders of Commerce.

30
<PAGE>

CERTAIN CORPORATE GOVERNANCE MATTERS

In addition to the provisions relating to classification of the Commerce
Board and the nomination procedures described in "Management of Commerce,"
Commerce's Certificate of Incorporation and Bylaws provide, in general, that
(i) the number of directors of Commerce will be fixed by resolution of the
Commerce Board, (ii) the directors of Commerce in office from time to time
will fill any vacancy or newly created directorship on the Commerce Board,
with any new director to serve in the class of directors to which he or she is
so elected, (iii) directors of Commerce may be removed only for cause by the
holders of at least 75% of Commerce's voting stock, (iv) stockholder action
can be taken only at an annual or special meeting of stockholders and not by
written consent in lieu of a meeting, and (v) except as described below,
special meetings of Commerce stockholders may be called only by the Chairman
of the Board or the President of Commerce or by a majority of the total number
of directors of Commerce, and the business permitted to be conducted at any
such meeting is limited to that brought before the meeting by the Chairman of
the Board or the President of Commerce or by a majority of the total number of
directors of Commerce. Commerce's Bylaws also require that stockholders
desiring to bring any business before an annual meeting of stockholders
deliver written notice thereof to the Secretary of Commerce not later than 60
days in advance of the meeting of stockholders; provided, however, that in the
event that the date of the meeting is not furnished to stockholders in a
notice or publicly disclosed by Commerce more than 65 days prior to the
meeting, notice by the stockholder to be timely must be delivered to the
Secretary of Commerce not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made. Commerce's Bylaws further require that the
notice by the stockholder set forth a description of the business to be
brought before the meeting and certain information concerning the stockholder
proposing such business, including such stockholder's name and address, the
class and number of shares of Commerce Stock that are owned beneficially by
such stockholder, and any material interest of such stockholder in the
business proposed to be brought before the meeting.

Under applicable provisions of the General Corporation Law of the State of
Delaware (the "DGCL"), the approval of a Delaware corporation's board of
directors, in addition to stockholder approval, is required to adopt any
amendment to the corporation's certificate of incorporation, but a
corporation's bylaws may be amended either by action of its stockholders or,
if the corporation's certificate of incorporation so provides, its board of
directors. Commerce's Certificate of Incorporation and Bylaws provide that the
provisions summarized above and the provisions relating to the classification
of the Commerce Board and nomination procedures may not be amended by the
stockholders, nor may any provision inconsistent therewith be adopted by the
stockholders, without the affirmative vote of the holders of at least 75% of
Commerce's voting stock, voting together as a single class.

In the event that Sterling Software ceases to beneficially own a majority of
the outstanding Commerce Stock (which will occur as a result of the
Distribution), the foregoing provisions of Commerce's Certificate of
Incorporation and Bylaws and the provisions of Commerce's Certificate of
Incorporation and Bylaws relating to classification of the Commerce Board and
the nomination procedures described in "Management of Commerce" may discourage
or make more difficult the acquisition of control of Commerce by means of a
tender offer, open market purchase, proxy contest or otherwise. These
provisions may have the effect of discouraging certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of Commerce first to negotiate with Commerce.
Commerce's management believes that the foregoing measures provide benefits to
Commerce and its stockholders by enhancing Commerce's ability to negotiate
with the proponent of any unfriendly or unsolicited proposal to take over or
restructure Commerce and that such benefits outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.

Commerce is a Delaware corporation and is subject to Section 203 of the DGCL
("Section 203"). In general, Section 203 prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" (as
defined in Section 203) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved

31
<PAGE>

the transaction in which the interested stockholder became an interested
stockholder or approved the business combination, (ii) upon consummation of
the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time such transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer), or (iii) following the transaction
in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors and which transaction is approved or not opposed by a
majority of the board of directors then in office. As a result of its initial
ownership of all of the outstanding Commerce Stock, Sterling Software is not
subject to the restrictions imposed upon an interested stockholder under
Section 203.

INDEMNIFICATION OF DIRECTORS AND OFFICERS OF COMMERCE

Commerce's Certificate of Incorporation provides that the personal liability
of directors of Commerce to Commerce is eliminated to the maximum extent
permitted by Delaware law. Commerce's Certificate of Incorporation and Bylaws
provide for the indemnification of the directors, officers, employees, and
agents of Commerce and its subsidiaries to the fullest extent that may be
permitted by Delaware law from time to time, and the Bylaws provide for
various procedures relating thereto. Certain provisions of Commerce's
Certificate of Incorporation protect Commerce's directors against personal
liability for monetary damages resulting from breaches of their fiduciary duty
of care, except as set forth below. Under Delaware law, absent these
provisions, directors could be held liable for gross negligence in the
performance of their duty of care, but not for simple negligence. Commerce's
Certificate of Incorporation absolves its directors of liability for
negligence in the performance of their duties, including gross negligence.
However, Commerce's directors remain liable for breaches of their duty of
loyalty to Commerce and its stockholders, as well as for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law and transactions from which a director derives improper personal
benefit. Commerce's Certificate of Incorporation also does not absolve
directors of liability under Section 174 of the DGCL, which makes directors
personally liable for unlawful dividends or unlawful stock repurchases or
redemptions in certain circumstances and expressly sets forth a negligence
standard with respect to such liability.

Under Delaware law, directors, officers, employees and other individuals may
be indemnified against expenses (including attorneys' fees), judgments, fines,
and amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation--a "derivative action")
if they acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A similar standard of care is applicable in the case of
a derivative action, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with defense or settlement
of such an action and Delaware law requires court approval before there can be
any indemnification of expenses where the person seeking indemnification has
been found liable to the corporation.

As authorized by Commerce's Certificate of Incorporation, Commerce has
entered into indemnification agreements with each of its directors and
officers. These indemnification agreements provide for, among other things,
(i) the indemnification by Commerce of the indemnitees thereunder to the
extent described above, (ii) the advancement of attorneys' fees and other
expenses, and (iii) the establishment, upon approval by the Commerce Board, of
trusts or other funding mechanisms to fund Commerce's indemnification
obligations thereunder.

32
<PAGE>

MANAGEMENT OF COMMERCE

EXECUTIVE OFFICERS AND DIRECTORS

Certain information regarding the current executive officers and current
directors of Commerce is set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sterling L. Williams.... 52 Chairman of the Board and Chief Executive Officer; Director
Warner C. Blow.......... 58 President and Chief Operating Officer
George H. Ellis......... 47 Executive Vice President, Chief Financial Officer and Treasurer
Jeannette P. Meier...... 48 Executive Vice President, Secretary and General Counsel
Phillip A. Moore........ 53 Executive Vice President
William W. Hymes........ 59 Senior Vice President and Group President
Paul L. H. Olson........ 45 Senior Vice President and Group President
Stephen R. Perkins...... 52 Senior Vice President and Group President
J. Brad Sharp........... 38 Senior Vice President and Group President
Thomas A. Lutz.......... 55 Vice President and Group President
Albert K. Hoover........ 36 Vice President, Legal
Steven P. Shiflet....... 49 Vice President, Finance
Dawn Wheeler............ 36 Vice President, Investor Relations
G. Clark Woodford....... 48 Vice President, Business Development
John Blaine............. 34 Controller
Sam Wyly................ 61 Director
Charles J. Wyly, Jr. ... 62 Director
Evan A. Wyly............ 34 Director
Robert E. Cook.......... 54 Director
Honor R. Hill........... 54 Director
</TABLE>

Sterling L. Williams has served as Chairman of the Board and Chief Executive
Officer of Commerce and a director since December 1995. He co-founded Sterling
Software in 1981, and since such time has served and continues to serve as
President, Chief Executive Officer and a director of Sterling Software. Mr.
Williams also currently serves as a director of INPUT, an information
technology market research company. Mr. Williams is a member of the Executive
Committee and the Stock Option Committee of the Commerce Board.

Warner C. Blow has served as President and Chief Operating Officer of
Commerce since December 1995. Prior to the completion of the Offering, he
served as President of Sterling Software's former Electronic Commerce Group
(the predecessor to Commerce) from July 1993 and as an Executive Vice
President of Sterling Software from October 1989. Prior to July 1993, Mr. Blow
also served as President of Sterling Software's former EDI Group.

George H. Ellis has served as an Executive Vice President, Chief Financial
Officer and Treasurer of Commerce since December 1995. Mr. Ellis has served
and continues to serve as an Executive Vice President (since July 1993) and
Chief Financial Officer (since February 1986) of Sterling Software. From
December 1994 to April 1996, Mr. Ellis also served as the Treasurer of
Sterling Software. Prior to July 1993, he served as a Senior Vice President of
Sterling Software.

Jeannette P. Meier has served as an Executive Vice President, Secretary and
General Counsel of Commerce since December 1995. She has served and continues
to serve as Executive Vice President (since July 1993) and General Counsel and
Secretary (since 1985) of Sterling Software. Prior to July 1993, Ms. Meier
served as a Senior Vice President of Sterling Software.

Phillip A. Moore has served as an Executive Vice President of Commerce since
December 1995. He co-founded Sterling Software in 1981 and since such time has
served and continues to serve as a director of Sterling Software. He has
served and continues to serve as Executive Vice President, Chief Technology
Officer of

33
<PAGE>

Sterling Software since December 1994. From July 1993 until December 1994, Mr.
Moore served as Executive Vice President, Technology of Sterling Software.
Prior to July 1993, Mr. Moore served as Senior Vice President, Technology of
Sterling Software.

William W. Hymes has served as a Senior Vice President and Group President
of Commerce since December 1995 and served as President of the Banking Systems
Division of Sterling Software's former Electronic Commerce Group (the
predecessor of Commerce) from July 1993 until completion of the Offering.
Prior to July 1993, Mr. Hymes served as President of the former Directions
Division of Sterling Software.

Paul L. H. Olson has served as a Senior Vice President and Group President
of Commerce since December 1995 and served as President of the Network
Services Division of Sterling Software's former Electronic Commerce Group (the
predecessor of Commerce) from August 1992 until completion of the Offering.
Prior to August 1992, Mr. Olson served as Group Vice President of Business
Development for Sterling Software's former EDI Group.

Stephen R. Perkins has served as a Senior Vice President and Group President
of Commerce since December 1995 and served as President of the Communications
Software Division of Sterling Software's former Electronic Commerce Group (the
predecessor of Commerce) from July 1993 until completion of the Offering.
Prior to July 1993, Mr. Perkins served as Vice President of Development for
Systems Center, a computer software company that was acquired by Sterling
Software in July 1993.

J. Brad Sharp has served as a Senior Vice President and Group President of
Commerce since December 1995 and served as President of the Interchange
Software Division of Sterling Software's former Electronic Commerce Group (the
predecessor of Commerce) from August 1992 until completion of the Offering.
Prior to August 1992, Mr. Sharp served as Vice President of Development of
Sterling Software's former EDI Labs Division.

Thomas A. Lutz has served as a Vice President and Group President of
Commerce since December 1995. Prior to completion of the Offering, he served
as President of Sterling Software's Creative Data Systems Division from
October 1991. Prior to October 1991, Mr. Lutz served as an Executive Vice
President of Sterling Software's Creative Data Systems Division. Mr. Lutz also
served as a Group Vice President of Sterling Software's former EDI Group from
August 1990 to July 1993.

Albert K. Hoover has served as Vice President, Legal of Commerce since
December 1995 and as Assistant General Counsel since March 1996. Prior to
completion of the Offering, he served as a Vice President (from May 1994) and
Assistant General Counsel (from June 1990) of Sterling Software.

Steven P. Shiflet has served as Vice President, Finance of Commerce since
December 1995 and served as Group Vice President, Finance & Administration of
Sterling Software's former Electronic Commerce Group (the predecessor of
Commerce) from 1986 until completion of the Offering.

Dawn Wheeler has served as Vice President, Investor Relations of Commerce
since February 1996 and served as Director of Industry Relations of Sterling
Software's former Electronic Commerce Group (the predecessor of Commerce) from
October 1994 until completion of the Offering. Prior to October 1994, Ms.
Wheeler served in various capacities for Sterling Software's Network Services
Division from November 1988.

G. Clark Woodford has served as Vice President, Business Development of
Commerce since December 1995 and served as Vice President, Business
Development of Sterling Software's former Electronic Commerce Group (the
predecessor of Commerce) from November 1993 until completion of the Offering.
Prior to November 1993, Mr. Woodford served as Vice President, National
Accounts for the Network Services Division of Sterling Software's former
Electronic Commerce Group.

John Blaine has served as Controller of Commerce since April 1996. From
September 1990 until April 1996, Mr. Blaine served in various financial
positions for Sterling Software, most recently as Director, Finance &
Administration for the France Division of Sterling Software's International
Group.

Sam Wyly has served as a director of Commerce since December 1995. He co-
founded Sterling Software in 1981 and since such time has served and continues
to serve as Chairman of the Board and a director of Sterling Software. In
1963, Mr. Wyly founded University Computing Company, a computer software and
services

34
<PAGE>

company ("University"), and served as President or Chairman from 1963 until
1979. University created a computer utility network, one of the earliest and
most successful marriages of computing and telecommunications. University was
one of the original participants in the software products industry in the late
1960's when the then market-dominant IBM unbundled computer hardware and
software. In 1968, Mr. Wyly founded Datran, Inc., which was envisioned as the
nation's first all-digital switched "telephone company for computers" and
contributed to the break up of AT&T's telephone monopoly and the resulting
benefits of increased competition in the telecommunications industry. These
Wyly-founded companies are among the forerunners of today's electronic
commerce industry. Mr. Wyly co-founded Earth Resources Company, an oil
refining and silver and gold mining company, and served as its Executive
Committee Chairman from 1968 to 1980. Mr. Wyly and his brother, Charles J.
Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse chain in 1967. It grew
to approximately 600 restaurants by 1989, during which time he served as
Chairman. Sam Wyly currently serves as Chairman of Michaels Stores, Inc.
("Michaels Stores"), a specialty retail chain (which has grown from 70 to 450
stores in 10 years of Wyly control), and as President of Maverick Capital,
Ltd., an investment fund management company. Sam Wyly is the father of Evan A.
Wyly, a director of Commerce. Sam Wyly is the Chairman of the Executive
Committee and serves on the Stock Option Committee of the Commerce Board.

Charles J. Wyly, Jr. has served as director of Commerce since December 1995.
He co-founded Sterling Software in 1981 and since such time has served and
continues to serve as a director and (since November 1984) as Vice Chairman of
Sterling Software. Mr. Wyly served as an officer and director of University
from 1964 to 1975, including President from 1969 to 1973. Mr. Wyly and his
brother, Sam Wyly, founded Earth Resources Company and Charles J. Wyly, Jr.
served as Chairman of the Board from 1968 to 1980. Mr. Wyly served as Vice
Chairman of the Bonanza Steakhouse chain from 1967 to 1989. Charles J. Wyly,
Jr. is the uncle of Evan A. Wyly. Mr. Wyly currently serves as Vice Chairman
of the Board of Michaels Stores and as Chairman of Maverick Capital, Ltd. Mr.
Wyly is a member of both the Executive Committee and the Stock Option
Committee of the Commerce Board.

Evan A. Wyly has served as director of Commerce since December 1995. He has
served and continues to serve as a director of Sterling Software since July
1992 and as a Vice President of Sterling Software since December 1994. Mr.
Wyly is a Managing Director of Maverick Capital, Ltd. In 1988, Mr. Wyly
founded Premier Partners Incorporated, a private investment firm, and served
as its President until 1992. Mr. Wyly has served as an officer of Michaels
Stores since 1991 and as a director of Michaels Stores since 1992. Mr. Wyly
also serves as a director of Xscribe Corp., a high-technology information
management company. Mr. Wyly is the son of Sam Wyly and the nephew of Charles
J. Wyly, Jr.

Robert E. Cook has served as a director of Commerce since March 1996. Mr.
Cook served as a director of Sterling Software from July 1993 to March 1996
when he resigned from the Software Board prior to his election to the Commerce
Board. Prior to July 1993, Mr. Cook served as Chairman and a director of
Systems Center, a computer software company that was acquired by Sterling
Software in July 1993. Mr. Cook currently also serves as a director of
ROADSHOW International, Inc., a privately held provider of computer-based
routing solutions for private fleet operations. Mr. Cook is a member of the
Special Stock Option Committee and the Audit Committee of the Commerce Board.

Honor R. Hill, a native of England and a Canadian citizen, has served as a
director of Commerce since March 1996. Mrs. Hill has been a listed Christian
Science practitioner since 1984 and a Christian Science lecturer since 1994.
Mrs. Hill, who has an honors degree in English from the University of Calgary
in Alberta, served on the Board of Trustees of the Christian Science
Publishing Society, the publications of which include the Christian Science
Monitor, during its 1993-1994 term. Mrs. Hill is a member of the Special Stock
Option Committee and the Audit Committee of the Commerce Board.

Four of Commerce's executive officers are also executive officers of
Sterling Software and will continue to serve in such dual capacities for some
period following the Distribution. Neither the length of such period for any
particular individual nor the capacity or capacities in which he or she may
serve either Sterling Software or

35
<PAGE>

Commerce (or both) following the conclusion of such period had been determined
as of the date of this Proxy Statement and could be affected by, among other
things, any limitations that may be imposed as a condition to the receipt of
the ruling from the IRS described in "The Distribution--Federal Income Tax
Aspects of the Distribution." Although such executive officers have severance
agreements with Commerce, no minimum term of employment with Commerce is
required as a condition to the receipt of the benefits and payments provided
for thereunder. See "--Benefit Plans and Agreements."

Commerce's Certificate of Incorporation and Bylaws provide that the
directors of Commerce are to be classified into three classes, with the
directors in each class serving for three-year terms and until their
successors are elected, except that the initial terms of the initial directors
of Commerce will expire at the 1997, 1998 or 1999 annual meeting of the
stockholders of Commerce, depending upon the particular class in which each
such director is placed. The terms of the current members of the Commerce
Board will expire at the annual meeting of Commerce stockholders for the years
indicated: Robert E. Cook and Evan A. Wyly: 1997; Honor R. Hill and Charles J.
Wyly, Jr.: 1998; and Sterling L. Williams and Sam Wyly: 1999. Any additional
person elected to the Commerce Board will be added to a particular class of
directors to be determined at the time of such election. In accordance with
Commerce's Certificate of Incorporation and Bylaws, the number of directors in
each class will be identical, or as nearly as practicable thereto, based on
the total number of directors then serving.

BOARD COMMITTEES

Commerce's Bylaws provide that the Commerce Board may elect such directorate
committees as it may from time to time determine. Four committees of the
Commerce Board have been established: the Executive Committee, the Audit
Committee, the Stock Option Committee and the Special Stock Option Committee.
The Special Stock Option Committee is comprised of two non-employee directors
who are not eligible to receive awards (other than formula awards) of options
of Commerce or any of its subsidiaries. The members of the Audit Committee of
the Commerce Board (the "Commerce Audit Committee") are directors who are not
officers or employees of, or otherwise affiliated with, Commerce or its
subsidiaries.

The Executive Committee of the Commerce Board (the "Commerce Executive
Committee") has all authority, consistent with the DGCL, granted to it by the
Commerce Board. Accordingly, the Commerce Executive Committee may exercise all
of the powers and authority of the Commerce Board in the oversight of the
management of the business and affairs of Commerce, except that the Commerce
Executive Committee does not have the power to amend Commerce's Certificate of
Incorporation or Bylaws (except, to the extent authorized by a resolution of
the Commerce Board, to fix the designations, preferences and other terms of
any preferred stock of Commerce), adopt an agreement of merger or
consolidation, recommend to the stockholders of Commerce the sale, lease or
exchange of all or substantially all of Commerce's property and assets, a
dissolution of Commerce or a revocation of a dissolution. The Commerce
Executive Committee is also responsible for considering and making
recommendations to the Commerce Board regarding nominees for election to the
Commerce Board and Commerce Board committee assignments. Messrs. Sam Wyly
(Chairman), Sterling L. Williams and Charles J. Wyly, Jr. are currently
members of the Commerce Executive Committee.

The Commerce Audit Committee reviews the professional services provided by
Commerce's independent auditors and the independence of such auditors from
management of Commerce. The Commerce Audit Committee also reviews the scope of
the audit by Commerce's independent auditors, the annual financial statements
of Commerce, Commerce's system of internal accounting controls and such other
matters with respect to the accounting, auditing and financial reporting
practices and procedures of Commerce as it finds appropriate or as are brought
to its attention. Mr. Robert E. Cook and Mrs. Honor R. Hill are members of the
Commerce Audit Committee.

The Stock Option Committee of the Commerce Board (the "Commerce Stock Option
Committee") and the Special Stock Option Committee of the Commerce Board (the
"Commerce Special Stock Option Committee") administer Commerce's 1996 Stock
Option Plan (the "Commerce Stock Option Plan"). The Commerce Stock Option
Committee has the authority, subject to certain restrictions set forth in the
Commerce Stock Option Plan,

36
<PAGE>

to determine from time to time the individuals to whom options will be
granted, the number of shares to be covered by each option and the time or
times at which options will become exercisable. Except in respect of the
initial grants of options under the Commerce Stock Option Plan, which were
made in February 1996, the Commerce Special Stock Option Committee will
determine the grants that are intended to be exempt from the profit forfeiture
provisions of Section 16(b) of the Exchange Act, and the members of the
Commerce Stock Option Committee or the Commerce Special Stock Option Committee
will determine all other grants (except that any grant to a member of the
Commerce Special Stock Option Committee, in his or her capacity as a non-
employee director, will be made pursuant to a formula as described in "--
Benefit Plans and Agreements--Commerce Stock Option Plan"). Messrs. Sam Wyly
(Chairman), Sterling L. Williams and Charles J. Wyly, Jr., are currently
members of the Commerce Stock Option Committee. Mr. Robert E. Cook and Mrs.
Honor R. Hill are members of the Commerce Special Stock Option Committee.

DIRECTOR NOMINATION PROCEDURES

Nominations for election of directors by the stockholders of Commerce at an
annual meeting of stockholders of Commerce may be made by the Commerce Board
as described above or by any Commerce stockholder entitled to vote in the
election of directors generally. Commerce's Bylaws require that stockholders
intending to nominate candidates for election as directors at an annual
meeting of stockholders deliver written notice thereof to the Secretary of
Commerce not later than 90 days prior to the anniversary date of the preceding
annual meeting of stockholders of Commerce. Commerce's Bylaws further require
that the notice by the stockholder set forth certain information concerning
such stockholder and the stockholder's nominees, including their names and
addresses, a representation that the stockholder is entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice, a description of all
arrangements or understandings between the stockholder and each nominee, such
other information as would be required to be included in a proxy statement
filed pursuant to the proxy rules with the Commission and the consent of each
nominee to serve as a director of Commerce if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with these requirements.

DIRECTOR COMPENSATION

For Commerce's current fiscal year, each director of Commerce who is not
also an employee of Commerce or any of its subsidiaries (or his or her
designee) will receive an annual fee of $30,000 plus $3,000 for each meeting
of the Commerce Board or a committee thereof that he or she attends during the
fiscal year. Under the Commerce Stock Option Plan, members of the Commerce
Special Stock Option Committee will automatically be awarded options to
purchase shares of Commerce Stock on the terms described below in "--Benefit
Plans and Agreements--Commerce Stock Option Plan" and other directors will be
eligible to receive discretionary grants. A director who is also an employee
of Commerce or any of its subsidiaries will receive no additional compensation
for serving as a director. All directors are reimbursed for their out-of-
pocket expenses incurred in connection with the attendance at meetings of the
Commerce Board, committees thereof and other activities relating thereto.

37
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS

The following table indicates the number of shares of Commerce Stock owned
beneficially as of March 31, 1996 by (i) each person known to own 5% or more
of the outstanding shares of Commerce Stock, (ii) the Commerce Named Executive
Officers (as defined below), (iii) each director of Commerce, and (iv) all
current directors and executive officers of Commerce as a group. Unless
otherwise indicated, each person and entity listed below has sole voting and
investment power with respect to such shares. In addition, the executive
officers or directors of Commerce, by reason of their relationship with
Sterling Software, may be deemed to beneficially own the shares of Commerce
Stock held by Sterling Software.

<TABLE>
<CAPTION>
SHARES OF COMMERCE STOCK
OWNED BENEFICIALLY
AS OF MARCH 31, 1996(1)
---------------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER OR GROUP NUMBER CLASS
--------------------------------- --------------- --------------
<S> <C> <C>
Sterling Software(2)....................... 61,200,000 81.6%
Sterling L. Williams....................... 3,000,000(3) 3.9
Warner C. Blow............................. 0 --
George H. Ellis............................ 0 --
Jeannette P. Meier......................... 0 --
Phillip A. Moore........................... 0 --
Sam Wyly................................... 650(4) --
Charles J. Wyly, Jr........................ 0(5) --
Evan A. Wyly............................... 0 --
Robert E. Cook............................. 0 --
Honor R. Hill.............................. 0 --
All current directors and executive
officers as a group (20 persons).......... 3,004,650 3.9
</TABLE>
- --------

(1) There were 75,000,000 shares of Commerce Stock issued and outstanding as
of March 31, 1996. The number of shares shown includes outstanding shares
owned by the person(s) indicated on March 31, 1996 and reflects shares
underlying options owned by such person(s) on March 31, 1996 that were
exercisable within 60 days of such date. The percent of class is computed
giving effect to the exercise by such person(s) of such options.

(2) The address of Sterling Software is 8080 North Central Expressway, Suite
1100, Dallas, Texas 75206.

(3) All of such shares are issuable upon the exercise of an option.

(4) Includes 450 shares held by Sam Wyly's spouse and 200 shares held by
family trusts of which Sam Wyly is trustee, and does not include 3,000,000
shares issuable upon exercise of options owned by an irrevocable trust
established by Sam Wyly. Sam Wyly disclaims beneficial ownership of the
excluded shares.
(5) Does not include 1,600,000 shares issuable upon exercise of options owned
by an irrevocable trust established by Charles J. Wyly, Jr. Charles J.
Wyly, Jr. disclaims beneficial ownership of the excluded shares.

38
<PAGE>

The following table indicates the number of shares of Software Stock owned
beneficially as of March 31, 1996 by the Commerce Named Executive Officers,
each director of Commerce and all current directors and executive officers of
Commerce as a group. Unless otherwise noted, each person has sole voting and
investment power with respect to such shares.

<TABLE>
<CAPTION>
SHARES OF
SOFTWARE STOCK
OWNED BENEFICIALLY
AS OF MARCH
31, 1996(1)
------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER OR GROUP NUMBER CLASS
--------------------------------- --------- ----------
<S> <C> <C>
Sterling L. Williams................................ 1,154,000(2) 3.3%
Warner C. Blow...................................... 212,900(3) *
George H. Ellis..................................... 150,000(4) *
Jeannette P. Meier.................................. 156,570(5) *
Phillip A. Moore.................................... 38,899(6) *
Sam Wyly............................................ 796,965(7) 2.3
Charles J. Wyly, Jr................................. 998,273(8) 2.9
Evan A. Wyly........................................ 86,440(9) *
Robert E. Cook...................................... 40,209(10) *
Honor R. Hill....................................... 0 --
All executive officers and current
directors as a group (20 persons).................. 3,431,614(11) 9.5
</TABLE>

- -------
* Less than 1%.

(5) Includes 144,350 shares issuable upon exercise of options.

(6) Includes 150 shares owned by Mr. Moore's son.

(7) Includes 257,342 shares owned by family trusts of which Sam Wyly is
trustee, and 438,612 shares (300,000 of which are also beneficially owned
by Charles J. Wyly, Jr.) held of record by two limited partnerships of
which Sam Wyly is general partner. Also includes 101,011 shares issuable
upon exercise of warrants owned by family trusts of which Sam Wyly is
trustee. Does not include an aggregate of 1,304,000 outstanding shares
and 666,666 shares issuable upon exercise of options owned by irrevocable
trusts of which Sam Wyly and his family are included as beneficiaries.
Sam Wyly disclaims beneficial ownership of the excluded shares.

(8) Includes 307,016 shares directly owned by family trusts of which Charles
J. Wyly, Jr. is trustee and 556,574 shares (300,000 of which are also
beneficially owned by Sam Wyly) held of record by two limited
partnerships of which Charles J. Wyly, Jr. is general partner. Also
includes 134,683 shares issuable upon exercise of warrants owned by
family trusts of which Charles J. Wyly, Jr. is trustee. Does not include
an aggregate of 600,000 outstanding shares and 333,334 shares issuable
upon exercise of options owned by irrevocable trusts of which Charles J.
Wyly, Jr. and his family are included as beneficiaries. Charles J. Wyly,
Jr. disclaims beneficial ownership of the excluded shares.

(9) Includes 33,686 shares issuable upon exercise of warrants.

(10) Includes 30,000 shares issuable upon exercise of options, 1,000 shares
held by a pension plan trust of which Mr. Cook is a trustee and 2,709
shares held by Mr. Cook's spouse. Mr. Cook disclaims beneficial ownership
of the shares held by his spouse.

(11) Includes 48,464 shares issuable upon exercise of options beneficially
owned by executive officers of Commerce not named in the table and 100
shares owned by the children of an executive officer.

As of March 31, 1996, an aggregate of 4,214,496 shares of Software Stock
were issuable upon the exercise of outstanding options and warrants. In
connection with the Offering, substantially all unvested options became
immediately exercisable upon completion of the Offering. Consequently,
Sterling Software believes that substantially all such options and warrants
may be exercised prior to the Distribution Record Date. However, under the
terms of Sterling Software's existing stock option plans, any presently
outstanding options that are not exercised prior to the Distribution Record
Date will be adjusted as a result of the Distribution to preserve the economic
value of the options. See "Proposal II--Approval of the 1996 Stock Option
Plan--Background."

If the Distribution occurs, the holder of each outstanding share of Software
Stock as of the Distribution Record Date will be entitled to receive from
Sterling Software such holder's proportionate share of the total number of
shares of Commerce Stock distributed in the Distribution.

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<PAGE>

EXECUTIVE COMPENSATION

Sterling L. Williams, Warner C. Blow, George H. Ellis, Jeannette P. Meier
and Phillip A. Moore (collectively, the "Commerce Named Executive Officers")
receive from a subsidiary of Commerce annualized base salaries of $500,000,
$435,000, $250,000, $225,000 and $150,000, respectively, in respect of their
services to Commerce and its subsidiaries. It is anticipated that Mr. Blow
will receive a cash bonus based on the performance of Commerce against
specified financial targets during fiscal 1996. The amount of Mr. Blow's
bonus, on an annualized basis, will be $215,000 if such targets are met, will
be greater than such amount if such targets are exceeded and will be less than
such amount if such targets are not met. The other executive officers may also
receive discretionary cash bonuses in respect of their services during fiscal
1996. In addition, such persons will be eligible to receive grants of options
under the Commerce Stock Option Plan and certain other benefits. See "--
Security Ownership of Management and Certain Stockholders" and "--Benefit
Plans and Agreements." Prior to the Offering, such persons (other than Mr.
Blow) were not paid any compensation or provided any benefits by Commerce or
any of its subsidiaries. Rather, such persons were paid compensation and
provided benefits by Sterling Software. In addition, Messrs. Williams and
Ellis, Ms. Meier and Mr. Moore receive from Sterling Software annualized base
salaries of $500,000, $250,000, $225,000 and $150,000, respectively, in
respect of their services to Sterling Software and its subsidiaries.

BENEFIT PLANS AND AGREEMENTS

Commerce Stock Option Plan. The Commerce Stock Option Plan is intended to
provide an equity interest in Commerce to certain of Commerce's executive
officers, directors, employees, advisors and consultants and to provide
additional incentives for such persons to devote themselves to Commerce's
business. The Commerce Stock Option Plan is also intended to aid in attracting
persons of outstanding ability to serve, and remain in the service of,
Commerce.

The Commerce Stock Option Plan is administered by the Commerce Stock Option
Committee and the Commerce Special Stock Option Committee as described in "--
Board Committees." Pursuant to the Commerce Stock Option Plan, the Commerce
Stock Option Committee and the Commerce Special Stock Option Committee are
authorized to grant stock options ("Commerce Options") to executive officers,
directors, employees, advisors and consultants of Commerce and its
subsidiaries (estimated to be approximately 100 persons in the aggregate) as
described in "--Board Committees." The Commerce Stock Option Plan also
provides for automatic awards of Commerce Options to members of the Commerce
Special Stock Option Committee.

As of March 31, 1996, the total number of shares of Commerce Stock available
for issuance under the Commerce Stock Option Plan was 17,399,400 and options
exercisable for 11,997,000 of such shares had been granted, resulting in
options for 5,402,400 shares being available for grant as of such date. If, at
the close of business on the last day of any subsequent fiscal quarter of
Commerce, the sum of (i) the total number of shares of Commerce Stock
theretofore issued upon the exercise of Commerce Options, (ii) the total
number of shares of Commerce Stock then subject to outstanding Commerce
Options, and (iii) the total number of shares of Commerce Stock then remaining
available under the Commerce Stock Option Plan to be made subject to future
grants of Commerce Options (such sum being the "Actual Number") is less than
20% of the total number of shares of Commerce Stock then outstanding or
issuable upon the exercise, conversion or exchange of outstanding options,
warrants or other securities convertible into or exchangeable for Commerce
Stock (the "Target Number"), the number of shares of Commerce Stock available
for issuance under the Commerce Stock Option Plan will automatically be
increased to a number that will result in the Actual Number being equal to the
Target Number.

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<PAGE>

The Commerce Stock Option Plan does not specify a maximum term for Commerce
Options granted thereunder. A grant of Commerce Options may provide for the
deferred payment of the exercise price from the proceeds of sales through a
bank or broker on the exercise date of some or all of the shares of Commerce
Stock to which such exercise relates. The exercise price of Commerce Options
may not be less than the fair market value per share of the Commerce Stock on
the date determined as the grant date in accordance with the authorization of
the Commerce Stock Option Committee or the Commerce Special Stock Option
Committee, as the case may be. Under the Commerce Stock Option Plan, the
committees may, without the consent of the option holder, amend any option
agreement in various respects, including acceleration of the time at which the
option may be exercised, extension of the expiration date, reduction of the
exercise price and waiver of other conditions or restrictions.

Each grant of Commerce Options will specify whether the exercise price is
payable in cash, by the actual or constructive transfer to Commerce of
nonforfeitable, unrestricted shares of Commerce Stock already owned by the
participant having an actual or constructive value as of the time of exercise
equal to the total exercise price, by any other legal consideration authorized
by the Commerce Stock Option Committee or the Commerce Special Stock Option
Committee, as the case may be, or by a combination of such methods of payment.
The Commerce Stock Option Plan does not require that a participant hold shares
received upon the exercise of Commerce Options for a specified period and
would permit immediate sequential exercises of Commerce Options with the
exercise price therefor being paid in shares of Commerce Stock, including
shares acquired as a result of prior exercises of Commerce Options.

Pursuant to the Commerce Stock Option Plan, each member of the Commerce
Special Stock Option Committee will automatically be awarded Commerce Options
to purchase 100,000 shares of Commerce Stock effective, in the case of initial
awards, as of the later of the date of the Offering and the date upon which
such non-employee member is first elected to the Commerce Board, and
thereafter upon the fifth anniversary of the immediately preceding award to
such non-employee member. Upon completion of the Offering, 11,931,000 options
granted to 55 directors, officers, employees and advisors of Commerce became
effective. An additional 66,000 options have been granted to three employees
subsequent to the Offering and prior to the date of this Proxy Statement. The
exercise price of the grants made prior to the Offering is $24.00, the initial
public offering price of the Commerce Stock. The exercise price of the grants
made subsequent to the Offering was $29.50.

Commerce Options granted under the Commerce Stock Option Plan are intended
to be nonqualified stock options. Nonqualified stock options generally will
not result in any taxable income to the optionee at the time of the grant, but
the holder thereof will realize ordinary income at the time of exercise of the
Commerce Options if the shares are not subject to any substantial risk of
forfeiture (as defined in Section 83 of the Code). Under such circumstances,
the amount of ordinary income is measured by the excess of the fair market
value of the optioned shares at the time of exercise over the exercise price.
An optionee's tax basis in shares acquired upon the exercise of nonqualified
stock options is generally equal to the exercise price plus any amount treated
as ordinary income. If the exercise price of a nonqualified stock option is
paid for, in whole or in part, by the delivery of shares of Commerce Stock
previously owned by the optionee ("Previously Acquired Shares"), no gain or
loss will be recognized on the exchange of the Previously Acquired Shares for
a like number of shares of Commerce Stock. The optionee's basis in the number
of shares received equal to the number of Previously Acquired Shares
surrendered would be the same as the optionee's basis in the Previously
Acquired Shares. However, the optionee would be treated as receiving ordinary
income equal to the fair market value (at the time of exercise) of the number
of shares of Commerce Stock received in excess of the number of Previously
Acquired Shares surrendered, and the optionee's basis in such excess shares
would be equal to their fair market value at the time of exercise.

To the extent that an optionee recognizes ordinary income in the
circumstances described above, Commerce or a subsidiary, as the case may be,
would be entitled to a corresponding deduction, provided in general that
(i) the amount is an ordinary and necessary business expense and such income
meets the test of reasonableness; (ii) the deduction is not disallowed
pursuant to Section 162(m) of the Code, as described below; and (iii) certain

41
<PAGE>

statutory provisions relating to so-called "excess parachute payments" do not
apply. Awards granted under the Commerce Stock Option Plan may be subject to
acceleration in the event of a change in control of Commerce, and, therefore,
it is possible that these change-in-control features may affect whether
amounts realized upon the receipt or exercise of Commerce Options will be
deductible by Commerce under the "excess parachute payments" provisions of the
Code.

Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1.0 million accrued with respect to the chief
executive officer and the four most highly compensated executive officers in
addition to the chief executive officer employed by the company at the end of
the applicable year. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. In the case of
options, one requirement is that the plan under which the options are granted
state a maximum number of shares with respect to which options may be granted
to any one participant during a specified period. The maximum aggregate number
of shares of Commerce Stock with respect to which Commerce Options may be
granted to any person during the term of the Commerce Stock Option Plan shall
not exceed ten million shares of Commerce Stock that may be issued from time
to time under the Commerce Stock Option Plan. Commerce intends to seek to
cause a second requirement, that the Commerce Stock Option Plan be approved by
Commerce's stockholders, to be satisfied by seeking the approval thereof by
such stockholders prior to the Distribution.

Other than the formula grants described above, it is not possible to
determine the specific awards of Commerce Options that will be granted to
various individuals in the future under the Commerce Stock Option Plan.

Informatics Supplemental Executive Retirement Plan II ("SERP II"). Upon
completion of the Offering, Commerce assumed the obligations of Software under
SERP II with respect to Mr. Blow. For a description of SERP II and the
obligations thereunder, see "Compensation of Sterling Software Management--
Pension Plan Table."

Change-in-Control and Severance Agreements. Commerce has entered into an
agreement (a "Commerce Change-in-Control Agreement") with each of its
executive officers, including the Commerce Named Executive Officers, which
agreements provide for certain payments and benefits upon the termination of
the employment of such persons with Commerce following a Change in Control (as
defined in such agreements). Each of the Commerce Change-in-Control Agreements
covers termination within a specified number of years after the date of a
Change in Control and requires Commerce to pay to such executive officer, if
prior to the expiration of such period his or her employment is terminated
with or without cause by Commerce (other than upon such executive officer's
death) or by such executive officer upon the occurrence of certain
constructive termination events, a lump sum amount equal to a multiple of such
executive officer's annual salary, bonus and cash incentive compensation
preceding such termination and to continue certain benefits for a specified
number of months. In addition, if any payment (including payments under the
Commerce Change-in-Control Agreements) to such executive officer is determined
to be "excess parachute payments" under the Code, such executive officer would
be entitled to receive an additional payment (net of income taxes) to
compensate such executive officer for the excise tax imposed by the Code on
such payments. The specified number of years, the multiple and the specified
number of months referred to in the immediately preceding sentence are five,
500% and 60, respectively, in the case of Mr. Sterling L. Williams, and four,
400% and 48, respectively, in the case of Mr. Warner C. Blow, and three, 300%
and 36, respectively, in the case of each of the other Commerce Named
Executive Officers.

Commerce has entered into an agreement (the "Commerce CEO Agreement") with
Mr. Sterling L. Williams, which provides for a minimum initial annual base
salary of $500,000 (subject to mutually agreeable annual increases) and
certain benefits plus such bonuses and other benefits which Commerce and Mr.
Williams may agree upon. Under the terms of the Commerce CEO Agreement, upon
termination of Mr. Williams' employment by (i) Commerce (with or without
cause) or (ii) Mr. Williams as a result of a reduction in his compensation or
of the nature or scope of his authority or duties, the Commerce CEO Agreement
will convert

42
<PAGE>

into a five-year consulting agreement. In such event, Mr. Williams would be
entitled to continue receiving compensation and certain benefits at the levels
specified in the Commerce CEO Agreement. Prior to the expiration of its five-
year term, the consulting agreement could be terminated by Mr. Williams at any
time and by Commerce at Mr. Williams' death. In the event of termination of
Mr. Williams' employment following a Change in Control, at Mr. Williams'
option, the terms of his Commerce Change-in-Control Agreement may govern the
termination in lieu of conversion of the Commerce CEO Agreement into a
consulting agreement. In the event of a Change in Control following conversion
of the Commerce CEO Agreement into a consulting agreement, Mr. Williams would
have the option of terminating the consulting agreement and would be entitled
to receive a lump sum amount equal to all compensation due through the
unexpired portion of the five-year consulting agreement. In addition, the
Commerce CEO Agreement provides that, in the event that Mr. Williams'
employment with Sterling Software is terminated (with or without cause) and
Mr. Williams is willing and able to devote his full-time efforts to Commerce,
Commerce will offer to increase his compensation and benefits paid by Commerce
to a level reasonably equivalent to the combined compensation and benefits he
is entitled to receive from both Commerce and Sterling Software immediately
prior to such termination. Mr. Williams has a similar agreement (the "Software
CEO Agreement") with Sterling Software (see "Compensation of Sterling Software
Management--Employment and Change-in-Control Agreements"). If Mr. Williams'
employment with Commerce is terminated and he accepts full-time employment
with Sterling Software under the provisions of the Software CEO Agreement, Mr.
Williams' right to compensation and benefits from Commerce under the Commerce
CEO Agreement and his right to convert the Commerce CEO Agreement into a
consulting agreement would terminate.

Commerce has entered into an agreement (a "Commerce Severance Agreement")
with each of its executive officers, including the Commerce Named Executive
Officers (other than Mr. Williams), which provides for the continued
compensation of such executive officer in the event that Commerce terminates
his or her employment, with or without cause. Each of these agreements will
expire a specified number of years (four in the case of Mr. Blow and three in
the case of each other Commerce Named Executive Officer) after the date on
which notice of termination is given to the executive officer by Commerce.
Each such agreement requires Commerce to continue to pay the executive
officer, upon his or her termination from employment by Commerce, for a
specified number of months (48 in the case of Mr. Blow and 36 in the case of
each other Commerce Named Executive Officer), the salary, bonus and certain
benefits in effect prior to the termination of his or her employment. In the
event of a termination of employment following a Change in Control, at the
executive officer's option, the terms of his or her Commerce Change-in-Control
Agreement may govern such termination in lieu of the terms of the Commerce
Severance Agreement. In addition, the Commerce Severance Agreements with each
of Mr. George H. Ellis, Ms. Jeannette P. Meier and Mr. Phillip A. Moore
provide that, in the event that such executive officer's employment with
Sterling Software is terminated (with or without cause) and he or she is
willing and able to devote his or her full-time efforts to Commerce, Commerce
will offer to increase such executive officer's compensation and benefits paid
by Commerce to a level reasonably equivalent to the combined compensation and
benefits such executive officer is entitled to receive from both Commerce and
Sterling Software immediately prior to such termination. Each such executive
officer has a similar agreement (the "Software Severance Agreements") with
Sterling Software (see "Compensation of Sterling Software Management--
Employment and Change-in-Control Agreements"). If any such executive officer's
employment with Commerce is terminated and he or she accepts full-time
employment with Sterling Software under the provisions of the Software
Severance Agreement, such executive officer's rights to compensation and
benefits from Commerce under the Commerce Severance Agreement would terminate.

Employee Stock Ownership Plan. Subsequent to the Distribution, Commerce
intends to establish and offer the employees of Commerce and its subsidiaries,
including their executive officers, a defined contribution plan (the "Plan")
intended to qualify under Section 401(a) of the Code. Eligible employees will
be permitted to contribute to the Plan through salary deferral elections of
not less than 1% nor more than 17% of the employee's salary. Contributions of
up to 3% of a participant's salary will be eligible for matching contributions
from Commerce (at a rate presently expected to be equal to 150% of such
employee contributions) under terms no less favorable than those provided in
Sterling Software's current Savings and Security Plan (the "401(k) Plan").

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<PAGE>

The portion of the Plan consisting of contributions other than employer
matching contributions is intended to qualify as a profit-sharing plan with a
"cash or deferred arrangement" under Section 401(k) of the Code, and the
portion of the Plan consisting of employer matching contributions will be
designated as an employee stock ownership plan. The rate at which employee
contributions will be matched will be subject to change as authorized by the
Commerce Board, provided that aggregate matching contributions by Commerce do
not exceed certain statutory limitations. Contributions by participants will
always be 100% vested and contributions by Commerce will vest over a period of
years, becoming fully vested after six years of employment with Commerce or
its affiliates (including Sterling Software prior to the Distribution). Assets
held in the 401(k) Plan which are attributable to employees of Commerce and
its subsidiaries will be transferred to the Plan. Assuming the Plan qualifies
under Section 401 of the Code, employee deferral contributions and employer
matching contributions to the Plan, and income earned on such contributions,
will not be taxable to the participants until withdrawn from the Plan.

Subsequent to the Distribution, Sterling Software presently intends to amend
and restate its 401(k) Plan to qualify in part as an employee stock ownership
plan having terms substantially identical to the Plan. See "Compensation of
Sterling Software Management--Employee Stock Ownership Plan."

BOARD AND COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Commerce Executive Committee are primarily responsible
for determining executive compensation other than grants of Commerce Options.
The members of the Commerce Executive Committee are Messrs. Sam Wyly
(Chairman), Sterling L. Williams and Charles J. Wyly, Jr.

Mr. Williams is an executive officer of Commerce in addition to serving on
the Commerce Executive Committee. Mr. Williams also serves on the executive
committee and certain stock option committees of the Software Board. See
"Management of Sterling Software" and "Compensation of Sterling Software
Management--Executive and Stock Option Committee Interlocks and Insider
Participation."

44
<PAGE>

BUSINESS OF COMMERCE

Commerce is a leading provider of electronic data interchange and other
electronic commerce products and services worldwide. Commerce develops,
markets and supports electronic commerce software products and provides
electronic commerce network services that enable businesses to engage in
business-to-business electronic communications and transactions. Commerce has
been providing electronic commerce solutions for over 20 years and has
numerous customers in industries such as banking, pharmaceuticals and
retailing. Commerce's customers include 96 of the 100 largest U.S. industrial
corporations, as ranked by 1994 sales in Fortune magazine, and 99 of the top
100 U.S. commercial banks, as ranked by deposits as of December 31, 1994, in
American Banker magazine. Selected customers of Commerce include Cummins
Engine Company, Mobil Corporation, NationsBanc Services, Inc., The Pillsbury
Company and Target Stores.

Commerce offers a comprehensive range of electronic commerce products and
services for the electronic commerce market. Commerce continually strives to
understand the business requirements of the global electronic commerce market;
address these requirements with flexible, reliable and secure electronic
commerce solutions; and deliver these solutions in an effective and efficient
manner. Commerce believes that many of today's business organizations operate
as extended enterprises that include not only an entity's divisions, plant
sites and sales offices, but also involve close partnering relationships with
customers, suppliers, banks and other trading partners. The foundation for
transacting business electronically is reliable and secure communications
software. Upon this foundation, solutions are provided for messaging
management, translation software, network services and automated payment
integration. Commerce provides all of these elements of electronic commerce,
among others, to support the extended enterprise.

Commerce operates through five separate groups, four of which offer distinct
families of products and services in North America and one of which markets
network services and related products outside of North America. Commerce
believes that its decentralized organizational structure promotes operating
flexibility, improves responsiveness to customer requirements and focuses
management on achieving revenue and profit objectives. The Network Services
Group is a leading provider of electronic commerce network services, offering
a variety of value-added services and software solutions under the COMMERCE
family name. The Interchange Software Group is a leading provider of
electronic commerce translation software, which converts data into and out of
standard electronic commerce formats, marketed under the GENTRAN family name.
The Communications Software Group provides software products and services
under the CONNECT family name that enable customers to send and receive data
electronically and support a variety of data transfer, EDI, electronic funds
transfer, claims processing and inventory management functions. The Banking
Systems Group, with its VECTOR family of products, is a leading provider of
financial EDI, item processing and electronic payments software and related
services for financial institutions. Commerce's International Group markets
network services and related products outside of North America, primarily in
Europe.

ELECTRONIC COMMERCE

Electronic commerce involves the automation of business-to-business
transactions through the use of telecommunications and computers to exchange
and process electronically commercial information and business transaction
documents. Due to the critical nature of these transactions, electronic
commerce requires reliable, secure, automated connectivity between businesses.
Electronic commerce typically involves software and network services to
perform essential business functions such as EDI, which facilitates uniform
communications with different trading partners, including suppliers,
customers, transportation carriers, banks and governmental agencies. In
addition, electronic commerce includes value-added services such as e-mail,
electronic funds transfer, electronic forms and bulletin board and catalog
services. Currently, EDI is the most widely utilized component of electronic
commerce. Advantages of electronic commerce include reduced clerical workload
and elimination of unnecessary paper handling; rapid, accurate and secure
exchange of time sensitive business information; reduced operating and
inventory carrying costs; and improved speed of ordering, delivering and
paying for goods and services.

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<PAGE>

A report by International Data Corporation indicates that the worldwide
market for electronic commerce was an estimated $1.2 billion in revenues in
1994 and is estimated to increase to $2.5 billion by 1998, an average annual
growth rate of approximately 20%. According to the Yankee Group, the 1994
worldwide market for EDI products and services was an estimated $850 million
in revenues and is estimated to increase to $1.8 billion by 1997, an average
annual growth rate of approximately 28%.

Groups of companies that regularly trade with each other generate
significant repetitive business transactions. These trading communities are
natural prospects for electronic commerce. Many large companies within a
trading community increasingly recommend or require that their trading
partners engage in electronic commerce, particularly EDI, as the primary
method of communicating business documents. Large companies within a trading
community often are described as "hubs" and their trading partners as
"spokes." A hub company and its trading partners communicate through
electronic networks, traditionally using value-added network service
providers, which utilize either their own proprietary network or third-party
networks. Alternatively, some trading communities use a private network owned
and operated by the hub company.

Hub companies typically decide to engage in electronic commerce for one or
more of the following reasons: (i) to reduce inventories by shortening the
time required to notify vendors and replenish stocks; (ii) to reduce the
administrative handling costs of documents that they send or receive from
their suppliers or customers; and (iii) to improve customer support and
service levels. For these reasons, a hub company often adopts a stated
business objective that all of its trading partners use EDI as the principal
means of communicating business documents. These trading partners or spoke
companies, in turn, often expand the use of electronic commerce by requesting
or requiring their trading partners to communicate through EDI. The expansion
of the number of trading partners adopting EDI increases the number of
potential software customers and network subscribers for EDI services.

In a typical EDI transaction, a trading partner (the "sending partner")
first generates, with its computer, the business data used for the completion
of a particular set of documents, described by EDI standards as a transaction
set. Transaction sets include requests for quotes, purchase orders, invoices,
shipping notices, remittance advices and other related documents and messages.
Second, a translation software program on the sending partner's computer
converts the data into a standard EDI format. Third, this information is
electronically transmitted directly to the intended trading partner's computer
(the "receiving partner") or to a central computer system of a network service
provider. Network service providers receive documents for subsequent delivery
to the receiving partner, connect many types of computer hardware and
communications devices, convert multiple transaction sets from one industry
standard to another and maintain security by reducing the possibility of
unauthorized access to critical business information. Finally, a translation
software program on the receiving partner's computer converts the document or
transaction set from a standard EDI format into the format required by the
receiving partner.

The adoption of electronic commerce products and services by a typical
organization tends to be an evolutionary process. The first stage involves
automating existing business processes, usually at the insistence of the
largest trading partners within a particular industry. At this stage,
departments within the organization typically replace paper processes with
electronic processes. During the second stage, the organization is either
changing existing processes or integrating new processes into its business,
usually in conjunction with the business strategy of a major trading partner.
For example, the organization may be a major supplier required to provide
just-in-time inventory to a manufacturer, quick response to a retailer or
efficient consumer response to a grocer. These activities tend to be
implemented at the corporate rather than the departmental level of the
organization and may involve other entities such as suppliers, shippers or
banks in the use of electronic commerce processes. In the third stage, the
organization integrates electronic commerce into its core business strategies.
For example, the organization may require its suppliers to provide just-in-
time inventory, quick response or efficient consumer response and,
additionally, integrate all of its key business partners in the process.

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<PAGE>

Based on the foregoing stages, Commerce believes that the electronic
commerce market can be divided into three general segments:

The Responsive Market. Customers in this market segment tend to be small
to medium size organizations that must implement EDI in order to support a
large trading partner's business. These customers may have installed a
personal computer ("PC") system and, in the high end of this market, a
local area network ("LAN"). These customers generally do not have a
significant investment in technology and do not have other systems that
require electronic commerce integration. They seek to implement EDI quickly
with minimum effort and expense.

The Proactive Market. Customers in this market segment tend to be medium
to large size organizations that are initially implementing or upgrading
their EDI capabilities, usually in response to a request from one of their
large customers or changing market dynamics, including competitive factors
or internal process changes. They generally have a mid-range computing
environment with installed applications that assist in managing their
business such as general ledger, inventory and accounts payable programs.
They seek an electronic commerce solution that will enable them to
implement EDI using their existing computing equipment and personnel.

The Messaging Market. Customers in this market segment tend to be global,
multi-divisional, decentralized organizations with complex computing
environments and sophisticated applications software. Typically, these
customers implement extended enterprise solutions, including quick
response, just-in-time manufacturing, vendor-managed inventory, efficient
consumer response and supply chain management, which encompass electronic
commerce with their suppliers, shippers, banks and customers. In addition,
these customers demand an array of electronic commerce products and
services that interact in a flexible, reliable and secure manner and
provide a comprehensive solution to their electronic commerce needs,
including integration with internally or externally developed applications
programs. Frequently, Messaging Market customers drive the implementation
of electronic commerce by their trading partners.

As a result of varying requirements of these market segments, the electronic
commerce market requires a broad range of integrated product and service
solutions with differing degrees of sophistication, rather than isolated
products or services. Most current offerings in the electronic commerce market
are narrowly designed to target specific computer platforms or specific
industry applications and, accordingly, do not provide a total solution.

THE COMMERCE SOLUTION

Commerce offers a comprehensive range of electronic commerce products and
services for the electronic commerce market. Commerce continually strives to
understand the business requirements of the global electronic commerce market;
address these requirements with flexible, reliable and secure electronic
commerce solutions; and deliver these solutions in an effective and efficient
manner. Commerce's products and services include communications and
interchange software, network services, value-added software applications and
closely-related professional services. Commerce believes that its ability to
offer a broad array of products across all major computing systems and to
provide network services by selectively utilizing multiple transmission
networks, including telecommunications carriers, public data networks and the
Internet, gives it a competitive advantage in addressing the needs of the
electronic commerce market. Commerce has been providing electronic commerce
solutions for over 20 years and has numerous customers in industries such as
banking, pharmaceuticals and retailing. Commerce is recognized as a leading
provider of EDI and other electronic commerce products and services worldwide.

The following are examples of customers utilizing Commerce's products and
services:

Retail. A major retailer uses Commerce's COMMERCE, GENTRAN and CONNECT
products and services to send electronic purchase orders to over 1,700
trading partners ranging across all three electronic commerce market
segments in the United States, Canada and other countries. The retailer
initiates an electronic transaction using Commerce's GENTRAN translation
software to convert data into a standard

47
<PAGE>

EDI document and transmits the document using Commerce's CONNECT
communications software via Commerce's COMMERCE network services, which
tailors delivery to trading partners based on individual specifications.
Data from the purchase order exchange becomes the basis for other
transaction documents such as invoices, ship notices and remittance
advices.

Manufacturing. A major manufacturer utilizes Commerce's GENTRAN
translation and CONNECT communications software products and COMMERCE
network services to request price quotes, issue purchase orders, accept
electronic invoices and control precisely timed delivery of materials to
plant sites worldwide through electronic material releases and advance ship
notices. This manufacturer utilizes Commerce's network services integrated
with a third-party multimedia catalog to provide its distributors with an
online view of parts for procurement and to automate the ordering of these
parts for the distributors' customers. The manufacturer realizes
significant cost savings by using Commerce's products and services to
manage suppliers and distributors as well as the manufacturer's internal
divisions.

Commerce believes that many of today's business organizations operate as
extended enterprises that include not only an entity's divisions, plant sites
and sales offices, but also involve close partnering relationships with
customers, suppliers, banks and other trading partners. The foundation for
transacting business electronically is reliable and secure communications
software. Upon this foundation, solutions are provided for messaging
management, translation software, network services and automated payment
integration. Commerce provides all of these elements of electronic commerce to
support the extended enterprise.

STRATEGY

Commerce's objective is to continue to strengthen its position as a leading
worldwide provider of electronic commerce products and services in an
expanding market. Commerce's strategy to achieve this objective includes the
following key elements.

Complete Range of Software Products and Network Services. Commerce's
software products and network services support all major aspects of electronic
commerce and operate on all major computing systems. More importantly,
Commerce's products and services are designed to provide total solutions,
sometimes on an industry-specific basis, to customers' electronic commerce
needs such as integrated supply chain management and business support
communications. Commerce intends to maintain and enhance its position as a
leader in electronic commerce by continuing to provide products and services
with superior functionality, reliability, ease of use and compatibility with
other business applications.

Innovative Solutions to Satisfy Customer Needs. Commerce continually seeks
to identify customer needs and anticipate market trends. Commerce's product
development strategy is to enhance existing products and to introduce and
acquire new products based upon current and anticipated customer needs. Recent
products introduced include CONNECT:Firewall, CONNECT:Direct for Windows NT
and GENTRAN:Director for Windows. In addition, Commerce has consummated a
number of business acquisitions that have expanded the array of products and
services available to its customers.

Targeted Marketing Strategies; Develop International Markets. Commerce's
principal marketing strategy focuses on promoting the advantages of electronic
commerce and expanding the number of businesses and industries using
Commerce's products and services. Commerce focuses its marketing efforts on
trading communities composed of trading partners in common industries
conducting recurring business transactions. Over time, Commerce works both to
increase the number of customers and to expand the range of electronic
commerce solutions used within the trading community. Commerce sells primarily
through direct sales to hub companies and their larger trading partners and
through telesales to the hub companies' smaller trading partners. Commerce
also participates in a number of co-marketing arrangements and other marketing
alliances. Given the global nature of the electronic commerce marketplace,
Commerce intends to rapidly expand its electronic commerce business
internationally, especially in Europe.

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<PAGE>

Internet Strategy. Commerce's strategy is to use the Internet as a vehicle
to expand the electronic commerce market, particularly among smaller
businesses and trading partners. Commerce is a major internal user of the
Internet and offers products and services that are used in connection with the
Internet. Product and service offerings in this area include CONNECT:Firewall,
GENTRAN:Server and COMMERCE:Network. Commerce believes that increased
awareness and usage of the Internet will increase the number of businesses
using electronic commerce, which will, in turn, generate demand for value-
added services, as well as software and related support services, from
electronic commerce vendors such as Commerce.

Outstanding Customer Support. Commerce strives to provide the highest
quality and most reliable customer support and services to its customers.
Commerce supports its customers through numerous activities, including
technical and non-technical support, product implementation, educational
services, on-line bulletin board services, a World Wide Web page, on-site
visits and user conferences. These services are designed to attract new
customers and to encourage greater utilization of Commerce's products and
services by existing customers, thereby increasing recurring revenues. In
addition, Commerce conducts ongoing reviews to ensure that its customers are
able to maximize the value of their investments in Commerce's software
products and network services.

Strategic Alliances and Acquisition Opportunities. Commerce actively seeks
strategic alliances to expand its distribution channels and to integrate its
products and services with complementary products and services of other
vendors. In the past several years, Commerce has entered into formal and
informal strategic alliances with other companies and trade associations,
including SAP, Microsoft, Novell, VISA, the National Wholesale Druggists'
Association and the National Hardware Manufacturers' Association. Commerce
intends to continue to pursue similar alliances. Commerce's acquisition
strategy is to selectively acquire technology and businesses to facilitate the
expansion of its operations. In the past six years, Commerce has completed six
acquisitions, including the acquisition of businesses having EDI translation
software for PC and UNIX platforms, software for managing electronic commerce
gateways at the enterprise level, software enabling financial electronic
commerce for banks and the operations of a network services provider.

PRODUCTS AND SERVICES

The foundation for transacting business throughout an extended enterprise is
reliable and secure communications software. Upon this foundation, solutions
are provided for messaging management, translation software, network services
and automated payment integration. Commerce has four groups that offer
distinct families of products that address targeted market segments. A brief
description of each family of products is included in the following table.

<TABLE>
<CAPTION>
NETWORK SERVICES INTERCHANGE SOFTWARE COMMUNICATIONS SOFTWARE BANKING SYSTEMS
---------------- ---------------------------- -------------------------- -----------------------------
<S> <C> <C> <C>
COMMERCE: A family of GENTRAN: A family of gate- CONNECT: A family of auto- VECTOR: A family of financial
value-added network services, way message handling and EDI mated file transfer and electronic commerce and bank
enabling software, data-bases translation software communications management automation software
and related products software
</TABLE>

Network Services. The COMMERCE family of value-added network services
addresses the needs of all three electronic commerce market segments and
includes COMMERCE:Network, a service that facilitates the secure, reliable
exchange of business documents among trading partners. Commerce's network
services utilize multiple transmission networks, including telecommunication
carriers, public data networks and the Internet, and are supplemented with
enabling software to allow customers to realize the maximum benefits of such
services regardless of the customer's size or technological sophistication.
Commerce's supplemental network services include, among others,
COMMERCE:Library for distribution of information and COMMERCE:Catalog for
management of universal product code information. Custom handling of
information is readily available through COMMERCE:Network, including the
simultaneous distribution of information to multiple recipients, notification
of receipt of incoming communications by means of alarms, pager activation or
other special means, and a number of specific handling options ranging from
fax delivery to providing access via the Internet.

49
<PAGE>

Network services are generally provided to trading partners within industry
markets. Commerce's primary vertical industry markets include banking,
consumer goods, government, grocery, hardlines, healthcare, manufacturing,
retail, telecommunications and transportation. During 1995, Commerce launched
its network services business in Europe. As of September 30, 1995, Commerce
had over 11,300 network customers worldwide.

Interchange Software. The GENTRAN family of gateway management and EDI
translation software is intended to fulfill the requirements of each
electronic commerce market segment. Products in this family include, among
others: GENTRAN:Server for high-end messaging management, including security,
delivery and monitoring functionality either directly between trading
partners, through value-added network services such as COMMERCE:Network or
over the Internet; GENTRAN:Basic, which provides advanced EDI translation
technology for mainframe and midrange computing environments; GENTRAN:Mentor
for UNIX, which provides EDI translation for the UNIX environment; and
GENTRAN:Director for Windows, which offers powerful, yet easy to implement,
EDI translation.

According to BIS Strategic Decisions, Commerce is the market leader in the
North American EDI translation software market and provides software for all
segments of the market. Commerce's GENTRAN products are widely accepted in the
retailing, grocery and healthcare industries, among others, with over 3,400
EDI translation software customers as of September 30, 1995.

Communications Software. The CONNECT family of software products offers
market-leading automated file transfer software designed to fulfill the needs
of mainframe, UNIX, Windows NT and PC computing environments, among others.
Commerce's two primary products are CONNECT:Direct and CONNECT:Mailbox.
CONNECT:Direct is a leading automated file transfer product for high speed,
reliable and secure movement of large amounts of data, using advance
compression and file recovery/restart techniques. CONNECT:Mailbox provides a
company's computing environment with a wide variety of connectivity options.
The CONNECT:Mailbox user can support dial-up or dedicated connections from
customers, suppliers, remote employees and divisions using the protocols that
best suit the application. Further, CONNECT:Direct and CONNECT:Mailbox
interface with each other to support the automated movement of information
within and outside the enterprise quickly and easily. In addition, Commerce
offers additional products such as CONNECT:Firewall, which was introduced in
1995 and is designed to protect network environments from being compromised
when connected to non-secure networks such as the Internet, with options for
managing domain name services and encryption.

Commerce is a leader in the automated file transfer software market, with
over 2,100 installed customers in a number of industry sectors licensed to use
Commerce's automated file transfer software products as of September 30, 1995.
The banking, insurance, government and telephone industries have adopted
Commerce's products as an integral component of their communications
functions.

Banking Systems. The VECTOR family of banking software consists of 24
distinct products to enable banks to utilize financial EDI and bank automation
and to provide electronic services to their corporate clients. The
VECTOR:Connexion product interfaces with the VISA network of banks, the
Federal Automated Clearing House and other forms of electronic funds transfer.
VECTOR software can be scaled to satisfy the electronic commerce requirements
of the largest bank holding companies as well as smaller regional banks.

Commerce has installed VECTOR products in 99 of the 100 largest banks in the
United States for item processing software, and over 80% of the U.S. banks
that have adopted financial EDI have done so with VECTOR software products. As
of December 31, 1995, Commerce had approximately 1,900 VECTOR installations at
over 800 banking institutions worldwide.

50
<PAGE>

Internet Products. Commerce has introduced a number of products for use
across the Internet. Commerce's CONNECT:Firewall product is designed to
provide multiple security capabilities to Internet users as well as to other
network environments. Commerce has recently announced several additional
initiatives targeted at enabling customers to use the Internet for reliable,
secure business transactions. These initiatives include the introduction of
the COMMERCE:Links interface to permit customers to mix Internet and non-
Internet EDI transactions; the planned introduction of CONNECT:Veil to provide
encryption and key management throughout an enterprise; and the addition of
Internet functionality to GENTRAN:Server and GENTRAN:Director.

SALES AND MARKETING

Each of Commerce's Network Services, Communications Software, Interchange
Software and Banking Systems Groups has its own sales and marketing
organizations. These organizations license and market Commerce's products and
services in the United States and Canada through a combination of direct
sales, telesales and telemarketing. Although each group's sales and marketing
organizations focus primarily on its products and services, they also seek to
market the products and services of Commerce's other groups when opportunities
arise. Commerce's International Group markets network services and related
products outside the United States and Canada, primarily in Europe. Commerce's
Banking Systems Group markets its software products and product support
services in the United States and internationally. Commerce has implemented a
comprehensive, performance-based system of sales commissions, awards and
recognition designed to compensate and motivate its sales force. At December
31, 1995, Commerce employed approximately 146 sales representatives.

Pursuant to the International Marketing Agreement, international licensing
and marketing of software products and product support services for Commerce's
communications and interchange software are provided by Sterling Software's
International Group. This group acts as the exclusive distributor (directly
and through subdistributors) of Commerce's interchange and communications
software products in markets outside the United States and Canada and is
responsible for sales, marketing and first level support of such products in
those markets. See "Relationship Between Sterling Software and Commerce After
the Distribution--Contractual Arrangements." Sterling Software's International
Group is headquartered in Paris, France and presently maintains offices
throughout Europe and in Tokyo, Japan and Sydney, Australia and has
relationships with agents and distributors in Asia (other than Japan), Central
and South America, Eastern Europe, the Middle East, Mexico and South Africa.

Commerce's principal marketing strategy focuses on promoting the advantages
of electronic commerce and expanding the number of businesses and industries
using Commerce's products and services. Commerce focuses its marketing efforts
on trading communities composed of trading partners in common industries
conducting recurring business transactions. In pursuing this strategy,
Commerce emphasizes sales to hub companies and their trading partners in a
wide range of trading communities. For example, a hub company will establish
an EDI program by selecting the software, documents, formats, standards and
value-added network services that it intends to employ to communicate and
transact business electronically with its trading partners. After announcing
the establishment of an EDI program, a hub company generally allows trading
partners a period of time, typically from three months to several years, to
comply with the EDI specifications and become EDI-capable. In many instances,
hub companies ultimately will require trading partners to execute all
transactions through EDI. Commerce's marketing and sales activities are
centered around the implementation of EDI within these trading communities
through hub and spoke programs, particularly within selected vertical markets.

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<PAGE>

CUSTOMERS

Commerce's customers include 96 of the 100 largest U.S. industrial
corporations, as ranked by 1994 sales in Fortune magazine, and 99 of the top
100 U.S. commercial banks, as ranked by deposits as of December 31, 1994, in
American Banker magazine. Selected customers of Commerce (grouped by industry)
are listed in the following table:

<TABLE>
<CAPTION>
GOVERNMENT AND
MANUFACTURING BANKING TELECOMMUNICATIONS
- ------------- ------- ------------------
<S> <C> <C>
Amoco Corporation Boatman's Bancshares, Inc. Alltel Information Services,
Cummins Engine Company, First Interstate Bancorp Inc.
Inc. First of America Corporation Bell Atlantic Network Services,
The Dow Chemical Company First Union Corporation Inc.
Imperial Oil Limited Liberty Bancorp, Inc. Cincinnati Bell Information
Martin Marietta Manage- NationsBanc Services, Inc. Systems (CBIS)
ment Data Systems PNC Bank, National Association Defense Logistics Agency
Mead Corporation Union Bank & Trust Co. Department of Agriculture
Mobil Corporation Wachovia Operational Services, Federal Reserve Automation
Siemens Energy & Automa- Inc. Services
tion, Inc. Wells Fargo & Co. HHS-Health Care Financing
Siemens Nixdorf Printing Administration
Systems NYNEX Mobile Communications
Sun Microsystems Inc. Company
Social Security Administration
Southern New England Telephone
Company
<CAPTION>
GROCERY AND FOOD MANUFACTURING HARDLINES HEALTHCARE AND PHARMACEUTICALS
- ------------------------------ --------- ------------------------------
<S> <C> <C>
Albertson's, Inc. Ace Hardware Corp. Abbott Laboratories
Borden Inc. Black & Decker (U.S.), Inc. Baxter Healthcare Corporation
The Kroger Company The Glidden Company Bayer Laboratories, Inc.
Nestle Food Company Hardware Wholesalers, Inc. Blue Cross/Blue Shield
The Pillsbury Company Home Depot USA, Inc. Bristol-Myers Squibb Company
Sara Lee Corporation Home Quarters Warehouses, Inc. Cardinal Health, Inc.
Star-Kist Foods Inc. Lowe's Companies, Inc. Merck, Sharp & Dohme
Tropicana Products, Inc. Newell Companies MetraHealth
Tyson Foods Inc. Servistar/Coast to Coast Corp. Schein Pharmaceuticals, Inc.
Wakefern Food Corpora- The Stanley Works Upjohn Company
tion
<CAPTION>
RETAIL CONSUMER GOODS TRANSPORTATION
- ------ -------------- --------------
<S> <C> <C>
American Stores Company Hartz Mountain Burlington Northern Railroad
Ames Department Stores Helene Curtis Consolidated Freightways, Inc.
Best Buy Co., Inc. Kimberly-Clark Corporation Consolidated Rail Corporation
Dillard's Department Lever Brothers Company Federal Express Corporation
Stores Levi Strauss & Co. Freightliner Corp.
Office Depot Maybelline, Inc. LogiCorp Inc.
Revco D.S., Inc. Nike, Inc. Roadway Services, Inc.
Rite Aid Corporation The Procter & Gamble Company Ryder Dedicated Logistics
Staples, Inc. Rubbermaid, Incorporated Skyway Freight Systems, Inc.
Target Stores Sunbeam-Northern Company Yellow Freight Systems, Inc.
Topco Sales
</TABLE>

PRODUCT LICENSES AND PRODUCT SUPPORT

Commerce's software products are licensed for perpetual use or for a fixed
term. Commerce typically does not sell or otherwise transfer title to its
software products. The license agreements generally restrict the use of the
product to designated sites or central processing units and prohibit
reproduction, transfer or disclosure of the product. However, some license
agreements may cover multiple sites or multiple central processing units at
one site.

In addition to obtaining licenses to use software products, Commerce's
customers often purchase product support services from Commerce. Typically,
these services are purchased pursuant to product support agreements having
one-year terms. Commerce's product support agreements allow customers to
receive updated or enhanced versions of Commerce's software products as they
become available and telephone access to Commerce's technical personnel.

52
<PAGE>

PRODUCT DEVELOPMENT

Commerce's product development strategy is to enhance existing products and
to introduce and acquire new products based upon current and anticipated
customer needs. In addition, Commerce has consummated a number of acquisitions
that have expanded the array of products and services available to its
customers.

Each of Commerce's Network Services, Communications Software, Interchange
Software and Banking Systems Groups performs its own product development
function. Each group development lab operates as a profit center, with
revenues derived from intracompany royalties earned on products sold in the
domestic and international markets. Commerce believes that this organizational
structure facilitates development cost control and focuses the development
function on customer needs. Approximately 238 of Commerce's employees were
engaged in product development at December 31, 1995. Gross product development
costs in 1993, 1994 and 1995 were $19,132,000, $21,718,000 and $24,858,000,
respectively, of which Commerce capitalized $12,654,000, $9,221,000 and
$10,051,000, respectively, as the cost of developing and testing new or
significantly enhanced software products.

Commerce has a disciplined approach to product development that, among other
things, includes evaluating anticipated customer needs, analyzing the cost of
developing new products versus the cost of acquiring new products and
analyzing anticipated revenues from new and enhanced products. In some
instances, Commerce may decide either to acquire an existing product or to
acquire a company that owns an existing product rather than developing the
product internally, and in other instances Commerce may contract with a third-
party developer to develop the product on Commerce's behalf. Because of these
and other factors, Commerce is unable to estimate future product development
costs.

COMPETITION

The electronic commerce market is very competitive. Numerous companies
supply electronic commerce products and services, and several competitors
target specific vertical markets to which Commerce presently is, or is seeking
to become, a provider. Commerce's competitors include both large companies
having substantially greater resources than Commerce and small specialized
companies that compete in a particular market niche. Each of Commerce's
Network Services, Communications Software, Interchange Software and Banking
Systems Groups faces its own set of competitors. The principal competitors of
the Network Services Group include, among others, General Electric Information
Systems, Advantis Systems, Inc. (a joint venture between Sears, Roebuck & Co.
and IBM), a joint venture between British Telecommunications Plc and MCI
Communications Corporation, Harbinger Corporation and QuickResponse Services,
Inc. The Network Services Group may in the future experience increased
competition from telecommunications companies such as AT&T Corp. and various
regional telecommunications companies. The principal competitors of the
Interchange Software Group include, among others, Premenos Technology Corp.,
Supply Tech Inc. and TSI International Inc., each of which markets platform-
specific translation software, and Harbinger Corporation. The principal
competitors of the Communications Software Group include, among others,
Computer Associates International, Inc., IBM and the internal programming
staffs of various businesses engaging in electronic commerce. Finally, the
Banking Systems Group competes with Computer Associates International, Inc.,
as well as a number of smaller competitors that offer products for specific
market niches.

Commerce expects competition to increase in the future from both existing
competitors and other companies that may enter Commerce's existing or future
markets. In addition, Commerce could experience increased competition if the
Internet becomes an accepted method of conducting electronic commerce.
Commerce believes that its ability to compete successfully in the electronic
commerce market depends on numerous factors, both within and outside its
control, including product performance, functionality and reliability, price
and customer service and support. Commerce's strategy is to offer total
solutions, including sophisticated communication and interchange software,
reliable network services and other value-added services designed to meet the
needs of the various segments of the electronic commerce market. Commerce
seeks to differentiate itself through superior products and services, its
reputation for quality and value and its ability to respond quickly and
efficiently to the

53
<PAGE>

changing needs of its electronic commerce customers. Although Commerce is
presently a leading provider of products and services in its markets, there
can be no assurance that it will not be adversely affected by competitive
factors.

INTELLECTUAL PROPERTY RIGHTS

Commerce relies primarily on a combination of copyright, patent and
trademarks laws, trade secrets, confidentiality procedures and contractual
provisions to protect its intellectual property rights. Commerce seeks to
protect its software, documentation and other written materials principally
under trade secret and copyright laws, which afford only limited protection.
Commerce routinely enters into non-disclosure and confidentiality agreements
with employees, contractors, consultants and customers. Despite Commerce's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of Commerce's products or to obtain and use information that
Commerce regards as proprietary. There can be no assurance that Commerce's
means of protecting its proprietary rights will be adequate or that Commerce's
competitors will not independently develop similar technology. In addition,
the laws of some foreign countries do not protect Commerce's proprietary
rights to as great an extent as the laws of the United States. Commerce does
not believe that any of its products infringe on the proprietary rights of
third parties in any material respect. Licenses for a number of software
products have been granted to Commerce for its own use or for remarketing to
its customers. Certain of these licenses, individually or in the aggregate,
are material to the business of Commerce. Management of Commerce believes that
the risk that Commerce will lose any such licenses is remote.

Commerce believes that, due to the rapid pace of innovation within the
electronic commerce industry, factors such as the technological and creative
skills of its personnel are more important in establishing and maintaining a
leadership position within the industry than are the various legal protections
afforded its technology.

EMPLOYEES

Commerce's business is dependent upon its ability to attract and retain
highly qualified managerial, technical and sales personnel. Competition for
such personnel is intense. There can be no assurance that Commerce can retain
its key managerial, technical and sales employees or that it can attract,
assimilate or retain such personnel in the future. Commerce's operations could
be adversely affected if it were to lose the services of a significant number
of qualified employees or if it were unable to obtain additional qualified
employees when needed. To attract and retain qualified personnel, Commerce
offers competitive compensation and benefits packages and strives to maintain
excellent employee relations, attractive office facilities and challenging
working environments. None of Commerce's employees are represented by a labor
union. Commerce has not experienced any work stoppages and considers its
employee relations to be good.

As of March 31, 1996, Commerce had approximately 1,123 full-time employees,
including 347 technical personnel engaged in maintaining or developing
Commerce's products or performing related services, 357 marketing, sales and
sales support personnel, 264 customer support personnel and 155
administration, finance and management personnel.

FACILITIES

Commerce's principal executive offices are currently located in Dallas,
Texas. Commerce also leases offices and facilities in San Francisco,
Sacramento and San Bernardino, California; Ann Arbor, Michigan; New York, New
York; Dublin, Ohio; Washington, D.C.; Toronto, Canada; London, England; Paris,
France; and Dusseldorf, Germany. Commerce believes that its facilities will be
adequate for its immediate needs and that additional or substitute space is
available if needed to accommodate expansion.

Commerce's 10,000 square foot data center, which is located in Dublin, Ohio,
utilizes mainframe and UNIX-based operating environments that support the
processing of customers' business information, data

54
<PAGE>

backup, product development and customer support. Front-end processors carry
hundreds of dedicated and dial-up lines and interface with over a dozen data
networks used by Commerce's customers to access Commerce's network services.
The data center also maintains Commerce's e-mail network and World Wide Web
connection. This system supports more than 600 employees worldwide, as well as
dozens of applications including e-mail and a customer tracking system. The
data center connects to the Internet and uses Commerce's CONNECT:Firewall
product for security.

GOVERNMENTAL REGULATIONS

Current regulations and laws governing the telecommunications industry
generally do not apply to network service providers. Accordingly, except for
regulations governing the ability of Commerce to disclose the contents of
communications by its customers, there are no governmental regulations
pertaining to customer privacy or the pricing, service characteristics or
capabilities, geographic distribution or quality control features of
Commerce's network services. There exists, however, the risk that governmental
policies affecting the network service industry could be implemented by
executive order, legislation or administrative order. If such policies are
adopted, they could have a material adverse effect on the business, results of
operations and financial condition of Commerce. Regulatory changes in the
telecommunications industry could cause an increase or decrease in
telecommunications costs.

LEGAL PROCEEDINGS

Commerce is not party to any material legal proceedings and is not aware of
any material threatened litigation.

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<PAGE>

SELECTED HISTORICAL FINANCIAL DATA OF STERLING SOFTWARE

The following table presents certain selected historical financial data of
Sterling Software which has been derived from Sterling Software's Consolidated
Financial Statements as of and for the three months ended December 31, 1995
and December 31, 1994 and the five fiscal years ended September 30, 1995. The
information set forth below does not reflect the Distribution and,
accordingly, the table presents data for Sterling Software that include
amounts attributable to both Commerce and Sterling Software. The information
set forth below should be read in conjunction with Sterling Software's
Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Software Form 10-K and the Software Form 10-Q, which are
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference."

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED SEPTEMBER 30 DECEMBER 31,(1)
----------------------------------------------- ------------------
1991 1992 1993 1994 1995 1994 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(2)(3)
Revenue................. $333,381 $378,396 $416,114 $473,393 $588,167 $126,418 $148,652
Cost of sales......... 141,436 162,592 172,105 171,745 190,563 42,510 49,663
Product development
and enhancement...... 24,545 25,161 27,397 33,002 42,509 9,446 9,360
Selling, general and
administrative....... 149,728 167,590 170,180 173,112 222,745 49,015 58,932
Income before
restructuring charge,
purchased research
and development,
other income
(expense), income
taxes, extraordinary
item and cumulative
effect of a change in
accounting
principle............ 17,672 23,053 46,432 95,534 132,350 25,447 30,697
Restructuring
charge(4)............ 23,085 11,515 91,260 19,512 19,512
Purchased research and
development.......... 62,000 62,000
Income (loss) before
extraordinary item
and cumulative effect
of a change in
accounting
principle............ (2,407) (5,182) (32,847) 58,339 9,274 (61,655) 21,307
Income (loss)
applicable to common
stockholders......... (5,700) (6,656) (38,106) 58,143 9,129 (61,704) 21,307
Average common shares
outstanding.......... 11,763 15,496 17,507 19,812 23,649 21,476 26,630
PER COMMON SHARE DATA
Income (loss) before
extraordinary item
and cumulative effect
of a change in
accounting principle:
Primary............. (.52) (.43) (1.93) 2.54 .39 (2.87) .72
Fully diluted....... (.52) (.43) (1.93) 2.31 .39 (2.87) .66
Income (loss) before
cumulative effect of
a change in
accounting principle:
Primary............. (.48) (.43) (2.02) 2.54 .39 (2.87) .72
Fully diluted....... (.48) (.43) (2.02) 2.31 .39 (2.87) .66
Net Income (loss)
Primary............. (.48) (.43) (2.18) 2.54 .39 (2.87) .72
Fully diluted....... (.48) (.43) (2.18) 2.31 .39 (2.87) .66
BALANCE SHEET DATA(2)
Working capital....... $ 32,402 $ 37,793 $ 53,668 $125,159 $222,405 87,066 233,092
Total assets.......... 330,499 347,484 402,266 488,773 714,180 567,303 702,497
Long-term debt........ 84,833 80,743 117,532 115,932 116,668 116,344 116,647
Other noncurrent
liabilities.......... 16,085 13,420 22,351 25,018 27,525 23,549 25,708
Stockholders' equity.. 108,468 117,565 97,697 175,804 348,338 191,113 359,123
</TABLE>
- -------
(1) Results of Operations for interim periods are not necessarily indicative
of results of operations for the entire fiscal year.
(2) On November 30, 1994, Sterling Software acquired KnowledgeWare in a stock-
for-stock acquisition accounted for as a purchase. Accordingly, the
operating results of KnowledgeWare are included in Sterling Software's
results of operations from the date of the acquisition. The results of
operations include $62,000,000 of purchased research and development
costs, which is the portion of the purchase price attributable to in-
process research and development and which was charged to expense in
accordance with purchase accounting guidelines. The 1995 results of
operations also include a charge for restructure costs of $19,512,000 to
integrate KnowledgeWare's business into Sterling Software's operations.
The restructure charge includes employee termination costs, costs related
to the elimination of duplicate facilities, the write-off of costs related
to certain software products which were not actively marketed and other
out of pocket costs related to the reorganization. Cash costs and expenses
directly related to the acquisition of KnowledgeWare and unrelated to the
restructuring of Sterling Software are accounted for as a cost of the
acquisition. See Note 2 of Notes to Consolidated Financial Statements in
the Software Form 10-K.
(3) In August 1994, Sterling Software acquired ABC in a stock-for-stock
acquisition accounted for as a pooling of interests. In July 1993,
Sterling Software acquired Systems Center in a stock-for-stock acquisition
accounted for as a pooling of interests. Sterling Software's consolidated
financial statements have been retroactively adjusted to include the
results of ABC and Systems Center for all periods presented. See Note 2 of
Notes to Consolidated Financial Statements in the Software Form 10-K.
(4) The 1993 restructuring charges reflect the cost of the combination of
Sterling Software and Systems Center including transaction costs and
charges relating to the elimination of duplicate facilities and equipment,
severance costs and the write-off of costs related to certain software
products not actively marketed by Sterling Software. The 1992
restructuring charges include severance and other costs related to Systems
Center's reduction in workforce, elimination of duplicate facilities and
the sale of certain AS/400 and UNIX utility products. The 1991
restructuring charges reflect a write-down by Systems Center of certain
purchased computer software costs based on a revaluation of the products
in light of changes in market conditions and increased competition, as
well as severance costs and costs associated with elimination of certain
management positions and duplicate functions resulting from previous
business acquisitions. See Note 3 of Notes to Consolidated Financial
Statements in the Software Form 10-K.

56
<PAGE>

PRO FORMA FINANCIAL DATA OF STERLING SOFTWARE

The following unaudited financial data illustrate the effects on Sterling
Software of the receipt of net proceeds from the Offering, the proceeds and
estimated tax benefit from the exercise of stock options through March 31,
1996, the conversion and redemption of the Debentures and the proposed
Distribution. The pro forma balance sheet is based on the December 31, 1995,
balance sheet of Sterling Software included in the Software Form 10-Q,
incorporated by reference herein and assumes the transactions were consummated
on that date. The pro forma statements of operations data are based on the
statements of operations data of Sterling Software for fiscal 1995 and 1994
and the three months ended December 31, 1995 and 1994 included, respectively,
in the Software Form 10-K and the Software Form 10-Q, incorporated by
reference herein, and assumes that the Distribution and the conversion and
redemption of the Debentures were consummated at the beginning of the fiscal
periods presented.

The pro forma financial data of Sterling Software do not purport to
represent what the financial position or results of operations of Sterling
Software would have been if the transactions had in fact been consummated on
such date or at the beginning of the period indicated or to project the
financial position or results of operations for any future date or period. The
pro forma adjustments are estimates based upon currently available information
and upon certain assumptions that Sterling Software's management believes are
reasonable in the circumstances. Actual results may vary from these estimates.

57
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS ADJUSTMENTS
HISTORICAL ADJUSTMENTS FOR THE FOR THE STERLING
STERLING FOR THE EXERCISE OF OFFERING AND SOFTWARE AS
SOFTWARE AT DEBENTURE STOCK THE DISTRIBUTION ADJUSTED AT
DEC. 31, 1995 CONVERSION(1) OPTIONS(2) OF COMMERCE(3)(4) DEC. 31, 1995
------------- ------------- ----------- ----------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets:
Cash and cash equiva-
lents................ $ 93,977 $ (10) $109,180 $266,316 $469,463
Marketable securi-
ties................. 142,562 142,562
Accounts and notes re-
ceivable, net........ 176,266 (48,758) 127,508
Other current assets.. 21,306 (10,484) 10,822
-------- --------- -------- -------- --------
Total current as-
sets............... 434,111 (10) 109,180 207,074 750,355
Property and equip-
ment, net............ 70,418 (31,668) 38,750
Computer software,
net.................. 88,602 (33,552) 55,050
Excess cost over net
assets acquired,
net.................. 84,337 (10,152) 74,185
Other noncurrent as-
sets................. 25,029 (19,394) 5,635
-------- --------- -------- -------- --------
Total assets........ $702,497 $ (10) $109,180 $112,308 $923,975
======== ========= ======== ======== ========
Current liabilities... $201,019 (30,284) $ 53,087 $223,822
Long-term debt........ 116,647 $(114,882) (1,461) 304
Other noncurrent lia-
bilities............. 25,708 (18,420) 7,288
Stockholders' equity:
Common stock.......... 2,741 405 424 3,570
Additional paid in
capital.............. 356,747 114,467 139,040 610,254
Retained earnings..... 30,822 79,102 109,924
Less: treasury stock.. (31,187) (31,187)
-------- --------- -------- -------- --------
Total stockholders'
equity............. 359,123 114,872 139,464 $ 79,102 692,561
-------- --------- -------- -------- --------
Total liabilities &
stockholders' equi-
ty................. $702,497 $ (10) $109,180 $112,308 $923,975
======== ========= ======== ======== ========
</TABLE>
- --------
(1) Adjusted to give effect to the conversion and redemption of the
outstanding Debentures. On December 20, 1995, Sterling Software gave
notice of the redemption of all of the $114,922,000 then outstanding
principal amount of the Debentures. The effective date of the redemption
was February 12, 1996. The Debentures were convertible into shares of
Software Stock. Approximately $114,912,000 principal amount of the
Debentures was presented for conversion. In addition, approximately
$78,000 principal amount of the Debentures had been converted prior to the
announcement of the redemption. Approximately 4,056,000 shares of Software
Stock were issued upon conversion of the Debentures. Approximately $10,000
principal amount of Debentures was redeemed for cash on February 12, 1996.

(2) In connection with the Offering, Sterling Software accelerated the vesting
of substantially all outstanding options granted under Sterling Software's
existing stock option plans. The pro forma balance sheet has been adjusted
to give effect to the receipt of proceeds of $109,180,000 from the
exercise of 4,242,000 employee stock options for the period from January
1, 1996 to March 31, 1996. If all remaining outstanding options and
warrants to purchase Software Stock at March 31, 1996 were exercised,
4,214,496 additional shares of Software Stock would be issued and
outstanding, resulting in additional proceeds to Sterling Software of
$152,154,000.

(3) Adjusted to give effect to the proposed Distribution. Assumes all options
and warrants are exercised prior to the Distribution Record Date.

(4) Adjusted to give effect to the receipt of net proceeds of approximately
$267,000,000 from the sale of Commerce Stock in the Offering. Based upon
certain assumptions and current estimates, Sterling Software presently
expects to record a gain of approximately $125,000,000 from the sale of
Commerce Stock in the Offering.

58
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS STERLING
STERLING FOR THE FOR THE SOFTWARE AS
SOFTWARE DEBENTURE DISTRIBUTION ADJUSTED
SEPT. 30, 1995 CONVERSION(1) OF COMMERCE(2) SEPT. 30, 1995(3)
-------------- ------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
YEAR ENDED SEPTEMBER 30, 1995
Revenue:
Products.......................................... $239,903 $ $ (71,603) $168,300
Product Support................................... 159,942 (46,190) 113,752
Services.......................................... 188,322 (74,063) 114,259
Royalties from affiliated companies............... (11,722)
11,722 (4)
-------- ------ --------- --------
Total revenue................................... 588,167 (191,856) 396,311
Cost and expenses:
Cost of sales:
Product and product support....................... 71,883 (25,879) 57,726
11,722 (4)
Services.......................................... 118,680 (15,671) 103,009
-------- ------ --------- --------
190,563 (29,828) 160,735
-------- ------ --------- --------
Product research, development and enhancement..... 42,509 (14,807) 27,702
Selling, marketing, general and administrative.... 222,745 (75,193) 151,052
3,500 (5)
Restructuring charges............................. 19,512 19,512
Purchased research and development................ 62,000 62,000
-------- ------ --------- --------
Total costs and expenses........................ 537,329 (116,328) 421,001
Income (loss) from operations..................... 50,838 (75,528) (24,690)
Interest expense.................................. (8,625) 6,612 43 (1,970)
Investment and interest income.................... 9,044 (47) 8,997
Other income...................................... 1,637 482 2,119
-------- ------ --------- --------
2,056 6,612 478 9,146
Income (loss) before income taxes................... 52,894 6,612 (75,050) (15,544)
Provision for income taxes.......................... 43,620 2,645 (30,020) 16,245
-------- ------ --------- --------
Income (loss) from continuing operations............ $ 9,274 $3,967 $ (45,030) $(31,789)
======== ====== ========= ========
Income (loss) from continuing operations per share.. $ .39 $ (1.15)
======== ========
</TABLE>
- --------
(1) Adjusted to give effect to the interest savings associated with the
conversion into Software Stock and retirement of the outstanding
Debentures.

(2) Adjusted to give effect to the proposed Distribution. Assumes all options
and warrants are exercised prior to the Distribution Record Date.

(3) Following the declaration by the Software Board of the special dividend
effecting the Distribution, Sterling Software expects to present the
business of Commerce and its subsidiaries, including the gain from the
Offering, as discontinued operations. Therefore, the net gain to be
recorded as a result of the sale of Commerce Stock by Sterling Software
has not been reflected herein.

(4) As owner of software products distributed by Sterling Software's
international operations, Commerce includes royalties received from
Sterling Software as revenue. Such revenues are eliminated in the pro
forma adjustment and are an expense to Sterling Software.

(5) Administrative charges incurred by Sterling Software allocated to Commerce
were $3,500,000 in 1995. This adjustment reflects the addition of those
costs to Sterling Software as if Commerce had been historically
distributed to stockholders.

59
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS STERLING
STERLING FOR THE FOR THE SOFTWARE AS
SOFTWARE DEBENTURE DISTRIBUTION ADJUSTED
SEPT. 30, 1994 CONVERSION(1) OF COMMERCE(2) SEPT. 30, 1994(3)
-------------- ------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
YEAR ENDED SEPTEMBER 30, 1994
Revenue:
Products.......................................... $178,233 $ $ (56,291) $121,942
Product Support................................... 133,752 (37,953) 95,799
Services.......................................... 161,408 (53,246) 108,162
Royalties from affiliated companies............... (8,426)
8,426 (4)
-------- ------ --------- --------
Total revenue................................... 473,393 (147,490) 325,903
Cost and expenses:
Cost of sales:
Products and product support...................... 64,123 (24,000) 48,549
8,426 (4)
Services.......................................... 107,622 (12,282) 95,340
-------- ------ --------- --------
171,745 (27,856) 143,889
-------- ------ --------- --------
Product research, development nd enhancement....... 33,002 (12,497) 20,505
Selling, marketing, general and administrative...... 173,112 (60,732) 115,880
3,500 (5)
Restructuring charges...............................
Purchased research and development..................
-------- ------ --------- --------
Total costs and expenses........................ 377,859 (97,585) 280,274
Income (loss) from operations....................... 95,534 (49,905) 45,629
Interest expense.................................... (6,658) 6,612 60 14
Investment and interest income...................... 1,519 (29) 1,490
Other income........................................ 2,206 119 2,325
-------- ------ --------- --------
(2,933) 6,612 150 3,829
Income before income taxes.......................... 92,601 6,612 (49,755) 49,458
Provision for income taxes.......................... 34,262 2,645 (19,902) 17,005
-------- ------ --------- --------
Income (loss) from continuing operations............ $ 58,339 $3,967 $ (29,853) $ 32,453
======== ====== ========= ========
Income (loss) from continuing operations per share.. $ 2.31 $ 1.20
======== ========
</TABLE>
- --------
(1) Adjusted to give effect to the interest savings associated with the
conversion into Software Stock and retirement of the outstanding
Debentures.

(2) Adjusted to give effect to the proposed Distribution. Assumes all options
and warrants are exercised prior to the Distribution Record Date.

(4) As owner of software products distributed by Sterling Software's
international operations, Commerce includes royalties received from
Sterling Software as revenue. Such revenues are eliminated in the pro-
forma adjustment and are an expense to Sterling Software.

(5) Administrative charges incurred by Sterling Software allocated to Commerce
were $3,500,000 in 1994. This adjustment reflects the addition of those
costs to Sterling Software as if Commerce had been historically
distributed to shareholders.

60
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS STERLING
STERLING FOR THE FOR THE SOFTWARE AS
SOFTWARE DEBENTURE DISTRIBUTION ADJUSTED
DEC. 31, 1995 CONVERSION(1) OF COMMERCE(2) DEC. 31, 1995(3)
------------- ------------- -------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
QUARTER ENDED DECEMBER
31, 1995
Revenue:
Products.............. $ 52,375 $(17,403) $34,972
Product Support....... 44,671 (13,477) 31,194
Services.............. 51,606 (21,787) 29,819
Royalties from affili-
ated companies....... (3,483)
3,483 (4)
-------- ------ -------- -------
Total revenue....... 148,652 (52,667) 95,985
Cost and expenses:
Cost of sales:
Product and product
support.............. 18,892 (7,221) 15,154
3,483 (4)
Services.............. 30,771 (4,695) 26,076
-------- ------ -------- -------
49,663 (8,433) 41,230
-------- ------ -------- -------
Product research,
development and
enhancement.......... 9,360 (3,288) 6,072
Selling, marketing,
general and
administrative....... 58,932 (20,255) 39,552
875 (5)
-------- ------ -------- -------
Total costs and ex-
penses............. 117,955 (31,101) 86,854
Income from operations.. 30,697 (21,566) 9,131
Interest expense........ (1,851) 1,745 12 (94)
Investment & interest
income................. 3,121 (16) 3,105
Other income............ 317 214 531
-------- ------ -------- -------
1,587 1,745 210 3,452
-------- ------ -------- -------
Income before income
taxes.................. 32,284 1,745 (21,356) 12,673
Provision for income
taxes.................. 10,977 698 (8,542) 3,133
-------- ------ -------- -------
Income from continuing
operations............. $ 21,307 $1,047 $(12,814) $ 9,540
======== ====== ======== =======
Income from continuing
operations per share... $ .66 $ .28
======== =======
</TABLE>
- --------
(1) Adjusted to give effect to the interest savings associated with the
conversion of the outstanding Debentures into Software Stock.

(2) Adjusted to give effect to the proposed Distribution. Assumes all options
and warrants are exercised prior to the Distribution Record Date.

(5) Administrative charges incurred by Sterling Software allocated to Commerce
were approximately $875,000 in the three months ended December 31, 1995.
This adjustment reflects the addition to those costs to Sterling Software
as if Commerce had been historically distributed to stockholders.

61
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS STERLING
STERLING FOR THE FOR THE SOFTWARE AS
SOFTWARE DEBENTURE DISTRIBUTION ADJUSTED
DEC. 31, 1994 CONVERSION(1) OF COMMERCE(2) DEC. 31, 1994(3)
------------- ------------- -------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
QUARTER ENDED DECEMBER
31, 1994
Revenue:
Products.............. $ 49,551 $(15,319) $ 34,232
Product support....... 34,671 (10,466) 24,205
Services.............. 42,196 (17,037) 25,159
Royalties from affili-
ated companies....... (2,274)
2,274 (4)
-------- ------ -------- --------
Total revenue....... 126,418 (42,822) 83,596
Cost and expenses:
Cost of sales:
Product and product
support.............. 16,011 (5,855) 12,430
2,274 (4)
Services.............. 26,499 (3,737) 22,762
-------- ------ -------- --------
42,510 (7,318) 35,192
-------- ------ -------- --------
Product research,
development and
enhancement.......... 9,446 (3,599) 5,847
Selling, marketing,
general and
administrative....... 49,015 (17,303) 32,587
875 (5)
Restructuring
charges.............. 19,512 19,512
Purchased research and
development.......... 62,000 62,000
-------- ------ -------- --------
Total costs and ex-
penses............. 182,483 (27,345) 155,138
Income (loss) from oper-
ations................. (56,065) (15,477) (71,542)
Interest expense........ (1,990) 1,745 25 (220)
Investment & interest
income................. 888 888
Other income............ (136) 34 (102)
-------- ------ -------- --------
(1,238) 1,745 59 566
-------- ------ -------- --------
Income (loss) before in-
come taxes............. (57,303) 1,745 (15,418) (70,976)
Provision (benefit) for
income taxes........... 4,352 698 (6,167) (1,117)
-------- ------ -------- --------
Income (loss) from con-
tinuing operations..... $(61,655) $1,047 $ (9,251) $(69,859)
======== ====== ======== ========
Income (loss) from con-
tinuing operations per
share.................. $ (2.87) $ (2.74)
======== ========
</TABLE>
- --------
(1) Adjusted to give effect to the interest savings associated with the
conversion of the outstanding Debentures into Software Stock.

(2) Adjusted to give effect to the proposed Distribution. Assumes all options
and warrants are exercised prior to the Distribution Record Date.

(5) Administrative charges incurred by Sterling Software allocated to Commerce
were approximately $875,000 in the three months ended December 31, 1994.
This adjustment reflects the addition of those costs to Sterling Software
as if Commerce had been historically distributed to stockholders.

62
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF STERLING SOFTWARE

The following discussion and analysis of pro forma financial condition and
results of operations is based on information derived from the pro forma
statements of operations for the three months ended December 31, 1995 and
December 31, 1994 and the pro forma consolidated balance sheets at December
31, 1995 of Sterling Software. See "Pro Forma Financial Data of Sterling
Software." The pro forma financial data of Sterling Software illustrate the
effects of the receipt of net proceeds from the Offering, the receipt of
proceeds and estimated tax benefit from the exercise of stock options through
March 31, 1996, the conversion and redemption of the Debentures and the
proposed Distribution. Management has used estimates in the preparation of the
pro forma financial data. Actual results may vary from these estimates. The
following discussion and analysis should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Software Form 10-K and the Software Form 10-Q,
which are incorporated herein by reference. See "Incorporation of Certain
Documents By Reference."

PRO FORMA RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994

Revenue increased by $12,389,000 or 15% in the first quarter of 1996 over
the same period of 1995. The Systems Management Group ("SMG") revenue
increased $1,836,000, or 6%. SMG's product and product support revenue
increased across the operations management and storage management product
lines. This increase was partially offset by a revenue decline in the VM
software product line due to the continuing trend of consolidation and
downsizing by customers using the VM operating system. The Applications
Management Group ("AMG") revenue increased $6,449,000, or 32%, due to the
inclusion of a full quarter of operating results of businesses acquired from
KnowledgeWare. Sterling Software acquired KnowledgeWare in a stock-for-stock
acquisition on November 30, 1994 (the "Merger"). AMG's product revenue
declined 11% in the first quarter of 1996 over the first quarter of 1995. In
the first quarter of 1995, the group's operations outside of North America
closed several large contracts which were not repeated in the first quarter of
1996 and subsequent to the Merger there was a reduced marketing and sales
emphasis on certain products which became non-strategic after the Merger. As a
direct result of the Merger, product support and consulting services revenue
increased 99% and 61% respectively in the first quarter of 1996 versus the
same quarter of 1995. The Federal Systems Group ("FSG") revenue increased
$2,597,000, or 11%, due to higher contract billings in the Information
Technology Division offset in part by lower contract billings due to the
completion of certain contracts at NASA. Revenue from outside North America
represented approximately 26% of Sterling Software's revenue in the first
quarter of 1996 compared to 25% in the first quarter of 1995. Approximately
35% of Sterling Software's total product revenue was generated from non-
mainframe products in the first quarter of 1996 and 1995.

Total costs and expenses decreased $68,284,000, primarily due to a
$62,000,000 charge in the first quarter of 1995 for the portion of the
purchase price of KnowledgeWare attributed to in-process research and
development and to a $19,512,000 charge for restructuring in the first quarter
of 1995 resulting from the Merger. Total cost of sales increased $6,038,000,
or 17%, on a 15% increase in revenue. Product development expense for the
first quarter of 1996 was $6,072,000, net of $3,132,000 of capitalized
software costs, as compared to first quarter of 1995 product development
expense of $5,874,000, net of $2,232,000 of capitalized software costs. The
increase in gross product development expense is primarily due to more
projects in development and higher costs in the first quarter of 1996 than in
the same period of 1995 resulting from the businesses acquired in the Merger.
Total capitalized costs represented 34% and 28% of total development expense
in the first quarter of 1996 and 1995 respectively. Product development
expense and the capitalization rate may fluctuate from period to period
depending in part upon the number and status of software development projects
which are in process. Selling, general and administrative expense increased
$6,965,000, or 21%, primarily due to expenses attributable to the businesses
acquired in the Merger and due to increased head count in the International
Group ("IG") to support the continuing growth of Sterling Software.

63
<PAGE>

Investment income increased $2,217,000 as a result of higher average
balances of investments in marketable securities. Income before income taxes
was $12,673,000 in the first quarter of 1996 as compared to a loss before
income taxes of $70,976,000 in the first quarter of 1995. Excluding the
$62,000,000 non-recurring charge for purchased research and development and
the $19,512,000 non-recurring charge for restructuring, income before income
taxes increased $2,137,000, or 20%, primarily due to higher operating profits
in FSG, up 51%, and SMG, up 4%, partially offset by a 14% decline in AMG's
operating profit resulting from the inclusion of the full operating costs of
the businesses acquired in the first quarter of 1995.

LIQUIDITY AND CAPITAL RESOURCES

Sterling Software's pro forma liquidity and financial position includes
$526,533,000 of working capital at December 31, 1995, which includes
$469,463,000 of cash and cash equivalents and $142,562,000 of marketable
securities.

The pro forma balance sheet reflects the receipt of net proceeds of
approximately $267,000,000 from the sale of Commerce Stock in the Offering. In
addition, the pro forma balance sheet reflects the receipt of proceeds of
$109,180,000 from the exercise of options to purchase Software Stock for the
period from January 1, 1996 through March 31, 1996. The estimated tax benefit
of approximately $30,284,000 from the exercise of stock options through March
31, 1996 has also been reflected in the accompanying pro forma balance sheet
as a reduction of taxes payable.

Also reflected in the pro forma balance sheet is the redemption of the
Debentures. On December 20, 1995, Sterling Software gave notice of the
redemption of all of the $114,922,000 then-outstanding principal amount of the
Debentures. The effective date of the redemption was February 12, 1996. The
Debentures were convertible into shares of Software Stock. Approximately
$114,912,000 principal amount of the Debentures was presented for conversion.
In addition, approximately $78,000 principal amount of the Debentures had been
converted prior to the announcement of the redemption. Approximately 4,056,000
shares of Software Stock had been issued upon conversion of the Debentures.
Approximately $10,000 principal amount of Debentures was redeemed for cash on
February 12, 1996. The conversion of the Debentures will reduce Sterling
Software's future interest charges by approximately $1,700,000 per quarter.

At December 31, 1995, after the utilization of $247,000 for standby letters
of credit, $34,753,000 was available for borrowing on Sterling Software's $35
million revolving credit and term loan agreement. Certain of Sterling
Software's foreign subsidiaries have separate lines of credit available for
foreign exchange exposure management and working capital requirements. These
lines of credit are guaranteed by Sterling Software. At December 31, 1995,
$5,633,000 was outstanding pursuant to foreign lines of credit and $16,615,000
was available for borrowing thereunder.

On October 2, 1995, Sterling Software renewed a share repurchase program
pursuant to which it may repurchase shares of Software Stock from time to time
through open market transactions. Through December 31, 1995, 699,500 shares of
Software Stock were repurchased for an aggregate of approximately $30,931,000.
Since December 31, 1995 and through March 31, 1996, approximately 429,400
shares of Software Stock were repurchased for an aggregate of approximately
$22,256,000.

At December 31, 1995, Sterling Software's capital resource commitments
consisted of commitments under lease arrangements for office space and
equipment. Sterling Software intends to meet such obligations primarily from
internally generated funds. No significant commitments exist for future
capital expenditures. Sterling Software believes available balances of cash,
cash equivalents and short-term investments combined with cash flows from
operations and amounts available under credit and term loan agreements are
sufficient to meet Sterling Software's cash requirements for the foreseeable
future.

64
<PAGE>

BUSINESS OF STERLING SOFTWARE

GENERAL

Following the Distribution, Sterling Software will continue to operate four
business groups, the Systems Management Group, the Applications Management
Group, the Federal Systems Group, and the International Group (collectively,
the "Sterling Software Businesses"), substantially as previously operated by
Sterling Software. Sterling Software was founded in 1981 and became a publicly
owned corporation in 1983. Sterling Software is a recognized worldwide
supplier of software products and services within the systems management and
applications management software markets and also provides technical
professional services to certain sectors of the federal government. Consistent
with Sterling Software's decentralized operating style, each major market is
served by independently operated business groups which consist of divisions
that focus on specific business niches within those markets. Sterling Software
has steadily expanded its operations through internal growth and by business
and product acquisitions.

Sterling Software is currently organized into the following four business
groups:

. The Systems Management Group, headquartered in Washington, D.C.,
provides systems management software products for computing
environments across the enterprise. The group provides software
products that specialize in storage management, VM systems management
and operations management. Sterling Software addresses the needs of
corporations as they move to client/server computing environments,
offering products that operate on a variety of computer platforms and
operating systems.

. The Applications Management Group, headquartered in Atlanta, Georgia,
provides products for developing new applications and revitalizing
existing applications and services to ensure that customers are
successful using the applications management products. These software
tools allow customers to quickly develop and implement new software
applications and to integrate and improve existing applications at
the desktop.

. The Federal Systems Group, headquartered in Washington, D.C.,
provides technical professional services to the federal government
under several multi-year contracts primarily in support of secure
communications systems for the U.S. Department of Defense ("DoD") and
National Aeronautics and Space Administration ("NASA") aerospace
research projects. The group's personnel serve as a source of
technical expertise for commercial customers and other divisions of
Sterling Software.

. The International Group, headquartered in Paris, France, is the
exclusive channel outside the United States and Canada for all of
Sterling Software's products. In addition, pursuant to the
International Marketing Agreement, the International Group acts as
the exclusive distributor (directly and through subdistributors) of
Commerce's interchange and communications software products in
markets outside the United States and Canada. See "Relationship
between Sterling Software and Commerce after the Distribution--
Intercompany Agreements." The group operates through six regional
divisions representing four regions of Europe, Asia/Pacific and other
countries throughout the world. The products are sold and supported
through 30 offices in 17 countries and through trained agents and
distributors in 36 additional countries.

A large percentage of Sterling Software's business is recurring business
through annual and multi-year product support agreements, generally having
terms ranging from one to three years, fixed term product lease and rental
agreements, generally having terms ranging from month-to-month to year-to-
year, and multi-year federal contracts. Recurring revenue of the Sterling
Software Businesses represented 55% and 63% of Sterling Software's total
revenue in 1995 and 1994, respectively. Sterling Software's customer base
includes 90 of the 100 largest U.S. industrial corporations, as ranked by 1994
sales reported in Fortune Magazine.

The product names used herein are registered or unregistered trademarks
owned by Sterling Software.

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SYSTEMS MANAGEMENT GROUP

The Systems Management Group is comprised of three divisions that provide
systems management software for computing environments across the enterprise.
These divisions specialize in storage management, VM systems management and
operations management software.

Under the SAMS family name, the Storage Management Division provides
software that manages, monitors, and automates data storage in both
distributed and centralized environments. These products provide enterprise-
wide storage management capabilities and include solutions for a variety of
platforms. The division's enterprise products, SAMS:Vantage, SAMS:Expert,
SAMS:Protect and SAMS:Control, automate the management of enterprise data
storage. SAMS:Vantage delivers automation, interactive reporting, analysis and
predictive modeling capabilities and centralized allocation control for MVS
environments. SAMS:Expert provides policy-based automation, interactive
viewing and fault-tolerant data protection for NetWare networks. SAMS:Protect
provides high-performance data protection for OS/2 LAN Server and
workstations. SAMS:Control integrates these three products to provide high-
performance LAN-to-mainframe backup, restore and remote vaulting.
SAMS:Allocate is a centralized allocation control system to make volume
pooling easier and SAMS:Disk is a complete DASD/tape management solution.
SAMS:Select is a high-performance backup accelerator for MVS data and
SAMS:Compress is a data compression tool available for MVS, IMS and DB2 data.
SAMS:Defrag is a defragmentation tool that reorganizes data on-line and in-
place.

Sterling Software's VM Software Division provides comprehensive integrated
systems management software for the VM operating system. VM:Manager, the
division's flagship product, allows VM sites to control costs, improve
performance and increase user productivity. VM:Manager provides solutions for
automated operations, storage management, service-level management, security
and recovery. In 1995, the VM Software Division introduced VM:Migrate, a
storage management package that enables sites to better exploit the advantages
and cost-savings potential of IBM's Shared File System ("SFS"). VM:Migrate
automatically migrates unused and infrequently used SFS files from expensive
primary storage to less expensive media.

Sterling Software's remaining systems management products are marketed by
the Operations Management Division under the SOLVE family name. The division
is a pioneer in service-driven operations, providing software for managing
systems and network operations from a service perspective. SOLVE:Netmaster
automates SNA and other network management operations across a variety of
enterprise platforms. SOLVE:Attach integrates network management across a
number of environments including IBM, Tandem, TCP/IP and NetWare.
SOLVE:Monitor provides a graphical user interface to SOLVE:Netmaster.
SOLVE:Central is a suite of products for managing enterprise-wide service desk
operations and is comprised of: SOLVE:Problem for problem tracking and
resolution; SOLVE:Change for managing the systems change process;
SOLVE:Configuration for tracking software and hardware configuration changes;
and SOLVE:Asset for business management of computer assets and the services
they deliver. During the year, Sterling Software released the following
products: SOLVE:Viewpoint, a Windows-based interface to the SOLVE:Central
suite that brings complete administrative control to the desktop;
SOLVE:Commander, a UNIX-based product that provides users with single-console
visibility of both MVS/SNA and UNIX/SNMP environments from a service
perspective; and SOLVE:Operations, a package that automates systems and
network operations driven by enterprise policies, service-level agreements and
business priorities.

APPLICATIONS MANAGEMENT GROUP

Effective November 1, 1995, Sterling Software reorganized the Applications
Management Group, establishing four divisions focused on the specific target
markets the group serves, offering both products and services.

The Applications Development Division markets scaleable PC-based products
and services under the KEY family name for predictably developing new
applications systems. The products combine business and applications modeling
with state-of-the-art rapid prototyping and visual client/server development
to produce applications for Windows, UNIX, OS/2, OS/400 and MVS environments.
A systematic approach to modeling,

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delivering and managing applications throughout the development process is
provided. KEY:Enterprise is an OS/2-based suite of second generation
client/server development and support products for the enterprise class
business application. The toolset facilitates the development of multi-tier,
client/server applications, assisting users in all development phases:
planning, analysis, prototyping, design, code generation, system documentation
and maintenance. The KEY:Enterprise components are: KEY:Advise, KEY:Analyze,
KEY:Client, KEY:Coordinate, KEY:Construct, KEY:Design, KEY:Document,
KEY:Guide, KEY:Insight, KEY:Plan, KEY:Rapid, KEY:Rochade and KEY:Team. In
September 1995, Sterling Software released KEY:Workgroup, a Windows-based
application development environment based on an underlying object oriented
architecture that combines the strengths of business modeling with the
capabilities of visual development. The toolset is a complete environment
consisting of integrated components based on the Object Linking and Embedding
2.0 interoperability framework. The Key:Workgroup components are: KEY:Advise,
KEY:Model, KEY:Assemble and KEY:Empower.

The Information Management Division markets products and services under the
VISION family name that enable customers to extract value from their existing
corporate data and maximize the return on their information technology
investment by extending the life and usefulness of their legacy applications.
By improving existing applications, customers can reconcile their legacy and
new development strategies, ensuring they have the resources to implement
required new systems. VISION:Results is a comprehensive information management
and report generation system for IBM mainframes and a dynamic complement to
COBOL. VISION:Builder and VISION:Transact are applications development tools
for batch and on-line environments, respectively, that operate on major IBM
mainframe platforms. The VISION:Legacy suite of tools addresses the functions
required to assess the quality and maintainability of applications,
restructure old COBOL programs, redocument the flow of control through legacy
systems and graphically represent the architecture and flow of existing
systems. VISION:Inform facilitates data extraction from the mainframe database
to the PC.

The Data Access Division markets products and services under the CLEAR
family name that enable business users to access corporate data in an
organized, efficient manner. CLEAR:Access and CLEAR:Manage are the
cornerstones of the product line and run on Windows, Windows NT, Windows 95
and Macintosh platforms. CLEAR:Access facilities end-user access as a query
and reporting tool. CLEAR:Manage allows database managers to monitor and
control database access in a client/server environment.

The Desktop Integration Division provides software products and services
under the STAR family name that assist organizations in their delivery of
client/server applications which integrate desktop systems with an operational
host. The division's flagship product, STAR:Flashpoint, is a Windows-based
tool that, using visual development techniques, allows users to incorporate
and integrate information at the desktop as well as to create graphical user
interfaces for legacy applications.

FEDERAL SYSTEMS GROUP

The Federal Systems Group formed a new division during the year and combined
two formerly independent divisions. The group is now composed of two divisions
that provide highly specialized technical professional services to sectors of
the federal government, generally under multi-year contracts.

The group's major customers are NASA and the DoD. In 1995, Sterling Software
began its 29th year of service to both NASA and the DoD. Altogether, in 1995
the Federal Systems Group was working under 106 contracts, many of which are
for multi-year terms.

Sterling Software's Information Technology Division provides highly
technical professional services, generally requiring Top Secret security
clearances, to military command and control, intelligence and weather
agencies. The division specializes in data handling, secure communications,
networking, systems integration and application development in support of
varied technical projects ranging from satellite data collection to counter-
terrorism. Division computing resources include data processing facilities
approved for classified operations, and

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<PAGE>

substantial hardware and software configurations to support software life
cycle activities in a distributed processing environment.

Effective September 30, 1995, Sterling Software combined the Scientific
Systems Division and NASA Ames Division, both located in Redwood City,
California and suppliers to NASA, into the new Scientific Systems Division.
Sterling Software's Scientific Systems Division is a provider of scientific
software support and highly technical professional services to civil sectors
of the federal government, particularly in scientific and engineering areas
and specialty software products in advanced graphics, visualization and
virtual realty. The divisions's contracts include projects such as spacecraft
imagery and scientific data systems and applications such as aero-dynamics,
aviation research and transportation safety. Under contract to NASA, the
division's engineers designed and now operate the NASA Science Internet and
designed and installed the Worldwide Web server home page for the White House.
Customers include the Jet Propulsion Laboratory, the NASA Ames Research
Center, the NASA Lewis Research Center and the MIT Lincoln Laboratory. In
1995, the division received "excellent" award fee scores on its three most
significant NASA contracts.

INTERNATIONAL GROUP

The International Group is the exclusive channel outside the United States
and Canada for all of Sterling Software's products. In addition, pursuant to
the International Marketing Agreement, the International Group acts as the
exclusive distributor (directly and through subdistributors) of Commerce's
interchange and communications software products in markets outside the United
States and Canada. See "Relationship between Sterling Software and Commerce
after the Distribution--Intercompany Agreements." The group operates through
six regional divisions representing four regions of Europe, Asia/Pacific and a
division representing the smaller, emerging growth markets located throughout
the world.

Each division is responsible for sales, marketing and first level support of
all of Sterling Software's products and services in their respective regions.
The Northern Europe Division, headquartered in London, England has
responsibility for direct sales in the United Kingdom, Belgium, The
Netherlands, Norway and Sweden and has offices in eight European cities. The
Central Europe Division, headquartered in Dusseldorf, Germany, has
responsibility for direct sales in Germany, Switzerland and Austria and has
offices in five European cities. The Southern Europe Division, headquartered
in Rome, Italy, has responsibility for direct sales in Italy, Spain and
Portugal, has responsibility for indirect sales in Italy and has offices in
four European cities. The France Division, with an office in Paris, France,
has responsibility for direct sales in France. The Pacific Division,
headquartered in Tokyo, Japan with an office in Sydney, has responsibility for
direct sales in Japan, Australia and New Zealand and indirect sales in Japan.
Sterling Software's Distributor Division, headquartered in London, England,
was renamed the Emerging Markets Division effective October 1, 1995. The
division continues to manage approximately 74 agents and distributors and also
has responsibility for direct sales in Singapore. Agents and distributors are
responsible for territories that include: Asia (except Japan), the Middle
East, South Africa, Eastern Europe, Mexico, and Central and South America.

COMPETITION

Sterling Software competes with internal programming staffs of corporations
and, increasingly, with hardware manufacturers. Some internal programming
staffs of corporations are capable of developing products similar to those
offered by Sterling Software. In general, however, Sterling Software believes
that the time and costs associated with custom software development
significantly exceed the time and costs required to license and install the
comparable product from Sterling Software. Also, competition within Sterling
Software's federal business is increasing because of continued federal budget
constraints and cutbacks.

Sterling Software believes that its products will continue to be chosen by
customers due to superior product functionality, reliability and technical
support, ease of product installation and use, close integration between the
products and customer business applications and, finally, Sterling Software's
history of success and reputation for providing quality products. However,
there can be no assurance regarding future customer decisions or the impact of
the Distribution on customers' perception of Sterling Software.

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EMPLOYEES

Sterling Software's business is dependent upon its ability to attract and
retain qualified personnel who are in limited supply. Sterling Software's
operations could be adversely affected if it were to lose the services of a
significant number of qualified employees or if it were unable to obtain
additional qualified employees when needed. To attract and retain qualified
personnel, Sterling Software strives to maintain excellent employee relations,
attractive office facilities and challenging working environments, and offers
competitive compensation and benefits packages.

At March 31, 1996, Sterling Software employed approximately 2,600 people,
not including approximately 1,123 employees of Commerce.

LEGAL PROCEEDINGS

On March 14, 1995, the Commission entered an Order Directing Private
Investigation and Designating Officers to take Testimony titled "In the Matter
of KnowledgeWare, Inc. (NY-6231)." Sterling Software acquired KnowledgeWare in
a stock-for-stock acquisition on November 30, 1994. The investigation
generally relates to trading in KnowledgeWare securities from July 1, 1992
through the time of Sterling Software's acquisition of KnowledgeWare,
KnowledgeWare's compliance with Commission filing and reporting obligations
and the adequacy and/or accuracy of its public disclosures, recordkeeping and
accounting controls.

Sterling Software is subject to certain legal proceedings and claims that
arise in the ordinary conduct of its business. In the opinion of Sterling
Software's management, the amount of ultimate liability, if any, with respect
to these actions, net of applicable reserves, will not materially affect the
financial condition or results of operations of Sterling Software.

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MANAGEMENT OF STERLING SOFTWARE

The directors and executive officers of Sterling Software following the
Distribution will be substantially identical to the current directors and
executive officers of Sterling Software, with the exception of Warner C. Blow.
Mr. Blow is presently considered an executive officer of Sterling Software in
his capacity as the President and Chief Operating Officer of Commerce.
Following the Distribution, Mr. Blow will no longer be an executive officer of
Sterling Software.

EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sam Wyly....................... 61 Chairman of the Board and Director
Charles J. Wyly, Jr............ 62 Vice Chairman of the Board and Director
Sterling L. Williams........... 52 President, Chief Executive Officer and Director
Warner C. Blow................. 58 President and Chief Operating Officer of Commerce
Geno P. Tolari................. 52 Executive Vice President and Chief Operating Officer
George H. Ellis................ 47 Executive Vice President and Chief Financial Officer
Werner L. Frank................ 66 Executive Vice President
M. Gene Konopik................ 53 Executive Vice President and Group President
48 Executive Vice President, Secretary and General
Jeannette P. Meier............. Counsel
Phillip A. Moore............... 53 Executive Vice President and Director
A. Maria Smith................. 54 Executive Vice President and Group President
Clive A. Smith................. 41 Executive Vice President and Group President
Richard Connelly............... 44 Vice President, Treasurer
Pamela L. Isbell............... 36 Vice President, Financial Planning
James E. Jenkins, Jr........... 42 Vice President, Finance
Julie G. Kupp.................. 32 Vice President, Investor Relations
Anne Vahala.................... 35 Vice President, Business Development
Evan A. Wyly................... 34 Vice President and Director
Laura Appling.................. 34 Controller
</TABLE>

Sam Wyly co-founded Sterling Software in 1981 and has served as Chairman of
the Board and a director since its formation. Mr. Wyly has served as a
director of Commerce since December 1995. For additional biographical
information see "Management of Commerce--Executive Officers and Directors."

Charles J. Wyly, Jr. co-founded Sterling Software in 1981 and has served as
a director since its formation and as Vice Chairman since 1984. Mr. Wyly has
served as a director of Commerce since December 1995. For additional
biographical information see "Management of Commerce--Executive Officers and
Directors."

Sterling L. Williams co-founded Sterling Software in 1981 and since such
time has served as President, Chief Executive Officer and a director of
Sterling Software. Mr. Williams has served as Chairman of the Board and Chief
Executive Officer of Commerce since December 1995 and also currently serves as
a director of INPUT, an information technology market research company.

Warner C. Blow has served as President and Chief Operating Officer of
Commerce since December 1995. Prior to the completion of the Offering, he
served as President of Sterling Software's former Electronic Commerce Group
(the predecessor to Commerce) from July 1993 and as an Executive Vice
President of Sterling Software from October 1989. Prior to July 1993, Mr. Blow
served as President of Sterling Software's former EDI Group.

Geno P. Tolari has served as an Executive Vice President of Sterling
Software since March 1990 and as Chief Operating Officer of Sterling Software
since April 1996. From November 1986 to March 1990, he served as a Senior Vice
President of Sterling Software. Mr. Tolari has also served as President of
Sterling Software's Systems Management Group since December 1, 1994 and he
served as President of the Federal Systems Group from October 1985 until
December 1994.

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George H. Ellis has served as Executive Vice President (since July 1993) and
Chief Financial Officer (since February 1986) of Sterling Software. From
December, 1994 to April 1996, Mr. Ellis also served as Treasurer of Sterling
Software. Prior to July 1993, Mr. Ellis served as a Senior Vice President of
Sterling Software. Mr. Ellis has served as an Executive Vice President and
Chief Financial Officer of Commerce since December 1995.

Werner L. Frank has served as an Executive Vice President of Sterling
Software since October 1984. From July 1993 until December 1994, Mr. Frank
served as President of Sterling Software's former Enterprise Software Group.
From 1985 until July 1993, Mr. Frank served as President of Sterling
Software's former Systems Software Group.

M. Gene Konopik has served as an Executive Vice President of Sterling
Software and President of Sterling Software's Federal Systems Group since
December 1994. From July 1993 until December 1994 Mr. Konopik served as the
President of Sterling Software's Information Technology Division. Prior to
July 1993 he served as the President of the former Intelligence and Military
Division of Sterling Software.

Jeannette P. Meier has served as an Executive Vice President (since July
1993) and as General Counsel and Secretary (since 1985) of Sterling Software.
Prior to July 1993, Ms. Meier served as a Senior Vice President of Sterling
Software. Ms. Meier has served as an Executive Vice President, Secretary and
General Counsel of Commerce since December 1995.

Phillip A. Moore co-founded Sterling Software in 1981 and since such time
has served as a director of Sterling Software. He has served as an Executive
Vice President of Software since July 1993. Prior to July 1993, Mr. Moore
served as Senior Vice President, Technology of Sterling Software. Mr. Moore
has served as Executive Vice President of Commerce since December 1995.

A. Maria Smith has served as an Executive Vice President of Sterling
Software and President of Sterling Software's Applications Management Group
since December 1994. From July 1993 until December 1994, Ms. Smith served as
President of Sterling Software's former Systems Management Division and prior
to July 1993 she served as President of the former Systems Software Marketing
Division of Sterling Software.

Clive A. Smith has served as an Executive Vice President of Sterling
Software since December 1994 and President of its International Group since
October 1994. From July 1993 until October 1994, Mr. Smith served as the
President of the former Europe Division and from September 1990 until July
1993 he served as the President of the former International Division.

Richard Connelly has served as a Vice President of Sterling Software since
July 1993 and as Treasurer of Sterling Software since April 1996. From July
1993 to April 1996, Mr. Connelly also served as the Controller of Sterling
Software. From October 1992 until July 1993, Mr. Connelly served as Corporate
Controller and from June 1987 until October 1992 he served as Director of
Accounting of Sterling Software.

Pamela L. Isbell has served as Vice President, Financial Planning of
Sterling Software since April 1996. From April 1988 until April 1996 Ms.
Isbell served as a Financial Analyst of Sterling Software.

James E. Jenkins, Jr. has served as Vice President, Finance of Sterling
Software since April 1996. From May 1994 to April 1996, Mr. Jenkins served as
Vice President, Tax and from May 1986 until May 1994 he served as Director of
Tax of Sterling Software.

Julie G. Kupp has served as Vice President, Investor Relations of Sterling
Software since April 1996. From September 1995 to April 1996 Ms. Kupp served
as Director, Investor Relations and from April 1995 to September 1995 she
served as Senior Financial Analyst of Sterling Software. From December 1993 to
April 1995

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Ms. Kupp served as Director of Accounting. Prior to December 1993, Ms. Kupp
was employed by Ernst & Young, LLP, most recently as Audit Senior Manager.

Anne Vahala has served as Vice President, Business Development of Sterling
Software since October 1995 and served as Vice President, Investor Relations
of Sterling Software from July 1993 until October 1995. From August 1992 until
July 1993, Ms. Vahala served as Director, Investor Relations and prior to
August 1992 she served as Senior Financial Analyst of Sterling Software.

Evan A. Wyly has served as a director of Sterling Software since July 1992
and as a Vice President of Sterling Software since December 1994. Mr. Wyly has
served as a director of Commerce since December 1995. For additional
biographical information see "Management of Commerce--Executive Officers and
Directors."

Laura Appling has served as Controller of Sterling Software since April
1996. From July 1993 to April 1996, Ms. Appling served as Vice President,
Finance for the former Banking Systems Division of Sterling Software. From
October 1992 to July 1993, Ms. Appling served as Senior Financial Analyst for
Sterling Software and from August 1991 to October 1992, Ms. Appling served as
Accounting Manager for the international headquarters of Sterling Software.
From August 1987 to August 1991, Ms. Appling served in various other
accounting capacities for Sterling Software.

DIRECTORS

For biographical information regarding the directors of Sterling Software,
see "Proposal III--Election of Directors."

MARKET FOR STERLING SOFTWARE STOCK

The Software Stock has been traded on the NYSE since March 28, 1990, under
the symbol "SSW." Prior to that time, the Software Stock was traded on the
American Stock Exchange from May 4, 1983. As of December 19, 1995, the trading
day preceding public announcement of the proposed Distribution, and as of
April 22, 1996, the closing sales price per share of the Software Stock on the
NYSE was $55 7/8 and $74 3/4 respectively. The high and low sales prices for
the Software Stock for the periods indicated are set forth below.

<TABLE>
<CAPTION>
PRICE RANGE
--------------
HIGH LOW
------ -----
<S> <C> <C>
Year Ended September 30, 1994:
Quarter Ended:
December 31, 1993....................................... $33 5/8 $23 7/8
March 31, 1994.......................................... $35 5/8 $27 1/2
June 30, 1994........................................... $34 1/2 $26 1/2
September 30, 1994...................................... $32 $25
Year Ended September 30, 1995:
Quarter Ended:
December 31, 1994....................................... $36 7/8 $28 5/8
March 31, 1995.......................................... $38 3/8 $34 1/4
June 30, 1995........................................... $39 5/8 $32 7/8
September 30, 1995...................................... $47 7/8 $38 1/4
Year Ended September 30, 1996:
Quarter Ended:
December 31, 1995....................................... $62 3/8 $ 40
March 31, 1996 ......................................... $72 5/8 $48 3/4
June 30, 1996 (through April 22, 1996).................. $75 5/8 $70 3/8
</TABLE>

The Commerce Stock began trading on the NYSE under the symbol "SE" on March
8, 1996. For information with respect to the high and low sale prices for the
Commerce Stock. See "Certain Considerations--Listing and Trading of Commerce
Stock."

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<PAGE>

PROPOSAL II--APPROVAL OF THE 1996 STOCK OPTION PLAN

BACKGROUND

In connection with the Offering, substantially all of the unvested stock
options outstanding under Sterling Software's existing stock option plans were
accelerated and became exercisable upon the completion of the Offering.
Sterling Software anticipates that substantially all options will be exercised
prior to the Distribution. The acceleration of such options was intended to
facilitate the establishment of an effective equity incentive plan for each of
Sterling Software and Commerce through the creation of stock options for
separate equity securities that will be more closely linked to the separate
businesses of the two companies. See "Proposal I--The Distribution--Background
and Reasons for the Distribution."

Substantially all of the options available for grant under Sterling
Software's existing option plans have been issued. Consequently, on April 22,
1996, the Software Board adopted the 1996 Stock Option Plan and directed that
it be submitted for approval at the Meeting. The 1996 Stock Option Plan is
intended to provide incentive compensation to certain of Sterling Software's
executive officers, directors, employees, advisors and consultants. The 1996
Stock Option Plan is also intended to aid in attracting persons of outstanding
ability to serve, and remain in the service of, Sterling Software. The
Software Board believes that the attraction and retention of executive
officers and other key employees in the highly competitive industry in which
Sterling Software does business is critical to Sterling Software's future
success. The Software Board also believes that a principal component of
attracting and retaining qualified executives and key employees is an equity-
based incentive plan which aligns the long-term economic interests of such
executives and employees with the long-term economic interests of Sterling
Software's stockholders. Because of this compensation philosophy, Sterling
Software has historically emphasized the use of stock options for creating
such equity-based incentives. Because substantially all of the options
available for grant under Sterling Software's existing stock option plans have
been issued, the Software Board adopted the 1996 Stock Option Plan.

Although the Software Board's adoption of the 1996 Stock Option Plan does
not require the approval of Sterling Software's stockholders, such approval is
being sought (i) in order to qualify the 1996 Stock Option Plan under Rule
16b-3 of the Exchange Act, (ii) to ensure that compensation pursuant to the
1996 Stock Option Plan will not be subject to the deduction limits under
Section 162(m) of the Code discussed below, and (iii) to comply with the rules
of the NYSE.

If the 1996 Stock Option Plan is approved by stockholders, the Software
Board will not issue any remaining options available for grant under any of
Sterling Software's other existing stock option plans. However, under the
terms of Sterling Software's other existing stock option plans, any
outstanding options that are not exercised prior to the Distribution Record
Date will be adjusted as a result of the Distribution to preserve the economic
value of the options. Although the adjustment will require the approval of the
applicable stock option committee, it is anticipated that the adjustment will
be made pursuant to a formula that will both increase the number of shares
subject to options and decrease the exercise price thereof. The magnitude of
the adjustment is not presently determinable because it is expected to be
determined based upon the market price of the Software Stock prior to and
following the Distribution.

DESCRIPTION OF THE 1996 STOCK OPTION PLAN

The 1996 Stock Option Plan will be administered by the Sterling Software
1996 Stock Option Committee (the "1996 Stock Option Committee") and the
Sterling Software 1996 Special Stock Option Committee (the "1996 Special Stock
Option Committee") as described in "--1996 Stock Option Plan Board
Committees." Pursuant to the 1996 Stock Option Plan, the 1996 Stock Option
Committee and the 1996 Special Stock Option Committee will be authorized to
grant 1996 Plan Options to certain executive officers, directors, employees,
advisors and consultants of Sterling Software and its subsidiaries (estimated
to be approximately 200 persons in the aggregate at the time the Distribution
is completed). The 1996 Stock Option Plan also provides for automatic awards
of 1996 Plan Options to members of the 1996 Special Stock Option Committee.

The total number of shares of Software Stock presently available for
issuance under the 1996 Stock Option Plan is 7,750,000. However, if at the
close of business on the last day of any fiscal quarter of Sterling Software

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the sum of (i) the total number of shares of Software Stock theretofore issued
upon the exercise of 1996 Plan Options, (ii) the total number of shares of
Software Stock then subject to outstanding 1996 Plan Options, and (iii) the
total number of shares of Software Stock then remaining available under the
1996 Stock Option Plan to be made subject to future grants of 1996 Plan
Options (such sum being the "Software Actual Number") is less than 20% of the
total number of shares of Software Stock then outstanding or issuable upon the
exercise, conversion or exchange of outstanding options, warrants or other
securities convertible into or exchangeable for Software Stock (the "Software
Target Number"), the number of shares of Software Stock available for issuance
under the 1996 Stock Option Plan will automatically be increased to a number
that will result in the Software Actual Number being equal to the Software
Target Number.

The 1996 Stock Option Plan does not specify a maximum term for 1996 Plan
Options granted thereunder. The exercise price of 1996 Plan Options may not be
less than the fair market value per share of the Software Stock on the date
determined as the grant date in accordance with the authorization of the 1996
Stock Option Committee or the 1996 Special Stock Option Committee, as the case
may be. Under the 1996 Stock Option Plan, the committees may, without the
consent of the option holder, amend any option agreement in various respects,
including acceleration of the time at which the option may be exercised,
extension of the expiration date, reduction of the exercise price and waiver
of other conditions or restrictions.

Each grant of 1996 Plan Options will specify whether the exercise price is
payable in cash, by the actual or constructive transfer to Sterling Software
of nonforfeitable, unrestricted shares of Software Stock already owned by the
participant having an actual or constructive value as of the time of exercise
equal to the total exercise price, by any other legal consideration authorized
by the 1996 Stock Option Committee or the 1996 Special Stock Option Committee,
as the case may be, or by a combination of such methods of payment. A grant of
1996 Plan Options may provide for the deferred payment of the exercise price
from the proceeds of sales through a bank or broker on the exercise date of
some or all of the shares of Software Stock to which such exercise relates.
The 1996 Stock Option Plan does not require that a participant hold shares
received upon the exercise of 1996 Plan Options for a specified period and
would permit immediate sequential exercises of 1996 Plan Options with the
exercise price therefor being paid in shares of Software Stock, including
shares acquired as a result of prior exercises of 1996 Plan Options.

Pursuant to the 1996 Stock Option Plan, each member of the 1996 Special
Stock Option Committee will receive automatic awards of 1996 Plan Options to
purchase 50,000 shares of Software Stock every five years. Initial awards to
the members of the 1996 Special Stock Option Committee will be made on the
date of appointment to the 1996 Special Stock Option Committee and subsequent
awards will be effective upon the fifth anniversary of the immediately
preceding award to such director.

The foregoing discussion of the material provisions of the 1996 Stock Option
Plan is qualified in its entirety by reference to the full text of the 1996
Stock Option Plan, a copy of which is attached hereto as Annex I and is
incorporated herein by reference.

1996 STOCK OPTION PLAN BOARD COMMITTEES

The 1996 Stock Option Committee and the 1996 Special Stock Option Committee
will administer the 1996 Stock Option Plan. The 1996 Stock Option Committee
has the authority, subject to certain restrictions set forth in the 1996 Stock
Option Plan, to determine from time to time the individuals to whom options
will be granted, the number of shares to be covered by each option and the
time or times at which options will become exercisable. The 1996 Stock Option
Plan provides that the 1996 Special Stock Option Committee consist of two or
more non-employee directors who are not eligible to receive awards (other than
formula awards) of options of Sterling Software or any of its subsidiaries.
The 1996 Special Stock Option Committee will determine the grants intended to
be exempt from Section 16 of the Exchange Act. The members of the 1996 Stock
Option Committee or the 1996 Special Stock Option Committee may determine the
grants for all other participants. It is presently anticipated that Messrs.
Sam Wyly, Charles J. Wyly, Jr. and Sterling L. Williams will be appointed to
be the members of the 1996 Stock Option Committee and that Messrs. Robert J.
Donachie and Donald R. Miller will be appointed to be the members of the 1996
Special Stock Option Committee.

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<PAGE>

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

1996 Plan Options granted under the 1996 Stock Option Plan are intended to
be nonqualified stock options. Nonqualified stock options generally will not
result in any taxable income to the optionee at the time of the grant, but the
holder thereof will realize ordinary income at the time of exercise of the
1996 Plan Options if the shares are not subject to any substantial risk of
forfeiture (as defined in Section 83 of the Code). Under such circumstances,
the amount of ordinary income is measured by the excess of the fair market
value of the optioned shares at the time of exercise over the Exercise Price.
An optionee's tax basis in shares acquired upon the exercise of nonqualified
stock options is generally equal to the exercise price plus any amount treated
as ordinary income. If the Exercise Price of a nonqualified stock option is
paid for, in whole or in part, by the delivery of shares of Software Stock
previously owned by the optionee ("Previously Purchased Shares"), no gain or
loss will be recognized on the exchange of the Previously Purchased Shares for
a like number of shares of Software Stock. The optionee's basis in the number
of shares received equal to the number of Previously Purchased Shares
surrendered would be the same as the optionee's basis in the Previously
Purchased Shares. However, the optionee would be treated as receiving ordinary
income equal to the fair market value (at the time of exercise) of the number
of shares of Software Stock received in excess of the number of Previously
Purchased Shares surrendered, and the optionee's basis in such excess shares
would be equal to their fair market value at the time of exercise.

To the extent that an optionee recognizes ordinary income in the
circumstances described above, Sterling Software or a subsidiary, as the case
may be, would be entitled to a corresponding deduction, provided in general
that (i) the amount is an ordinary and necessary business expense and such
income meets the test of reasonableness, (ii) the deduction is not disallowed
pursuant to Section 162(m) of the Code, as described below, and (iii) certain
provisions of the Code relating to so-called "excess parachute payments" do
not apply. Awards granted under the 1996 Stock Option Plan may be subject to
acceleration in the event of a change in control of Sterling Software, and,
therefore, it is possible that these change-in-control features may affect
whether amounts realized upon the receipt or exercise of 1996 Options will be
deductible by Sterling Software under the "excess parachute payments"
provisions of the Code.

Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1.0 million accrued with respect to the chief
executive officer and the four most highly compensated executive officers in
addition to the chief executive officer employed by the company at the end of
the applicable year. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. In the case of
options, one requirement is that the plan under which the options are granted
state a maximum number of shares with respect to which options may be granted
to any one participant during a specified period. The maximum aggregate number
of shares of Software Stock with respect to which 1996 Plan Options may be
granted to any person during the term of the 1996 Stock Option Plan shall not
exceed 5,425,000. A second requirement of Section 162(m) of the Code is that
the 1996 Stock Option Plan be approved by Sterling Software's stockholders.

GRANTS UNDER THE 1996 STOCK OPTION PLAN

As of the date of this Proxy Statement, no 1996 Plan Options have been
granted. Although it is presently anticipated that the 1996 Stock Option
Committee and the 1996 Special Stock Option Committee will consider making
grants of 1996 Plan Options following the Distribution, other than the formula
grants described above, it is not possible to determine the specific awards of
1996 Plan Options that will be granted to various individuals in the future
under the 1996 Stock Option Plan.

PROPOSAL III--ELECTION OF DIRECTORS

NOMINEES FOR DIRECTOR

Sterling Software's Certificate of Incorporation provides for a Board of
Directors divided into three classes, as nearly equal in number as possible,
with the term of office of one class expiring each year at Sterling Software's
Annual Meeting of Stockholders. Each class of directors is elected for a term
of three years except in the case of elections to fill vacancies or newly
created directorships. The Software Board presently consists of

75
<PAGE>

nine persons: Sam Wyly (Chairman), Charles J. Wyly, Jr. (Vice Chairman),
Sterling L. Williams, Phillip A. Moore, Robert J. Donachie, Michael C. French,
Evan A. Wyly, Donald R. Miller, Jr. and Francis A. Tarkenton.

Sam Wyly, Sterling L. Williams and Donald R. Miller, Jr. are the Class C
directors whose terms expire in 1996, and each of whom has been nominated for
reelection as a Class C director to serve as such for a term expiring at
Sterling Software's Annual Meeting of Stockholders in 1999 or until their
successors have been duly elected and qualified. It is intended that the
persons named in the Proxy will vote for the reelection of each of the three
nominees. Each of the nominees has indicated his willingness to serve as a
member of the Software Board if elected; however, in case any nominee shall
become unavailable for election to the Software Board for any reason not
presently known or contemplated, the Proxy holders will have discretionary
authority in that instance to vote the Proxy for a substitute. Proxies cannot
be voted for more than three nominees.

Following is certain information concerning the three nominees for election
as Class C directors together with the Class A and Class B directors whose
terms of office will continue after the Meeting. There is currently a vacancy
in the Class A Directors as a result of Mr. Cook's resignation in connection
with becoming a director of Commerce. The Class C directors who are nominees
for reelection at the Meeting are as follows:

Sam Wyly, age 61. Sam Wyly co-founded Sterling Software in 1981 and since
such time has served as Chairman of the Board and a director. Mr. Wyly has
served as a director of Commerce since December 1995. In 1963, Mr. Wyly
founded University, a computer software and services company, and served as
President or Chairman from 1963 until 1979. University created a computer
utility network, one of the earliest and most successful marriages of
computing and telecommunications. University was one of the original
participants in the software products industry in the late 1960s when the then
market-dominant IBM unbundled computer hardware and software. In 1968, Mr.
Wyly founded Datran, Inc., which was envisioned as the nation's first all-
digital switched "telephone company for computers" and contributed to the
break up of AT&T's telephone monopoly and the resulting benefits of increased
competition in the telecommunications industry. These Wyly-founded companies
are among the forerunners of today's electronic commerce industry. Mr. Wyly
co-founded Earth Resources Company, an oil refining and silver mining company,
and served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and
his brother, Charles J. Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse
chain in 1967. It grew to approximately 600 restaurants by 1989, during which
time he served as Chairman. Mr. Wyly currently serves as Chairman of Michaels
Stores and as President of Maverick Capital, Ltd., an investment fund
management company. Sam Wyly is the father of Evan A. Wyly. Sam Wyly is the
Chairman of the Executive Committee and the Stock Option Committee of the
Software Board. It is presently anticipated that Mr. Wyly will also be
appointed to serve as a member of the 1996 Stock Option Committee of the
Software Board.

Sterling L. Williams, age 52. Sterling L. Williams co-founded Sterling
Software in 1981 and since such time has served as President, Chief Executive
Officer and a director of Sterling Software. Mr. Williams has served as
Chairman of the Board and Chief Executive Officer and a director of Commerce
since December 1995 and also currently serves as a director of INPUT, an
information technology market research company. Mr. Williams is a member of
the Executive Committee and the Stock Option Committee of the Software Board.
It is presently anticipated that Mr. Williams will also be appointed to serve
as a member of the 1996 Stock Option Committee of the Software Board.

Donald R. Miller, age 41. Donald R. Miller, Jr. has served as a director of
Sterling Software since September 1993. Mr. Miller has served as Vice
President-Market Development of Michaels Stores since November 1990 and as a
director of Michaels Stores since September 1992. Prior to November 1990, Mr.
Miller served as Director of Real Estate of Michaels Stores. Mr. Miller also
serves on the Board of Directors of Xscribe Corp., a high technology
information management company. Mr. Miller is the son-in-law of Charles J.
Wyly, Jr. Mr. Miller is a member of the Audit Committee and the Special Stock
Option Committee of the Software Board. It is presently anticipated that Mr.
Miller will also be appointed to serve as a member of the 1996 Special Stock
Option Committee of the Software Board.

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<PAGE>

CURRENT DIRECTORS

The current Class A Directors of Sterling Software who are not standing for
reelection at the Meeting and whose terms will expire in 1997 are as follows:

Robert J. Donachie, age 68. Robert J. Donachie has served as a director of
Sterling Software since May 1983. He has been principally employed as a
private business consultant since March 1981. Mr. Donachie is a member of the
Audit Committee and the Special Stock Option Committee of the Software Board.
It is presently anticipated that Mr. Donachie will also be appointed to serve
as a member of the 1996 Special Stock Option Committee of the Software Board.

Francis A. Tarkenton, age 56. Francis A. Tarkenton has served as a director
of Sterling Software since November 1994. From December 1986 until November
1994, Mr. Tarkenton served as Chairman of the Board and Chief Executive
Officer of KnowledgeWare, a provider of applications development software and
services that was acquired by Sterling Software in November 1994. Prior to
December 1986, Mr. Tarkenton was a founder and served as President and a
director of Tarkenton Software, Inc. from its incorporation in 1977 until its
merger with KnowledgeWare in 1986. Mr. Tarkenton is also a director of Coca
Cola Enterprises, Inc.

Evan A. Wyly, age 34. Evan A. Wyly has served as a director of Sterling
Software since July 1992 and as a Vice President of Sterling Software since
December 1994. Mr. Wyly has served as a director of Commerce since December
1995 and is a Managing Director of Maverick Capital, Ltd. Prior to joining
Maverick Capital, Ltd., Mr. Wyly served as a Vice President of Michaels Stores
from December 1991 to October 1993. In June 1988, Mr. Wyly founded Premier
Partners Incorporated, a private investment firm, and served as President
prior to joining Michaels Stores. Mr. Wyly also serves as a director of
Michaels Stores and Xscribe Corp., a high-technology information management
company. Mr. Wyly is the son of Sam Wyly and the nephew of Charles J. Wyly,
Jr.

The current Class B Directors of Sterling Software who are not standing for
reelection at the Meeting and whose terms will expire in 1998 are as follows:

Charles J. Wyly, Jr., age 62. Charles J. Wyly, Jr. co-founded Sterling
Software in 1981 and since such time has served as a director and as Vice
Chairman since 1984. Mr. Wyly has served as a director of Commerce since
December 1995. Mr. Wyly served as an officer and director of University from
1964 to 1975, including President from 1969 to 1973. Mr. Wyly and his brother,
Sam Wyly, founded Earth Resources Company and Charles J. Wyly, Jr. served as
Chairman of the Board from 1968 to 1980. Mr. Wyly served as Vice Chairman of
the Bonanza Steakhouse chain from 1967 to 1989. Mr. Wyly currently serves as
Vice Chairman of Michaels Stores and as Chairman of Maverick Capital, Ltd.
Charles J. Wyly, Jr. is the father-in-law of Donald R. Miller, Jr. and the
uncle of Evan A. Wyly. Mr. Wyly is a member of the Executive Committee and the
Stock Option Committee of the Software Board. It is presently anticipated that
Mr. Wyly will also be appointed to serve as a member of the 1996 Stock Option
Committee of the Software Board.

Phillip A. Moore, age 53. Phillip A. Moore co-founded Sterling Software in
1981 and since such time has served as a director of Sterling Software. He has
served as an Executive Vice President of Sterling Software since July 1993.
Mr. Moore has also served as an Executive Vice President of Commerce since
December 1995. Prior to July 1993, Mr. Moore served as Senior Vice President,
Technology of Sterling Software.

Michael C. French, age 53. Michael C. French has served as a director of
Sterling Software since July 1992. He was a partner with the law firm of
Jackson & Walker, L.L.P from 1976 through 1995. He is currently a consultant
to the international law firm of Jones, Day, Reavis & Pogue. Since September
1992, Mr. French has served as a director of Michaels Stores. Mr. French also
currently serves as a Managing Director of Maverick Capital, Ltd.

77
<PAGE>

BOARD OF DIRECTORS AND COMMITTEES

The business of Sterling Software is managed under the direction of the
Software Board. The Software Board meets on a regularly scheduled basis during
its fiscal year to review significant developments affecting Sterling Software
and to act on matters requiring Software Board approval. It also holds special
meetings when an important matter requires Software Board action between
scheduled meetings. The Software Board met four times and acted by unanimous
written consent seven times during the 1995 fiscal year. During the 1995
fiscal year, each member of the Software Board participated in at least 75% of
all Software Board and applicable committee meetings held during the period
for which he was a director.

The Software Board has established executive, audit and stock option
committees to devote attention to specific subjects and to assist it in the
discharge of its responsibilities. The functions of those committees, their
current members and the number of meetings held during the 1995 fiscal year
are described below.

Executive Committee. The Executive Committee is empowered to act on any
matter except those matters for which the Software Board may specifically
reserve authority to itself and except those matters specifically reserved to
the full Software Board or by applicable law. Messrs. Sam Wyly (Chairman),
Charles J. Wyly, Jr. and Sterling L. Williams currently are members of the
Executive Committee. The Executive Committee met one time and acted by
unanimous written consent 17 times during the 1995 fiscal year. The Executive
Committee held responsibility for determining executive compensation for
fiscal 1995 excluding determinations relating to the grants of stock options
under Sterling Software's various stock option plans.

Audit Committee. The Audit Committee recommends to the Software Board the
appointment of the firm selected to be independent public accountants for
Sterling Software and its subsidiaries and monitors the performance of such
firm; reviews and approves the scope of the annual audit and evaluates with
the independent public accountants Sterling Software's annual audit and annual
consolidated financial statements; reviews with management the status of
internal accounting controls; evaluates problem areas having a potential
financial impact on Sterling Software which may be brought to its attention by
management, the independent public accountants or the Software Board and
evaluates public financial reporting documents of Sterling Software.
Mr. Robert J. Donachie currently is the only member of the Audit Committee.
The Audit Committee met two times during the 1995 fiscal year.

Stock Option Committee. The Stock Option Committee administers Sterling
Software's Incentive Stock Option Plan (the "Incentive Plan") and Sterling
Software's Non-Statutory Stock Option Plan (the "Non-Statutory Plan") with
respect to the participants in such plans who are not executive officers or
directors of Sterling Software. The Stock Option Committee has the authority,
subject to certain restrictions set forth in such plans, to determine from
time to time the individuals (excluding executive officers and directors of
Sterling Software) to whom options are granted, the number of shares covered
by each option grant and the time or times at which options become
exercisable. The Stock Option Committee also administers Sterling Software's
1992 Non-Statutory Stock Option Plan (the "1992 Plan"). In this capacity, the
Stock Option Committee has the authority, subject to certain restrictions set
forth in the 1992 Plan, to determine from time to time the individuals
(including executive officers and directors of Sterling Software) to whom
options are granted under the 1992 Plan, the number of shares covered by each
option grant and the time or times at which options become exercisable.
Messrs. Sam Wyly (Chairman), Charles J. Wyly, Jr. and Sterling L. Williams
currently are the members of the Stock Option Committee. The Stock Option
Committee met 22 times and acted by unanimous written consent two times during
the 1995 fiscal year.

Special Stock Option Committee. The Special Stock Option Committee
administers the Incentive Plan and Non-Statutory Plan with respect to the
participants in such plans who are executive officers or directors of Sterling
Software. The Special Stock Option Committee has the authority, subject to
certain restrictions set forth in such plans, to determine from time to time
the executive officers and employee directors of Sterling Software to whom
options are granted, the number of shares covered by each option grant and the
time or times at which options become exercisable. In accordance with
amendments made to the Non-Statutory Plan in June 1995 to comply with new Rule
16b-3 under the Exchange Act, the Special Stock Option Committee does not have
the

78
<PAGE>

authority to determine the terms and number of options granted under the Non-
Statutory Plan to non-employee directors of Sterling Software. Instead, grants
to non-employee directors are made pursuant to a formula as set forth in such
plan. Non-employee directors are not eligible to receive option grants under
the Incentive Plan. The Special Stock Option Committee also administers
Sterling Software's 1994 Non-Statutory Stock Option Plan (the "1994 Plan"). In
this capacity, the Special Stock Option Committee has the authority, subject
to certain restrictions set forth in the 1994 Plan, to determine from time to
time the individuals (including executive officers and directors of Sterling
Software) to whom options are granted, the number of shares covered by each
option grant and the time or times at which options become exercisable.
Messrs. Robert J. Donachie and Donald R. Miller, Jr. currently are the members
of the Special Stock Option Committee. The Special Stock Option Committee met
one time and acted by unanimous written consent six times during the 1995
fiscal year.

The Software Board expects to establish the 1996 Stock Option Committee and
the 1996 Special Stock Option Committee to administer the 1996 Stock Option
Plan. See "Proposal II--Approval of the 1996 Stock Option Plan--1996 Stock
Option Plan Board Committees."

Sterling Software does not have a nominating or compensation committee. The
functions customarily attributable to a nominating committee are performed by
the Software Board as a whole, and the functions customarily attributable to a
compensation committee generally are performed by the Executive Committee.

SECURITY OWNERSHIP OF STERLING SOFTWARE MANAGEMENT AND CERTAIN STOCKHOLDERS

The following table sets forth as of March 31, 1996 information regarding
the beneficial ownership of Software Stock by each director of Sterling
Software (which includes all nominees), each of the Software Named Executive
Officers (as defined below), the directors and executive officers of Sterling
Software as a group and each person or entity known by Sterling Software to
own 5% or more of the outstanding shares of Software Stock. The information
regarding beneficial ownership of Software Stock by the entities identified
below is included in reliance on a report filed with the Commission by such
entities, except that the percentage of Software Stock owned is based upon
Sterling Software's calculations made in reliance upon the number of shares of
Software Stock reported to be beneficially owned by such entities in such
report and the number of shares of Software Stock outstanding on March 31,
1996. The persons and entities named in the table have sole voting and
investment power with respect to all shares of Software Stock owned by them,
except as otherwise noted.

<TABLE>
<CAPTION>
SHARES OF
SOFTWARE STOCK
OWNED BENEFICIALLY
AS OF MARCH 31,
1996(1)
------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER OR GROUP NUMBER CLASS
- --------------------------------- --------- ----------
<S> <C> <C>
Sam Wyly.............................................. 796,965(2) 2.3%
Charles J. Wyly, Jr................................... 998,273(3) 2.9
Evan A. Wyly.......................................... 86,440(4) *
Sterling L. Williams.................................. 1,154,000(5) 3.3
Phillip A. Moore...................................... 38,899(6) *
Robert J. Donachie.................................... 1,100 *
Michael C. French..................................... 800(7) *
Warner C. Blow........................................ 212,900(8) *
George H. Ellis....................................... 150,000(9) *
Donald R. Miller, Jr.................................. 0 --
Francis A. Tarkenton.................................. 183,113(10) *
All current directors and executive officers as a
group (21 persons)................................... 3,988,461(11) 10.9
Alpha Assurances I.A.R.D. and related entities,
AXA and The Equitable Companies Incorporated......... 3,827,892(12) 11.2
</TABLE>
- -------
* Less than 1%.

(footnotes on following page)

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<PAGE>

(1) There were 34,140,048 shares of Software Stock issued and outstanding as
of March 31, 1996. The number of shares shown includes outstanding shares
owned by the person(s) indicated on March 31, 1996 and shares underlying
options on such date and/or warrants owned by such person(s) on March 31,
1996 that were exercisable within 60 days of such date. See "Proposal II--
Approval of the 1996 Stock Option Plan--Background." The table above does
not include information regarding the beneficial ownership of Software
Stock by Friess Associates, Inc. ("Freiss") or AIM Management Group, Inc.
("AIM"). Each of Freiss and AIM has filed a Schedule 13G with the
Commission reporting beneficial ownership of 1,430,000 shares (4.2%) and
1,361,513 shares (4.0%) of Software Stock, respectively. At the time such
reports were filed with the Commission, each of Freiss and AIM
beneficially owned more than 5% of the outstanding Software Stock.
However, due to the increase in the number of outstanding shares of
Software Stock resulting from the conversion of Debentures and the
exercise of outstanding options and warrants, neither Freiss nor AIM
beneficially owned 5% or more of the outstanding Software Stock as of
March 31, 1996 based on the number of shares of Software Stock reported to
be owned by such entities in the reports filed with the Commission.

(2) Includes 257,342 shares owned by family trusts of which Sam Wyly is
trustee, of 438,612 shares (300,000 of which are also beneficially owned
by Charles J. Wyly, Jr.) held of record by two limited partnerships of
which Sam Wyly is general partner. Also includes 101,011 shares issuable
upon exercise of warrants owned by family trusts of which Sam Wyly is
trustee. Does not include an aggregate of 1,304,000 outstanding shares and
666,666 shares issuable upon exercise of options owned by irrevocable
trusts of which Sam Wyly and his family are included as beneficiaries. Sam
Wyly disclaims beneficial ownership of the excluded shares.

(3) Includes 307,016 shares directly owned by family trusts of which Charles
J. Wyly, Jr. is trustee and 556,574 shares (300,000 of which are also
beneficially owned by Sam Wyly) held of record by two limited partnerships
of which Charles J. Wyly, Jr. is general partner. Also includes 134,683
shares issuable upon exercise of warrants directly owned by family trusts
of which Charles J. Wyly, Jr. is trustee. Does not include an aggregate of
600,000 outstanding shares and 333,334 shares issuable upon exercise of
options owned by irrevocable trusts of which Charles J. Wyly, Jr. and his
family are included as beneficiaries. Mr. Wyly disclaims beneficial
ownership of the excluded shares.

(4) Includes 33,686 shares issuable upon exercise of warrants.
(5) Includes 1,150,000 shares issuable upon exercise of options.

(6) Includes 150 shares owned by Mr. Moore's son.

(7) Includes 800 shares held in a retirement account directed by Mr. French.

(8) Includes 211,550 shares issuable upon exercise of options.

(9) All of such shares are issuable upon exercise of options.

(10) Includes 26,449 shares issuable upon exercise of options and 250 shares
owned by Mr. Tarkenton's stepdaughter.

(11) Includes 586,104 shares issuable upon exercise of options beneficially
owned by executive officers of Sterling Software not named in the table
above.

(12) Based on a Schedule 13G dated April 9, 1996 filed by Alpha Assurances
I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA Assurances I.A.R.D.
Mutuelle, AXA Assurances Vie Mutuelle, and Uni Europe Assurance Mutuelle,
as a group (collectively, the "Mutuelles AXA"), AXA and The Equitable
Companies Incorporated. It was reported that three subsidiaries of The
Equitable Companies Incorporated, The Equitable Life Assurance Society of
the United States, Alliance Capital Management L.P. and Wood, Struthers
and Winthrop Management Corporation, are deemed to have sole voting power
for an aggregate of 3,491,600, shared voting power for 119,300 shares and
sole dispositive power for 3,827,392 shares. The address of Alpha
Assurances I.A.R.D. Mutuelle and Alpha Assurances Vie Mutuelle is 101-100
Terrasse Boieldieu, 92042 Paris La Defense, France; the address of AXA
Assurances I.A.R.D. Mutuelle and AXA Assurances Vie Mutuelle is La Grande
Arche, Pardi Nord, 92044 Paris La Defense, France; the address of Uni
Europe Assurance Mutuelle is 24 Rue Drouot, 75009 Paris, France; the
address of AXA is 23 Avenue Matignon, 75008 Paris, France; and the
address of The Equitable Companies Incorporated is 787 Seventh Avenue,
New York, New York 10019.

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COMPENSATION OF STERLING SOFTWARE MANAGEMENT

SUMMARY COMPENSATION TABLE

The following table sets forth certain information regarding compensation
paid or accrued for services rendered during each of Sterling Software's last
three fiscal years to Sterling Software's Chief Executive Officer and each of
the other four most highly compensated executive officers of Sterling Software
based on salary and bonus earned during fiscal 1995 (collectively, the
"Software Named Executive Officers").

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ---------------------
NAME AND OTHER ANNUAL SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION UNDERLYING OPTIONS(2) COMPENSATION
------------------ ---- -------- -------- ------------ --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sterling L. Williams.... 1995 $750,000 $450,000 $168,833(3) 650,000 $ 33,900(4)
President, Chief 1994 650,000 400,000 127,701(3) -0- 39,771
Executive Officer 1993 600,000 300,000 30,695(3) 300,000 29,423
and Director
Sam Wyly................ 1995 850,000(5) 450,000 44,417(6) 1,466,666 120,649(7)
Chairman of the 1994 770,000(5) 400,000 3,025(6) -0- 70,660
Board and Director 1993 710,000(5) 300,000 33,212(6) 300,000 62,581
Charles J. Wyly, Jr..... 1995 425,000(8) 225,000 66,783(9) 733,334 60,020(10)
Vice Chairman of the 1994 385,000(8) 200,000 582(9) -0- 62,718
Board and Director 1993 355,000(8) 150,000 1,986(9) 150,000 28,385
Warner C. Blow.......... 1995 348,000 273,610 -- 75,000 4,773(11)
Executive Vice 1994 315,000 246,614 63,689(12) 50,000 4,598
President 1993 290,000 170,000 -- 100,000 12,823
George H. Ellis......... 1995 375,000 225,000 86,961(13) 200,000 4,500(11)
Executive Vice 1994 325,000 200,000 34,172(13) -0- 3,960
President and Chief 1993 300,000 150,000 61,525(13) 80,000 7,942
Financial Officer
</TABLE>
- --------
(1) Reflects bonus earned during the fiscal year. In some instances, the
payment of all or a portion of the bonus was deferred until the next
fiscal year.
(2) Reflects options to acquire shares of Software Stock. Sterling Software
has not granted stock appreciation rights.
(3) For fiscal 1995, includes a $47,897 reimbursement for medical expenses, a
$44,222 housing allowance bonus and a $55,541 reimbursement for the
payment of taxes; for fiscal 1994, includes a $55,710 reimbursement for
medical expenses and a $52,168 reimbursement for the payment of taxes; and
for fiscal 1993 consists of a reimbursement for the payment of taxes.
(4) Consists of $4,500 in Sterling Software contributions to the 401(k) Plan,
and $29,400 in premiums on a universal life insurance policy for Mr.
Williams' benefit.
(5) Includes director's fees of $425,000, $385,000 and $355,000 paid to Sam
Wyly in fiscal 1995, 1994 and 1993, respectively, for his services as
Chairman of the Software Board.
(6) Consists of reimbursements for the payment of taxes.
(7) Consists of $4,225 in Sterling Software contributions to the 401(k) Plan
and $116,424 in premiums on a universal life insurance policy for Mr.
Wyly's benefit.
(8) Includes director's fees of $212,500, $192,500 and $177,500 paid to
Charles J. Wyly, Jr. in fiscal 1995, 1994 and 1993, respectively, for his
services as Vice Chairman of the Software Board.
(9) For fiscal 1995, includes $43,046 for costs related to his use of a
Sterling Software-provided automobile and a $14,626 reimbursement for the
payment of taxes; and for fiscal 1994 and 1993 consists of reimbursements
for the payment of taxes.
(10) Consists of $4,363 in Sterling Software contributions to the 401(k) Plan
and $55,657 in premiums on a universal life insurance policy for Mr.
Wyly's benefit.
(11) Consists of Sterling Software contributions to the 401(k) Plan.
(12) Includes $45,573 in the form of incentive travel and a $1,288
reimbursement for the payment of taxes.
(13) For fiscal 1995, includes a $24,470 reimbursement for medical expenses,
$20,146 for costs related to his use of a Sterling Software-provided
automobile, a $18,514 reimbursement for the payment of taxes and $17,314
in the form of incentive travel; for fiscal 1994, consists of a
reimbursement for the payment of taxes; and for fiscal 1993 includes
$22,689 in the form of incentive travel, $13,700 for costs related to his
use of a Sterling Software-provided automobile, a $10,181 reimbursement
for medical expenses and a $6,096 reimbursement for the payment of taxes.

81
<PAGE>

OPTION GRANTS IN FISCAL 1995

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM (3)
---------------------------------------------------------- ---------------------------
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE
GRANTED(1) FISCAL 1995 PER SHARE(2) EXPIRATION DATE 5% 10%
---------- ------------- -------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sterling L. Williams.... 650,000 12.7% $29.00 November 23, 2004 $ 11,854,664 $ 30,042,045
Sam Wyly................ 800,000 15.6 29.00 November 23, 2004 14,590,355 36,974,825
666,666 13.0 45.875 September 11, 2005 19,233,675 48,741,908
Charles J. Wyly, Jr..... 400,000 7.8 29.00 November 23, 2004 7,295,178 18,487,413
333,334 6.5 45.875 September 11, 2005 9,616,866 24,371,027
Warner C. Blow.......... 75,000 1.5 29.00 November 23, 1999 600,912 1,327,859
George H. Ellis......... 200,000 3.9 29.00 November 23, 2004 3,647,589 9,243,706
</TABLE>
The following table provides information related to options granted to the
Software Named Executive Officers during fiscal 1995.

- --------
(1) Reflects options to acquire shares of Software Stock. In connection with
the Offering, Sterling Software accelerated such options, all of which are
presently exercisable. See "Proposal II--Approval of the 1996 Stock Option
Plan--Background." Sterling Software has not granted stock appreciation
rights.
(2) The option exercise price may be paid in shares of Software Stock owned by
the Software Named Executive Officer, in cash, or in any other form of
valid consideration or a combination of any of the foregoing, as
determined by the Stock Option Committee in its discretion. The exercise
price was equal to the fair market value of the Software Stock on the date
of grant.

(3) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation on the Software Stock over the term of the options.
These numbers do not take into account provisions of certain options
providing for termination of the option following termination of
employment, nontransferability or vesting over periods of up to four
years. The use of the assumed 5% and 10% returns are established by the
Commission and is not intended by Sterling Software to forecast possible
future appreciation of the price of the Software Stock.

OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES

The following table provides information related to options exercised by the
Software Named Executive Officers during fiscal 1995 and the number and value
of options held at fiscal year-end. Sterling Software does not have any
outstanding stock appreciation rights.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS OPTIONS
NAME EXERCISE REALIZED(1) AT SEPTEMBER 30, 1995(#) AT SEPTEMBER 30, 1995($)(2)
---- ----------- ----------- ---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE(3) EXERCISABLE UNEXERCISABLE(3)
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sterling L. Williams.... 308,000 $ 5,771,463 1,142,000 -- $24,061,500 --
Sam Wyly................ 0(4) -- 1,100,000 666,666 21,112,500 --
Charles J. Wyly, Jr..... 0(5) -- 550,000 333,334 10,556,250 --
Warner C. Blow.......... 107,200 2,622,013 17,800 193,750 346,038 $4,057,812
George H. Ellis......... 202,500 3,818,063 -- 150,000 -- 2,475,000
</TABLE>
- --------
(1) Value was calculated based on the difference between the option exercise
price and the closing market price of Software Stock on the date of
exercise multiplied by the number of shares to which the exercise relates.
(2) The closing price for Software Stock as reported by the NYSE on September
30, 1995 was $45.50. See "Market for Software Stock." Value is calculated
on the basis of the difference between the option exercise price and
$45.50 multiplied by the number of shares of Software Stock underlying the
option.
(3) In connection with the Offering Sterling Software accelerated such
options, all of which are presently exercisable. See "Proposal II--
Approval of the 1996 Stock Option Plan--Background."
(4) In fiscal 1993 Sam Wyly transferred options to purchase 667,000 shares of
Software Stock and disclaims the beneficial ownership of the transferred
options and the underlying shares of Software Stock. The table above does
not include the value realized upon exercise of such options in fiscal
1995.
(5) In fiscal 1993 Charles J. Wyly, Jr. transferred options to purchase
333,000 shares of Software Stock and disclaims the beneficial ownership of
the transferred options and the underlying shares of Software Stock. The
table above does not include the value realized upon exercise of such
options in fiscal 1995.

82
<PAGE>

COMPENSATION OF DIRECTORS

Messrs. Donachie, French, Miller and Tarkenton received an annual fee of
$30,000 for their services as directors of Sterling Software plus $2,500 for
each meeting of the Software Board and each meeting of any committee of the
Software Board that they attended during fiscal 1995. Additionally, during
fiscal 1995, Messrs. Sam Wyly and Charles J. Wyly, Jr. received annual
directors' fees of $425,000 and $212,500 in their capacities as Chairman and
Vice Chairman of the Software Board, respectively. Messrs. Evan Wyly, Williams
and Moore did not receive separate compensation for their services as
directors. For fiscal 1996, Messrs. Sam Wyly and Charles J. Wyly, Jr. are
entitled to receive annual directors' fees of $500,000 and $250,000,
respectively, and Messrs. Donachie, French, Miller and Tarkenton are each
entitled to receive an annual fee of $30,000 plus $2,500 for each meeting of
the Software Board and each meeting of any committee of the Software Board
that they attend. In addition, all directors of Sterling Software are eligible
to receive options under Sterling Software's stock option plans, except that
options under the Incentive Plan may be granted only to directors who are also
employees of Sterling Software. During fiscal 1995, Mr. Sam Wyly, Mr. Charles
J. Wyly, Jr., and Mr. Williams received options to purchase 1,466,666, 733,334
and 650,000 shares of Software Stock, respectively. See "--Option Grants In
Fiscal 1995." Additionally, in fiscal 1995, Messrs. Donachie, French, Miller,
Moore and Evan Wyly received options to purchase 30,000, 30,000, 30,000,
50,000 and 60,000 shares of Software Stock, respectively. In connection with
Sterling Software's acquisition of KnowledgeWare, Mr. Tarkenton's outstanding
KnowledgeWare options were converted to options to purchase 26,449 shares of
Software Stock on the same terms applicable to all KnowledgeWare option
holders.

Jackson & Walker, L.L.P, a law firm of which Michael C. French was a partner
until August 1995, provided legal services to Sterling Software in fiscal
1995. Sterling Software was not charged by such firm for time spent by Mr.
French on any Sterling Software matters during fiscal 1995. Jones, Day, Reavis
& Pogue, a law firm for whom Mr. French is currently a consultant, provides
legal services to Sterling Software. Such firm does not charge Sterling
Software for any time spent by Mr. French on Sterling Software matters. Since
January 1, 1994, Mr. French has received a non-refundable retainer of $15,000
per month for his assistance in significant acquisitions and other matters.
Beginning January 15, 1996, Mr. French has received $1,000 per month as an
employee of Sterling Software, which amount is deducted from amounts paid to
him as a retainer.

Pursuant to the terms of the Merger Agreement between Sterling Software and
KnowledgeWare, in December 1994 Sterling Software entered into a three-year
Consultation Agreement with Mr. Francis A. Tarkenton (who served as the
Chairman and Chief Executive Officer of KnowledgeWare prior to Sterling
Software's acquisition of KnowledgeWare on November 30, 1994). Pursuant to
this Consultation Agreement, Mr. Tarkenton receives a monthly fee of $25,000
for the term of the agreement. In consideration for such fee, Mr. Tarkenton
serves in an advisory capacity to the President of Sterling Software for the
purpose of making certain financial and strategic recommendations regarding
Sterling Software's applications development business, and, at the request of
Sterling Software's President, is required to represent Sterling Software in
certain mergers and acquisitions and at trade shows, user group meetings,
quota clubs, professional association meetings and meetings with prospective
and current clients. In addition, Mr. Tarkenton receives an allowance of
$3,000 per month for office and secretarial assistance relating to the
performance of his duties under the agreement. The agreement may be terminated
by Mr. Tarkenton at any time. During the three-year term, Mr. Tarkenton also
receives $10,000 per year as an employee of Sterling Software in order to meet
certain obligations to Mr. Tarkenton in effect prior to November 30, 1994,
which amount is deducted from amounts paid under the Consultation Agreement.

EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS

Sterling Software has entered into an agreement (a "Change-in-Control
Agreement") with each of Messrs. Sam Wyly, Charles J. Wyly, Jr., Williams and
Ellis and certain of its other executive officers, which agreements provide
for certain payments and benefits upon the termination of the employment of
such persons with Sterling Software following a Change in Control (as defined
in such agreements). Each of the Change-in-Control Agreements covers
termination within a specified number of years after the date of a Change in
Control and requires Sterling Software to pay to such executive officer, if
prior to the expiration of such period his or her

83
<PAGE>

employment is terminated with or without cause by Sterling Software (other
than upon such executive officer's death) or by such executive officer upon
the occurrence of certain constructive termination events, a lump sum amount
equal to a multiple of such executive officer's annual salary, bonus and cash
incentive compensation preceding such termination and to continue certain
benefits for a specified number of months. In addition, if any payments
(including payments under the Change-in-Control Agreement) to such executive
officer are determined to be "excess parachute payments" under the Code, such
executive officer would be entitled to receive an additional payment (net of
income taxes) to compensate such executive officer for the excise tax imposed
by the Code on such payments. The specified number of years, the multiple and
the specified number of months referred to in the immediately preceding
sentence are five, 500% and 60, respectively, in the case of Sterling L.
Williams and seven, 700% and 84, respectively in the case of each of Sam Wyly
and Charles J. Wyly, Jr., and three, 300% and 36, respectively, in the case of
George H. Ellis.

Sterling Software has also entered into an agreement (the "Software CEO
Agreement") with Mr. Sterling L. Williams, which provides for a minimum
initial base salary of $500,000 (subject to mutually agreeable annual
increases) and certain benefits plus such bonuses and other benefits which
Sterling Software and Mr. Williams may agree upon. Under the terms of the
Software CEO Agreement, upon termination of Mr. Williams' employment by (i)
Sterling Software (with or without cause) or (ii) Mr. Williams as a result of
a reduction in his compensation or of the nature or scope of his authority or
duties, the Software CEO Agreement will convert into a five-year consulting
agreement. In such event, Mr. Williams would be entitled to continue receiving
compensation and certain benefits at the levels specified in the Software CEO
Agreement. Prior to the expiration of its five-year term, the consulting
agreement could be terminated by Mr. Williams at any time and by Sterling
Software at Mr. Williams' death. In the event of termination of Mr. Williams'
employment following a Change in Control, at Mr. Williams' option, the terms
of his Change-in-Control Agreement may govern the termination in lieu of
conversion of the Software CEO Agreement into a consulting agreement. In the
event of a Change in Control following conversion of the Software CEO
Agreement into a consulting agreement, Mr. Williams would have the option of
terminating the consulting agreement and would be entitled to receive a lump
sum amount equal to all compensation due through the unexpired portion of the
five-year consulting agreement. In addition, the Software CEO Agreement
provides that, in the event that Mr. Williams' employment with Commerce is
terminated (with or without cause) and Mr. Williams is willing and able to
devote his full-time efforts to Sterling Software, Sterling Software will
offer to increase his compensation and benefits paid by Sterling Software to a
level reasonably equivalent to the combined compensation and benefits he is
entitled to receive from both Sterling Software and Commerce immediately prior
to such termination. Mr. Williams has a similar agreement (the "Commerce CEO
Agreement") with Commerce (see "Management of Commerce--Benefit Plans and
Agreements"). If Mr. Williams' employment with Sterling Software is terminated
and he accepts full-time employment with Commerce under the provisions of the
Commerce CEO Agreement, Mr. Williams' rights to compensation and benefits from
Sterling Software under the Software CEO Agreement and his right to convert
the Software CEO Agreement into a consulting agreement would terminate.

Sterling Software has entered into agreements (a "Software Severance
Agreement") with certain of its executive officers, including Mr. Ellis and
certain Sterling Software executive officers who are also executive officers
of Commerce ("Dual Executive Officers"), which provide for the continued
compensation of such executive officer in the event that Sterling Software
terminates his or her employment, with or without cause. The Dual Executive
Officers' Software Severance Agreements will expire three years after the date
on which notice of termination is given to him or her by Sterling Software.
Such agreement requires Sterling Software to continue to pay such Dual
Executive Officer, upon his or her termination from employment by Sterling
Software, for 36 months, the salary, bonus and certain benefits in effect
prior to the termination of his or her employment. In the event of a
termination of employment following a Change in Control, at the executive
officer's option, the terms of his or her Change-in-Control Agreement may
govern such termination in lieu of the terms of the Software Severance
Agreement. In addition, the Software Severance Agreement with such Dual
Executive Officers provides that, in the event that his or her employment with
Commerce is terminated (with or without cause) and he or she is willing and
able to devote his or her full-time efforts to Sterling Software, Sterling
Software will offer to increase his or her compensation and benefits paid by
Sterling Software to a level

84
<PAGE>

reasonably equivalent to the combined compensation and benefits such Executive
Officer is entitled to receive from both Sterling Software and Commerce
immediately prior to such termination. Each such Dual Executive Officer has a
similar agreement (the "Commerce Severance Agreement") with Commerce (see
"Management of Commerce--Benefit Plans and Agreements"). If any such Dual
Executive Officers's employment with Sterling Software is terminated and he or
she accepts full-time employment with Commerce under the provisions of the
Commerce Severance Agreement, such executive officer's rights to compensation
and benefits from Sterling Software under the Software Severance Agreement
would terminate.

In addition to the above-described agreements, Sterling Software has agreed
to reimburse each of Messrs. Williams and Ellis for legal planning (up to
$20,000 per fiscal year for Mr. Williams and up to $10,000 per fiscal year for
Mr. Ellis) and for financial planning (up to $20,000 per fiscal year for Mr.
Williams and up to $10,000 per fiscal year for Mr. Ellis). Additionally,
Commerce has agreed to reimburse Mr. Blow for legal planning (up to $10,000
per fiscal year) and for financial planning (up to $10,000 per fiscal year).

During 1995, Mr. Warner Blow was a party to agreements substantially similar
to the Change-in-Control Agreements and the Software Severance Agreements,
which agreements were terminated when he resigned as an officer of Sterling
Software upon completion of the Offering.

EXECUTIVE COMPENSATION

Following the completion of the Offering, the base salaries of each of the
four executive officers of Sterling Software who also serve as executive
officers of Commerce were adjusted downward. The current annualized base
salaries that Messrs. Williams and Ellis, Ms. Meier and Mr. Moore receive from
Sterling Software are $500,000, $250,000, $225,000 and $150,000, respectively.
See "Management of Commerce--Executive Compensation."

REPORT OF THE EXECUTIVE AND STOCK OPTION COMMITTEES ON EXECUTIVE COMPENSATION

Overview and Philosophy. Sterling Software is engaged in a highly
competitive industry. In order to succeed, Sterling Software believes that it
must be able to attract and retain qualified executives. To achieve this
objective, Sterling Software believes that providing executive compensation
that is tied in part to operating performance enables Sterling Software to
attract and retain key employees.

During fiscal 1995, the members of the Executive Committee had primary
responsibility for determining executive compensation levels. The Executive
Committee, as part of its review and consideration of executive compensation,
took into account, among other things, the following goals:

. Provision of incentives and rewards that will attract and retain
highly qualified and productive people;

. Motivation of employees to high levels of performance;

. Differentiation of individual pay based on performance;

. Ensuring external competitiveness and internal equity; and

. Alignment of Sterling Software, employee and stockholder interests.

To achieve these goals, Sterling Software's executive compensation policies
integrate annual base compensation with bonuses based on operating
performance, with a particular emphasis on attainment of planned objectives,
and on individual initiatives and performance. Compensation through stock
options is designed to attract and retain qualified executives and to ensure
that such executives have a continuing stake in the long-term success of
Sterling Software. When granting stock options, the Stock Option Committee and
the Special Stock Option Committee (the "Stock Option Committees") evaluate a
number of criteria, including the recipient's level of cash compensation,
years of service with Sterling Software, position with Sterling Software, the
number of unexercised options held by the recipient, and other factors. The
Stock Option Committees have not established a formula to assign specific
weights to any of these factors when making their determinations.

85
<PAGE>

Chief Executive Officer's Compensation for Fiscal 1995. In 1995, Sterling
Software's Chief Executive Officer, Sterling L. Williams, was compensated in
accordance with an agreement entered into effective January 1, 1993. Such
agreement provided for an annual base salary of $650,000 and certain benefits
plus such bonuses or other benefits and annual increases on which Sterling
Software and Mr. Williams may agree. Mr. Williams' base salary was increased
to $750,000 for fiscal 1995. Because there was no pre-established formula for
determining Mr. Williams' bonus for fiscal 1995, the Executive Committee
exercised its judgment in awarding Mr. Williams' fiscal 1995 bonus of
$450,000. Sterling Software's fiscal 1995 year-end results reflected record
revenue and profit performance in each of Sterling Software's major worldwide
markets. Revenue increased 24% in fiscal 1995 over fiscal 1994, and earnings
per share increased 26% in fiscal 1995 over fiscal 1994 before restructuring
charges, an extraordinary item and the cumulative effect of a change in
accounting principle recorded in fiscal 1994. In addition, the Executive
Committee took into account Mr. Williams' key role in acquisitions by Sterling
Software, most notably the acquisition of KnowledgeWare. Based on these
factors, the Executive Committee concluded that Mr. Williams' outstanding
performance for Sterling Software merited his bonus.

Compensation of Executive Officers. Compensation of Sterling Software's
executive officers is comprised of base salary, annual cash incentive
compensation, long-term incentive compensation in the form of stock options
and various benefits. Each element has a somewhat different purpose and all of
the determinations of the Executive and Stock Option Committees regarding the
appropriate form and level of executive compensation, including compensation
of the Chief Executive Officer, were ultimately judgments based on such
committees' ongoing assessment and understanding of the computer software and
services industry, Sterling Software and Sterling Software's executive
officers. In determining salaries for executive officers in fiscal 1995, the
Executive Committee took into account individual experience and performance of
its executive officers, as well as Sterling Software's operating performance
for fiscal 1995 and the attainment of financial and strategic objectives.
Specifically, the Executive Committee and the Stock Option Committees took
into consideration the same types of factors (such as revenue and earnings per
share) as were considered with respect to the Chief Executive Officer.

In addition, Sterling Software establishes for each fiscal year a plan for
group presidents (the "Group Presidents Plan"), which is based on operating
profits. All group presidents (including, during Sterling Software's fiscal
year 1995, Warner Blow) are eligible to participate in the Group Presidents
Plan and, pursuant to such plan, they receive a salary as well as a bonus that
is calculated as a percentage of the operating profits for their respective
groups. No group president will be eligible for a bonus, however, unless his
or her group meets certain minimum performance criteria. In addition, because
the Group Presidents Plan does not constitute an employment agreement, a
participant's employment and participation in such plan may be terminated by
the Chief Executive Officer at any time.

Sterling Software has maintained four stock option plans for its executives,
as well as its key employees and directors: the Non-Statutory Plan, the
Incentive Plan, the 1992 Plan and the 1994 Plan. These plans are administered
by the Stock Option Committees. The Non-Statutory Plan and the Incentive Plan
were adopted by Sterling Software's stockholders in March 1993 and, as amended
to date, such plans provided for the grant of options to purchase up to
4,875,000 and 2,000,000 shares of Software Stock, respectively. Options
granted pursuant to such plans were intended to qualify for special treatment
under Section 16 of the Exchange Act and options granted under the Incentive
Plan are intended to qualify as "incentive stock options" within the meaning
of Section 422 of the Code. In May 1992, the Software Board adopted the 1992
Plan and such plan, as amended to date, provided for the grant of options to
acquire up to 5,295,000 shares of the Software Stock. The 1992 Plan was
adopted as a "broad-based" plan and, unlike the Incentive Plan and Non-
Statutory Plan, it was not intended to qualify for special treatment under
Section 16 of the Exchange Act. The primary difference between options granted
under the 1992 Plan and the Incentive Plan and Non-Statutory Plan (in addition
to treatment under Section 16) is with respect to transferability of options.
Under the 1992 Plan, options may be transferred by the optionee upon five
days' prior written notice to Sterling Software. In March 1994, the
stockholders approved the 1994 Plan, which plan provided for the grant of
options to purchase up to 1,250,000 shares of Software Stock.

86
<PAGE>

Options granted under the 1994 Plan are not "incentive stock options" and are
not intended to qualify for special treatment under Section 16 of the Exchange
Act.

The Stock Option Committees believe that the grant of options aligns
executive and stockholder long-term interests by creating a strong and direct
link between executive compensation and stockholder return and enables
executives to develop and maintain a significant long-term ownership position
in Software Stock. All stock options granted during fiscal 1995 were granted
at fair market value on the date of grant.

In August 1993, as part of the Omnibus Budget Reconciliation Act of 1993,
Section 162(m) of the Code was enacted, which section provides for an annual
$1,000,000 limitation on the deduction that an employer may claim for
compensation of certain executives. Section 162(m) of the Code provides
exceptions to the deduction limitation, and it is the intent of the Executive
Committee and the Special Stock Option Committee to qualify for such
exceptions to the extent feasible and in the best interests of Sterling
Software. Option grants pursuant to Sterling Software's 1994 Plan and 1996
Stock Option Plan are intended to meet the performance based compensation
exception to the deduction limitation.

This report is submitted by the members of the Executive, Stock Option and
Special Stock Option Committees:

<TABLE>
<CAPTION>
SPECIAL
EXECUTIVE COMMITTEE STOCK OPTION COMMITTEE STOCK OPTION COMMITTEE
------------------- ---------------------- ----------------------
<S> <C> <C>
Sam Wyly Sam Wyly Robert J. Donachie
Charles J. Wyly, Jr. Charles J. Wyly, Jr. Donald R. Miller, Jr.
Sterling L. Williams Sterling L. Williams
</TABLE>

EMPLOYEE STOCK OWNERSHIP PLAN

Subsequent to the Distribution, Sterling Software intends to amend and
restate its 401(k) Plan to qualify in part as an employee stock ownership plan
(the "Software Plan"). Eligible employees will continue to be permitted to
contribute to the Software Plan through salary deferral elections of not less
than 1% nor more than 17% of the employee's salary. Contributions of up to 3%
of a participant's salary will be eligible for matching contributions from
Sterling Software (at a rate presently expected to be equal to 150% of such
employee contributions) under terms no less favorable than those provided in
the 401(k) Plan. The portion of the Software Plan consisting of contributions
other than employer matching contributions is intended to qualify as a profit-
sharing plan with a "cash or deferred arrangement" under Section 401(k) of the
Code, and the portion of the Software Plan consisting of employer matching
contributions will be designated as an employee stock ownership plan. The rate
at which employee contributions will be matched will be subject to change as
authorized by the Software Board, provided that aggregate matching
contributions by Sterling Software do not exceed certain statutory
limitations. Contributions by participants will always be 100% vested and
contributions by Sterling Software will vest over a period of years, becoming
fully vested after six years of employment with Sterling Software or its
affiliates (including Commerce prior to the Distribution). Assets held in the
401(k) Plan which are attributable to employees of Sterling Software and its
subsidiaries will be transferred to the Software Plan. Assuming the Software
Plan qualifies under Section 401 of the Code, employee deferral contributions
and employer matching contributions to the Software Plan, and income earned on
such contributions, will not be taxable to the participants until withdrawn
from the Software Plan.

EXECUTIVE AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1995, the members of the Executive Committee were primarily
responsible for determining executive compensation, and the members of the
Stock Option Committees made decisions related to stock option grants to
executive officers. The following directors, who also are members of the
Executive, Stock Option and/or Special Stock Option Committees, participated
in meetings with respect to executive officer compensation matters: Sam Wyly,
Charles J. Wyly, Jr., Sterling L. Williams, Robert J. Donachie and Donald R.
Miller, Jr. Sam Wyly, Charles J. Wyly, Jr. and Sterling L. Williams are
executive officers of Sterling Software.

87
<PAGE>

Sam Wyly and Charles J. Wyly, Jr. are executive officers and members of the
Executive Committees, Stock Option Committees and Boards of Directors of both
Sterling Software and Michaels Stores. Additionally, Sam Wyly and Charles J.
Wyly, Jr. are members of the compensation committee of the Michaels Stores'
Board of Directors. Accordingly, Sam Wyly and Charles J. Wyly, Jr. have
participated in decisions related to compensation of executive officers of
each of Sterling Software and Michaels Stores. Donald R. Miller, Jr., a
director and a member of the Special Stock Option Committee of Sterling
Software, is also an officer and a director of Michaels Stores. Evan A. Wyly,
an executive officer and a director of Sterling Software, is also an officer
and a director of Michaels Stores.

In June 1995, Sterling Software entered into an Exchange Agreement with Evan
A. Wyly, three trusts of which Sam Wyly serves as trustee (the "Sam Wyly
Trusts"), and four trusts of which Charles J. Wyly, Jr., serves as trustee
(the "Charles Wyly Trusts"). Pursuant to the Exchange Agreement, Evan A. Wyly
exchanged 25,010 shares of Sterling Software's Series B Preferred Stock, par
value $0.10 per share (the "Preferred Stock"), for warrants to purchase 33,686
shares of Software Stock, the Sam Wyly Trusts exchanged an aggregate of 74,995
shares of Preferred Stock for warrants to purchase 101,011 shares of Software
Stock, and the Charles Wyly Trusts exchanged an aggregate of 99,995 shares of
Preferred Stock for warrants to purchase 134,684 shares of Software Stock. The
warrants have an exercise price of $36.50 per share of Software Stock and
became fully exercisable on September 25, 1995. The warrants are fully
transferable and will expire on June 27, 1997. Following this exchange, no
shares of Preferred Stock remained outstanding.

From time to time Sterling Software leases charter aircraft from a company
owned by Sam Wyly and Charles J. Wyly, Jr., for travel by Sterling Software's
senior management in the course of Sterling Software's business. Sterling
Software is charged for the use of such aircraft at prevailing rates. For
travel during fiscal 1995, such charges totalled $474,475. Sterling Software
may lease such aircraft from time to time in fiscal 1996 at prevailing rates.

During fiscal 1995, Sterling L. Williams was indebted to Sterling Software
pursuant to the terms of a promissory note executed by Mr. Williams effective
January 1, 1992, which note bore interest at an annual rate of 4.69% and
matured on December 31, 2000. The largest amount of indebtedness outstanding
by Mr. Williams to Sterling Software since the beginning of fiscal 1995 was
$1,610,826. Mr. Williams repaid all outstanding principal and interest due
under this promissory note on June 9, 1995. In late fiscal 1995, Mr. Williams
received unsecured advances from Sterling Software totalling $110,000, which
were fully repaid by Mr. Williams in November 1995.

In fiscal 1995, Sterling Software made payments totalling $367,239 to
Intelecon Services, Inc. ("Intelecon") for providing audio and visual aids and
other related services at prevailing rates at customer conferences, trade
shows, user group meetings and other corporate meetings. Laurie and David
Matthews, the daughter and son-in-law, respectively, of Sam Wyly, jointly hold
41.5% of the outstanding stock of Intelecon. David Matthews is also an officer
and a director of Intelecon.

88
<PAGE>

STOCK PERFORMANCE CHART

The following chart compares the yearly percentage change in the cumulative
total stockholder return on the Software Stock during the five fiscal years
ended September 30, 1995 with the cumulative total return on the S&P 500 Index
and the S&P Computer Software and Services Index. The comparison assumes $100
was invested on September 30, 1990 in the Software Stock and in each of the
foregoing indices and assumes reinvestment of dividends.

[GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
TOTAL RETURN -- DATA SUMMARY
CUMULATIVE TOTAL RETURN
-----------------------------
9/90 9/91 9/92 9/93 9/94 9/95
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sterling Software................................ 100 257 293 417 539 791
S & P 500 Index.................................. 100 131 146 165 171 221
S & P Computer Software and Services Index....... 100 154 190 252 299 436
</TABLE>

89
<PAGE>

PENSION PLAN TABLE

Informatics Supplemental Executive Retirement Plan II ("SERP II"). In
connection with its acquisition of Informatics General Corporation in 1985,
Sterling Software retained the SERP II. As of December 31, 1995, Mr. Warner C.
Blow had accrued approximately twenty-one years of service under SERP II. None
of the other Software Named Executive Officers participates in SERP II. The
annual benefit payable upon retirement at age 65 or above under SERP II is
equal to the lesser of the following amounts: (i) 2% of the participant's
"final average pay," which is equal to the highest average of the
participant's base salary plus the participant's bonuses (up to a maximum
bonus amount not to exceed 50% of the participant's base salary) over three
consecutive years of service times the participant's years of service and (ii)
50% of the final average pay less the annuity equivalent of the participant's
account balance under the Sterling Software, Inc. Subsidiary Retirement Plan
as of June 30, 1987 and the annuity equivalent of the assumed Sterling
Software matching contribution under the 401(k) Plan thereafter (collectively,
the "annuity offset"). Benefits paid under SERP II are adjusted in the event
of disability or retirement prior to age 65. Benefits are also adjusted
annually, upward or downward, to the extent that the increase or decrease, if
any, in the Consumer Price Index for the preceding calendar year over the
Consumer Price Index for the next preceding calendar year exceeds 5%. Amounts
paid under SERP II are taxable as income. SERP II is not funded and benefits
are paid as they become due. In connection with the Offering, Commerce assumed
the obligations of Sterling Software under SERP II with respect to Mr. Blow.

The following table shows the estimated annual benefits payable upon
retirement at age 65 to the participants in SERP II for the indicated level of
three-year average annual compensation and various periods of service. The
amounts shown in the table may be subject to the annuity offset, the amount of
which depends on the pay history of the participant and the return on the
401(k) Plan.

<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$400,000........................... $120,000 $160,000 $200,000 $200,000 $200,000
500,000........................... 150,000 200,000 250,000 250,000 250,000
600,000........................... 180,000 240,000 300,000 300,000 300,000
700,000........................... 210,000 280,000 350,000 350,000 350,000
</TABLE>

SECTION 16 REQUIREMENTS

Section 16(a) of the Exchange Act requires Sterling Software's directors and
officers, and persons who own more than 10% of a registered class of Sterling
Software's equity securities, to file initial reports of ownership and reports
of changes in ownership with the Commission and the NYSE. Such persons are
required by Commission regulation to furnish Sterling Software with copies of
all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by Sterling
Software with respect to fiscal 1995, or written representations from certain
reporting persons, Sterling Software believes that all filing requirements
have been complied with, except as described below. Form 5 reports filed for
the fiscal year ended September 30, 1994 by executive officers and certain
directors of Sterling Software incorrectly reported share ownership held in
their plan accounts in the 401(k) Plan. Because of a change in plan
recordkeepers and administrators in 1994, a regular plan statement setting
forth shares held in plan accounts for such reporting persons was not
available at the time the Forms 5 were required to be filed. The reporting
persons relied, instead, on a Sterling Software--prepared report that resulted
in the underreporting of an aggregate of approximately 1,187 shares. The
executive officers whose Form 5 reports contained these inaccuracies are
Messrs. Blow, Connelly, Ellis, Frank, Hoover, Jenkins, Lott, Moore, Plumb,
Tolari, Williams, Sam Wyly and Charles J. Wyly, Jr. and Mmes. Hill, Meier, and
Vahala. The Form 3 reports for two other executive officers (Ms. Smith and Mr.
Konopik) overreported an aggregate of nine additional shares for the same
reason. The original Form 3 and Form 5 reports were corrected in Forms 5 filed
for the fiscal year ended September 30, 1995. Messrs. Sam Wyly and Charles J.
Wyly, Jr. each filed one report on Form 4 that incorrectly reported one stock
option grant, which

90
<PAGE>

reports were promptly corrected by filing amendments to such Forms.
Additionally, Robert E. Cook, a former director of Sterling Software, filed
one report on Form 4 that incorrectly reported his stock ownership due to an
improper elimination of fractional shares in connection with Sterling
Software's 1993 acquisition of Systems Center. Mr. Cook corrected this
discrepancy by filing an amendment to such Form 4.

INDEPENDENT AUDITORS

The Software Board has selected Ernst & Young LLP as independent auditors to
examine Sterling Software's accounts for the 1996 fiscal year. Representatives
of Ernst & Young LLP are expected to be present at the Meeting with the
opportunity to make a statement if they desire to do so and to be available to
respond to appropriate questions.

STOCKHOLDER PROPOSALS

It is anticipated that the 1997 Annual Meeting of Stockholders will be held
in January 1997, consistent with Sterling Software's historical practice.
Stockholders may submit proposals on matters appropriate for stockholder
action at subsequent annual meetings of Sterling Software consistent with Rule
14a-8 promulgated under the Exchange Act. For such proposals to be considered
for inclusion in the Proxy Statement and Proxy relating to the 1997 Annual
Meeting of Stockholders, such proposals must be received by Sterling Software
not later than September 29, 1996. Such proposals should be directed to
Sterling Software, Inc., Suite 1100, 8080 North Central Expressway, Dallas,
Texas 75206, Attention: Secretary.

OTHER MATTERS

The Software Board knows of no other matters other than those described
herein that will be presented for consideration at the Meeting. However,
should any other matters properly come before the Meeting or any adjournment
thereof, it is the intention of the persons named in the accompanying Proxy to
vote in accordance with their best judgment in the interest of Sterling
Software.

MISCELLANEOUS

All costs incurred in the solicitation of Proxies will be borne by Sterling
Software. In addition to the solicitation by mail, officers and employees of
Sterling Software may solicit Proxies by telephone, telegraph or personally,
without additional compensation. Sterling Software may also make arrangements
with brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of shares of
Software Stock held of record by such persons, and Sterling Software may
reimburse such brokerage houses and other custodians, nominees and fiduciaries
for their out-of-pocket expenses incurred in connection therewith. In
addition, Georgeson & Company has been retained by Sterling Software to aid in
the solicitation of Proxies and will solicit Proxies by mail, telephone,
telegraph and personal interview and may request brokerage houses and nominees
to forward soliciting material to beneficial owners of Software Stock. For
these services, Georgeson & Company will be paid fees not to exceed $12,500
plus expenses.

The Software Form 10-K, which includes financial statements, accompanies
this Proxy Statement.

ADDITIONAL COPIES OF THE SOFTWARE FORM 10-K, INCLUDING FINANCIAL STATEMENTS
AND SCHEDULES, BUT NOT INCLUDING EXHIBITS, WILL BE FURNISHED AT NO CHARGE TO
EACH PERSON TO WHOM A PROXY STATEMENT IS DELIVERED UPON RECEIPT OF A WRITTEN
OR ORAL REQUEST OF SUCH PERSON ADDRESSED TO STERLING SOFTWARE, INC., ATTN:
INVESTOR RELATIONS, 8080 NORTH CENTRAL EXPRESSWAY, SUITE 1100, DALLAS, TEXAS
75206 (TELEPHONE: (214) 891-8600).

91
<PAGE>

AVAILABLE INFORMATION

Both Sterling Software and Commerce are subject to the informational
requirements of the Exchange Act and the rules and regulations promulgated
thereunder and in accordance therewith file reports, proxy statements and
other information with the Commission. Reports, proxy statements and other
information filed by Sterling Software or Commerce may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of
the Commission at Seven World Trade Center, Suite 1300, New York, New York
10048 and in the Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such information may be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.

FORWARD-LOOKING INFORMATION

This Proxy Statement (including the Software Form 10-K and the other
documents incorporated by reference herein) contains certain forward-looking
statements and information relating to Sterling Software and Commerce that are
based on the beliefs of Sterling Software's management as well as assumptions
made by and information currently available to Sterling Software's management.
When used in this Proxy Statement, the words "anticipate," "believe,"
"estimate," "expect," "intend" and similar expressions, as they relate to
Sterling Software, Commerce or Sterling Software's management, identify
forward-looking statements. Such statements reflect the current views of
Sterling Software with respect to future events and are subject to certain
risks, uncertainties and assumptions, relating to the operations and results
of operations of Sterling Software and Commerce following the Distribution,
competitive factors and pricing pressures, shifts in market demand, the
performance and needs of the industries served by Sterling Software and
Commerce, the costs of product development, general economic conditions and
acts by third parties, as well as the other factors described in this Proxy
Statement, including the factors described under the caption "Certain
Considerations." Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
or outcomes may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

Sterling Software hereby incorporates by reference into this Proxy Statement
(i) Sterling Software's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995, as amended by Sterling Software's Form 10-K/A filed
January 29, 1996, (ii) Sterling Software's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1995 and (iii) Sterling Software's
Current Reports on Form 8-K dated March 7, 1996, January 4, 1996 and
December 20, 1995.

All documents subsequently filed by Sterling Software pursuant to Section
13(a), 13(e), 14 or 15(d) of the Exchange Act, prior to the date of the
Meeting, shall be deemed incorporated by reference in this Proxy Statement and
to be a part of this Proxy Statement from the date of the filing of such
reports.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement, to the extent that a statement contained
herein or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.

Any person receiving a copy of this Proxy Statement may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the exhibits expressly incorporated in such documents by
reference). Requests should be directed to: Sterling Software, Inc., 8080 N.
Central Expressway, Suite 1100, Dallas, Texas 75206, Attention: Jeannette P.
Meier, Executive Vice President, Secretary and General Counsel (telephone:
(214) 891-8600).

92
<PAGE>

STERLING COMMERCE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1994 AND SUBSEQUENT TO
SEPTEMBER 30, 1995 IS UNAUDITED)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1994, September 30, 1995
and December 31, 1995................................................... F-3
Consolidated Statements of Operations for the Years Ended September 30,
1993, 1994 and 1995 and the three months ended December 31, 1994 and
1995.................................................................... F-4
Consolidated Statements of Equity for the Years Ended September 30, 1993,
1994 and 1995 and the three months ended December 31, 1995.............. F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1993, 1994 and 1995 and the three months ended December 31, 1994 and
1995.................................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Sterling Commerce, Inc.

We have audited the accompanying consolidated balance sheets of Sterling
Commerce, Inc. (a wholly owned subsidiary of Sterling Software, Inc.) and
subsidiaries as of September 30, 1994 and 1995, and the related consolidated
statements of operations, equity and cash flows for each of the three years in
the period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Commerce, Inc. and subsidiaries at September 30, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.

Ernst & Young LLP

Dallas, Texas
March 4, 1996

F-2
<PAGE>

STERLING COMMERCE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, 1995
----------------- 1995 (UNAUDITED)
1994 1995 (UNAUDITED) (PRO FORMA)
-------- -------- ------------ ------------
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................ $ 379 $ 395 $ 3,527 $ 3,527
Accounts and notes receivable,
net (Note 7)................... 33,642 49,155 48,758 48,758
Deferred income taxes benefit
(Note 10)...................... 3,726 3,463 2,669 2,669
Prepaid expenses and other
current assets................. 2,412 3,041 4,503 4,503
-------- -------- -------- --------
Total current assets.......... 40,159 56,054 59,457 59,457
Property and equipment, net (Note
8)............................... 17,047 25,838 29,941 29,941
Computer software, net of
accumulated amortization of
$24,974 in 1994 and $34,112 in
1995 (Note 1).................... 27,208 32,263 32,890 32,890
Excess cost over net assets
acquired, net of accumulated
amortization of $2,661 in 1994
and $3,087 in 1995............... 10,685 10,259 10,152 10,152
Other assets (Note 7)............. 5,539 4,564 5,106 5,106
-------- -------- -------- --------
$100,638 $128,978 $137,546 $137,546
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued
liabilities (Note 9)........... $ 15,213 $ 21,442 $ 21,969 $ 21,969
Deferred revenue................ 22,748 30,920 31,127 31,127
-------- -------- -------- --------
Total current liabilities..... 37,961 52,362 53,096 53,096
Deferred income taxes (Note 10)... 13,475 17,749 17,876 17,876
Other noncurrent liabilities...... 6,151 5,680 6,972 6,972
Contingencies and commitments
(Notes 11 and 13)
Stockholders' equity:
Preferred stock $.01 par value,
50,000,000 shares authorized...
Common stock $.01 par value,
150,000,000 shares authorized;
73,200,000 shares issued and
outstanding.................... 732
Additional paid-in capital...... 58,870
Stockholder's net investment.... 43,051 53,187 59,602
-------- -------- -------- --------
Total stockholders' equity.... 43,051 53,187 59,602 59,602
-------- -------- -------- --------
$100,638 $128,978 $137,546 $137,546
======== ======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

STERLING COMMERCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30 ENDED DECEMBER 31
-------------------------- ------------------
1993 1994 1995 1994 1995
------- ------- ---------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Products...................... $43,509 $56,291 $ 71,603 $15,319 $ 17,403
Product support............... 29,875 37,953 46,190 10,466 13,477
Services...................... 39,523 53,246 74,063 17,037 21,787
Royalties from affiliated
companies.................... 4,906 8,426 11,722 2,274 3,483
------- ------- ---------- ------- ----------
117,813 155,916 203,578 45,096 56,150
Costs and expenses:
Cost of sales:
Products and product
support.................... 15,884 24,000 25,879 5,855 7,221
Services.................... 11,673 12,282 15,671 3,737 4,695
------- ------- ---------- ------- ----------
27,557 36,282 41,550 9,592 11,916
Product development and
enhancement.................. 6,478 12,497 14,807 3,599 3,288
Selling, general and
administrative............... 54,777 60,732 75,193 17,303 20,255
Restructuring charges (Note
5)........................... 3,638
------- ------- ---------- ------- ----------
92,450 109,511 131,550 30,494 35,459
------- ------- ---------- ------- ----------
Income before other expense and
income taxes................... 25,363 46,405 72,028 14,602 20,691
Other expense................... 40 150 478 59 210
------- ------- ---------- ------- ----------
Income before income taxes...... 25,323 46,255 71,550 14,543 20,481
Provision for income taxes (Note
10)............................ 10,129 18,502 28,620 5,817 8,192
------- ------- ---------- ------- ----------
Net income...................... $15,194 $27,753 $ 42,930 $ 8,726 $ 12,289
======= ======= ========== ======= ==========
Pro forma earnings per common
share data:
Earnings per common share..... $ 0.59 $ 0.17
========== ==========
Average common shares
outstanding.................. 73,200,000 73,200,000
========== ==========
</TABLE>

See accompanying notes.

F-4
<PAGE>

STERLING COMMERCE, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
- ------------------------
<S> <C>
Balance at October 1, 1992............................................ $ 38,650
Net income............................................................ 15,194
Net cash distributed to Sterling Software............................. (15,810)
Other................................................................. (536)
--------
Balance at September 30, 1993......................................... 37,498
Net income............................................................ 27,753
Net cash distributed to Sterling Software............................. (22,534)
Other................................................................. 334
--------
Balance at September 30, 1994......................................... 43,051
Net income............................................................ 42,930
Net cash distributed to Sterling Software............................. (32,354)
Other................................................................. (440)
--------
Balance at September 30, 1995......................................... $ 53,187
========
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 (UNAUDITED)
- ------------------------------------------
<S> <C>
Balance at September 30, 1995......................................... $ 53,187
Net income............................................................ 12,289
Net cash distributed to Sterling Software............................. (6,189)
Other................................................................. 315
--------
Balance at December 31, 1995.......................................... $ 59,602
========
</TABLE>

See accompanying notes.

F-5
<PAGE>

STERLING COMMERCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30 DECEMBER 31
---------------------------- --------------------
1993 1994 1995 1994 1995
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income................ $15,194 $ 27,753 $ 42,930 $ 8,726 $ 12,289
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 10,181 14,497 17,517 3,749 4,887
Provision for losses on
accounts receivable.... 1,296 1,883 (466) 200 153
Provision for deferred
income taxes........... 2,538 (478) 4,537 1,143 921
Changes in operating
assets and liabilities,
net of effects of
business acquisitions:
Increase in accounts
and notes
receivable........... (3,950) (10,392) (17,474) (1,637) (137)
Decrease (increase) in
prepaid expenses and
other assets......... 1,357 (632) (989) (615) (2,202)
Increase in accounts
payable and accrued
liabilities.......... 4,907 2,110 5,154 183 279
Increase in deferred
revenue.............. 3,104 4,350 7,677 1,038 221
Other................. (531) 2,658 (588) (263) 123
-------- -------- -------- --------- ---------
Net cash provided by
operating
activities......... 34,096 41,749 58,298 12,524 16,534
Investing activities:
Purchases of property
and equipment.......... (6,038) (10,346) (15,633) (2,535) (4,597)
Purchases and
capitalized cost of
development of computer
software............... (12,717) (9,624) (10,244) (2,183) (2,935)
Business acquisitions,
net of cash acquired... (2,823) (185)
Other................... (109) (215) 192 192
-------- -------- -------- --------- ---------
Net cash used in
investing
activities......... (18,864) (20,185) (28,508) (4,526) (7,717)
Financing activities:
Proceeds from the sale
of lease and
installment
receivables............ 334 1,410 3,166 556 245
Other................... 358 (521) (586) (965) 259
-------- -------- -------- --------- ---------
Net cash used in
financing
activities......... 692 889 2,580 (409) 504
Net cash distributed to
Sterling Software........ (15,810) (22,534) (32,354) (7,698) (6,189)
-------- -------- -------- --------- ---------
Increase (decrease) in
cash..................... 114 (81) 16 (109) 3,132
-------- -------- -------- --------- ---------
Cash at beginning of
year..................... 346 460 379 379 395
-------- -------- -------- --------- ---------
Cash and cash equivalents
at end of year........... $ 460 $ 379 $ 395 $ 270 $ 3,527
======== ======== ======== ========= =========
</TABLE>

See accompanying notes.

F-6
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Sterling Software, Inc. ("Sterling Software") organized Sterling Commerce,
Inc. (the "Company") as a wholly owned subsidiary in December 1995.
Thereafter, in contemplation of initial public offerings (the "Offerings") by
Sterling Software and the Company of shares of common stock of the Company
("Common Stock"), Sterling Software caused to be transferred to or merged into
the Company the direct and indirect subsidiaries through which Sterling
Software has historically conducted its electronic commerce business. Upon the
completion of the Offerings, Sterling Software will own approximately 84% of
the outstanding shares of Common Stock (or approximately 81.6% if certain
options granted to underwriters in connection with the Offerings are exercised
in full). The unaudited pro forma balance sheet reflects the formation of the
Company through the foregoing transactions.

Sterling Software has announced that, following the completion of the
Offerings, Sterling Software intends to distribute pro rata to its
stockholders as a dividend its remaining shares of Common Stock by means of a
tax-free distribution. The distribution will be subject to certain conditions,
including approval by Sterling Software's stockholders of both the
distribution and a new Sterling Software stock option plan and the declaration
by Sterling Software's Board of Directors of a dividend of the shares of
Common Stock then owned by Sterling Software. Sterling Software has advised
the Company that such declaration will be conditioned upon the receipt of a
favorable ruling from the IRS as to the tax-free nature of the distribution
and the absence of any change in market conditions or other circumstances that
would cause the Board of Directors of Sterling Software to conclude that the
distribution is not in the best interests of the stockholders of Sterling
Software. Sterling Software has advised the Company that it presently
anticipates that the distribution will occur prior to September 30, 1996.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Consolidated Financial Statements have been prepared using Sterling
Software's historical basis in the assets and liabilities of its Electronic
Commerce Group, including goodwill and other intangible assets recognized by
Sterling Software in the original acquisition of certain businesses conducted
by the Company. All significant intercompany accounts among the Company and
its consolidated subsidiaries have been eliminated.

The Consolidated Financial Statements reflect the results of operations,
financial condition and cash flows of the Company as a component of Sterling
Software and may not be indicative of actual results of operations and
financial position of the Company under other ownership. Management believes
that the consolidated income statements include a reasonable allocation of the
incremental administrative costs previously incurred by Sterling Software,
including executive compensation and the related costs of a corporate staff
function. The allocations of such costs were approximately $3,500,000 in each
of 1993, 1994 and 1995 and $875,000 in each of the three month periods ended
December 31, 1994 and 1995 and represent management's estimate of the costs
that would have been incurred had the Company operated independently of
Sterling Software. Management does not anticipate that such costs in the
immediate future will be significantly different than the historical costs.

The consolidated financial information for the three months ended December
31, 1994 and 1995 contained herein is unaudited but, in the opinion of
management, reflects 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
three month periods presented herein are not necessarily indicative of results
of operations for the entire year.

Sterling Software's international operations will act as a distributor of
the Company's products outside the United States and Canada for the
foreseeable future and will pay a royalty to the Company. Management believes
that the royalties as reflected herein have been determined in accordance with
royalties payable in other comparable uncontrolled transactions.

F-7
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Revenue

Revenue from license fees, including leasing transactions, for standard
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.
Network services revenue earned but not invoiced at the end of a month is
recognized as revenue in such month and recorded as unbilled accounts
receivable until invoiced in the following month.

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.

Software Development Costs

The Company capitalizes the costs of developing and testing new or
significantly enhanced software products in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." Unamortized
software development costs of $24,928,000 and $27,555,000 are included in
"Computer software, net" at September 30, 1994 and 1995, respectively.
Pursuant to FAS No. 86, costs are capitalized upon the establishment of
technological feasibility of the product. Technological feasibility is
established either upon the completion of a detailed program design or the
completion of a working model. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software
development costs require judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Software development capitalized costs include, among other things,
programmers' salaries and benefits, outside contractor costs, computer time
and allocated facilities costs.

Depreciation and Amortization

Property and equipment are recorded at cost and depreciated using the
straight-line method over average useful lives of three to fifteen years.
Computer software costs are amortized on a product-by-product basis using the
greater of the amount computed by taking the ratio of current year net revenue
to estimated future net revenue or the amount computed by the straight-line
method over periods ranging from three to five years. Leasehold improvements
are amortized over the term of the lease. Excess costs over the net assets of
businesses acquired are amortized on a straight-line basis over periods of ten
to forty years. Other intangible assets are amortized on a straight-line basis
over periods of three to ten years.

F-8
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Depreciation and amortization consists of the following for the years ended
September 30, 1993, 1994 and 1995 (in thousands):

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Property and equipment............................. $ 3,184 $ 4,579 $ 7,084
Purchased computer software........................ 1,822 1,385 1,405
Capitalized computer software development costs.... 3,919 7,353 7,772
Excess costs over net assets of businesses ac-
quired............................................ 438 407 426
Intangible assets.................................. 818 773 830
------- ------- -------
$10,181 $14,497 $17,517
======= ======= =======
</TABLE>

Income Taxes

The Company has entered into a tax sharing agreement with Sterling Software
covering the period of time the Company will be included in Sterling
Software's consolidated tax returns. The Company's operations have
historically been included in consolidated income tax returns filed by
Sterling Software. Income tax expense in the accompanying financial statements
has been computed assuming the Company filed separate income tax returns.
Deferred taxes result primarily from the use of accelerated depreciation for
tax purposes, expensing of development costs and the timing of deductions for
expenses under certain employee benefit plans and accrued expenses.

Earnings Per Share

The earnings per share calculation is based on shares outstanding after the
organization of the Company and before the Offerings. The shares have been
reflected as outstanding for all years presented.

3. TRANSACTIONS WITH AFFILIATED COMPANIES

Amounts payable and receivable from Sterling Software arise as a result of
various transactions between the Company and Sterling Software, including the
Company's participation in Sterling Software's central cash management
program, royalties paid to the Company as a result of Sterling Software acting
as an international distributor, tax expense charged to the Company and other
expenses incurred on behalf of the Company as described below. At the end of
each year, net available cash flow after consideration of the charges as
described above, is distributed to Sterling Software.

Certain costs and expenses (other than the expense allocations discussed in
Note 2) are initially incurred by Sterling Software on behalf of the Company,
and charged to the Company. An analysis of significant items follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Summary of Expenses:
Legal, accounting and professional fees......... $ 846 $1,376 $ 600
Payroll related................................. 276 739 1,403
Occupancy....................................... 599 694 661
Miscellaneous................................... 204 349 374
------- ------- -------
$ 1,925 $ 3,158 $ 3,038
======= ======= =======
</TABLE>

The international operations of Sterling Software act as a distributor of
certain of the Company's products.

F-9
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. BUSINESS COMBINATIONS

In July 1993, Sterling Software acquired all of the outstanding common stock
and preferred stock of Systems Center, Inc. ("Systems Center"), a recognized
leader in data communications and systems management software, for
approximately $156 million in a stock-for-stock acquisition (the "SCI Merger")
accounted for as a pooling of interests. Certain businesses formerly conducted
by Systems Center are included in the results of operations of the Company.
The Company's financial statements for periods prior to the SCI Merger
represent the combined financial statements of the previously separate
entities adjusted to conform Systems Center's fiscal years and accounting
policies to those used by the Company.

In August 1994, Sterling Software acquired all of the outstanding common
stock of American Business Computer Company ("ABC"), a Michigan corporation
based near Detroit, Michigan, which developed, marketed and supported UNIX-
based electronic data interchange products, including products that provide
sophisticated electronic commerce gateway functionality, in a stock-for-stock
acquisition (the "ABC Merger") accounted for as a pooling of interests. The
business formerly conducted by ABC is included in the results of operations of
Sterling Commerce, Inc. The Company's financial statements for periods prior
to the ABC Merger represent the combined financial statements of the
previously separate entities adjusted to conform ABC's fiscal years and
accounting policies to those used by the Company.

In March 1995, Sterling Software acquired for cash all of the outstanding
common stock of MAXXUS, Inc. ("MAXXUS"), a San Francisco-based leading
provider of Financial Electronic Data Interchange software. MAXXUS's business
is included in the results of operations of the Company from the date of
acquisition.

5. RESTRUCTURING CHARGE

The Company recorded a restructuring charge of approximately $3,638,000
during 1993. The restructuring charge reflects the cost of combining certain
businesses of Sterling Software and Systems Center, including charges relating
to the elimination of duplicate facilities and equipment, severance costs and
the write-off of costs related to certain software products not actively
marketed by the Company.

6. LEGAL PROCEEDINGS AND CLAIMS

The Company is subject to certain legal proceedings and claims which arise
in the conduct of its business. In the opinion of management, the amount of
any liability with respect to these actions will not have a material effect on
the financial condition or results of operations of the Company.

7. ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable consist of the following at September 30 (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Trade..................................................... $26,794 $39,851
Unbilled.................................................. 7,692 9,490
Other..................................................... 1,986 1,814
------- -------
36,472 51,155
Less: Allowance for doubtful accounts..................... 2,830 2,000
------- -------
$33,642 $49,155
======= =======
</TABLE>

At September 30, 1994 and 1995, accounts receivable include $1,154,000 and
$1,290,000, respectively, due under contracts with the federal government and
related agencies. The remainder of the Company's receivables are due
principally from corporations in diverse industries located in the United
States and Canada.

F-10
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at September 30 (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Computer and peripheral equipment......................... $23,700 $36,634
Furniture, fixtures and other equipment................... 3,989 5,016
Building and improvements................................. 2,072 3,131
------- -------
29,761 44,781
Less accumulated depreciation............................. 12,714 18,943
------- -------
$17,047 $25,838
======= =======
</TABLE>

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following at
September 30 (in thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Trade accounts payable.................................... $ 5,178 $ 7,204
Accrued compensation...................................... 7,906 11,113
Other accrued liabilities................................. 2,129 3,125
------- -------
$15,213 $21,442
======= =======
</TABLE>

10. INCOME TAXES

The provision for income taxes is composed of the following (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal...................................... $ 6,642 $ 16,608 $ 21,073
State........................................ 949 2,372 3,010
Deferred:
Federal...................................... 2,221 (418) 3,970
State........................................ 317 (60) 567
-------- -------- --------
$ 10,129 $ 18,502 $ 28,620
======== ======== ========
</TABLE>

The effective income tax rate on income before taxes differed from the
federal income tax statutory rate for the following reasons (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
--------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Tax expense at U.S. federal statutory rate.... $ 8,863 $ 16,189 $ 25,043
State income taxes, net of federal benefit.... 1,266 2,313 3,577
-------- -------- --------
$ 10,129 $ 18,502 $ 28,620
======== ======== ========
</TABLE>

F-11
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax asset as of September 30 are as follows (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred income tax assets:
Deferred revenue......................................... $ 1,254 $ 843
Reserves and restructuring accruals...................... 2,472 2,620
------- -------
Deferred income tax assets............................. 3,726 3,463
------- -------
Deferred income tax liabilities:
Capitalized software costs............................... 11,240 11,361
Depreciation and amortization............................ 2,235 6,388
------- -------
Deferred income tax liabilities........................ 13,475 17,749
------- -------
Deferred income tax liability net of deferred income
tax assets............................................ $ 9,749 $14,286
======= =======
</TABLE>

11. COMMITMENTS

The Company leases certain facilities and equipment under operating leases.
Total rent expense for the years ended September 30, 1993, 1994 and 1995 was
$4,684,000, $6,071,000 and $7,537,000, respectively. At September 30, 1995,
minimum future rental payments due under all operating leases, net of future
sublease income, are as follows (in thousands):

<TABLE>
<S> <C>
1996............................................................ $ 7,562
1997............................................................ 6,820
1998............................................................ 5,990
1999............................................................ 4,857
2000............................................................ 2,289
Thereafter...................................................... 11,333
-------
$38,851
=======
</TABLE>

It is anticipated that a subsidiary of the Company will pay to its executive
officers annualized salaries and cash bonuses aggregating approximately
$4,700,000 in respect of their services to the Company and its subsidiaries
during 1996. The Company has also entered into change-in-control agreements
with each of its executive officers which provide for payments based on the
individual's respective salary, bonus and cash incentive compensation and the
continuation of certain benefits if there has been a change of control (as
defined) of the Company and the employment of the executive officer has been
terminated. Based upon annualized salary, bonus, incentive cash compensation
and benefit levels expected to be in effect upon the completion of the
Offerings, the aggregate potential cash cost of the Company's obligations
under these agreements is estimated to be up to approximately $14,800,000.

In addition, the Company has entered into agreements with each of its
executive officers which provide for the continued compensation of such
executive officer in the event that the employment of the executive officer is
terminated. Each such agreement requires the Company to continue to pay the
executive officer, upon his or her termination of employment by the Company,
for a specified number of months the salary, bonus and certain benefits in
effect prior to the termination of his or her employment (or, in the case of
Mr. Williams, the conversion of his agreement into a five-year consulting
agreement entitling Mr. Williams to continue to receive compensation and
benefits). In the event of a termination of employment following a change in
control (as

F-12
<PAGE>

STERLING COMMERCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
defined) of the Company, at the executive officer's option, the terms of his
or her change-in-control agreement will govern such termination (or, in the
case of Mr. Williams in certain circumstances, his consulting agreement will
terminate and all amounts payable during the remaining term thereof will
become immediately due and payable). Based upon salary, bonus and benefit
levels expected to be in effect upon the completion of the Offerings, the
aggregate potential cash cost of the Company's obligations under these
agreements is estimated to be up to approximately $12,900,000.

12. STOCK OPTIONS

The Company has a stock option plan for the granting of options to certain
of the Company's officers, directors, employees, advisors, consultants and
non-employee directors. The total number of shares of Common Stock available
for issuance under the option plan initially will be 15,000,000.

13. POSTRETIREMENT BENEFITS

The Company participated in Sterling Software's plan that provides
retirement benefits under the provisions of Section 401(k) of the Internal
Revenue Code for all domestic employees who have completed a specified term of
service. Pursuant to this plan, eligible participants may elect to contribute
a percentage of their annual gross compensation and the Company will
contribute additional amounts, as provided by the plan. Benefits under the
plan are limited to the assets of the plan. Company contributions charged to
expense during 1993, 1994 and 1995 were $423,000, $861,000 and $930,000,
respectively. A portion of the Company contributions are invested in Sterling
Software's Common Stock. During 1993, 1994 and 1995, the Company's
contributions included 7,368, 12,088 and 7,807 shares of Sterling Software
Common Stock, respectively. Of the 1995 contribution, 2,789 shares of Sterling
Software Common Stock were transferred to the plan in October 1995.

The Company does not provide other significant postemployment benefits.

14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

The Company's consolidated operating results for each quarter of 1994 and
1995 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1994:
Revenue.......................... $34,393 $36,778 $39,171 $45,574
Cost of sales.................... 8,704 8,359 8,907 10,312
Product development and enhance-
ment............................ 2,470 3,594 3,045 3,388
Selling, general and administra-
tive............................ 15,218 14,168 15,270 16,076
Income before other expense and
income
taxes........................... 8,001 10,657 11,949 15,798
Net income....................... 4,772 6,375 7,139 9,467
Year ended September 30, 1995:
Revenue.......................... $45,096 $46,275 $51,637 $60,570
Cost of sales.................... 9,592 9,648 10,233 12,077
Product development and enhance-
ment............................ 3,599 4,032 3,706 3,470
Selling, general and administra-
tive............................ 17,303 16,535 19,284 22,071
Income before other expense and
income
taxes........................... 14,602 16,060 18,414 22,952
Net income....................... 8,726 9,568 10,946 13,690
</TABLE>

F-13
<PAGE>

ANNEX I

STERLING SOFTWARE, INC.
1996 STOCK OPTION PLAN

Sterling Software, Inc., a Delaware corporation (the "Company"), hereby
establishes the Sterling Software, Inc. 1996 Stock Option Plan (the "Plan"),
effective as of April 22, 1996.

1. Purpose. The purpose of the Plan is to attract and retain the best
available talent and encourage the highest level of performance by executive
officers, key employees, directors, advisors and consultants, and to provide
them with incentives to put forth maximum efforts for the success of the
Company's business, in order to serve the best interests of the Company and
its shareholders. All options granted under the Plan are intended to be
nonstatutory stock options.

2. Definitions. The following terms, when used in the Plan with initial
capital letters, will have the following meanings:

(a) "Act" means the Securities Exchange Act of 1934 as in effect from
time to time.

(b) "Board" means the Board of Directors of the Company.

(d) "Common Stock" means the common stock, par value $.10 per share, of
the Company or any security into which such common stock may be changed by
reason of any transaction or event of the type described in Paragraph 9.

(e) "Date of Grant" means (i) with respect to Participants, the date
specified by the Stock Option Committee or the Special Stock Option
Committee, as applicable, on which a grant of Stock Options will become
effective (which date will not be earlier than the date on which such
committee takes action with respect thereto) and (ii) with respect to
Nonemployee Directors, the applicable date specified in Paragraph 7.

(f) "Market Value per Share" means (i) the fair market value per share of
the Common Stock on the Date of Grant as determined by the Stock Option
Committee or the Special Stock Option Committee, as applicable, with
respect to Stock Options granted to Participants, and (ii) with respect to
Stock Options granted to Nonemployee Directors pursuant to Paragraph 7, the
average of the high and low closing sale prices as reported on any national
securities exchange on which the Common Stock is listed on the Date of
Grant if such date is a trading day and, if such date is not a trading day,
on the immediately preceding date which is a trading day.

(g) "Nonemployee Director" means a member of the Board who is not an
employee of the Company or any Subsidiary, who qualifies as a
"disinterested person" within the meaning of Rule 16b-3 and who is a member
of the Special Stock Option Committee.

(h) "Option Price" means the purchase price per share payable on exercise
of a Stock Option.

(i) "Participant" means a person who is selected by the Stock Option
Committee or the Special Stock Option Committee, as applicable, to receive
Stock Options under Paragraph 5 or Paragraph 6 of the Plan and who is at
that time (i) an executive officer or other key employee of the Company or
any Subsidiary, (ii) an advisor or consultant to the Company or any
Subsidiary, or (iii) a member of the Board other than a Nonemployee
Director.

(j) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act, as such
Rule is in effect from time to time.

(k) "Special Stock Option Committee" means the 1996 Special Stock Option
Committee, which is a committee of the Board whose members are appointed by
the Board from time to time. All of the members of the Special Stock Option
Committee at all times will qualify as "outside directors" within the
meaning of Section 162(m) of the Code, and at least two of the members of
the Special Stock Option Committee at all times will qualify as
"disinterested persons" within the meaning of Rule 16b-3.

I-1
<PAGE>

(l) "Stock Option" means the right to purchase a share of Common Stock
upon exercise of an option granted pursuant to Paragraph 5, Paragraph 6 or
Paragraph 7.

(m) "Stock Option Committee" means the 1996 Stock Option Committee
appointed by the Board.

(n) "Subsidiary" means any corporation, partnership, joint venture or
other entity in which the Company owns or controls, directly or indirectly,
not less than 50% of the total combined voting power or equity interests
represented by all classes of stock issued by such corporation,
partnership, joint venture or other entity.

3. Shares Available Under Plan. The shares of Common Stock which may be
issued under the Plan will not exceed in the aggregate 7,750,000 shares,
subject to adjustment as provided in this Paragraph 3. Such shares may be
shares of original issuance or treasury shares or a combination of the
foregoing.

(a) Any shares of Common Stock which are subject to Stock Options that
are terminated, unexercised, forfeited or surrendered or that expire for
any reason will again be available for issuance under the Plan.

(b) If, as of the close of business on the last day of each fiscal
quarter of the Company following the effective date of the Plan, the sum of
(i) the total number of shares of Common Stock previously issued upon the
exercise of Stock Options, (ii) the total number of shares of Common Stock
then subject to outstanding Stock Options, and (iii) the total number of
shares of Common Stock then remaining available for future Stock Option
grants under the Plan (such sum being the "Plan Shares") is less than 20%
of the total number of shares of Common Stock then outstanding computed on
a fully diluted basis (such total number being the "Outstanding Shares"),
the number of shares of Common Stock available for issuance under the Plan
will be increased (but not decreased) so that the number of Plan Shares
will be equal to 20% of the number of Outstanding Shares. For purposes of
the foregoing adjustment, all outstanding Stock Options will be treated as
fully exercised in computing the number of outstanding shares of Common
Stock on a fully diluted basis, without regard to whether the Stock Options
are then fully exercisable.

4. Individual Limitation on Stock Options. The maximum aggregate number of
shares of Common Stock with respect to which Stock Options may be granted to
any Participant during the term of the Plan will not exceed 5,425,000 shares.

5. Stock Options for Participants--Nonexempt Grants. The Stock Option
Committee or the Special Stock Option Committee may from time to time
authorize grants to any Participant of options to purchase shares of Common
Stock upon such terms and conditions as such committee may determine in
accordance with the provisions set forth below. Grants made by the Stock
Option Committee or the Special Stock Option Committee pursuant to this
Paragraph 5 are not intended to comply with or otherwise satisfy the
requirements of Rule 16b-3.

(a) Each grant will specify the number of shares of Common Stock to which
it pertains.

(b) Each grant will specify the Option Price, which will not be less than
100% of the Market Value per Share on the Date of Grant.

(c) Each grant will specify whether the Option Price will be payable (i)
in cash or by check acceptable to the Company, (ii) by the transfer to the
Company of shares of Common Stock owned by the Participant for at least six
months (or, with the consent of the Stock Option Committee or the Special
Stock Option Committee, as applicable, for less than six months) having an
aggregate fair market value per share at the date of exercise equal to the
aggregate Option Price, (iii) with the consent of the Stock Option
Committee or the Special Stock Option Committee, as applicable, by
authorizing the Company to withhold a number of shares of Common Stock
otherwise issuable to the Participant having an aggregate fair market value
per share on the date of exercise equal to the aggregate Option Price or
(iv) by a combination of such methods of payment; provided, however, that
the payment methods described in clauses (ii) and (iii) will not be
available at any time that the Company is prohibited from purchasing or
acquiring such shares of Common Stock. Any grant may provide for deferred
payment of the Option Price from the proceeds of sale through a bank or
broker of some or all of the shares to which such exercise relates.

I-2
<PAGE>

(d) Successive grants may be made to the same Participant whether or not
any Stock Options previously granted to such Participant remain
unexercised.

(e) Each grant will specify the required period or periods (if any) of
continuous service by the Participant with the Company or any Subsidiary
and/or any other conditions to be satisfied before the Stock Options or
installments thereof will become exercisable, and any grant may provide, or
may be amended to provide, for the earlier exercise of the Stock Options in
the event of a change in control of the Company (as defined in the stock
option agreement evidencing such grant or in any agreement referred to in
such stock option agreement) or in the event of any other similar
transaction or event.

(f) Each Stock Option granted pursuant to this Paragraph 5 will be
subject to the transfer restrictions set forth in Paragraph 8.

(g) Each grant will be evidenced by a stock option agreement executed on
behalf of the Company by the Chief Executive Officer (or another officer
designated by the Stock Option Committee or the Special Stock Option
Committee, as applicable) and delivered to the Participant and containing
such further terms and provisions, consistent with the Plan, as such
committee may approve.

6. Stock Options for Participants--Exempt Grants. The Special Stock Option
Committee may from time to time authorize grants to any Participant of options
to purchase shares of Common Stock upon such terms and conditions as it may
determine in accordance with the provisions set forth below. Grants made by
the Special Stock Option Committee pursuant to this Paragraph 6 are intended
to comply with and otherwise satisfy the requirements of Rule 16b-3.

(a) Each grant will specify the number of shares of Common Stock to which
it pertains.

(b) Each grant will specify the Option Price, which will not be less than
100% of the Market Value per Share on the Date of Grant.

(c) Each grant will specify whether the Option Price will be payable (i)
in cash or by check acceptable to the Company, (ii) by the transfer to the
Company of shares of Common Stock owned by the Participant for at least six
months (or, with the consent of the Special Stock Option Committee, for
less than six months) having an aggregate fair market value per share at
the date of exercise equal to the aggregate Option Price, (iii) with the
consent of the Special Stock Option Committee, by authorizing the Company
to withhold a number of shares of Common Stock otherwise issuable to the
Participant having an aggregate fair market value per share on the date of
exercise equal to the aggregate Option Price or (iv) by a combination of
such methods of payment; provided, however, that the payment methods
described in clauses (ii) and (iii) will not be available at any time that
the Company is prohibited from purchasing or acquiring such shares of
Common Stock. Any grant may provide for deferred payment of the Option
Price from the proceeds of sale through a bank or broker of some or all of
the shares to which such exercise relates.

(d) Successive grants may be made to the same Participant whether or not
any Stock Options previously granted to such Participant remain
unexercised.

(f) Each Stock Option granted pursuant to this Paragraph 6 will be
subject to the transfer restrictions set forth in Paragraph 8.

(g) Each grant will be evidenced by a stock option agreement executed on
behalf of the Company by the Chief Executive Officer (or another officer
designated by the Special Stock Option Committee) and delivered to the
Participant and containing such further terms and provisions, consistent
with the Plan, as the Special Stock Option Committee may approve.

I-3
<PAGE>

7. Stock Options for Nonemployee Directors. Each Nonemployee Director will
be granted an option to purchase 50,000 shares of Common Stock on the date of
his or her initial appointment to the Special Stock Option Committee. Each
Nonemployee Director will also be granted an additional option to purchase
50,000 shares of Common Stock every five years on the anniversary date of the
initial grant, beginning on the fifth anniversary of the initial grant,
provided that such individual continues to serve as a member of the Special
Stock Option Committee through the close of business on such anniversary date.
All Stock Options granted pursuant to this Paragraph 7 will contain the terms
and conditions set forth below. Stock Options granted pursuant to this
Paragraph 7 are intended to comply with and otherwise satisfy the requirements
of Rule 16b-3. To the extent any provision of the Plan applicable to a Stock
Option granted pursuant to this Paragraph 7 or any act of the Board, the Stock
Option Committee or the Special Stock Option Committee would cause such Stock
Option to fail to satisfy or comply with any requirement of Rule 16b-3, such
provision or act will be deemed null and void for purposes of such Stock
Option.

(a) Each grant will specify the number of shares of Common Stock to which
it pertains.

(b) Each grant will specify the Option Price, which will be 100% of the
Market Value per Share on the Date of Grant.

(c) Each grant will specify that the Option Price will be payable (i) in
cash or by check acceptable to the Company, (ii) by the transfer to the
Company of shares of Common Stock owned by the Nonemployee Director for at
least six months (or, with the consent of the Special Stock Option
Committee, for less than six months) having an aggregate fair market value
per share at the date of exercise equal to the aggregate Option Price,
(iii) with the consent of the Special Stock Option Committee, by
authorizing the Company to withhold a number of shares of Common Stock
otherwise issuable to the Nonemployee Director having an aggregate fair
market value per share on the date of exercise equal to the aggregate
Option Price or (iv) by a combination of such methods of payment; provided,
however, that the payment methods described in clauses (ii) and (iii) will
not be available at any time that the Company is prohibited from purchasing
or acquiring such shares of Common Stock. Each grant will also provide for
deferred payment of the Option Price from the proceeds of sale through a
bank or broker of some or all of the shares to which such exercise relates.

(d) Stock Options for Nonemployee Directors will become exercisable in
cumulative annual installments of one-fourth of the shares subject to the
Stock Options, beginning one year after the Date of Grant and will expire
on the fifth anniversary of the Date of Grant. Such Stock Options will also
provide for immediate exercise in the event of a Change in Control, as
hereinafter defined.

(e) Each Stock Option granted pursuant to this Paragraph 7 will be
subject to the transfer restrictions set forth in Paragraph 8.

(f) Each grant will be evidenced by a stock option agreement executed on
behalf of the Company by the Chief Executive Officer (or another officer
designated by the Special Stock Option Committee) and delivered to the
Nonemployee Director and containing such terms and provisions, consistent
with the Plan and Rule 16b-3, as the Special Stock Option Committee may
approve.

For purposes of this Paragraph 7, a "Change in Control" means the
occurrence, prior to the expiration of a Stock Option granted to a Nonemployee
Director, of any of the following events:

(i) the Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than two-thirds of the combined voting
power of the then-outstanding securities entitled to vote generally in the
election of directors ("Voting Stock") of such corporation or person
immediately after such transaction are held in the aggregate by the holders
of Voting Stock of the Company immediately prior to such transaction;

(ii) the Company sells or otherwise transfers all or substantially all of
its assets to another corporation or other legal person, and as a result of
such sale or transfer less than two-thirds of the combined voting

I-4
<PAGE>

power of the then-outstanding Voting Stock of such corporation or person
immediately after such sale or transfer is held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such sale or
transfer;

(iii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated pursuant to the
Act, disclosing that any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Act) has become the beneficial owner
(as the term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Act) of securities
representing 20% or more of the combined voting power of the then-
outstanding Voting Stock of the Company;

(iv) the Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Act disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report or item
therein) that a change in control of the Company has occurred or will occur
in the future pursuant to any then-existing contract or transaction; or

(v) if, during any period of two consecutive years, individuals who at
the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority thereof; provided,
however, that for purposes of this clause (v) each director who is first
elected, or first nominated for election by the Company's stockholders, by
a vote of at least two-thirds of the directors of the Company (or a
committee thereof) then still in office who were directors of the Company
at the beginning of any such period will be deemed to have been a director
of the Company at the beginning of such period.

Notwithstanding the foregoing provisions of clauses (iii) or (iv) above,
unless otherwise determined in a specific case by majority vote of the Board,
a "Change in Control" will not be deemed to have occurred for purposes of
clause (iii) or clause (iv) above solely because (A) the Company, (B) a
Subsidiary or (C) any Company-sponsored employee stock ownership plan or any
other employee benefit plan of the Company or any Subsidiary either files or
becomes obligated to file a report or a proxy statement under or in response
to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) under the Act disclosing beneficial
ownership by it of shares of Voting Stock of the Company, whether in excess of
20% or otherwise, or because the Company reports that a change in control of
the Company has occurred or will occur in the future by reason of such
beneficial ownership or any increase or decrease thereof.

8. Transferability. Except as otherwise expressly provided in the agreement
evidencing a Stock Option granted pursuant to Paragraph 5 or Paragraph 6, or
in any amendment to such agreement, no Stock Option will be transferable by a
Participant or Nonemployee Director other than (i) by will or the laws of
descent and distribution or (ii) pursuant to a qualified domestic relations
order, as that term is defined under the Code or the Employee Retirement
Income Security Act of 1974, as amended.

9. Adjustments. The Stock Option Committee, with respect to Stock Options
granted under Paragraph 5, and the Special Stock Option Committee, with
respect to all other Stock Options, may make or provide for such adjustments
in the maximum number of shares specified in Paragraph 3, in the number of
shares of Common Stock covered by outstanding Stock Options granted hereunder,
in the Option Price applicable to any such Stock Options, and/or in the kind
of shares covered thereby (including shares of another issuer), as such
Committee in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of
Participants and Nonemployee Directors that otherwise would result from any
stock dividend, stock split, combination of shares, recapitalization or other
change in the capital structure of the Company, merger, consolidation, spin-
off, reorganization, partial or complete liquidation, issuance of rights or
warrants to purchase securities or any other corporate transaction or event
having an effect similar to any of the foregoing. Any fractional shares
resulting from the foregoing adjustments will be eliminated.

10. Withholding of Taxes. To the extent that the Company is required to
withhold federal, state, local or foreign taxes in connection with any benefit
realized by an optionee under the Plan, or is requested by an optionee to
withhold additional amounts with respect to such taxes, and the amounts
available to the Company

I-5
<PAGE>

for such withholding are insufficient, it will be a condition to the
realization of such benefit that the optionee make arrangements satisfactory
to the Company for payment of the balance of such taxes required or requested
to be withheld. In addition, if permitted by the Stock Option Committee, with
respect to Stock Options granted under Paragraph 5, or by the Special Stock
Option Committee, with respect to all other Stock Options, an optionee may
elect to have any withholding obligation of the Company satisfied with shares
of Common Stock that would otherwise be transferred to the optionee on
exercise of the Stock Option.

11. Administration of the Plan. (a) The Plan will be administered by the
Stock Option Committee or the Special Stock Option Committee with respect to
Stock Options granted under Paragraph 5 and by the Special Stock Option
Committee with respect to all other Stock Options. For purposes of any action
taken by the Stock Option Committee or the Special Stock Option Committee,
whichever is applicable, a majority of the members will constitute a quorum,
and the action of the members present at any meeting at which a quorum is
present, or acts unanimously approved in writing, will be the acts of the
Stock Option Committee or the Special Stock Option Committee.

(b) Subject to the allocation of administrative responsibilities set forth
in Paragraph 11(a), the Stock Option Committee and the Special Stock Option
Committee have the full authority and discretion to administer the Plan and to
take any action that is necessary or advisable in connection with the
administration of the Plan, including without limitation the authority and
discretion to interpret and construe any provision of the Plan or of any
agreement, notification or document evidencing the grant of a Stock Option.
The interpretation and construction by the Stock Option Committee or the
Special Stock Option Committee, as applicable, of any such provision and any
determination by the Stock Option Committee or the Special Stock Option
Committee pursuant to any provision of the Plan or of any such agreement,
notification or document will be final and conclusive. No member of the Stock
Option Committee or the Special Stock Option Committee will be liable for any
such action or determination made in good faith.

(c) Notwithstanding the provisions of Paragraph 11(b), if any authority,
discretion or responsibility granted to the Special Stock Option Committee
under the Plan would, if exercised or discharged by the Special Stock Option
Committee, cause the provisions of Paragraph 7 or any Stock Option granted
under Paragraph 7 to fail to satisfy the requirements of Rule 16b-3, such
authority, discretion or responsibility may be exercised by the Board to the
same extent and with the same effect as if exercised by the Special Stock
Option Committee, provided such act of the Board will not cause the provisions
of Paragraph 7 or any Stock Option granted under Paragraph 7 to fail to
satisfy the requirements of Rule 16b-3 or cause any member of the Special
Stock Option Committee to cease to be a disinterested administrator for
purposes of Rule 16b-3.

12. Amendments, Etc. (a) The Stock Option Committee or the Special Stock
Option Committee, as applicable, may, without the consent of the optionee,
amend any agreement evidencing a Stock Option granted under the Plan, or
otherwise take action, to accelerate the time or times at which the Stock
Option may be exercised, to extend the expiration date of the Stock Option, to
waive any other condition or restriction applicable to such Stock Option or to
the exercise of such Stock Option, to reduce the exercise price of such Stock
Option, to amend the definition of a change in control of the Company (if such
a definition is contained in such agreement) to expand the events that would
result in a change in control of the Company and to add a change in control
provision to such agreement (if such provision is not contained in such
agreement) and may amend any such agreement in any other respect with the
consent of the optionee. Notwithstanding the foregoing, no amendment will be
made to an agreement evidencing a Stock Option granted to a Nonemployee
Director pursuant to Paragraph 7 if such amendment would cause such
Nonemployee Director to cease to qualify as a "disinterested person" within
the meaning of Rule 16b-3.

(b) The Plan may be amended from time to time by the Stock Option Committee
or the Board but may not be amended without further approval by the
shareholders of the Company if such Plan amendment would result in any grant
or other transaction with respect to Stock Options under Paragraph 6 or
Paragraph 7 no longer satisfying the requirements of Rule 16b-3.
Notwithstanding the foregoing, the provisions of Paragraph 7 that designate
Nonemployee Directors eligible to receive Stock Options and specify the
amount, Option Price and

I-6
<PAGE>

timing of Stock Option grants may be amended only by the Board and may be
amended not more than once every six months except to comply with changes in
the Code, the Employee Retirement Income Security Act of 1974, as amended, or
the rules and regulations thereunder. In the event any law, or any rule or
regulation issued or promulgated by the Internal Revenue Service, the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc., any stock exchange upon which the Common Stock is listed for
trading, or any other governmental or quasi-governmental agency having
jurisdiction over the Company, the Common Stock or the Plan, requires the Plan
to be amended, or in the event Rule 16b-3 is amended or supplemented (e.g., by
addition of alternative rules) or any of the rules under Section 16 of the Act
are amended or supplemented, in either event to permit the Company to remove
or lessen any restrictions on or with respect to Stock Options, the Stock
Option Committee and the Board each reserves the right to amend the Plan to
the extent of any such requirement, amendment or supplement, and all Stock
Options then outstanding will be subject to such amendment.

(c) The Plan may be terminated at any time by action of the Board. The
termination of the Plan will not adversely affect the terms of any outstanding
Stock Option.

(d) The Plan will not confer upon any Participant or Nonemployee Director
any right with respect to continuance of employment or other service with the
Company or any Subsidiary, nor will it interfere in any way with any right the
Company or any Subsidiary would otherwise have to terminate a Participant's
employment or other service at any time.

Sterling Software, Inc.

/s/ Sterling L. Williams
By __________________________________
Name: Sterling L. Williams
Title: President and Chief
Executive Officer

I-7
<PAGE>

DETACH HERE DETACH HERE
STERLING SOFTWARE, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING, MAY 29, 1996

The undersigned hereby appoints Sterling L. Williams and Jeannette P.
P Meier, each with power to act without the other and with full power of
substitution and resubstitution, as Proxies to represent and to vote, as
R designated on the reverse side, all stock of Sterling Software, Inc.
("Sterling Software") owned by the undersigned, at the Annual Meeting of
O Stockholders to be held at the Doubletree Hotel, 8250 North Central
Expressway, Dallas, Texas, on Wednesday, May 29, 1996, at 10:00 a.m., local
X time, upon such business as may properly come before the meeting or any
adjournments thereof including the following as set forth on the reverse
Y side.

YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE BOX,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOX IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT
VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
---------------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE | SEE REVERSE |
| SIDE |
---------------

<PAGE>

STERLING SOFTWARE, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

FOR ANNUAL MEETING, MAY 29, 1996

- --------------------------------------------------------------------------------
THE EFFECTIVENESS OF PROPOSAL I IS CONDITIONED UPON THE APPROVAL OF PROPOSAL
II AND CERTAIN ADDITIONAL CONDITIONS. ACCORDINGLY, FAILURE OF THE STOCKHOLDERS
TO APPROVE PROPOSAL II MAY RESULT IN PROPOSAL I NOT BECOMING EFFECTIVE.
- --------------------------------------------------------------------------------

1. PROPOSAL I: Approval of a special dividend, if declared by the Board of
Directors, consisting of the distribution (the "Distribution") to the
holders of Sterling Software's outstanding shares of common stock, par value
$0.10 per share, on a pro rata basis, of shares of common stock, par value
$0.01 per share, of Sterling Software's subsidiary, Sterling Commerce, Inc.
("Commerce"), and ratification of the related intercompany agreements
between Sterling Software and Commerce.

2. PROPOSAL II: Approval of the adoption of the Sterling Software, Inc. 1996
Stock Option Plan to provide continued employment and performance incentives
for management of Sterling Software's executive officers, directors,
employees, advisors and consultants.

3. PROPOSAL III: The election as Class C directors of the three nominees listed
below (except as indicated to the contrary below):

4. In their discretion on any other matter that may properly come before the
meeting or any adjournments thereof.

Please mark -----
/X/ your votes as in |
this example. |

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO SPECIFICATION IS GIVEN, THIS
PROXY WILL BE VOTED (I) FOR APPROVAL OF THE PROPOSED DISTRIBUTION (AS
DEFINED ABOVE), (II) FOR APPROVAL OF THE ADOPTION OF THE STERLING
SOFTWARE, INC. 1996 STOCK OPTION PLAN, (III) FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR; AND (IV) AT THE DISCRETION OF THE PROXY HOLDERS
WITH REGARD TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENTS THEREOF.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL I, PROPOSAL II AND PROPOSAL III.

1. Approval of FOR AGAINST ABSTAIN
Special Dividend / / / / / /
(see above)

2. Approval of FOR AGAINST ABSTAIN
1996 Stock / / / / / /
Option Plan

3. Election of Class C Directors
NOMINEES: SAM WYLY, STERLING L. WILLIAMS,
DONALD R. MILLER

/ / FOR ALL NOMINEES

/ / WITHHELD FROM ALL NOMINEES

For, except vote withheld from the following nominee(s):

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

MARK HERE FOR
ADDRESS CHANGE / /
AND NOTE AT LEFT

Please sign name(s) exactly as
appearing hereon. When signing as
attorney, executor, administrator or
other fiduciary, please give your
full title as such. Joint owners
should each sign personally. If a
corporation, sign in full corporate
name, by authorized officer. If a
partnership, please sign in
partnership name, by authorized
person.

SIGNATURE: ______________DATE: _______SIGNATURE: ______________DATE: _______