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

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

                                   FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
  SECURITIES EXCHANGE ACT OF 1934

  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999

                                      OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
  SECURITIES EXCHANGE ACT OF 1934

  FOR THE TRANSITION PERIOD FROM     TO

                          COMMISSION FILE NO. 1-14196

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

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

<TABLE>
<S>                                            <C>
                  DELAWARE                                       75-2623341
        (STATE OR OTHER JURISDICTION                          (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
</TABLE>

              300 CRESCENT COURT, SUITE 1200 DALLAS, TEXAS 75201
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                (214) 981-1100
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                Registrant's web page: WWW.STERLINGCOMMERCE.COM

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
        Common Stock, $0.01 Par Value                     New York Stock Exchange
 Rights to Purchase Series A Junior Partici-              New York Stock Exchange
                    pating
      Preferred Stock, $0.01 Par Value
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                                     NONE

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

  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

  As of December 7, 1999, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $2,383,122,220,
based on the closing sales price of $30.3125 of the Registrant's Common Stock
on the New York Stock Exchange. All executive officers and directors of the
Registrant have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the Registrant.

  As of December 7, 1999, the number of shares outstanding of the Registrant's
Common Stock was 79,969,498.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the proxy statement for the annual meeting of the Registrant to
be held during 2000 are incorporated by reference in Part III.

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                            STERLING COMMERCE, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 FORM 10-K ITEM                                                           PAGE
 --------------                                                           ----
 <C>            <S>                                                       <C>
                                         PART I
 ITEM 1.        BUSINESS................................................    1
 ITEM 2.        PROPERTIES..............................................   12
 ITEM 3.        LEGAL PROCEEDINGS.......................................   12
 ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....   12
                                         PART II
 ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS....................................   13
 ITEM 6.        SELECTED FINANCIAL DATA.................................   13
 ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS....................   14
 ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                 RISK...................................................   34
 ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............   36
 ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE....................   62
                                        PART III
 ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......   62
 ITEM 11.       EXECUTIVE COMPENSATION..................................   62
 ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT.............................................   62
 ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........   62
                                         PART IV
 ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                 FORM 8-K...............................................   63
</TABLE>
<PAGE>

                                     PART I

ITEM 1. BUSINESS.

INTRODUCTION

  Sterling Commerce, Inc. (together with its predecessors and subsidiaries, the
"Company") is a worldwide leader in providing E-Business integration solutions
for Global 5000 and other companies and their commerce communities. The Company
develops, markets and supports software products and provides services and
consulting that enable businesses to engage in E-Business communications and
transactions with their partners and other E-Community constituents. During
1999, the Company began a program of realigning its resources to new
initiatives to address what it believes are future growth areas: E-Business
Process Integration, E-Business Communications Infrastructure, E-Community
Management and E-Sourcing. The Company has been providing solutions to allow
businesses to conduct transactions electronically with other businesses for
more than 25 years and has customers in many industries, including banking, "E-
tailing," healthcare, insurance, manufacturing, pharmaceuticals, retailing,
telecommunications, government and transportation. The Company has direct
operations in 20 countries outside of the United States, a Pan-European support
center in Amsterdam, a Pan-Asian support and development center in Singapore
and more than 40 distributors worldwide.

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

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

  On February 28, 1997, the Company completed a public offering of 14,375,000
previously unissued shares of Common Stock.

ACQUISITIONS AND OTHER TRANSACTIONS

  Throughout the Company's history, and particularly since the Distribution,
the Company has complemented its internal growth by actively pursuing strategic
acquisitions and investments to expand its technologies, product offerings and
distribution capabilities.

  During fiscal 1999, the Company acquired Electronic Commerce Group Limited,
an E-Business solutions provider based in the United Kingdom. Additionally,
during 1999, the Company made strategic investments in businesses operated,
directly or indirectly, by the following companies: ParaRede Tecnologias de la
Communicacion, S.A., a Portugal based business that provides information
technology products and services, including E-commerce products and services;
FORTHnet S.A., the largest Internet services provider in Greece, where it is
based; Satyam Infoway Limited, the second largest national provider of Internet
access and services to consumers and businesses in India, where it is based;
Information Access, Inc., a United States based provider of E-Community
management services; and Oberon Software Incorporated, a United States based
provider of E-Business integration software and services for the enterprise
application integration and business process integration marketplaces.

  Also in 1999, the Company determined that the product lines acquired in the
July 21, 1998 acquisition of XcelleNet, Inc. ("XcelleNet") are not sufficiently
strategic to the Company's future growth plans. Therefore, the Company has
decided to divest itself of the XcelleNet business.
<PAGE>

  In fiscal 1998, the Company made several acquisitions, including the E-
Community management unit and the E-Business software and services unit of
o.tel.o Communications GmbH & Co., a Dusseldorf, Germany based
telecommunications company; The Electronic Data Exchange Service Limited, a
London, England based provider of value-added E-Community management network
services and related PC-based enabling software; and Network Integration
Systems Pte Ltd. and iCommerce Pte Ltd., both Singapore based providers of
electronic commerce software and services, including Web-based community
management software and services.

  In anticipation of the Distribution the Company and Sterling Software entered
into an International Distributor Agreement dated March 4, 1996 (as amended,
the "International Marketing Agreement"). The International Marketing Agreement
defined the terms pursuant to which Sterling Software acted as the exclusive
distributor of certain of the Company's products in markets outside the United
States and Canada. In order for the Company to establish direct licensing of
its products outside the United States and Canada, the Company and Sterling
Software agreed to terminate the International Marketing Agreement, effective
June 30, 1997, and the Company acquired from Sterling Software certain assets
and assumed certain liabilities associated with the distribution of its
products. The Company also hired certain Sterling Software employees, most of
whom had been dedicated to the sales and marketing of the Company's products.

  The Company made several additional acquisitions in fiscal 1997, including
the acquisition of Comfirst S.A. ("Comfirst"), a Paris, France based provider
of communications and file transfer software.

  For more information with respect to business acquisitions and other
transactions, see Notes 4 and 5--Notes to Consolidated Financial Statements.

ORGANIZATIONAL STRUCTURE

  The Company operates primarily through groups and divisions that offer broad-
based, distinct families of products and/or services to E-Business communities
worldwide. The Company believes that its organizational structure promotes
operating flexibility, improves responsiveness to customer requirements and
focuses management on achieving revenue and profit objectives. Each group and
division has its own sales and marketing organization. These organizations are
complimented with the Company's enterprise-wide strategic account sales and
marketing program that promotes all Company products and services to selected
customers. The Company licenses and markets its products and services on a
worldwide basis through a combination of direct sales, indirect sales through
distributors and resellers, telesales and telemarketing. The Company utilizes
enterprise-wide product development to allow its product families to create
products in conjunction with each other, which shortens the time to market for
new products and promotes integrated solutions.

TARGETED MARKET

  The Company intends to continue its business growth by further penetrating
Global 5000 companies and their E-Communities. Global 5000 companies are
located throughout the world, have annual revenues of at least $1 billion and
operate in more than 15 industries, including automotive, banking, consumer
products, healthcare, insurance, pharmaceuticals, retail and
telecommunications. The Company targets its offerings to these worldclass,
leading organizations and believes that having these organizations as customers
is highly advantageous when pursuing mid-tier and smaller industry participants
as customers. The Company has also begun targeting ".com"-type companies which
are rapidly building E-Business infrastructures and communities.

  The advent of the Internet and related technologies has created unprecedented
opportunities for business organizations to extend their E-Business
relationships beyond traditional electronic commerce. The Company

                                       2
<PAGE>

believes that the Global 5000 business organizations represent the leaders in
each of their industries in operating as extended communities that include not
only their divisions, plant sites and distributed sales offices, but also their
customers, suppliers, banks, carriers, governments and other trading partners.

  To fully achieve the benefits from their extended E-Communities, business
organizations need to streamline their internal business processes and extend
them beyond their enterprise to interact and collaborate with their business
partners. The Company's experience with customers is that they intend to focus
on their core competencies and business activities. These business
organizations require vendors that can provide comprehensive solutions to
assist them in integrating applications involved in their business processes as
well as building, enabling and servicing the E-Communities involved with these
processes. The Company has found that both traditional and Internet-based
technologies must be incorporated into these solutions since the business
processes of Global 5000, ".com" and other companies involve multiple E-
Communities, often global in scope, and span a wide range of automation
platforms, communication protocols and varying business rules among the
numerous business enterprises and other organizations involved.

  In response to these needs, the Company offers a comprehensive range of E-
Business integration solutions on a global basis.

PRODUCTS AND SERVICES

  The Company provides comprehensive E-Business integration solutions for its
customers through the following offerings:

  .  E-Community Management;

  .  E-Business Process Integration;

  .  E-Business Communications Infrastructure; and

  .  E-Sourcing.

  The Company provides products and services through these offerings in varying
combinations, depending upon the solution required by the customer. The Company
believes that it is uniquely qualified to provide these solutions because of
the breadth of products and services available through these offerings, in
addition to its extensive industry specific experience and focus in each of the
industries it serves.

  These offerings incorporate more than 90 separate products and services
delivered by the Company. Furthermore, the offerings are all focused on
providing Internet-based solutions and integrating processes across automation
platforms with "any-to-any" connection capabilities.

E-COMMUNITY MANAGEMENT

  The Company's E-Community Management service offerings build, manage and
service integrated business partner communities for Global 5000 and other
companies. Businesses are able to interact with a greater range of constituents
than was practicably possible through traditional electronic data interchange
("EDI") due to the proliferation of the Internet for business communications.
Today, businesses are seeking solutions that extend their business processes
beyond the supply chain to include customers, alliance partners, banks,
governments and carriers. Instead of E-Communities with a small number of E-
Business partners, companies are now participating in E-Communities consisting
of thousands to tens of thousands of E-Business partners. These interactions
are layered upon business processes that companies have automated over the past
decade, including supply, selling, procurement, logistics, billing and payment
processes. Companies are deploying both Web- and EDI-based technologies in
order to interact with these E-Business partners and to manage the many
transactions that occur on a daily basis. The task of establishing and managing
these E-Communities is complicated by the fact that these communities are
global and often industry specific in nature.

                                       3
<PAGE>

  The Company's E-Community Management offerings are marketed and sold under
the COMMERCE service family name. The Company meets the needs of these E-
Communities by providing solutions based upon its demonstrated E-Community
building, managing and servicing capabilities and extensive industry-specific
expertise. The Company provides three categories of solutions for E-Community
Management, which can be either Web- or EDI-based, or both, depending on the
customer's needs.

  .  E-Community Development consists of solutions to build E-Communities in
     sizes ranging from hundreds to tens of thousands of E-Business partners.
     The solutions are comprised of techniques (know-how and methodology),
     tools (Web-based software) and technology (E-Business forms). During
     fiscal 1999, over 300 E-Community Development programs were sold and
     implemented for targeted companies to build E-Business partnerships with
     their suppliers, distributors, carriers, customers and banks. The
     increasing use of Internet technologies has led to an exponential
     increase in the size of E-Communities. The Company believes that its
     ability to manage massive E-Communities is a key competitive strength.

  .  E-Community Services represent core technology and services for E-
     Community Management and include:

<TABLE>
       <S>                                    <C>
       Commerce policy management             Extranet systems management
       Business process integration services  Connectivity management
       Information exchange                   Customer management
       Security and access control            Billing management
</TABLE>

  The configurations that the Company can deliver with these E-Community
Services include: (i) extranet hosted communities (Web- or EDI-based over the
Internet) and (ii) node-to-node communities (based on traditional EDI or EDI
over the Internet). The Company also offers COMMERCE:Centre, a highly scalable
software and services package that is being utilized as the platform for E-
Community Services in ten countries by the Company and several of its
distributors. Also, the Company offers help desk outsourcing for support of
these E-Communities.

  .  E-Community Solutions are packaged services with features required by
     specific industries or company-level business processes. For example,
     the Company offers a Web-based E-Community Solution to the
     pharmaceutical industry that enables wholesale distributors to track
     product deliveries via carriers such as United Parcel Service from
     manufacturers such as Merck. Over 20 distinct E-Community Solutions are
     used in over ten industries. The Company has created a library of over
     3,000 company-level business processes for companies such as Ford Motor
     Company and Wal-Mart.

  The Company is already managing and servicing over 280 extranet hosted
communities. The Company has deployed Web- and EDI-based communities in the
Americas, Europe and Asia. The Company currently has more than 29,000 contracts
with E-Community Management customers in multiple industries who maintain over
650,000 business partner relationships. Furthermore, the Company has
established these communities for multiple industries. The global
infrastructure of the Company, with presence in 37 cities, including 19 outside
the United States, allows it to effectively design, implement and manage these
large, complex communities.

E-BUSINESS PROCESS INTEGRATION

  The Company's E-Business Process Integration ("BPI") offerings are software
products and related services that facilitate end-to-end integration of
business processes within and among enterprises and organizations. Since the
environments into which these offerings are applied span a broad range of
technologies and systems, the Company's BPI solutions accommodate ever-
expanding requirements for a consistent and robust integration framework that
provides the business benefits of both enterprise application integration
("EAI") and EDI. The Company views BPI as a mission-critical component of the
enterprise and a keystone element of the extended enterprise. As a result, the
Company's solutions are scalable and designed for robust operation in high-
performance business environments, twenty-four hours a day, seven days a week.

                                       4
<PAGE>

  The Company's BPI offerings are marketed and sold under the GENTRAN product
family name. These products are available for all major operating systems and
platforms, including UNIX, Windows, Windows NT, AS/400 and IBM mainframe and
for use with various business standards, including X.12, EDIFACT, CII and XML.
Moreover, these offerings can be closely interfaced with applications systems
provided by major enterprise resource planning ("ERP") vendors such as Baan,
Oracle, PeopleSoft and SAP. Companies such as Lawson Software and Symix resell
GENTRAN solutions to their customers. Key GENTRAN BPI product offerings are as
follows:

  .  GENTRAN:Server--a high performance E-Business solution product serving
     approximately 8,100 installation sites in more than 50 countries
     worldwide. The GENTRAN:Server XML product allows native application
     formats (including EDI) to be translated to and from XML data types.

  .  GENTRAN:WebSuite--a Web-based solution serving approximately 120
     installation sites that allows businesses to exchange data using a
     variety of methods including Web-based forms, EDI-INT standards and
     real-time integration for highly interactive processes.

  .  GENTRAN:Catalyst--released in November 1999, an application broker
     solution that allows for message brokering to support a variety of
     business application data access and distribution requirements coupled
     with automation and message tracking services.

E-BUSINESS COMMUNICATIONS INFRASTRUCTURE

  The Company's E-Business Communications Infrastructure ("EBCI") offerings are
software products and services focused specifically on the complexities of
managing data delivery within and between enterprises and organizations. As BPI
grows more ubiquitous, a communications infrastructure to support increasingly
interactive and complex processes becomes necessary. The Company's EBCI
solutions are based upon an architecture where applications are isolated from
the complexities of managing and transporting data. The resulting EBCI
solutions are coordinated sets of platform-, protocol- and network-independent
communication infrastructure products that are highly reliable and robust over
private and public networks as well as the Internet.

  The Company's EBCI offerings are marketed and sold under the CONNECT product
family name. These products are available for all major operating systems,
platforms and business standards. Currently, the Company's EBCI solutions
support more than 12 automation platforms, 30 operating systems and seven
protocols. These solutions provide extensive interactivity between multiple,
divergent systems and provide a solid foundation upon which customers can
leverage their existing applications and network architectures into new and
expanded BPI applications. These solutions are widely used in several
industries including financial services, government, insurance and
telecommunications. Once implemented, these solutions often become a de facto
standard for the user's data communication functions. There are approximately
7,300 EBCI installation sites worldwide. Key EBCI product offerings include:

  .  CONNECT:Direct--a high performance Advanced File Transfer solution that
     enables the secure, automated exchange of information between
     distributed applications. It enables organizations to reduce
     implementation time for the exchange of data between applications with
     the flexibility to easily embrace new business processes and
     technologies.

  .  CONNECT:Mailbox--a data collection and distribution software solution
     that enables E-Business by managing and securing the exchange of data
     over private and public networks, as well as the Internet.

  .  CONNECT:Enterprise--the Company's new Managed Data Delivery solution, an
     adaptive communications infrastructure that can support moving data of
     any type, anywhere, at any time. The new product, released in October
     1999, features common management, security and administration features
     and supports the exchange of information within and between enterprises
     utilizing private networks, public networks and the Internet.

                                       5
<PAGE>

E-SOURCING

  The Company's E-Sourcing offerings consist of consulting, implementation,
education and outsourcing services in support of its other E-Business
integration solutions. The Company believes that establishing an E-Community
strategy is a critical element of the current business environment. E-Sourcing
allows companies to implement E-Community solutions while remaining focused on
their core competencies. As a result, companies increasingly rely on third-
party providers to deliver E-Community solutions. International Data
Corporation ("IDC") estimates that worldwide Internet-related services spending
will grow from $8 billion in 1998 to $79 billion in 2003, a compound annual
growth rate of 59%. IDC further estimates that EDI consulting spending
worldwide will grow from $967 million in 1998 to $2.3 billion in 2003, a
compound annual growth rate of 19%.

  The Company provides its E-Sourcing offerings through its Managed Services
Division. Through the Managed Services Division, the Company has the capability
to deliver a broad range of consulting and other services, including the
comprehensive outsourcing of an enterprise's E-Business systems, and functions
on a global basis.

  The Company offers E-Sourcing solutions that include (i) software and
education services, (ii) integrated E-Business consulting services and (iii)
outsourcing. Software and education services include installation, consulting,
implementation and education services provided in relation to the Company's
products. Integrated E-Business consulting services involve assessments of
business processes and long-term projects to integrate E-Business into
customers' business, ERP, legacy and Web commerce systems. The Company provided
E-Sourcing solutions to over 1,300 customers during fiscal 1999.

  The Company's outsourcing options consist of on-site, remote and centralized
services and are designed to help companies successfully implement E-Business
strategies on a global basis. On-site outsourcing consists of resources
provided at the customer site to manage and support day-to-day E-Business
operations and related customer personnel. The hardware and software for the
on-site outsourcing are located at the customer site. Remote outsourcing
consists of similar management and support where the resources provided by the
Company are located at the Company's facilities and the hardware and software
are located at the customer site. Central outsourcing is a service provided
using the Company's systems and data center, with resources provided both on-
site and at the Company's facilities. With the flexibility to outsource
implementation of E-Business solutions at any level, companies can gain
operational improvement without losing control over costs, timelines and major
business decisions.

  The Company's unique services model leverages a combination of internal
consultants with an external partner network to provide a scalable service
solution. The Company believes there is tremendous opportunity in the E-
Sourcing market and has experienced significant growth in demand for those
services. The Company has established strategic relationships with consulting
organizations that train and provide implementation and integration services to
organizations using the Company's solutions. The Company's E-Sourcing business
is exclusively focused on, and has developed an expertise in, providing E-
Business solutions. Since the Company's E-Sourcing is focused on its products,
the Company, primarily through its Managed Services Division, has developed a
highly efficient implementation methodology. Also, the Company's arrangement
with service partners allows staff to be efficiently deployed without incurring
substantial fixed costs.

BANKING SYSTEMS

  In addition to its E-Business integration solutions, the Company provides
industry-specific solutions that enable banks and other financial institutions
to automate banking transaction processes. The Company's offerings include
software products and related services, which are marketed under the VECTOR
product family name. The VECTOR products serve as the industry standard in the
banking industry in providing the following:

  .  Software products that automate key item processing applications for
     financial institutions, such as check fraud control, currency control,
     electronic check order sort and presentment, research functions, return
     item processing and statement sorting;

                                       6
<PAGE>

  .  Software products that enable banks to offer integrated item-processing
     services to their retail and corporate customers; and

  .  Services to assist banks and other financial institutions plan,
     implement and maintain their software solutions.

  The Company has licensed more than 570 copies of VECTOR products to customers
worldwide, including ABN AMRO, Bank of America, Chase Manhattan and Wells
Fargo.

SEGMENT AND GEOGRAPHIC INFORMATION

  Segment and geographic information are included in Note 13--Notes to
Consolidated Financial Statements included in Item 8, Part II of this report.

EMPLOYEES

  The Company's business is dependent upon its ability to attract and retain
highly qualified personnel. The Company's operations could be adversely
affected if it were to lose the services of a significant number of its
employees or if the Company was unable to obtain additional qualified personnel
when needed. Since the market for highly qualified personnel in the software
and electronic commerce industries is extremely competitive, it is difficult
for companies in these industries, including the Company, to attract and retain
qualified employees. To attract and retain qualified employees, the Company
offers competitive compensation and benefits packages, and strives to maintain
excellent employee relations, attractive office facilities and challenging
working environments. None of the Company's employees are represented by a
labor union. The Company has not experienced any work stoppages and considers
its employee relations to be excellent. At September 30, 1999, the Company
employed approximately 2,300 full-time employees.

CUSTOMERS

  The Company has a worldwide customer base in more than 15 industries,
including banking, "E-tailing," telecommunications, manufacturing, government,
insurance, healthcare, automotive, retail, transportation, pharmaceuticals and
consumer products. While the Company's customer base includes some of the
largest multinational companies in the world, it also includes numerous
regional and local companies. As of September 30, 1999, the Company's customers
included 98 of the 100 largest U.S. industrial corporations and 95 of the 100
largest global industrial corporations, as ranked by 1998 sales in Fortune
magazine and 94 of the top 100 U.S. commercial banks, as ranked by deposits as
of December 31, 1998, in American Banker magazine.

  Many of these customers use several of the Company's products and services,
including Internet-related electronic commerce solutions. The Company develops
and markets products for companies of all sizes.

PRODUCT LICENSES AND PRODUCT SUPPORT

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

  In conjunction with the licensing of the Company's software products, the
Company also markets product support services to its customers. Typically, the
Company provides these services pursuant to product support agreements having
terms ranging generally from one to three years. The Company's product support
agreements generally allow customers to receive updated or enhanced versions of
the Company's software products as they become available and also allow
telephone and Internet access to the Company's technical personnel.

                                       7
<PAGE>

SERVICES

  The Company's services revenue includes transaction fees in accordance with
COMMERCE services agreements and are recognized at the time the service is
performed. These agreements have terms ranging from month-to-month, which are
cancelable upon 30 days' notice, to three years. COMMERCE services agreements
may have guaranteed revenue streams which correspond to the term of the
agreement. Services revenue also includes fees generated through the Company's
Managed Services Division which are recognized at the time the service is
performed. These services include specific project agreements or extended
services agreements.

PRODUCT DEVELOPMENT

  The Company's product development strategy is to enhance existing products
and to introduce new products based upon current and anticipated customer
needs. The Company's approach to product development includes, among other
things, 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. For example, the Company
may seek to acquire an existing product or license an existing product rather
than develop the product internally. In other instances, the Company may
contract with a third-party developer to develop the product for the Company.
Due to these and other factors, it is difficult for the Company to estimate
future product development costs.

  The Company employs an enterprise-wide product development approach that
focuses on the opportunities in specific markets for each product family. The
Company believes that organizing development functions this way facilitates
development cost control and focuses the development function on customer
needs.

  Total product development and enhancement costs for fiscal 1999, 1998 and
1997 were $38.5 million, $29.7 million and $24.9 million, respectively, net of
capitalized costs of $24.7 million, $17.6 million and $13.5 million,
respectively.

  The Company has addressed, and continues to address, year 2000 issues that
may have a material adverse impact on its product and services offerings. In
this regard, see "Year 2000" in Item 7, Part II of this report.

COMPETITION

  E-Business integration is a worldwide industry which is rapidly evolving and
highly competitive. The Company has many competitors which range from large
companies with substantially greater resources than the Company, to small,
specialized companies that compete in a particular geographic region or market
niche. The Company also competes with internal programming staffs of companies
and with certain hardware manufacturers.

  The Company believes that its ability to compete successfully in the E-
Business integration industry depends upon numerous factors, both within and
outside its control, including product performance, functionality and
reliability, price and customer service and support. The Company's strategy is
to offer a broad range of E-Business integration solutions that can meet a
range of customer needs, from specific applications to broader process
integration and E-Community related activities to complete E-Business
outsourcing capabilities. The Company offers E-Business integration solutions
that are designed to meet the needs of the various segments of the E-Business
markets on a local, regional and worldwide basis. The Company 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
changing needs of its E-Business customers. See "Risk Factors--Competition" in
Item 7, Part II of this report for additional information regarding the
Company's competitive environment, including a list of certain of the Company's
competitors.

INTELLECTUAL PROPERTY RIGHTS

  The Company relies primarily on a combination of copyright, patent and
trademark laws, confidentiality procedures and contractual provisions to
protect its intellectual property rights. The Company routinely enters

                                       8
<PAGE>

into nondisclosure and confidentiality agreements with employees, contractors,
consultants, vendors and customers to protect its proprietary rights.

  The Company does not believe that any of its products or services infringe on
the valid rights of third parties in any material respect. Licenses for a
number of software products have been granted to the Company for its own use or
for remarketing to its customers.

  See "Risk Factors--Limited Protection of Proprietary Rights; Risks of
Infringement and Loss of Licenses" in Item 7, Part II of this report for
additional information relating to the intellectual property rights of the
Company.

  The COMMERCE, GENTRAN, CONNECT and VECTOR product and service names used
herein are registered or unregistered trademarks owned by the Company.

SHARED MANAGEMENT AND CONTRACTUAL ARRANGEMENTS WITH STERLING SOFTWARE

 Shared Management

  The Board of Directors of the Company (the "Board") currently has seven
members. Messrs. Sterling L. Williams (Chairman), Sam Wyly, Charles J. Wyly,
Jr. and Evan A. Wyly are directors of the Company and are also directors of
Sterling Software. Mr. Williams, who serves as President and Chief Executive
Officer of Sterling Software, ceased his employment with the Company in May
1998, whereupon he and the Company entered into a consulting agreement.

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

 Contractual Arrangements

  In anticipation of the Distribution, the Company and Sterling Software
entered into a number of agreements (the "Intercompany Agreements") for the
purpose of defining certain relationships between them. As a result of Sterling
Software's ownership interest in the Company at such time, the terms of such
agreements were not the result of arm's-length negotiation.

  The Intercompany Agreements included, among others, a tax allocation
agreement and an indemnification agreement, each of which is briefly described
below:

  .  The tax allocation agreement provides that for periods during which the
     Company is included in Sterling Software's consolidated federal income
     tax returns or consolidated, combined or unitary state tax returns
     (which periods included the period between the Offering and the
     Distribution), the Company is required to pay to or is entitled to
     receive from Sterling Software its allocable portion of the consolidated
     federal and state income tax liability or refunds, respectively.

  .  The indemnification agreement provides, among other things, that each
     party thereto (the "Indemnifying Party") will indemnify the other party
     thereto and its directors, officers, employees, agents and
     representatives (each, an "Indemnified Party") for liabilities that may
     be incurred by an Indemnified Party relating to (1) 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 the Company and its

                                       9
<PAGE>

     subsidiaries) or (2) 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 the Company will
     indemnify Sterling Software and its directors, officers, employees,
     agents and representatives for any liabilities resulting from or arising
     out of certain acts, failures to act or the provision of incorrect
     factual information by the Company in connection with the Internal
     Revenue Service ruling request that cause the Distribution to be taxable
     to Sterling Software or its stockholders. The indemnification agreement
     also provides that each party thereto (the "Obligor Party") (1) 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, (2) will indemnify the Guarantor Party for any
     liabilities incurred under such guarantees, bonds, letters of credit and
     other arrangements and (3) 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.

EXECUTIVE AND OTHER OFFICERS

  The following information regarding the executive officers of the Company is
as of December 7, 1999.

<TABLE>
<CAPTION>
     NAME                AGE                        POSITION
     ----                ---                        --------
<S>                      <C> <C>
Warner C. Blow..........  62 Chief Executive Officer; Director
J. Brad Sharp...........  42 President and Chief Operating Officer
Albert K. Hoover........  39 Executive Vice President and General Counsel; Secretary
Steven P. Shiflet.......  52 Senior Vice President and Chief Financial Officer
Paul L. H. Olson........  49 Executive Vice President and Group President
Stephen R. Perkins......  55 Executive Vice President and Group President
David R. Dodge..........  52 Senior Vice President and Group President
</TABLE>

  Warner C. Blow has served as Chief Executive Officer and a director of the
Company since October 1996. From December 1995 until October 1999, Mr. Blow
also served as President of the Company and, from December 1995 until October
1996, Chief Operating Officer of the Company. Prior to December 1995, Mr. Blow
served as President of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from July 1993 and as an Executive Vice President
of Sterling Software from October 1989.

  J. Brad Sharp has served as President and Chief Operating Officer of the
Company since October 1999. Prior to October 1999, Mr. Sharp served as
Executive Vice President of the Company since November 1997, and also as Chief
Operating Officer since October 1998. From December 1995 until November 1997,
Mr. Sharp served as Senior Vice President of the Company and as President of
the Company's Interchange Software Group. Prior to March 1996, Mr. Sharp served
as President of the Interchange Software Division of Sterling Software's
Electronic Commerce Group (the predecessor of the Company) from August 1992.

  Albert K. Hoover has served as Executive Vice President of the Company since
October 1999, General Counsel of the Company since June 1997 and as Secretary
since June 1998. From June 1997 until October 1999, Mr. Hoover served as Senior
Vice President of the Company. From December 1995 until June 1997, Mr. Hoover
served as Vice President, Legal of the Company. Prior to March 1996, Mr. Hoover
also served as a Vice President of Sterling Software from May 1994 and as
Assistant General Counsel of Sterling Software from June 1990.

  Steven P. Shiflet has served as Senior Vice President and Chief Financial
Officer of the Company since January 1997. From December 1995 until January
1997, Mr. Shiflet served as Vice President, Finance of the Company. Prior to
March 1996, Mr. Shiflet served as Group Vice President, Finance and
Administration of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from 1986.


                                       10
<PAGE>

  Paul L. H. Olson has served as Executive Vice President of the Company since
November 1997 and as President of the Company's Commerce Services Group since
December 1995. From December 1995 until November 1997, Mr. Olson served as
Senior Vice President of the Company. Prior to March 1996, Mr. Olson served as
President of the Commerce Services Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from August 1992.

  Stephen R. Perkins has served as Executive Vice President of the Company
since November 1997 and as President of the Company's Communications Software
Group since December 1995. From December 1995 until November 1997, Mr. Perkins
served as Senior Vice President of the Company. Prior to March 1996, Mr.
Perkins served as President of the Communications Software Division of Sterling
Software's Electronic Commerce Services Group (the predecessor of the Company)
from July 1993.

  David R. Dodge has served as Senior Vice President of the Company and
President of the Company's Interchange Software Group since July 1999. From
October 1995 to July 1999, Mr. Dodge served as Senior Vice President of Global
Sales for the Commerce Services Group. Prior to October 1995, Mr. Dodge served
as Vice President, Sales for the Commerce Services Division of Sterling
Software's Electronic Commerce Group (the predecessor of the Company) from
February 1986.

  The following information regarding certain other officers of the Company is
also as of December 7, 1999.

<TABLE>
<CAPTION>
      NAME                     AGE                   POSITION
      ----                     ---                   --------
<S>                            <C> <C>
Lon Baugh.....................  39 Vice President, Investor Relations
Dennis P. Byrnes..............  36 Vice President and Assistant General Counsel
Karen J. Dover................  37 Vice President, Planning
James W. Hoyt.................  51 Vice President, Technology
William W. Hymes..............  62 Senior Vice President and Division President
Esther L. McDowell............  49 President, Managed Services Division
David A. Myers................  36 Vice President and Treasurer
Kevin D. Sibbring.............  39 Vice President, Marketing
I. Stephen Wolken.............  57 Vice President, Strategic Accounts
G. Clark Woodford.............  52 Vice President, Business Development
</TABLE>

  Lon Baugh has served as Vice President, Investor Relations of the Company
since May 1999. Prior to May 1999, Mr. Baugh served as Director of Tax of the
Company since March 1996. Prior to March 1996, Mr. Baugh was employed most
recently by Ernst & Young, LLP, as Tax Senior Manager from October 1993.

  Dennis P. Byrnes has served as Vice President of the Company since September
1999 and as Assistant General Counsel since June 1997. Prior to June 1997, Mr.
Byrnes served as corporate counsel of the Company from April 1996. Prior to
April 1996, Mr. Byrnes was an attorney in the business group of Baker &
Hostetler LLP from June 1991.

  Karen J. Dover has served as Vice President, Planning of the Company since
October 1999. From December 1995 to October 1999, Ms. Dover served as Director
of Planning of the Company. Prior to December 1995, Ms. Dover served as
Director of Finance of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from October 1994.

  James W. Hoyt has served as Vice President, Technology of the Company since
July 1996. Mr. Hoyt served as Director of Product Architecture of the Company's
Communications Software Group from March 1996 until June 1996 and of Sterling
Software's Communications Software Division from July 1993 until March 1996.

  William W. Hymes has served as a Senior Vice President of the Company since
December 1995 and as President of the Banking Systems Division since June 1997.
From December 1995 to June 1997, Mr. Hymes

                                       11
<PAGE>

served as President of the Company's former Banking Systems Group. Prior to
March 1996, Mr. Hymes served as President of the Banking Systems Division of
Sterling Software's Electronic Commerce Group (the predecessor of the Company)
from July 1993.

  Esther L. McDowell has served as President of the Managed Services Division
since July 1998. Prior to July 1998, Ms. McDowell was Vice President of
Customer Services for the Company's Interchange Software Group from March 1996.
Prior to March 1996, Ms. McDowell was Vice President of the Interchange
Software Division of Sterling Software's Electronic Commerce Group (the
predecessor of the Company) from February 1993.

  David A. Myers has served as Vice President and Treasurer of the Company
since October 1999. Prior to October 1999, Mr. Myers served as Assistant
Treasurer of the Company from June 1998 and as Director of Treasury from March
1996. Prior to March 1996, Mr. Myers served as Senior Treasury Analyst for
Sterling Software from August 1994.

  Kevin D. Sibbring has served as Vice President, Marketing of the Company
since October 1999. Prior to October 1999, Mr. Sibbring served as Director,
Industry Relations since March 1996. Prior to March 1996, Mr. Sibbring served
as Director, Strategic Alliances from March 1995 and Director, Midrange Sales
for the Interchange Software Division of Sterling Software's Electronic
Commerce Group (the predecessor of the Company) from February 1994 to March
1995.

  I. Stephen Wolken has served as Vice President, Strategic Accounts of the
Company since June 1999. Prior to June 1999, Mr. Wolken served as President of
Sterling Software's Creative Data Systems Division from March 1996. Prior to
March 1996, Mr. Wolken served as Vice President, Sales and Marketing for
Sterling Software's Creative Data Systems Division from October 1991.

  G. Clark Woodford has served as Vice President, Business Development of the
Company since December 1995. Prior to December 1995, Mr. Woodford served as
Vice President, Business Development of Sterling Software's Electronic Commerce
Group (the predecessor of the Company) from November 1993.

ITEM 2. PROPERTIES.

  The Company's principal executive offices are located in Dallas, Texas. The
Company's principal administrative offices are located in Columbus, Ohio. Both
facilities are leased under operating leases. The Company also leases offices
and facilities in more than 46 other locations in the United States and various
other countries under operating leases. The primary services, support and
product development efforts for the COMMERCE and GENTRAN product families and
Managed Services are performed at facilities in Columbus, Ohio and the primary
services, support and product development efforts for the CONNECT products
family are located in facilities at Irving, Texas, all of which are leased
under operating leases. The Company believes that its facilities will be
adequate for its immediate needs and that additional or substitute space is
available if needed to accommodate expansion.

ITEM 3. LEGAL PROCEEDINGS.

  The information set forth in Note 6 of the Notes to Consolidated Financial
Statements included in Item 8, Part II of this report is incorporated herein by
reference.

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

  The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.

                                       12
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

  The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "SE." The high and low sales prices for the Company's Common Stock for
the periods indicated are set forth below.

<TABLE>
<CAPTION>
                                                                   PRICE RANGE
                                                                  -------------
                                                                   HIGH   LOW
                                                                  ------ ------
     <S>                                                          <C>    <C>
     FISCAL QUARTERS YEAR ENDED SEPTEMBER 30, 1999:
     December 31, 1998........................................... $46.00 $20.13
     March 31, 1999.............................................. $46.44 $24.13
     June 30, 1999............................................... $44.50 $26.00
     September 30, 1999.......................................... $38.13 $18.50
     FISCAL QUARTERS YEAR ENDED SEPTEMBER 30, 1998:
     December 31, 1997........................................... $39.13 $31.50
     March 31, 1998.............................................. $50.25 $33.50
     June 30, 1998............................................... $48.75 $37.50
     September 30, 1998.......................................... $48.50 $30.00
</TABLE>

  At December 7, 1999, the Company had 1,193 holders of record of Common Stock.

  The Company has historically not paid dividends on its Common Stock. The
Company currently intends to retain earnings and reinvest such earnings in its
business. Additionally, the Company currently has a covenant related to an
operating lease that restricts the payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA.

  The following selected financial data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.

<TABLE>
<CAPTION>
                                          YEARS ENDED SEPTEMBER 30,
                                 ---------------------------------------------
                                   1999     1998      1997     1996     1995
                                 -------- --------  -------- -------- --------
<S>                              <C>      <C>       <C>      <C>      <C>
OPERATING DATA:
Revenues........................ $623,072 $490,302  $350,597 $267,773 $203,578
Costs of sales..................  129,295   96,161    70,615   54,418   41,550
Product development and
 enhancement expenses...........   38,457   29,717    24,853   15,553   14,807
Selling, general and
 administrative expenses........  260,674  201,689   134,849  102,597   75,193
Income (loss) before other
 income and income taxes (1)....  174,546  (21,161)   72,591   95,205   72,028
Net income (loss)...............  123,889  (61,156)   55,444   58,392   42,930
Income (loss) per common share:
  Basic......................... $   1.34 $  (0.67) $   0.66 $   0.79
  Diluted.......................     1.31    (0.67)     0.64     0.77
BALANCE SHEET DATA:
Working capital (2)............. $294,000 $546,816  $491,801 $ 77,159 $  3,692
Total assets....................  780,731  967,004   748,566  241,680  128,978
Stockholders' equity............  517,905  747,915   600,862  138,187
Stockholder's net investment....                                        53,187
</TABLE>
--------
(1) Includes $20.1 million of reorganization and unusual costs charged to
    expense in 1999, $116.5 million of purchased research and development and
    $67.4 million of reorganization and unusual costs charged to expense in
    1998, and $31.9 million of purchased research and development and $15.8
    million of reorganization and unusual costs charged to expense in 1997 (see
    Notes 3 and 4--Notes to Consolidated Financial Statements).

                                       13
<PAGE>

(2) Prior to fiscal 1996, substantially all of the excess cash generated by the
    Company's operations was regularly remitted to Sterling Software pursuant
    to Sterling Software's centralized cash management program.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

INTRODUCTION

  The Company is a worldwide leader in providing E-Business integration
solutions for Global 5000 and other companies and their E-Communities. The
Company develops, markets and supports software products and provides services
and consulting that enable businesses to engage in E-Business communications
and transactions with their trading partners and other E-Community
constituents. The Company is focused on providing E-Business integration
solutions through its COMMERCE, GENTRAN and CONNECT product families. Software
and services to build, manage and service integrated business partner
communities are provided by the Company's E-Community management (COMMERCE
service family). The Company's E-Business Process Integration (GENTRAN product
family) provides software products and related services that facilitate end-to-
end integration of business processes within and among enterprises and
organizations Through the Company's E-Business Communications Infrastructure
(CONNECT product family), the Company provides software and services focused
specifically on the complexities of managing data delivery within and between
enterprises and organizations. Consulting, implementation, education and
outsourcing services in support of the Company's other E-Business integration
solutions are provided through the Company's E-Sourcing services (Managed
Services). The Company provides bank automation solutions to financial
institutions through its VECTOR product family.

  The Company was incorporated in December 1995. The Company, through its
predecessors and subsidiaries, has been providing solutions to allow businesses
to conduct transactions electronically with their business partners and other
E-Community consultants for more than 25 years and has customers in many
industries, including banking, "E-tailing," healthcare, insurance,
manufacturing, pharmaceuticals, retailing, telecommunications, government and
transportation. The Company has direct operations in 20 countries outside of
the United States, a Pan-European support center in Amsterdam, a Pan-Asian
support and development center in Singapore and more than 40 distributors
worldwide.

  Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
notes thereto which are in Part II, Item 8 of this report.

  The Company operates within four reportable business segments: COMMERCE,
GENTRAN, CONNECT and Managed Services, which are organized based upon products
sold and/or services provided (see Note 13--Notes to Consolidated Financial
Statements). Each business segment offers a distinct family of products and/or
services to E-Business communities worldwide. Although each business segment
offers a distinct family of products and/or services, a business segment may
sell another business segment's products and/or services. During 1999, the
Company determined that the product lines acquired in the 1998 acquisition of
XcelleNet are not sufficiently strategic to its future growth plans.

  The Company's recurring revenues includes revenue from annual and multi-year
product support agreements having terms ranging generally from one to three
years, fixed-term product license agreements having terms ranging generally
from month-to-month to year-to-year and COMMERCE services agreements that are
cancelable upon 30 days' notice. The Company includes the entire portion of the
recognized revenue from COMMERCE services agreements in recurring revenues,
although no assurances can be given that such agreements will not be canceled.

  Internet-related revenues are revenues derived primarily from products and
services in the COMMERCE, GENTRAN and CONNECT families that are implemented
directly on the Internet or used with Internet-based technologies, including
extranet and intranet configurations. Examples include Web-based electronic
commerce message management software, software for the movement and management
of information over extranets and intranets, management of business communities
over extranets and related consulting services. The Company did not track
Internet-related revenue during fiscal 1997.

                                       14
<PAGE>

RESULTS OF OPERATIONS

 Fiscal 1999 Compared to Fiscal 1998

  Total revenues increased $132.8 million or 27%, in 1999 compared to 1998. The
revenue increase was due to a $45.1 million or 24% increase in products
revenue, a $41.9 million or 42% increase in product support revenue and a $45.8
million or 23% increase in services revenue. The increase in products and
product support revenues was due primarily to an increase in licensing of
CONNECT software products, a $45.1 million increase in remote and mobile
management software products and related product support resulting from the
acquisition of XcelleNet completed July 21, 1998, and an increase in the
licensing of GENTRAN software products. The increase in services revenue was
primarily due to growth in customer volume in COMMERCE services, an increase in
the number of customers purchasing services from the Company's Managed Services
business segment and the addition of new customers in other groups. Products
revenue, product support revenue and services revenue represented 38%, 23% and
39%, respectively, of total 1999 revenues compared to 39%, 21% and 40%,
respectively, of total 1998 revenues. The Company's recurring revenues
increased $65.2 million or 26% in 1999 compared to 1998 and represented 51% of
total revenues during 1999 and 1998. The Company's Internet-related revenues
increased 54% to $202.2 million for 1999 from $131.7 million for 1998.

  The Company's products revenue growth rate for 1999 is lower, as compared to
1998, primarily due to a slowdown in product licensing as a result of customers
delaying new licensing decisions until their internal year 2000 ("Y2K") issues
are addressed and lower than expected growth from certain of the Company's more
traditional EDI and file transfer products due to the maturity of these market
segments combined with the penetration of the Company's products in these
segments. The Company expects the dampening effects of Y2K on products revenue
to continue possibly into its second fiscal quarter of 2000. The Company has
been providing services specific to Y2K consulting and testing for customers
and their trading communities. However, these Y2K specific services were not
sufficient to offset the lower growth trend in products revenue due to the
effects of Y2K as described above.

  Revenue from the COMMERCE business segment increased $27.4 million or 15%, in
1999 over 1998, primarily due to a 16% increase in products revenue, a 19%
increase in product support revenue and a 14% increase in services revenue. The
increase in products and product support revenues was primarily due to an
increase in international software licensing and a larger customer base. The
increase in services revenue was primarily due to an increase in customer
transaction volume, the addition of new customers and to a lesser extent,
certain price increases. Approximately 17% of the Company's total international
revenue was generated by the COMMERCE business segment in 1999, compared to 16%
in 1998.

  Revenue from the GENTRAN business segment increased $9.3 million or 12%, in
1999 over 1998, primarily due to a 20% increase in product support revenue and
to a lesser extent, an increase in services revenue. Products revenue increased
slightly in 1999. The increase in product support revenue was primarily due to
an expansion of the installed customer base. The increase in services revenue
was primarily due to an increase in services provided to international
customers. Approximately 18% of the Company's total international revenue was
generated by the GENTRAN business segment in 1999, compared to 20% in 1998.

  Revenue from the CONNECT business segment increased $29.2 million or 17%, in
1999 over 1998 due to a 16% increase in products revenue and a 26% increase in
product support revenue. CONNECT services revenue was not significant for
either year. The increase in products and product support revenues was
primarily due to increased software licensing to new and existing customers,
new product offerings and certain price increases. Approximately 49% of the
Company's total international revenue was generated by the CONNECT business
segment in 1999, compared to 57% in 1998.

  Revenue from the Managed Services business segment increased $19.2 million or
55%, in 1999 over 1998. The increase in services revenue was due primarily to
an increase in the number of customers from the Company's GENTRAN and CONNECT
business segments that purchased services, expansion of the business segment's
services offerings and international services and to a lesser extent certain
price increases. Approximately 6% of the Company's total international revenue
was generated by the Managed Services business segment in 1999, compared to 4%
in 1998.

                                       15
<PAGE>

  Total revenue generated from the Company's international operations was
$140.8 million and $101.3 million in 1999 and 1998, respectively, representing
an increase of $39.5 million or 39%. This was due primarily to a 54% year over
year increase in international revenue generated by the COMMERCE business
segment, a 30% increase by the GENTRAN business segment, an 18% increase by the
CONNECT business segment and a 100% increase by the Managed Services business
segment. Revenue from the Company's international operations represented 23% of
total revenue for 1999 as compared to 21% in 1998.

  Total costs and expenses decreased $62.9 million in 1999 as compared to 1998
due primarily to charges in 1999 of $20.1 million for reorganization and
unusual costs compared to charges in 1998 of $116.5 million for purchased
research and development acquired primarily from XcelleNet and $67.4 million of
reorganization and unusual costs. The reorganization and unusual costs and
purchased research and development costs are hereinafter referred to as
"Special Charges." See Reorganization and Unusual Costs and Research and
Development Costs below. Excluding these charges in 1999 and 1998, total costs
and expenses increased $100.9 million or 31% (including $47.8 million of
XcelleNet costs and expenses) on revenue growth of 27%. The increase in total
costs and expenses of the COMMERCE, GENTRAN, CONNECT and Managed Services
business segments are 10%, 32%, 10% and 46%, respectively. The increase in
total costs and expenses of the COMMERCE, CONNECT and Managed Services business
segments resulted from higher revenues generated by these segments, although
the increases are not as great as the revenue growth generated in these
segments. The increase in total costs and expenses of the GENTRAN business
segment resulted from higher revenues and international expansion.

  Total cost of sales consists primarily of salaries and related expenses for
product support, managed services, data center and communications personnel,
and related expenses for the Company's data center and other facilities,
communications, product media, duplication, packaging and shipping. Total costs
of sales increased $33.1 million or 34%, in 1999 as compared to 1998. As a
percentage of total revenues, total costs of sales increased to 21% in 1999
from 20% for 1998. Costs of sales for products and product support increased
$19.2 million or 46%, due to $16.6 million of XcelleNet costs not included in
the prior year since XcelleNet was not acquired until July 21, 1998, an
increase of costs associated with supporting expanding software licensing and a
larger installed customer base. Costs of sales for products and product support
as a percentage of revenues increased to 10% in 1999 from 9% in 1998. Costs of
sales for services increased $13.9 million or 26%, primarily due to higher
costs associated with providing Managed Services education and consulting and
also includes $3.9 million related to XcelleNet. As a percentage of total
revenues, costs of sales for services remained unchanged at 11%. Cost of sales
includes $37.9 million of depreciation and amortization for 1999 (including
$11.6 million from the XcelleNet acquisition) and $28.6 million of depreciation
and amortization for 1998.

  Product development and enhancement expenses consists primarily of salaries
and related expenses from product development personnel and outside contractor
costs, together with the cost of facilities and equipment. Product development
and enhancement expenses for 1999 were $38.5 million, net of $24.7 million
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 86"), an increase of $8.8 million or 30% compared to 1998
product development and enhancement expenses of $29.7 million, net of $17.6
million capitalized pursuant to FAS 86. The increase was primarily due to
higher product development and enhancement expenses of $5.9 million, net of
$3.1 capitalized pursuant to FAS 86 from the XcelleNet acquisition and higher
gross product development expense relating to products under development during
1999 including those under the Company's new growth initiatives. As a
percentage of total revenues, product development and enhancement expenses
remained unchanged at 6% for 1999 and 1998. As a percentage of total
development and enhancement expenses, total capitalized costs increased to 39%
in 1999 from 37% in 1998. Product development and enhancement expenses and the
capitalization rate may fluctuate from period to period depending in part upon
the number and status of software development projects in process.

  Selling, general and administrative expenses consists primarily of salaries,
commissions and related expenses of sales, marketing, administrative, executive
and financial personnel, as well as outside professional fees, facilities and
depreciation expenses. Selling, general and administrative expenses increased
$59.0 million or 29%, in 1999 compared to 1998, primarily due to $21.4 million
of costs from the XcelleNet acquisition not

                                       16
<PAGE>

included in 1998 and an increase in sales, marketing and administrative support
activities needed to support the corresponding growth in revenue. As a
percentage of total revenues, selling, general and administrative expenses
increased to 42% for 1999 from 41% for 1998.

  Income before other income and income taxes was $174.5 million for 1999 as
compared to a loss before other income and income taxes of $21.2 million for
the same period of 1998 due to a $132.8 million increase in revenue and a $62.9
million decrease in total costs due primarily to reorganization and unusual
charges of $20.1 million in 1999 compared to charges in 1998 of $116.5 million
for purchased research and development acquired primarily from XcelleNet and
$67.4 million of reorganization and unusual costs. Excluding these charges in
1999 and 1998, income before other income and income taxes was $194.6 million
and $162.7 million, respectively. Other income decreased $1.1 million primarily
due to lower investment income.

  Provision for income taxes increased $9.6 million for 1999 compared to 1998,
primarily due to the increase in income before income taxes for 1999. XcelleNet
contributed $2.1 million to this increase.

 Fiscal 1998 Compared to Fiscal 1997

  Total revenues increased $139.7 million or 40%, in 1998 as compared to 1997.
The revenues increase was due to a $67.8 million or 55% increase in products
revenue, a $25.9 million or 34% increase in product support revenue and a $46.0
million or 30% increase in services revenue. The growth in products and product
support revenues is due to the addition of new customers, new product
offerings, certain price increases, the expansion of the installed customer
base for product support, remote and mobile management software products and
related product support acquired with the XcelleNet business, and the result of
having direct licensing of products outside of the United States and Canada in
1998 as opposed to having royalty revenue during the first three quarters of
1997. The increase in products and product support revenues is the result of
increased software product licensing for CONNECT and GENTRAN, and $11.1 million
of products and product support revenues related to the acquisition of
XcelleNet. The increase in services revenue is due primarily to growth in
existing COMMERCE services customer transaction volume, the addition of new
COMMERCE customers, and an increase in education and consulting services
provided by Managed Services. Products revenue, product support revenue and
services revenue represented 39%, 21% and 40%, respectively, of total 1998
revenues compared to 35%, 21% and 43%, respectively, of total 1997 revenues.
The Company's recurring revenues increased $48.0 million or 24%, in 1998
compared to 1997 and represented 51% of total revenues during 1998 compared to
58% during 1997. The Company's revenue from sources outside the United States
represented 20% of total revenues for 1998, compared to 13% for 1997.

  Total revenue generated from the Company's international operations was
$101.3 million and $46.2 million in 1998 and 1997, respectively, representing
an increase of $55.1 million or 119%. The increase in the relative percentage
for the GENTRAN and CONNECT business segments is due largely to the Company
receiving 100% of the revenues from the licensing of products outside the
United States and Canada in 1998 as opposed to a 50% royalty on such revenues
from Sterling Software in the first three quarters of 1997 pursuant to the
International Marketing Agreement. This increase in revenue is due primarily to
a 41% year over year increase in international revenue generated by the
COMMERCE business segment, a 156% increase by the GENTRAN business segment, a
118% increase by the CONNECT business segment and a 605% increase by the
Managed Services business segment. Revenue from the Company's international
operations represented 21% of total revenue for 1998 as compared to 13% in
1997.

  Revenue from the COMMERCE business segment increased $32.4 million or 21%, in
1998 over 1997, primarily due to a 36% increase in products revenue, a 33%
increase in product support revenue and a 19% increase in services revenue. The
increase in products and product support revenue is primarily due to an
increase in software licensing and a larger customer base. The increase in
services revenue is primarily due to an increase in customer transaction
volume, the addition of new customers and to a lesser extent, certain price
increases. Approximately 16% of the Company's total international revenue was
generated by the COMMERCE business segment in 1998, compared to 24% in 1997.

                                       17
<PAGE>

  Revenue from the GENTRAN business segment increased $19.6 million or 35%, in
1998 over 1997, primarily due to a 38% increase in products revenue a 29%
increase in product support revenue and to a lesser extent, an increase in
services revenue. The increase in products and product support revenues is
primarily due to an increase in software licensing and a larger customer base.
The increase in service revenue is primarily due to an increase in services
provided to international customers and to a lesser extent, certain price
increases. Approximately 20% of the Company's total international revenue was
generated by the GENTRAN business segment in 1998, compared to 17% in 1997.

  Revenue from the CONNECT business segment increased $57.9 million or 51%, in
1998 over 1997 primarily due to a 54% increase in products revenue and a 38%
increase in product support revenue. CONNECT services revenue was not
significant for either year. The increase in products and product support
revenues is primarily due to an increase in international software licensing,
increased sales to new and existing customers, a larger customer base and
certain price increases. The CONNECT business segment generated 57% of the
Company's revenue from international operations in 1999 and 1998.

  Revenue from the Managed Services business segment increased $16.5 million or
88%, in 1998 over 1997. The increase in services revenue was primarily due to
an increase in the number of customers in the Company's GENTRAN and CONNECT
business segments that purchased services, expansion of the business segment's
services offerings and expansion of international services. Approximately 4% of
the Company's total international revenue was generated by the Managed Service
business segment in 1998, compared to 1% in 1997.

  Total costs and expenses increased $233.5 million in 1998 as compared to 1997
due primarily to charges in the fourth quarter of 1998 of $116.5 million for
purchased research and development acquired primarily from XcelleNet and $67.4
million of reorganization and unusual costs. Costs for purchased research and
development and reorganization and unusual costs for 1997 were $31.9 million
and $15.8 million, respectively. See Reorganization and Unusual Costs and
Research and Development Costs below. Excluding these charges in 1998 and 1997,
total costs and expenses increased $97.3 million or 42% on revenue growth of
40%. XcelleNet accounted for $9.7 million of this increase. The increase in
total costs and expenses of the COMMERCE, GENTRAN, CONNECT and Managed Services
business segments were 15%, 36%, 68% and 107%, respectively. The increase in
total costs and expenses of the COMMERCE business segment resulted from higher
revenues generated by this segment, although the cost and expense increases
were not as great as the revenue growth generated in this segment. The increase
in total costs and expense of the GENTRAN, CONNECT and Managed Services
business segments resulted from higher revenues and international expansion.

  Total cost of sales consists primarily of salaries and related expenses for
product support, managed services, data center and communications personnel,
and related expenses for the Company's data center and other facilities,
communications, product media, duplication, packaging and shipping. Total costs
of sales increased $25.5 million or 36% in 1998 compared to 1997. As a
percentage of total revenues, total costs of sales remained unchanged at 20%
for 1998 and 1997. Costs of sales for products and product support increased
$7.6 million or 22% due to increased costs to support expanding software
licensing activities, an increase of $4.7 million related to supporting a
larger installed customer base and the acquisition of XcelleNet. The increase
in costs of sales for products and product support includes an increase of $1.8
million of amortization costs for software products of which $1.4 million is
due to the acquisition of XcelleNet. As a percentage of revenue, cost of sales
for products and product support decreased to 9% in 1998 from 10% in 1997.
Costs of sales for services increased $17.9 million or 49% primarily due to
growth in Managed Services and increased costs to support a growing customer
base and greater customer volume. As a percentage of total revenues, costs of
sales for services increased to 11% in 1998 from 10% in 1997. Costs of sales
includes $28.6 million of depreciation and amortization in 1998 compared to
$21.4 million of depreciation and amortization in 1997.

  Product development and enhancement expenses consists primarily of salaries
and related expenses from product development personnel and outside contractor
costs, together with the cost of facilities and equipment.

                                       18
<PAGE>

Product development and enhancement expense for 1998 of $29.7 million, net of
$17.6 million capitalized pursuant to FAS 86 increased $4.8 million or 19%,
compared to 1997 product development and enhancement expense of $24.9 million,
net of $13.5 million capitalized pursuant to FAS 86. The increase was primarily
due to the higher gross product development expense relating to products under
development during 1998. As a percentage of total revenue, product development
and enhancement expenses decreased to 6% in 1998 from 7% in 1997. Total
capitalized costs represented 37% and 35% of total product and enhancement
expense for 1998 and 1997, 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 in process.

  Selling, general and administrative expenses increased $66.8 million or 50%,
in 1998 as compared to 1997, primarily due to an increase in sales, marketing
and administrative support activities needed to support the corresponding
growth in revenue, increases in personnel following the termination of the
International Marketing Agreement in June, 1997 and a $6.4 million increase in
costs due to the acquisition of XcelleNet. Selling, general and administrative
expenses, as a percentage of total revenues, were 41% and 38% for 1998 and
1997, respectively.

  Loss before other income and income taxes was $21.2 million for 1998 as
compared to income before other income and income taxes of $72.6 million for
the same period of 1997 due to a $139.7 million increase in revenues offset by
a $233.5 million increase in total costs and expenses including nonrecurring
charges of $183.9 million for purchased research and development and
reorganization and other unusual costs in the fourth quarter of 1998 related to
the acquisitions and other activities noted below. Excluding the Special
Charges in 1998 and 1997, income before other income and income taxes was
$162.7 million and $120.3 million in 1998 and 1997, respectively.

  Other income increased $7.5 million in 1998 as compared to 1997, primarily
due to an increase in investment income resulting generally from a higher
average balance of investments. Provision for income taxes increased $30.3
million in 1998 as compared to 1997, primarily due to the increase in taxable
income which includes greater nondeductible charges in 1998 as compared to
1997.

REORGANIZATION AND UNUSUAL COSTS

 1999 Reorganization and Unusual Costs

  Based in part on changes in the Company's marketplace, during 1999 the
Company began a program of realigning its resources to new initiatives to
address what it believes are future growth areas: E-Business Process
Integration, E-Business Communications Infrastructure, E-Community Management
and E-Sourcing. Based on the Company's third quarter results, during the fourth
quarter the Company also determined that a realignment of additional resources,
exiting of certain businesses and discontinuance of certain product lines was
necessary to maximize future operating results, revenue and earnings growth and
stockholder value. As a result, in the fourth quarter of 1999 approximately 200
positions were eliminated from the Company's global workforce.

  Primarily due to the realignment, the Company recorded a charge of $26.1
million (see 1998 Reorganization and Unusual Costs below) in 1999 ("1999
Reorganization and Unusual Costs"). The Company has reassigned approximately
450 employees and has redirected the use of $75 million to $100 million to be
utilized for the new initiatives in fiscal 2000 which would have otherwise been
used in more traditional product lines and product lines which have been
discontinued. Additionally, in calendar 2000, the Company plans to reassign an
additional 300 people from more traditional product lines and other product
lines that have been discontinued or reduced to focus on the new initiatives.

                                       19
<PAGE>

  The components of the 1999 Reorganization and Unusual Costs are as follows
(in thousands):

<TABLE>
     <S>                                                               <C>
     Excess facilities costs.......................................... $12,346
     Write-down of software products which will no longer be actively
      marketed or supported and related assets........................   6,578
     Employee termination costs.......................................   5,382
     Other............................................................   1,801
                                                                       -------
                                                                       $26,107
                                                                       =======
</TABLE>

  Excess facilities costs of $12.3 million consist of $9.9 million of
continuing obligations under operating leases and other cash payments and $2.4
million of leasehold improvement write-offs. During the third quarter of fiscal
1999, the Company decided to relocate operations from a facility which it
currently leases to a new leased facility which was occupied in October 1999.
As the Company is required to continue its operating lease payments for the
vacated facility, it recorded a charge for the future lease commitments of the
vacated facility and asset write-offs for related leasehold improvements
totaling $3.0 million. The $3.0 million charge is included in the excess
facilities costs of the previously mentioned 1999 Reorganization and Unusual
Costs.

  At September 30, 1999 the unpaid balance of the 1999 Reorganization and
Unusual Costs was $14.2 million and is included in accounts payable and accrued
liabilities (see Note 8--Notes to Consolidated Financial Statements). The
balance is comprised of $10.2 million of excess facilities costs, $3.0 million
of employee termination costs and $1.0 million related to other items.

 1998 Reorganization and Unusual Costs

  The Company's results of operations for 1998 include reorganization and
unusual costs of $67.4 million. These costs were primarily related to the
reorganization of the Company's operations in connection with the fiscal 1998
acquisitions discussed below, the write-off of certain assets and excess cost
over net assets acquired and the accrual of costs in connection with the
Company's decision to exit the business of publishing CD-ROM-based catalogs and
the write-off of certain other software products which the Company no longer
intends to actively market and support.

  The components of the 1998 Reorganization and Unusual Costs were as follows
(in thousands):

<TABLE>
   <S>                                                                  <C>
   Write-down of software products and other assets and recognition of
    liabilities associated with software products and services which
    will no longer be actively marketed or supported and related
    assets............................................................. $21,806
   Write-off of software and other assets and recognition of
    liabilities associated with exiting the business of publishing CD-
    ROM based catalogs.................................................  18,204
   Write-off of excess costs over net assets acquired..................   8,488
   Employee termination costs..........................................   7,993
   Out of pocket costs related to the reorganization...................   4,784
   Other...............................................................   6,161
                                                                        -------
                                                                        $67,436
                                                                        =======
</TABLE>

  The costs associated with exiting the business of publishing CD-ROM based
catalogs and other estimated charges were, and are expected to remain, less
than the Company originally estimated, resulting in a $6.0 million reversal
during fiscal 1999 of the costs originally reserved for this purpose. This
reversal is included in 1999 Reorganization and Unusual costs of $20.1 million.

  During 1999, $20.0 million, including $3.5 million of employee termination
costs, were disbursed or reversed from the September 30, 1998 balance of
accrued reorganization and unusual costs. The unpaid balance

                                       20
<PAGE>

remaining for the 1998 Reorganization and Unusual Costs at September 30, 1999
was $3.6 million, which is included in accounts payable and accrued
liabilities.

 1997 Reorganization and Unusual Costs

  In June 1997, the Company established direct operations outside the United
States and Canada to distribute its products and services by acquiring certain
assets and assuming certain liabilities associated with the distribution of
certain of the Company's products by Sterling Software outside the United
States and Canada. Additionally, the Company terminated the International
Marketing Agreement.

  The Company paid Sterling Software $5.2 million for the early termination of
the International Marketing Agreement and $10.1 million for the net book value
of the assets the Company acquired less the liabilities assumed. The Company
recorded the $5.2 million payment and other costs, principally incurred to
integrate the international distribution business formerly conducted by
Sterling Software into the Company's operations, as reorganization and unusual
costs in fiscal year 1997.

  The components of the 1997 Reorganization and Unusual Costs consist of (in
thousands):

<TABLE>
     <S>                                                                <C>
     Early termination payment to Sterling Software.................... $ 5,226
     Transaction costs and professional fees...........................   3,100
     Severance and transition costs....................................   2,400
     Other.............................................................   5,084
                                                                        -------
                                                                        $15,810
                                                                        =======
</TABLE>

  At September 30, 1997, the remaining balance of the 1997 Reorganization and
Unusual Costs was $8.9 million which was paid in fiscal 1998.

BUSINESS COMBINATIONS

  On July 21 1998, the Company completed the acquisition of all of the issued
and outstanding stock of XcelleNet, an Atlanta, Georgia based provider of
remote systems management software products and services (see Notes 4 and 5--
Notes to Consolidated Financial Statements and Research and Development Costs
and Supplemental Results of Operations below). The acquisition was accounted
for pursuant to the purchase method of accounting; therefore, the Company's
consolidated statements of operations reflect the results of operations of
XcelleNet from the date of the acquisition. The aggregate purchase price paid
was $224.2 million consisting of $83.2 million of cash, 2.4 million shares of
Common Stock and 1.3 million stock options to purchase the Company's Common
Stock which replaced outstanding options held by XcelleNet employees and
directors to purchase XcelleNet stock.

  In February 1997, the Company acquired for cash all of the outstanding stock
of Comfirst, a Paris, France based provider of communication and file transfer
software. In May 1997, the Company acquired Automated Catalogue Services L.P.,
a provider of electronic product catalogs and information databases delivered
via CD-ROM and the Internet. The aggregate purchase price was $48.2 million,
which consisted of $32.0 million in cash, 0.2 million shares of Common Stock
valued at $5 million and promissory notes due January 2, 1998 (the "Notes"), in
the amount of $11.2 million. The Notes were paid in full in July 1997. Both
acquisitions were accounted for under the purchase method of accounting. The
effects of the acquisitions were not material to the Company's results of
operations for 1997.

RESEARCH AND DEVELOPMENT COSTS

  The purchase price of the XcelleNet acquisition was allocated based on the
estimated fair value of assets acquired and liabilities assumed at the date of
acquisition. The estimates of fair value were determined by the Company's
management based on information furnished by the management of XcelleNet and an
independent

                                       21
<PAGE>

valuation of developed software, core technology and purchased research and
development. The Company allocated $114.7 million of the purchase price to
purchased research and development. The Company recorded a nondeductible charge
for such amount, which represented the appraised value of products still in the
development stage that were not considered to have reached technological
feasibility based on the status of design and development activities that
required further refinement and testing. The development activities required to
complete the acquired in-process technologies include additional coding, cross-
platform porting and validation, quality assurance procedures and beta testing.

  The Company relied primarily on the income approach to determine the fair
market value of the developed software, core technology and research and
development, whereupon fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses. The income
approach focuses on the income producing capability of the developed software,
core technology and purchased research and development projects and best
represents the present value of the future economic benefits expected to be
derived. In determining the amount of the purchase price to allocate to
purchased research and development, factors such as stage of completion and
technological uncertainties were considered by the Company and its independent
appraiser in determining the present value of the future benefits to be
received.

  The Company had estimated at September 30, 1998 that further expenditures of
$8.5 million would be required during the succeeding 18 months to develop the
XcelleNet acquired research and development into commercially viable products.
Due to changes in business priorities, four projects that were originally
planned to use the research and development were cancelled. Therefore, the
above mentioned estimate for further expenditures was reduced in fiscal 1999 to
$6.1 million and as of the end of 1999, such amount had been expended resulting
in new products which are currently being marketed.

                                       22
<PAGE>

SUPPLEMENTAL RESULTS OF OPERATIONS

  During 1999, the Company determined that the XcelleNet product lines were not
sufficiently strategic to its future growth plans primarily because the
products are primarily utilized for information technology systems management
and the customers and sales processes utilized are different than those for the
Company's other infrastructure products. Therefore, the Company has decided to
sell the XcelleNet business (see Notes 3, 4 and 5--Notes to Consolidated
Financial Statements). The results of operations of the Company without the
XcelleNet business, purchased research and development and reorganization and
unusual charges for fiscal years 1999, 1998 and 1997 are supplementally
presented below in order to provide meaningful information which will represent
the continuing operations of the Company after the divestiture (in thousands,
except per share information).

<TABLE>
<CAPTION>
                                                                      PERCENT OF
                                                       CHANGE FROM    CHANGE FROM    PERCENT OF
                                                       PRIOR YEAR     PRIOR YEAR   TOTAL REVENUE
                                                     ---------------- ------------ ----------------
                            1999     1998     1997    99/98    98/97  99/98  98/97 1999  1998  1997
                          -------- -------- -------- -------  ------- -----  ----- ----  ----  ----
<S>                       <C>      <C>      <C>      <C>      <C>     <C>    <C>   <C>   <C>   <C>
Revenue:
 Products...............  $202,580 $183,583 $123,594 $18,997  $59,989   10%    49%  36%   39%   35%
 Product support........   120,549   97,656   75,114  22,893   22,542   23%    30%  22%   20%   22%
 Services...............   238,332  197,164  151,889  41,168   45,275   21%    30%  42%   41%   43%
                          -------- -------- -------- -------  -------              ---   ---   ---
                           561,461  478,403  350,597  83,058  127,806   17%    36% 100%  100%  100%
Costs and expenses:
 Cost of sales:
 Products and product
  support...............    43,058   40,488   34,217   2,570    6,271    6%    18%   8%    9%   10%
 Services...............    63,745   53,697   36,398  10,048   17,299   19%    48%  11%   11%   10%
                          -------- -------- -------- -------  -------              ---   ---   ---
                           106,803   94,185   70,615  12,618   23,570   13%    33%  19%   20%   20%
 Product development and
  enhancement expenses..    31,285   28,455   24,853   2,830    3,602   10%    14%   6%    5%    7%
 Selling, general and
  administrative
  expenses..............   232,872  195,268  134,849  37,604   60,419   19%    45%  41%   41%   39%
                          -------- -------- -------- -------  -------              ---   ---   ---
                           370,960  317,908  230,317  53,052   87,591   17%    38%  66%   66%   66%
                          -------- -------- -------- -------  -------              ---   ---   ---
 Income before other
  income and income
  taxes.................   190,501  160,495  120,280  30,006   40,215   19%    33%  34%   34%   34%
 Other income...........    23,053   24,152   16,693  (1,099)   7,459   (5%)   45%   4%    5%    5%
                          -------- -------- -------- -------  -------              ---   ---   ---
 Income before income
  taxes.................   213,554  184,647  136,973  28,907   47,674   16%    35%  38%   39%   39%
 Provision for income
  taxes.................    75,960   66,827   51,409   9,133   15,418   14%    30%  13%   14%   15%
                          -------- -------- -------- -------  -------              ---   ---   ---
 Net income.............  $137,594 $117,820 $ 85,564 $19,774  $32,256   17%    38%  25%   25%   24%
                          ======== ======== ======== =======  =======              ===   ===   ===
 Income per common
  share:
 Basic..................  $   1.49 $   1.29 $   1.02
                          ======== ======== ========
 Diluted................  $   1.45 $   1.24 $   0.99
                          ======== ======== ========
</TABLE>

  A reconciliation from the amounts reported in the consolidated statements of
operations to the amounts reported above is as follows (in thousands):

<TABLE>
<CAPTION>
                         INCOME (LOSS) BEFORE OTHER
                          INCOME AND INCOME TAXES         NET INCOME (LOSS)
                         ---------------------------- ---------------------------
                           1999      1998      1997     1999      1998     1997
                         --------  --------  -------- --------  --------  -------
<S>                      <C>       <C>       <C>      <C>       <C>       <C>
As reported............. $174,546  $(21,161) $ 72,591 $123,889  $(61,156) $55,444
XcelleNet business......   (4,145)   (2,240)            (1,270)   (1,378)
Purchased research and
 development related to
 XcelleNet business.....            114,650                      114,650
Purchased research and
 development............              1,810    31,879              1,810   20,135
Reorganization and
 unusual costs..........   20,100    67,436    15,810   14,975    63,894    9,985
                         --------  --------  -------- --------  --------  -------
                         $190,501  $160,495  $120,280 $137,594  $117,820  $85,564
                         ========  ========  ======== ========  ========  =======
</TABLE>

                                       23
<PAGE>

  The Company is supplementally presenting the quarterly financial information
below based upon the continuing operations of the Company and excluding the
results of the XcelleNet and Special Charges for 1999 and 1998 (in thousands,
except per share information). See Note 14--Notes to Consolidated Financial
Statements.

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED
                                   --------------------------------------------
                                                 MARCH
                                   DECEMBER 31,   31,    JUNE 30, SEPTEMBER 30,
                                   ------------ -------- -------- -------------
<S>                                <C>          <C>      <C>      <C>
Year ended September 30, 1999:
  Revenues........................   $128,049   $135,829 $137,193   $160,390
  Costs of sales..................     24,085     26,883   27,690     28,145
  Product development and
   enhancement expenses...........      7,455      7,866    7,238      8,726
  Selling, general and
   administrative expenses........     52,259     53,938   55,426     71,249
  Income before other income and
   income taxes...................     44,250     47,142   46,839     52,270
  Net income......................     32,429     34,323   35,222     35,620
  Income per common share:
    Basic.........................   $   0.34   $   0.36 $   0.37   $   0.42
    Diluted.......................       0.33       0.35     0.36       0.42
Year ended September 30, 1998:
  Revenues........................   $106,283   $111,076 $122,095   $138,949
  Costs of sales..................     20,462     24,030   24,099     25,594
  Product development and
   enhancement expenses...........      7,648      6,392    7,343      7,072
  Selling, general and
   administrative expenses........     45,577     44,789   47,666     57,236
  Income before other income and
   income taxes...................     32,596     35,865   42,987     49,047
  Net income......................     24,200     26,978   31,226     35,146
  Income per common share:
    Basic.........................   $   0.27   $   0.30 $   0.34   $   0.38
    Diluted.......................       0.26       0.29     0.33       0.36
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

  The Company had $294.0 million of working capital at September 30, 1999,
including $61.7 million of cash and cash equivalents and $200.4 million of
marketable securities. At September 30, 1998, the Company had $546.8 million of
working capital. The decrease in working capital is principally due to the
Company's expenditure of $415.1 million during fiscal 1999 pursuant to its
stock repurchase program (see below).

  Net cash flows from operations increased $48.7 million to $159.6 million in
1999 as compared to 1998 primarily due to higher operating profits and an
increase in deferred revenue which was offset by a decrease in noncash charges,
an increase in accounts receivable, an increase in prepaid expenses and other
assets and a decrease in accounts payable, accrued liabilities and income taxes
payable. Income tax payments decreased $11.8 million in 1999 compared to 1998.
The decrease in tax payments is primarily due to the write-off of assets for
tax purposes in 1999 due to exiting the business of publishing CD-ROM based
catalogs in 1998. A portion of the Company's cash flow from operations during
1999 and 1998 was used to fund software additions and capital expenditures.
Software expenditures during 1999 were $26.5 million as compared to $19.3
million in 1998. The software expenditures during the current year were
primarily for new products and enhancements of existing products. Property and
equipment purchases of $57.8 million for 1999 were primarily for purchases of
equipment upgrades for processing systems and computer equipment purchases to
support the continuing growth in revenue.

  During 1999, the Company's Board of Directors approved a stock repurchase
program which authorizes the repurchase of up to 25 million shares of the
Company's Common Stock. Purchases may be made in open market, negotiated or
block transactions from time to time as market and business conditions warrant.
As of September 30, 1999, the Company had purchased 16.8 million shares of
Common Stock at an average price of $24.76 per share.


                                       24
<PAGE>

  The Company cancelled its Revolving Credit and Term Loan Agreement on June
30, 1999. At September 30, 1999, the Company's capital resource commitments
consisted primarily of commitments under lease arrangements for office space
and equipment activities (see Note 10--Notes to Consolidated Financial
Statements). The Company currently intends to meet such obligations from cash
flows from operations. There are no significant commitments for future capital
expenditures. The Company believes available balances of cash and cash
equivalents and marketable securities, combined with cash flows from
operations, are sufficient to meet the Company's working capital requirements
for the foreseeable future.

EFFECTS OF INFLATION

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

YEAR 2000

 General

  The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Accordingly,
computer programs that perform date-related functions may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of operations, including a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. The following discussion regarding year 2000
matters constitutes a "Year 2000 Readiness Disclosure" within the meaning of
the Year 2000 Information and Readiness Disclosure Act of 1998.

  The Company continues to assess and resolve year 2000 issues associated with
its product and services offerings, material internal systems, such as
information technology ("IT") systems and non-IT systems, and material third-
party relationships. The Company has established web pages to update customers
on the year 2000 status of its offerings and to assist them in understanding
the Company's year 2000 strategy. This information may be accessed on the
Company's website at www.sterlingcommerce.com/y2kstatement.

 Product and Services Offerings

  The Company has completed a year 2000 assessment of its currently offered
products and services. This assessment included internal testing of the year
2000 capabilities of the Company's product and services offerings. The Company
has not had, and does not plan to have, its products or services tested by an
independent source. Based on its assessment, the Company believes that all
required steps have been taken to prepare its currently offered products and
services for year 2000 compliant operation. The increased amount of testing
related to the year 2000 resulted in some delays in the release of new products
or product versions. However, because year 2000 compliance was generally
integrated into its normal product development activities, the Company has not
incurred any significant incremental expenses in addressing the year 2000 issue
in its product or E-Business services offerings.

  The Company believes that a small percentage of its customers who receive
product support from the Company are operating product versions that may not be
year 2000 compliant or products or product versions that the Company has
replaced with comparable year 2000 compliant products. The Company believes
that the majority of these customers have migrated to year 2000 compliant
versions and products through new releases, which the Company has strongly
encouraged. In addition, certain customers may be operating non-compliant
versions of products in respect of which the Company's agreed-upon product
support and warranty periods have expired. The Company has not undertaken an
assessment of whether these customers are taking appropriate steps to address
any related year 2000 issues.

                                       25
<PAGE>

  The Company provides a significant amount of its E-Community Management
services through its data center located in Columbus, Ohio. The data center
utilizes third-party software and hardware, as well as some Company software.
Furthermore, the data center requires electricity and other utilities and
relies on the Internet and third-party communications providers for the
transmission of data to and from its customers. The Company has made provision
for back-up systems and established contingency plans. The Company has also
conducted extensive assessment and testing of the data center, including
operating a back-up system in a post year 2000 mode, and has taken appropriate
remedial actions, all in an effort to avoid year 2000 failures.

  The Company does not believe that customers who license or migrate to year
2000 compliant versions of its products, or customers who purchase the
Company's E-Community Management or other services, will experience any year
2000 failures caused by such products or services. In addition, the Company
believes that its licenses and other agreements contain customary and
appropriate limitations on the Company's obligations with respect to any year
2000 failures its current or former products and services may cause. However,
there can be no assurance that the Company's expectations and beliefs as to
these matters will prove to be accurate. Moreover, the Company's products are
used in, and the provision of its services requires the use of, systems
comprised of third-party hardware and software, some of which may not be year
2000 compliant.

 Internal Systems

  The Company has conducted a year 2000 assessment of its material internal
systems, both IT and non-IT, on a risk-priority basis. That assessment included
an assessment of certain embedded systems. Based on the results of that
assessment, the Company has taken certain remedial action with respect to its
internal systems. The remediation effort for these systems was completed in
June 1999. Any newly discovered remediation requirements have been, or will be,
addressed. Based upon its experience to date, the Company does not anticipate
that the internal and external costs of such remediation will have a material
adverse effect on the Company.

  There can be no assurance that the remediation of the Company's material
internal systems will be completed in a timely manner or that such remediated
systems will function as anticipated. Interruption of normal business
operations, including the Company's ability to effectively provide E-Community
Management and other services to customers, in such events could have a
material adverse effect on the Company's business, operating results and
financial condition.

 Third-Party Relationships

  The Company has conducted a year 2000 assessment of its material third-party
supplier relationships. The assessment was conducted through communications
with such suppliers, testing of supplier equipment, systems or interfaces, and
a review of the year 2000 information made publicly available by such
suppliers. As a result of this assessment, certain actions were taken by the
Company to obtain assurances as to the correct future operation of third-party
systems. There can be no assurance, however, that the Company has received all
information necessary to fully evaluate the year 2000 readiness of all material
suppliers. Moreover, the Company relies in various ways, both domestically and
internationally, on government, utility and communications service providers to
conduct normal business operations. There can be no assurance that such
suppliers will not suffer business interruptions caused by a year 2000 issue.
Such interruptions could have a material adverse effect on the Company's
business, operating results and financial condition.

 Additional Risks

  Additional aspects of the year 2000 issue may pose risks to be considered in
evaluating the future growth of the Company. The Company believes that it has
experienced lower than expected growth from certain products, in part as a
result of customers addressing internal year 2000 issues, and there can be no
assurance that year 2000 issues will not continue to affect future customer
purchasing patterns, possibly resulting in lower demand for the Company's
products and services. For example, certain industry analysts believe that many

                                       26
<PAGE>

customers and potential customers chose to defer system investments during
calendar 1999 and may choose to defer such investments in early calendar 2000
as they test and correct year 2000 problems in their systems. Other analysts
have indicated that many enterprises that have completed their year 2000
corrective measures may still defer system investments until after the early
part of calendar 2000. Conversely, the Company may have experienced greater
demand for certain of its products and services, particularly document
verification and year 2000 testing services, in calendar 1999 as customers
sought to replace, upgrade and test their systems to address year 2000 issues.
The Company anticipates that demand for such services will diminish in calendar
2000.

  Furthermore, some commentators have also predicted that a significant amount
of litigation may arise out of year 2000 compliance issues. While the Company
has not been subject to any year 2000 claims or lawsuits to date, there can be
no assurance that customers or former customers will not bring claims or
lawsuits against the Company seeking compensation for losses associated with
year 2000-related failures. A material adverse outcome in a year 2000 claim or
lawsuit could have a material adverse effect on the Company's business,
financial condition and results of operations.

 Contingency Planning

  Although the Company believes that it has executed a timely, effective plan
for addressing material year 2000 issues that may affect the Company, there can
be no assurance that the Company or a third party on which the Company
significantly relies will not experience unanticipated consequences or material
expenses which could have a material adverse effect on the Company's business,
operating results or financial condition. The Company believes that it is
difficult to specifically describe its most likely "worst case" year 2000
scenario. One "worst case" scenario is the failure of the Company's products to
correctly perform date-related functions through the year 2000, causing
customer systems or operations dependent upon such products or services to fail
or be disrupted. Other "worst case" scenarios involve the Company's E-Community
Management offerings. Failure of the Company's internal systems to correctly
perform date-related functions through the year 2000, or disruptions in those
systems, could result in errors or delays in the provision of the Company's E-
Community Management and other services. Another "worst case" year 2000
scenario is the failure of a material third-party supplier, such as a
communications or utility provider, to address its year 2000 issues, resulting
in errors or delays in the provision of the Company's E-Community and other
services. In the event of such failures or disruptions, customers may commence
legal action against the Company or otherwise seek compensation for their
losses.

  The Company has established a set of "contingency plans" to address potential
consequences of the year 2000 issue. These plans include documented action to
take in the event of any outage, a response chain-of-command to be used in
managing any outage, and the reporting that is required. The Company has
evaluated, and intends to continue to evaluate, both existing and newly
identified year 2000 risks and to develop and implement such further responsive
measures as it deems appropriate.

 No Assurance Concerning Year 2000 Readiness Efforts

  Although the Company believes that its year 2000 readiness efforts are
designed to appropriately identify and address those year 2000 issues that are
within the Company's control, there can be no assurance that the Company's
efforts will be fully effective or that year 2000 issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations. The novelty and complexity of the issues presented and
the Company's dependence on the preparedness of third parties are among the
factors that could cause the Company's efforts to be less than fully effective.
Moreover, year 2000 issues present many risks that are simply beyond the
Company's control, such as the potential effects of year 2000 issues on the
economy in general and on the Company's business partners and customers in
particular.

OTHER MATTERS

  The assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at exchange rates in effect as of the respective balance
sheet dates, and revenue and expense accounts of these operations

                                       27
<PAGE>

are translated at average exchange rates during the month in which the
underlying transaction occurs. Unrealized translation gains and losses are
included as an adjustment to accumulated other comprehensive income (loss). The
Company has mitigated a portion of its currency exposure through decentralized
sales, marketing and support operations in which costs are local currency
based. In addition, the Company may from time to time employ external hedging
strategies. The Company believes that its results of operations and financial
condition will not be materially affected by the recent decrease in the
relative value of certain foreign currencies compared to the U.S. dollar.

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

NEW EUROPEAN CURRENCY

  Eleven of the fifteen member countries of the European Union established
fixed conversion rates between their sovereign currencies and a new currency,
the "Euro", and adopted the Euro as their common currency effective January 1,
1999. Under the Euro introduction plan, sovereign currencies of the Euro
participants will be phased out beginning January 1, 2002 and eliminated by
June 30, 2002. In the meantime, the Euro is an acceptable legal business
currency (as a "book" currency) as well as the sovereign currencies although
the actual introduction of Euro notes and coins will not occur until January 1,
2002. The Company continues to review its products and business operations with
respect to the Euro's requirements in order to determine pricing strategies in
the new economic environment, implement changes to the legal and contractual
implications for contracts, ensure systems are Euro capable, and ensure vendors
can support the Company's operations with respect to Euro transactions. The
Company's currently offered products are currency neutral; therefore, the
Company has not had to make material modifications, nor does it expect to make
material modifications, to its products or internal systems used to support
Euro transactions. The cost of minor modifications have not had, nor are they
expected to have, a material adverse effect on the Company's results of
operations or financial condition. There can be no assurance, however, that the
Company will be able to complete such modifications to comply with Euro
requirements or that any failure to complete such modifications would not have
an adverse effect on the Company's business, results of operations or financial
condition. In addition, the Company faces risks to the extent that third-party
suppliers upon which the Company relies, or their suppliers, are unable to make
appropriate modifications to support Euro transactions. Currently, the Company
does not know of any appropriate modifications to support Euro transactions
which need to be made by suppliers.

FORWARD-LOOKING INFORMATION

  This report and other reports and statements published by the Company from
time to time (collectively, "Published Reports") contain, or may contain,
certain forward-looking statements and information that are based on the
beliefs of, and information currently available to, the Company's management,
as well as estimates and assumptions made by the Company's management. When
used in Published Reports, words such as "anticipate," "believe," "estimate,"
"expect," "future," "intend," "plan" and similar expressions, as they relate to
the Company or the Company's management, identify forward-looking statements.
Such statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions relating
to the Company's operations and results of operations, competitive factors and
pricing pressures, shifts in market demand, the performance and needs of the
industries served by the Company, the costs of product development and other
risks and uncertainties, including, in addition to any risks and uncertainties
specifically identified in the text surrounding such statements, those risks
discussed herein under the section titled "Risk Factors," uncertainties with
respect to changes or developments in social, economic, business, industry,
market, legal and regulatory circumstances and conditions and actions taken or
omitted to be taken by third parties, including the Company's stockholders,
customers, suppliers, business partners, competitors and legislative,
regulatory, judicial and other governmental authorities and officials.

                                       28
<PAGE>

Should one or more of these risks or uncertainties materialize, or should the
underlying estimates or assumptions prove incorrect, actual results or outcomes
may vary significantly from those anticipated, believed, estimated, expected,
intended or planned. The Company does not intend to update the forward-looking
statements contained in this or other Published Reports.

RISK FACTORS

 General

  The Company and its businesses are subject to a number of risks, including
those enumerated below. Any or all of such risks could have a material adverse
effect on the business, financial condition, results of operations and
prospects of the Company and on market prices for the Company's Common Stock.
See also "Forward-Looking Information" above.

 Competition

  The market for electronic commerce solutions is very competitive. Numerous
companies supply electronic commerce products and services, and several
competitors target specific customer requirements for which the Company
presently is, or may become, a provider. The Company's competitors include both
large companies with substantially greater resources than the Company and
small, specialized companies that may compete in one or more particular market
niches. Competitors that offer products and/or services that compete with
various of the Company's products and services include, among others, AT&T;
Computer Associates International, Inc.; General Electric Information Services;
Harbinger Corporation; IBM; MCI WorldCom; Quick Response Services, as well as
certain hardware companies and the internal programming staffs of various
businesses engaging in electronic commerce.

  The Company expects competition to increase in the future from both existing
competitors and other companies that may enter the Company's existing or future
markets. The Company believes that its ability to compete successfully in the
electronic commerce market depends on numerous factors, some of which are
outside its control, including product performance, functionality and
reliability, price and customer service and support. There can be no assurance
that new or established competitors will not offer products and services that
are superior to and/or lower in price than those of the Company. In addition,
the Company could face increased competition as the Internet continues to gain
acceptance as a method of conducting electronic commerce.

 Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results

  The Company's future quarterly operating results may vary and reduced levels
of earnings or losses could be experienced in one or more quarters.
Fluctuations in the Company's quarterly operating results could result from a
variety of factors, including changes in the levels of revenue derived from
licensing of software products and E-Community Management, E-Sourcing and other
services, the timing of new product and service announcements by the Company or
its competitors, changes in pricing policies by the Company or its competitors,
changes in accounting requirements dictated by regulatory agencies or standards
bodies (including possibly retroactive changes), market acceptance of new and
enhanced versions of the products and services of the Company or its
competitors, the size and timing of significant orders, changes in operating
expenses, changes in the Company's strategy, the introduction of alternative
technologies, the effect of potential acquisitions and industry and general
economic factors.

  The Company has limited or no control over many of these factors. In
addition, a somewhat greater portion of the Company's revenues tends to be
recognized in the fourth fiscal quarter as a result of a number of factors,
including the Company's incentive compensation structure for its sales
personnel (under which opportunities to earn higher commissions applicable to
sales in excess of annual quotas and to realize other benefits associated with
the achievement of such quotas are at their greatest during the fourth fiscal
quarter).

  The Company operates with virtually no product order backlog because its
software products typically are shipped shortly after orders are received. As a
result, product revenues in any quarter are substantially

                                       29
<PAGE>

dependent on the quantity of such products licensed in that quarter.
Additionally, as a result of potentially lengthy sales cycles, revenues
associated with products and services may not actually be recognized until a
later fiscal quarter.

  The Company's expense levels are based in part on its expectations as to
future revenues. If revenue levels are below expectations, the Company's
operating results are likely to be adversely affected unless the Company is
willing and able to reduce its expenses proportionately.

  As a result of the foregoing factors, comparisons of results of operations
between particular periods are not necessarily meaningful and historical
results of operations are not necessarily indicative of future performance.

 Technological Change; Dependence on New Products and Related Risks

  The electronic commerce industry is characterized by rapid technological
change, frequent new product and service introductions and evolving industry
standards. The Company's future success will depend in significant part on its
ability to anticipate and guide industry standards, to continue to apply
advances in electronic commerce product and service technologies, to enhance
existing products and services and to introduce and acquire new products and
services on a timely basis to keep pace with technological developments.

  In this regard, there can be no assurance that the Company will be successful
in developing, acquiring or marketing new or enhanced products or services that
respond to technological change or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, acquisition or marketing of such products or services
or that the Company's new or enhanced products and services will adequately
meet the requirements of the marketplace or achieve market acceptance.

  Any delay or failure in the introduction of new or enhanced products or
services, or the failure of such products or services to achieve market
acceptance, could have a material adverse effect on the business, results of
operations and financial condition of the Company.

  The introduction and marketing of new or enhanced products and services
requires management of the transition from existing products and services in
order to minimize the disruption in customer purchasing patterns. There can be
no assurance that the Company will successfully manage the transition to new or
enhanced products and services. Further, there can be no assurance that
products, services or technologies developed by others will not render the
Company's products, services or technologies obsolete.

  From time to time, the Company or its competitors may announce new products,
services, capabilities or technologies that have the potential to replace or
shorten the life cycle of the Company's existing products and services
offerings. There can be no assurance that announcements of product enhancements
or new product or service offerings will not cause customers to defer or cancel
purchasing existing products and services. Any such deferrals or cancellations
could have a material adverse effect on the Company's business, results of
operations and financial condition.

  Software products as complex as those used in the electronic commerce
industry may contain undetected errors or failures when first introduced or
when new versions are released. If software errors are discovered after
introduction, the Company could experience delays or lost revenues during the
period required to correct these errors. There can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of, or delay in, market acceptance, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.

  The Company faces certain risks relating to year 2000 issues. In this regard,
see the information set forth in "Year 2000" above, which is incorporated
herein by reference.

                                       30
<PAGE>

 Growth Through Acquisitions

  A key element of the Company's growth strategy has been strategic
acquisitions. There can be no assurance that, in the future, acquisition
candidates will be found on terms suitable to the Company or that the Company
will have adequate resources to consummate any acquisition. Acquisitions
involve a number of other special risks, including time and expenses associated
with identifying and evaluating acquisitions, the diversion of management's
attention, the difficulty in the integration of acquired products and services,
the difficulty in combining different company cultures and the potential loss
of key employees of the acquired company. In addition, customer satisfaction or
performance problems at a single acquired firm could have a material adverse
effect on the reputation of the Company as a whole.

  Acquisitions may also result in potentially dilutive issuance of equity
securities, the incurrence of debt, the write-off of research and development
and capitalized product costs, integration costs and the amortization of
expenses related to goodwill and other intangible assets, all of which could
have a material adverse effect on the results of operations and financial
condition of the Company.

  The guidelines and requirements for the accounting of acquisitions, including
those for the pooling-of-interests method of accounting, the expensing of
certain costs and the write-down of certain assets, are currently being changed
or under consideration for change by various regulatory agencies and standards
bodies. Those changes and the related uncertainties could make acquisitions
less beneficial or attractive to the Company and could impact the Company's
ability to make future acquisitions.

 International Growth and Marketing

  Prior to June 1997, Sterling Software acted as the exclusive distributor of
certain of the Company's products outside the United States and Canada pursuant
to the International Marketing Agreement. In June 1997, the Company and
Sterling Software terminated the International Marketing Agreement.
Concurrently therewith, the Company acquired certain assets and assumed certain
liabilities associated with the distribution of its products, and the Company
hired certain Sterling Software employees, most of whom had been dedicated to
the sales and marketing of those products. The Company's ability to maintain
and expand this business and its E-Community Management and E-Sourcing
businesses internationally will depend upon, among other things, its ability to
attract and retain both talented and qualified managerial, technical and sales
personnel as well as customers outside the United States and Canada and its
ability to continue to effectively manage its domestic operations while
focusing on international expansion. Moreover, the Company's ability to
successfully implement its international strategy will require additional
improvements to its infrastructure and management information systems, and
particularly to its international customer support systems.

  International operations are subject to certain inherent risks, including
unexpected changes in regulatory requirements and tariffs, local political and
economic developments, difficulties in staffing and managing foreign
operations, exchange controls, expropriation, longer payment cycles, increased
difficulties in collecting accounts receivable, changes in foreign currency
exchange rates and potentially adverse tax consequences.

  To the extent international sales are denominated in foreign currencies,
fluctuations in the exchange rates between the U.S. dollar and applicable
international currencies may contribute to fluctuations in the Company's
results of operations. The Company has in the past, on a limited basis, entered
into hedging arrangements for the purpose of reducing the risk of currency
fluctuations. In addition, sales in Europe and certain other parts of the world
typically are adversely affected in the third calendar quarter of each year
because many customers reduce their business activities in the summer months.

  The assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at exchange rates in effect as of the respective balance
sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as a component of
comprehensive income and transaction gains and losses are included in the
determination of net income.

                                       31
<PAGE>

  In the event of any dispute arising from international operations, the
Company may be subject to the exclusive jurisdiction of foreign courts and may
not be successful in subjecting foreign persons or entities to the jurisdiction
of the courts in the United States. The Company may also be hindered in or
prevented from enforcing its rights with respect to foreign governments because
of the doctrine of sovereign immunity. There can be no assurance that the laws,
regulations or administrative practices of foreign countries relating to the
Company's ability to do business in that country will not change. Any such
change could have a material adverse effect on the business, results of
operations and financial condition of the Company.

  The Company faces certain risks relating to the adoption of the Euro as a new
currency in Europe. In this regard, see the information set forth in "New
European Currency" above. Such information is incorporated herein by reference.

 Ability to Attract Qualified Personnel

  The Company'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 the Company can
retain its key managerial, technical and sales personnel or that it can
attract, assimilate or retain such personnel in the future. The inability of
the Company to attract and retain such personnel could have a material adverse
effect on the business, results of operations and financial condition of the
Company.

 Dependence on Data Center

  The Company's services offerings, especially its E-Community Management
services offerings, are dependent upon the Company's ability to protect its
computer equipment and the information stored in its data center against damage
that may be caused by fire, power loss, telecommunications failures,
unauthorized intrusion, computer viruses and disabling devices and other
similar events. The data center is located in a single facility in Columbus,
Ohio and the Company has no present intention of establishing an additional
data center in a separate location.

  The Company is party to a disaster recovery agreement that provides
alternative off-site computer systems for use in such disastrous events. In
addition, the Company has taken precautions to protect itself and its customers
from events that could interrupt delivery of certain of the Company's E-
Community Management and other services. These precautions include, among
others, backup power generation equipment, fire protection and physical
security systems and an early warning detection and fire extinguishing system.
Notwithstanding such precautions, there can be no assurance that a fire or
other natural disaster, including national, regional or local
telecommunications disruptions, would not result in a prolonged disruption of
the Company's E-Community Management or other services.

  The Company is currently covered under a business interruption insurance
policy. However, even if lost revenues or increased costs experienced by the
Company during the pendency of any disruption of its services business were
substantially recovered under any such insurance policy (as to which, depending
upon the circumstances, there can be no assurance), longer term revenue losses
not recoverable under such policies could result from possible losses of
customers and, consequently, could have a material adverse effect on the
business, results of operations and financial condition of the Company.

  The Company faces certain risks relating to year 2000 issues. In this regard,
see information set forth in "Year 2000" above. Such information is
incorporated herein by reference.

 Limited Protection of Proprietary Rights; Risks of Infringement and Loss of
Licenses

  Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary through reverse
engineering or otherwise. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar

                                       32
<PAGE>

technology. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. However, the Company 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 this industry than are the various
legal protections afforded its proprietary rights.

  The Company does not believe that any of its products or services infringe
the valid proprietary rights of third parties in any material respect. However,
a large number of patents, trademarks and copyrights have been, and are being,
issued, registered or asserted in the software and electronic commerce
industries. There can be no assurance that the Company is aware of all such
intellectual property rights that may pose a risk of infringement by the
Company's products or services, especially with respect to United States
patents which can cover extremely broad concepts and the applications for which
are confidential until the patents are issued.

  The Company from time to time has received communications from third parties
alleging that the Company is infringing intellectual property rights. There can
be no assurance that third parties will not assert infringement claims in the
future or that the Company would prevail in any litigation to enjoin the
Company from offering affected products or services or be able to obtain a
license with respect to such rights on terms acceptable to the Company. Such
events could have a material adverse effect on the business, results of
operations and financial condition of the Company.

  Licenses for a number of third-party software products have been granted to
the Company for its own use or for remarketing to its customers. In the
aggregate, these licenses are material to the business of the Company. Although
management believes that the risk that the Company will lose a significant
number of licenses is remote, such a loss could have a material adverse effect
on the business, results of operations and financial condition of the Company.

 Government Regulatory and Industrial Policy Risks

  Current United States and Canadian regulations and laws governing the
telecommunications industry generally do not apply to providers of electronic
commerce services and products. Except for government regulations in certain
foreign countries (which may affect the provision of certain of the Company's
services or use of certain of its products) and regulations governing the
ability of the Company to disclose the contents of communications by its
customers, there are no government regulations pertaining to the pricing,
service characteristics or capabilities, geographic distribution or quality
control features of the Company's electronic commerce services or products.
There exists, however, the risk that governmental policies affecting the
electronic commerce industry could be implemented by executive order,
legislation, administrative order or otherwise. If such policies are adopted,
they could have a material adverse effect on the business, results of
operations and financial condition of the Company.

  Although the Company does not believe that import and export control
regulations currently create significant impediments to the Company's
international growth strategy, such regulations are applicable to certain of
the Company's software products and could interfere with such growth in the
future.

 Certain Anti-takeover Provisions

  Certain provisions of the Company's Fourth Amended and Restated Certificate
of Incorporation ("Certificate of Incorporation"), the Company's Amended and
Restated Bylaws ("Bylaws") and the Delaware General Corporation Law may have
the effect of delaying, deterring or preventing a change in control of the
Company. The Certificate of Incorporation authorizes the issuance of up to
300,000,000 shares of Common Stock and up to 50,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). The Board of Directors of
the Company has the power to determine the price and terms under which any such
additional capital stock may be issued and to fix the terms of such Preferred
Stock, and existing stockholders of the Company will not have preemptive rights
with respect thereto.

                                       33
<PAGE>

  The Company is a party to a Rights Agreement, dated as of December 18, 1996
(the "Rights Agreement"), between the Company and The First National Bank of
Boston, as rights agent. The existence of the Rights Agreement and the
provisions thereunder could also have the effect of delaying, or deterring or
preventing, a change in control of the Company.

 Amendment to Bylaws

  The Board of Directors of the Company have amended certain provisions of the
Company's Bylaws, including, among others, the provision relating to bringing
business before an annual meeting. The Bylaws provide that for business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof. The Bylaws have been amended to require
that, in order for a stockholder's notice to be timely, it must be delivered to
or mailed to and received at the principal executive offices of the Company not
less than eighty days and no earlier than 110 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders. The notice
must also contain the information required by Article II, Section 2 of the
Bylaws.

  The foregoing description of the Bylaws does not purport to be complete and
is qualified in its entirety by reference to the Bylaws filed herewith.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

INTEREST RATE RISK

  The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio of marketable securities. The
Company does not use derivative financial instruments in its investment
portfolio. The stated objectives of the Company's investment guidelines are:
safety of principal, liquidity, maximization of yield and diversification of
risk. The Company places its investments with high credit quality issuers,
principally states of the United States, political subdivisions of the states
and corporate debt issuers, and limits the amount of credit exposure to any one
issuer. The marketable securities portfolio includes only those securities with
active secondary or resale markets in order to ensure portfolio liquidity.

  The table below presents principal amounts and related weighted average
interest rates by date of maturity for the Company's marketable securities.
Weighted average interest rates include the after-tax yield on debt securities
of states of the United States and political subdivisions of the states. The
total investment portfolio had an effective maturity of 258 days at September
30, 1999.

<TABLE>
<CAPTION>
                                       MATURITY
                          (IN THOUSANDS, EXCEPT PERCENTAGES)
                         ----------------------------------------    FAIR VALUE AT
                           2000       2001      2002      TOTAL    SEPTEMBER 30, 1999
                         ---------  --------  --------  ---------  ------------------
<S>                      <C>        <C>       <C>       <C>        <C>
Commercial paper........ $  89,440                      $  89,440       $ 89,001
  Average interest
   rate.................      5.74%                          5.74%
Debt securities.........    79,673  $ 16,602  $ 14,950    111,225        111,443
  Average interest
   rate.................      5.38%     5.61%     5.80%      5.47%
Total marketable
 securities............. $ 169,113  $ 16,602  $ 14,950  $ 200,665       $200,444
  Average interest
   rate.................      5.57%     5.61%     5.80%      5.59%
</TABLE>

<TABLE>
<CAPTION>
                                      MATURITY
                         (IN THOUSANDS, EXCEPT PERCENTAGES)
                         -------------------------------------   FAIR VALUE AT
                            1999         2000        TOTAL     SEPTEMBER 30, 1998
                         -----------  ----------- ------------ ------------------
<S>                      <C>          <C>         <C>          <C>
Commercial paper........ $    52,650              $    52,650       $ 51,972
  Average interest
   rate.................        5.64%                    5.64%
Debt securities.........     118,223  $   12,658      130,881        131,479
  Average interest
   rate.................        5.90%       6.11%        5.92%
Total marketable
 securities............. $   170,873  $   12,658  $   183,531       $183,541
  Average interest
   rate.................        5.82%       6.11%        5.84%
</TABLE>


                                       34
<PAGE>

FOREIGN CURRENCY RISK

  The Company conducts business in various foreign currencies, primarily in
Canada and Europe and to a lesser extent in Australia, Japan and other Asian
countries. The Company monitors its foreign currency exposure and, from time to
time, will attempt to reduce its exposure through hedging. As of September 30,
1999, the Company had no foreign currency hedges outstanding. The Company has
mitigated, and expects to continue to mitigate, a portion of its currency
exposure through decentralized sales, marketing and support operations in which
all costs are local currency based. Additionally, the Company operates in U.S.
dollars with its third-party distributors, thereby eliminating currency
exposure from these relationships.

                                       35
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                            STERLING COMMERCE, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Ernst & Young LLP, Independent Auditors.........................  37
Consolidated Financial Statements:
  Consolidated Balance Sheets at September 30, 1999 and 1998..............  38
  Consolidated Statements of Operations for the Years Ended September 30,
   1999, 1998 and 1997....................................................  39
  Consolidated Statements of Stockholders' Equity for the Years Ended
   September 30, 1999, 1998 and 1997......................................  40
  Consolidated Statements of Cash Flows for the Years Ended September 30,
   1999, 1998 and 1997....................................................  41
  Notes to Consolidated Financial Statements..............................  42
</TABLE>

                                       36
<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. (the "Company") as of September 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. Our
audit also included the financial statement schedule listed under Item 14(a) of
the Company's Annual Report on Form 10-K for the year ended September 30, 1999.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at September 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                          /s/ Ernst & Young LLP

Dallas, Texas
November 17, 1999

                                       37
<PAGE>

                            STERLING COMMERCE, INC.

                          CONSOLIDATED BALANCE SHEETS

                          SEPTEMBER 30, 1999 AND 1998
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                             1999       1998
                                                           ---------  --------
<S>                                                        <C>        <C>
                                   ASSETS
                                   ------
Current assets:
  Cash and cash equivalents............................... $  61,689  $354,948
  Marketable securities...................................   200,444   183,451
  Accounts receivable, net................................   189,703   151,256
  Deferred income taxes...................................     9,748    11,627
  Prepaid expenses and other current assets...............    30,321    15,869
                                                           ---------  --------
    Total current assets..................................   491,905   717,151
Property and equipment, at cost:
  Computers and peripheral equipment......................   138,572    87,942
  Furniture, fixtures and other equipment.................    22,906    27,991
  Leasehold improvements..................................    17,792    18,144
                                                           ---------  --------
                                                             179,270   134,077
  Accumulated depreciation................................   (80,103)  (57,542)
                                                           ---------  --------
  Property and equipment, net.............................    99,167    76,535
Computer software, net....................................    92,123    91,409
Excess cost over net assets acquired, net.................    56,342    63,382
Other assets..............................................    41,194    18,527
                                                           ---------  --------
                                                           $ 780,731  $967,004
                                                           =========  ========
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                    ------------------------------------
Current liabilities:
  Accounts payable and accrued liabilities................ $  90,749  $ 90,599
  Income taxes payable....................................    20,512     7,992
  Deferred revenue........................................    86,644    71,744
                                                           ---------  --------
    Total current liabilities.............................   197,905   170,335
                                                           ---------  --------
Deferred income taxes.....................................    38,481    30,335
Other noncurrent liabilities..............................    26,440    18,419
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.01 par value; 50,000 shares autho-
   rized; no shares issued and outstanding................
  Common stock, $.01 par value; 300,000 and 150,000 shares
   authorized at September 30, 1999 and 1998,
   respectively; 96,124 and 94,511 shares issued at
   September 30, 1999 and 1998, respectively..............       961       945
  Additional paid-in capital..............................   763,639   714,156
  Retained earnings.......................................   153,030    31,756
  Accumulated other comprehensive income (loss)...........    (2,010)    1,058
  Treasury stock, at cost; 16,160 shares at September 30,
   1999...................................................  (397,715)
                                                           ---------  --------
    Total stockholders' equity............................   517,905   747,915
                                                           ---------  --------
                                                           $ 780,731  $967,004
                                                           =========  ========
</TABLE>

                            See accompanying notes.

                                       38
<PAGE>

                            STERLING COMMERCE, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                     1999     1998      1997
                                                   -------- --------  --------
<S>                                                <C>      <C>       <C>
Revenues:
  Products........................................ $236,432 $191,380  $123,594
  Product support.................................  142,925  101,005    75,114
  Services........................................  243,715  197,917   151,889
                                                   -------- --------  --------
                                                    623,072  490,302   350,597
Costs and expenses:
  Costs of sales:
    Products and product support..................   61,044   41,842    34,217
    Services......................................   68,251   54,319    36,398
                                                   -------- --------  --------
                                                    129,295   96,161    70,615
  Product development and enhancement expenses....   38,457   29,717    24,853
  Selling, general and administrative expenses....  260,674  201,689   134,849
  Purchased research and development..............           116,460    31,879
  Reorganization and unusual costs................   20,100   67,436    15,810
                                                   -------- --------  --------
                                                    448,526  511,463   278,006
                                                   -------- --------  --------
Income (loss) before other income and income
 taxes............................................  174,546  (21,161)   72,591
Other income......................................   23,129   24,152    16,693
                                                   -------- --------  --------
Income before income taxes........................  197,675    2,991    89,284
Provision for income taxes........................   73,786   64,147    33,840
                                                   -------- --------  --------
Net income (loss)................................. $123,889 $(61,156) $ 55,444
                                                   ======== ========  ========
Income (loss) per common share:
  Basic........................................... $   1.34 $  (0.67) $   0.66
                                                   ======== ========  ========
  Diluted......................................... $   1.31 $  (0.67) $   0.64
                                                   ======== ========  ========
</TABLE>


                            See accompanying notes.

                                       39
<PAGE>

                            STERLING COMMERCE, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              ACCUMULATED
                          COMMON STOCK  ADDITIONAL               OTHER      TREASURY STOCK        TOTAL
                          -------------  PAID-IN   RETAINED  COMPREHENSIVE -----------------  STOCKHOLDERS'
                          SHARES AMOUNT  CAPITAL   EARNINGS  INCOME (LOSS) SHARES   AMOUNT       EQUITY
                          ------ ------ ---------- --------  ------------- ------  ---------  -------------
<S>                       <C>    <C>    <C>        <C>       <C>           <C>     <C>        <C>
Balance at September 30,
 1996...................  75,000  $750   $ 98,111  $ 39,282     $    44                         $138,187
 Net income.............                             55,444                                       55,444
 Foreign currency
  translation
  adjustment............                                           (442)                            (442)
 Unrealized gain on
  marketable securities,
  net of tax............                                            260                              260
                                                                                                --------
 Total comprehensive
  income................                                                                          55,262
                                                                                                --------
 Issuance of Common
  Stock.................  14,375   144    400,001                                                400,145
 Issuance of Common
  Stock for
  acquisitions..........     194     2      4,998                                                  5,000
 Issuance of Common
  Stock pursuant to
  employee stock plans,
  including tax benefit
  of $1,200.............      75            3,000                                                  3,000
 Other..................                     (255)     (477)                                        (732)
                          ------  ----   --------  --------     -------    ------  ---------    --------
Balance at September 30,
 1997...................  89,644   896    505,855    94,249        (138)                         600,862
 Net loss...............                            (61,156)                                     (61,156)
 Foreign currency
  translation
  adjustment............                                          1,420                            1,420
 Unrealized loss on
  marketable securities,
  net of tax............                                           (224)                            (224)
                                                                                                --------
 Total comprehensive
  loss..................                                                                         (59,960)
                                                                                                --------
 Issuance of Common
  Stock and stock
  options for
  acquisitions..........   2,442    24    140,987                                                141,011
 Issuance of Common
  Stock pursuant to
  employee stock plans,
  including tax benefit
  of $9,946.............   2,425    25     67,408                                                 67,433
 Other..................                      (94)   (1,337)                                      (1,431)
                          ------  ----   --------  --------     -------    ------  ---------    --------
Balance at September 30,
 1998...................  94,511   945    714,156    31,756       1,058                          747,915
 Net income.............                            123,889                                      123,889
 Foreign currency
  translation
  adjustment............                                         (2,455)                          (2,455)
 Unrealized loss on
  marketable securities,
  net of tax............                                           (613)                            (613)
                                                                                                --------
 Total comprehensive
  income................                                                                         120,821
                                                                                                --------
 Issuance of Common
  Stock pursuant to
  employee stock plans,
  including tax benefit
  of $8,323.............   1,613    16     49,483    (2,615)                 (602) $  17,369      64,253
 Purchase of treasury
  stock.................                                                   16,762   (415,084)   (415,084)
                          ------  ----   --------  --------     -------    ------  ---------    --------
Balance at September 30,
 1999...................  96,124  $961   $763,639  $153,030     $(2,010)   16,160  $(397,715)   $517,905
                          ======  ====   ========  ========     =======    ======  =========    ========
</TABLE>

                            See accompanying notes.

                                       40
<PAGE>

                            STERLING COMMERCE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                 1999       1998       1997
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
OPERATING ACTIVITIES:
Net income (loss)............................. $ 123,889  $ (61,156) $  55,444
 Adjustments to reconcile net income (loss) to
  net cash provided by operating activities:
 Depreciation and amortization................    56,955     40,718     30,214
 Provision for losses on accounts receivable..    11,302      8,952      3,567
 Provision for (benefit of) deferred income
  taxes.......................................    10,025      1,481    (15,586)
 Purchased research and development...........              116,460     31,879
 Noncash reorganization and unusual costs.....     9,762     36,192
 Changes in operating assets and liabilities,
  net of effects of business acquisitions:
  Accounts receivable.........................   (49,749)   (47,073)   (10,751)
  Prepaid expenses and other assets...........   (39,027)    (9,383)   (13,917)
  Accounts payable, accrued liabilities and
   income taxes payable.......................    12,670     14,371     19,677
  Deferred revenue............................    14,900      7,823     17,067
  Other.......................................     8,825      2,474      3,559
                                               ---------  ---------  ---------
   Net cash provided by operating activities..   159,552    110,859    121,153
                                               ---------  ---------  ---------
INVESTING ACTIVITIES:
 Purchases of property and equipment..........   (57,835)   (48,598)   (32,148)
 Purchases and capitalized cost of development
  of computer software........................   (26,539)   (19,320)   (13,855)
 Business acquisitions, net of cash acquired..              (56,637)   (38,320)
 Purchases of investments.....................  (345,964)  (257,730)  (313,460)
 Sales of investments.........................   328,358    308,593    100,349
                                               ---------  ---------  ---------
   Net cash used in investing activities......  (101,980)   (73,692)  (297,434)
                                               ---------  ---------  ---------
FINANCING ACTIVITIES:
 Issuance of Common Stock.....................    64,253     67,433    403,145
 Purchase of treasury stock...................  (415,084)
                                               ---------  ---------  ---------
   Net cash provided by (used in) financing
    activities................................  (350,831)    67,433    403,145
                                               ---------  ---------  ---------
Increase (decrease) in cash and cash
 equivalents..................................  (293,259)   104,600    226,864
Cash and cash equivalents at beginning of
 year.........................................   354,948    250,348     23,484
                                               ---------  ---------  ---------
Cash and cash equivalents at end of year...... $  61,689  $ 354,948  $ 250,348
                                               =========  =========  =========
SUPPLEMENTAL CASH FLOW INFORMATION:
  Income taxes paid........................... $  39,434  $  51,216  $  49,278
                                               =========  =========  =========
</TABLE>

                            See accompanying notes.

                                       41
<PAGE>

                            STERLING COMMERCE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       SEPTEMBER 30, 1999, 1998 AND 1997

1. GENERAL INFORMATION

 General

  Sterling Commerce, Inc. (the "Company") provides E-Business integration
solutions for Global 5000 and other companies and their commerce communities.
The Company develops, markets and supports software products and provides
services and consulting that enable businesses to engage in E-Business
communications and transactions with their trading partners and other E-
Community constituents. The Company is focused on providing E-Business
integration solutions through its COMMERCE, CONNECT and GENTRAN product
families. Through the Company's E-Business Communications Infrastructure
(CONNECT product family), the Company provides software and services which
focus on managed data delivery within and between enterprises. The Company's E-
Business Process Integration (GENTRAN product family) provides software and
services to integrate business processes within an enterprise and among its E-
Business communities. Software and services to build, manage and service
integrated E-Communities is provided by the Company's E-Community Management
(COMMERCE product family). Resources and expertise to solve customers' business
problems are provided through the Company's E-Sourcing (Managed Services). The
Company also provides bank automation solutions to financial institutions
through its VECTOR product family.

  The Company was incorporated in December 1995. The Company, through its
predecessors and subsidiaries, has been providing solutions to allow businesses
to conduct transactions electronically with their trading partners for more
than 25 years and has customers in many industries, including banking, "E-
tailing," healthcare, insurance, manufacturing, pharmaceuticals, retailing,
telecommunications, government and transportation. The Company has direct
operations in 20 countries outside of the United States, a Pan-European support
center in Amsterdam, a Pan-Asian support and development center in Singapore
and more than 40 distributors worldwide.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 Basis of Presentation

  The Company's consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts for the comparative periods
have been reclassified to conform to the current year presentation. The
financial statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingencies at September 30, 1999 and 1998, and the results of
operations for the years ended September 30, 1999, 1998 and 1997. While
management has based its assumptions and estimates on the facts and
circumstances currently known, final amounts may differ from such estimates.

 Revenue

  Revenue from license fees for software products is recognized when the
software is delivered, when there is persuasive evidence that an arrangement
exists, when the fee is fixed and determinable and when collection is probable.
If software products transactions include the right to receive future products,
a portion of the software products revenue is deferred and recognized when such
products are delivered. Revenue from services is recognized as the services are
performed.

  If software product licensing transactions include multiple elements, each
element of the software licensing is separately identified and accounted for
based on the relative fair value of such element. Revenue is

                                       42
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

not recognized on any element of the license arrangement if undelivered
elements are essential to the functionality of the delivered elements.

  Product support contracts generally 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. Returns, allowances and other similar adjustments
to revenue involving software licensing have historically not been material to
the Company's results of operations.

 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" ("FAS 86").
Unamortized software development costs of $42.6 million and $39.0 million are
included in computer software, net at September 30, 1999 and 1998,
respectively. Pursuant to FAS 86, costs are capitalized when technological
feasibility of the product is established. 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 requires 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, product
development personnel salaries and related expenses, outside contractor costs
and allocated facilities and equipment 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.
Capitalized computer software costs are amortized on a product-by-product basis
using the greater of the amount determined by taking the ratio of current year
net revenue to estimated future net revenue or the straight-line method over
periods ranging from two 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 seven to forty
years. Other intangible assets are amortized on a straight-line basis over
periods of three to ten years.

  Depreciation and amortization consists of the following for the years ended
September 30, 1999, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
                                                        1999    1998    1997
                                                       ------- ------- -------
   <S>                                                 <C>     <C>     <C>
   Property and equipment............................. $29,589 $22,022 $16,617
   Purchased computer software........................   5,866   3,122   1,720
   Capitalized computer software development costs....  11,600  11,535  10,252
   Excess costs over net assets of businesses
    acquired..........................................   8,001   2,194     830
   Other intangible assets............................   1,899   1,845     795
                                                       ------- ------- -------
                                                       $56,955 $40,718 $30,214
                                                       ======= ======= =======
</TABLE>


                                       43
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Accumulated amortization related to computer software, net was $67.0 million
and $62.3 million at September 30, 1999 and 1998, respectively. At September
30, 1999 and 1998, accumulated amortization for excess costs over net assets
acquired, net was $12.4 million and $2.3 million, respectively.

 Income Taxes

  The Company computes its provision for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," which requires the use of an asset and liability approach of accounting
for income taxes. Under the asset and liability approach, a deferred tax asset
or liability is recognized for estimated future tax effects attributable to
temporary differences and carryforwards. Deferred tax assets are reduced by a
valuation allowance when it is more likely than not the entire amount of the
deferred tax asset will not be realized. The effect on deferred taxes of a
change in income tax rates is recognized in the period that includes the
enactment date.

 Stock Options

  The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock plans. For fixed stock option grants under APB 25, if the
exercise price of an employee stock option equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

 Income Per Common Share

  The following table sets forth the computation of basic and diluted income
per common share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                    YEARS ENDED SEPTEMBER 30,
                                                    --------------------------
                                                      1999   1998(1)    1997
                                                    -------- --------  -------
<S>                                                 <C>      <C>       <C>
Basic:
Net income (loss).................................. $123,889 $(61,156) $55,444
                                                    ======== ========  =======
Weighted average common shares outstanding.........   92,625   91,307   83,561
                                                    ======== ========  =======
Income (loss) per common share..................... $   1.34 $  (0.67) $  0.66
                                                    ======== ========  =======
Diluted:
Net income (loss).................................. $123,889 $(61,156) $55,444
                                                    ======== ========  =======
Weighted average common shares outstanding.........   92,625   91,307   83,561
Net effect of dilutive stock options (2)...........    2,089             3,254
                                                    -------- --------  -------
Diluted weighted average common shares
 outstanding.......................................   94,714   91,307   86,815
                                                    ======== ========  =======
Income (loss) per common share..................... $   1.31 $  (0.67) $  0.64
                                                    ======== ========  =======
</TABLE>
--------
(1) In connection with the computation of the loss per share for the year ended
    September 30, 1998, all otherwise dilutive stock options have been excluded
    since the impact on the Company's net loss per common share is
    antidilutive. In the absence of this net loss, 3.8 million additional
    shares related to dilutive stock options would be included in the
    computation of diluted income per common share.
(2) For 1999, 1998 and 1997, 2.5 million, 0.4 million, 0.3 million,
    respectively, of antidilutive stock options are excluded from the
    calculation since the option exercise prices were greater than the average
    market prices.


                                       44
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

 Foreign Currency Translation

  The assets and liabilities of consolidated non-U.S. operations are translated
into U.S. dollars at exchange rates in effect as of the respective balance
sheet dates. Revenue and expense accounts of those operations are translated at
average exchange rates prevailing during the period the transactions occur.
Translation gains and losses are included as a component of comprehensive
income and transaction gains and losses are included in the determination of
net income.

 Comprehensive Income

  On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
requires the presentation of comprehensive income and its components in the
financial statements. The purpose of reporting comprehensive income is to
report changes in equity that result from transactions and other economic
events, excluding transactions with owners in their capacity as owners. The
Company's comprehensive income consists of net income, foreign currency
translation adjustments and unrealized gains or losses on marketable
securities. The adoption of FAS 130 had no impact on the financial position or
results of operations of the Company.

  The components of accumulated other comprehensive income (loss) as of
September 30, 1999, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         1999     1998  1997
                                                        -------  ------ -----
     <S>                                                <C>      <C>    <C>
     Foreign currency translation adjustment........... $(1,487) $  968 $(452)
     Unrealized gain (loss) on marketable securities,
      net of tax.......................................    (523)     90   314
                                                        -------  ------ -----
                                                        $(2,010) $1,058 $(138)
                                                        =======  ====== =====
</TABLE>

 Cash and Cash Equivalents

  Cash and cash equivalents consist primarily of highly liquid investments in
investment-grade commercial paper of various issuers, with maturities of three
months or less when purchased. Cash and cash equivalents are recorded at their
fair value.

 Marketable Securities

  The Company invests surplus cash in a diversified portfolio consisting of a
variety of securities, including commercial paper, corporate debt securities
and debt securities issued by states of the United States and political
subdivisions of the states. The fair values for marketable securities are based
on quoted market prices.

  All marketable securities are classified as available-for-sale securities.
Unrealized holding gains and losses on securities available-for-sale are
recorded in accumulated other comprehensive income (loss), net of any related
tax effect. The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to their effective maturity date. Such
amortization is included in investment income. Realized gains and losses and
declines in values judged to be other-than-temporary are included in investment
income.

 Accounts Receivable

  The Company's accounts receivable are due principally from corporations in
diverse industries primarily located in North America and Europe and are
generally unsecured. Accounts receivable are shown in the accompanying
consolidated balance sheets net of an allowance for doubtful accounts of $15.2
million and $10.3 million as of September 30, 1999 and 1998, respectively.


                                       45
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

 Excess Cost Over Net Assets Acquired

  The carrying amount of such costs which are not associated with other assets
acquired in a purchase business combination is reassessed by management if
facts and circumstances suggest that such amount may be impaired. If such
assessment indicates that the costs will not be recoverable, as determined
based on the estimated discounted future cash flows of the business acquired
over the remaining amortization period, the carrying amount is reduced by the
estimated shortfall of cash flows. The carrying amount of costs associated with
other assets acquired in a purchase business combination is included in
impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.

 Recent Pronouncements

  Effective October 1, 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition," as amended by Statement of Position 98-4
"Deferral of the Effective Date of Certain Provisions of SOP 97-2" ("SOP 97-
2"), which requires each element of a software license arrangement to be
separately identified and accounted for based on the relative fair value of
each element. Revenue cannot be recognized on any element of the license
arrangement if undelivered elements are essential to the functionality of the
delivered elements. Adoption of SOP 97-2 did not significantly affect the
Company's results of operations for the year ended September 30, 1999, since
the Company's revenue recognition policies have historically been in
substantial compliance with the practices required by SOP 97-2.

  On December 15, 1998, Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-
9") was released. SOP 98-9 amends SOP 97-2 to require that an entity recognize
revenue for multiple element arrangements by means of the "residual method"
when (1) there is vendor-specific objective evidence ("VSOE") of the fair
values of all the undelivered elements that are not accounted for by means of
long-term contract accounting (2) VSOE of fair value does not exist for one or
more of the delivered elements and (3) all revenue recognition criteria of SOP
97-2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. VSOE is determined by the price charged when each item
is sold separately, or by deducting the fair value of one or more items from
the total fair value of the agreement or by using objective evidence based upon
the vendor's facts and circumstances.

  The residual method requires revenue for multiple element arrangements to be
recognized as follows: (1) the total fair value of the undelivered elements, as
indicated by VSOE, is deferred and subsequently recognized in accordance with
SOP 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related
to the delivered elements.

  The provisions of SOP 98-9 extend the deferral of certain provisions of SOP
97-2. All other provisions of SOP 98-9 will be effective for the Company's
fiscal year beginning October 1, 1999. Retroactive application is prohibited.
The adoption of SOP 98-9 is not expected to significantly impact the Company.

  FAS No. 133: "Accounting for Derivative Instruments and Hedging Activities."
FAS 133, as amended, requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. FAS 133 will be effective for the Company's fiscal year beginning
October 1, 2000. Currently the Company does not use derivatives to a
significant extent; therefore, the adoption of FAS 133 is not expected to have
a material impact on the financial position or results of operations of the
Company.


                                       46
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  SOP 98-1: "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
SOP 98-1 will be effective for the Company's fiscal year beginning October 1,
1999. The adoption of SOP 98-1 is not expected to have a material impact on the
financial position or results of operations of the Company.

3. REORGANIZATION AND UNUSUAL COSTS

 1999 Reorganization and Unusual Costs

  Based in part on the changes in the Company's marketplace, during 1999 the
Company began a program of realigning its resources to new initiatives to
address what it believes are future growth areas: E-Business Process
Integration, E-Business Communications Infrastructure, E-Community Management
and E-Sourcing. Based on the Company's third quarter results, during the fourth
quarter the Company also determined that a realignment of additional resources,
exiting of certain businesses and discontinuance of certain product lines, was
necessary to maximize future operating results, revenue and earnings growth and
stockholder value. As a result, in the fourth quarter of fiscal 1999
approximately 200 positions were eliminated from the Company's global
workforce. Primarily due to the realigning of efforts, the Company has recorded
a charge of $26.1 million (see 1998 Reorganization and Unusual Costs below) in
fiscal 1999 ("1999 Reorganization and Unusual Costs").

  The components of the 1999 Reorganization and Unusual Costs are as follows
(in thousands):

<TABLE>
     <S>                                                               <C>
     Excess facilities costs.......................................... $12,346
     Write-down of software products which will no longer be actively
      marketed or supported and related assets........................   6,578
     Employee termination costs.......................................   5,382
     Other............................................................   1,801
                                                                       -------
                                                                       $26,107
                                                                       =======
</TABLE>

  Excess facilities costs of $12.3 million consist of $9.9 million of
continuing obligations under operating leases and other cash payments and $2.4
of leasehold improvement write-offs. During the third quarter of fiscal 1999,
the Company decided to relocate operations from one facility, which it leased,
to a new leased facility which was occupied in October 1999. The Company is
required to continue its operating lease payments for the vacated facility,
therefore, it recorded a charge for the future lease commitments of the vacated
facility and asset write-offs for related leasehold improvements totaling $3.0
million. The $3.0 million charge is included in the excess facilities costs of
the previously mentioned 1999 Reorganization and Unusual Costs.

  At September 30, 1999 the unpaid balance of the 1999 Reorganization and
Unusual Costs was $14.2 million and is included in accounts payable and accrued
liabilities (see Note 8). The balance is comprised of $10.2 million of excess
facilities costs, $3.0 million of employee termination costs and $1.0 million
related to other items.

 1998 Reorganization and Unusual Costs

  The Company's results of operations for 1998 include reorganization and
unusual costs of $67.4 million. These costs are primarily related to the
reorganization of the Company's operations in connection with the fiscal 1998
acquisitions discussed below, the write-off of certain assets and excess cost
over net assets acquired and the accrual of costs in connection with the
Company's decision to exit the business of publishing CD-ROM

                                       47
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

based catalogs and the write-off of certain other software products which the
Company no longer intends to actively market and support.

  The components of the 1998 Reorganization and Unusual Costs were as follows
(in thousands):

<TABLE>
   <S>                                                                  <C>
   Write-down of software products and other assets and recognition of
    liabilities associated with software products and services which
    will no longer be actively marketed or supported................... $21,806
   Write-off of software and other assets and recognition of liabili-
    ties associated with exiting the business of publishing CD-ROM
    based catalogs.....................................................  18,204
   Write-off of excess costs over net assets acquired..................   8,488
   Employee termination costs..........................................   7,993
   Out of pocket costs related to the reorganization...................   4,784
   Other...............................................................   6,161
                                                                        -------
                                                                        $67,436
                                                                        =======
</TABLE>

  The costs associated with exiting the business of publishing CD-ROM based
catalogs and other estimated charges were, and are expected to remain, less
than the Company originally estimated, resulting in a $6.0 million reversal
during 1999 of the costs originally reserved for this purpose. This reversal is
included in 1999 reorganization and unusual costs of $20.1 million.

  During the fiscal year ended September 30, 1999, $20.0 million, including
$3.5 million of employee termination costs, were disbursed or reversed from the
September 30, 1998 balance of accrued reorganization and unusual costs. The
unpaid balance remaining for the 1998 Reorganization and Unusual Costs at
September 30, 1999 was $3.6 million and is included in accounts payable and
accrued liabilities.

 1997 Reorganization and Unusual Costs

  In June 1997, the Company established direct operations outside the United
States and Canada to distribute its products and services by acquiring certain
assets and assuming certain liabilities associated with the distribution of
certain of the Company's products by Sterling Software outside the United
States and Canada. Additionally, the Company terminated the International
Marketing Agreement with Sterling Software.

  The Company paid Sterling Software $5.2 million for the early termination of
the International Marketing Agreement and $10.1 million for the net book value
of the assets the Company acquired less the liabilities assumed. The Company
recorded the $5.2 million payment and other costs, principally incurred to
integrate the international distribution business formerly conducted by
Sterling Software into the Company's operations, as reorganization and unusual
costs in the fiscal year ended September 30, 1997.

  The components of the 1997 Reorganization and Unusual Costs consist of (in
thousands):

<TABLE>
   <S>                                                                  <C>
   Early termination payment to Sterling Software...................... $ 5,226
   Transaction costs and professional fees.............................   3,100
   Severance and transition costs......................................   2,400
   Other...............................................................   5,084
                                                                        -------
                                                                        $15,810
                                                                        =======
</TABLE>

  At September 30, 1997, the remaining balance of the 1997 Reorganization and
Unusual Costs was $8.9 million which was paid in fiscal 1998.


                                       48
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. BUSINESS COMBINATIONS

 1998 Business Combinations

  On July 21, 1998, the Company completed the acquisition of all of the issued
and outstanding stock of XcelleNet, Inc. ("XcelleNet"), an Atlanta, Georgia
based provider of remote systems management software products and services (see
Note 5). The acquisition was accounted for pursuant to the purchase method of
accounting; therefore, the Company's consolidated statements of operations
reflect the results of operations of XcelleNet from the date of the
acquisition. The aggregate purchase price paid was $224.2 million consisting of
$83.2 million of cash, 2.4 million shares of Common Stock and 1.3 million stock
options to purchase the Company's Common Stock which replaced outstanding
options held by XcelleNet employees and directors to purchase XcelleNet stock.

  The purchase price of the XcelleNet acquisition was allocated based on the
estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition. The estimates of fair value were determined by the
Company's management based on information furnished by the management of
XcelleNet and an independent valuation of developed software, core technology
and purchased research and development. The excess of cost over net assets
acquired is being amortized on a straight-line basis over ten years. The
Company allocated $114.7 million of the purchase price to purchased research
and development. The Company recorded a nondeductible charge for such amount,
which represented the appraised value of products still in the development
stage that were not considered to have reached technological feasibility based
on the status of design and development activities that required further
refinement and testing. The development activities required to complete the
acquired in-process technologies included additional coding, cross-platform
porting and validation, quality assurance procedures and beta testing.

  The Company relied primarily on the income approach to determine the fair
market value of the developed software, core technology and research and
development, whereupon fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses. The income
approach focuses on the income producing capability of the developed software,
core technology and purchased research and development projects and best
represents the present value of the future economic benefits expected to be
derived. In determining the amount of the purchase price to allocate to
purchased research and development, factors such as stage of completion and
technological uncertainties were considered by the Company and its independent
appraiser in determining the present value of the future benefits to be
received.

  The Company had estimated at September 30, 1998 that further expenditures of
$8.5 million would be required during the succeeding 18 months to develop the
XcelleNet acquired research and development into commercially viable products.
Due to changes in business priorities, four projects that were originally
planned to use the research and development were cancelled. Therefore, the
above mentioned estimate for further expenditures was reduced in 1999 to $6.1
million and as of the end of 1999, such amount had been expended, resulting in
new products which are currently being marketed.

                                       49
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  The following unaudited pro forma information presents the Company's results
of operations as if the XcelleNet acquisition had occurred at October 1, 1996
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                               SEPTEMBER 30,
                                                             ------------------
                                                               1998      1997
                                                             --------  --------
                                                                (UNAUDITED)
   <S>                                                       <C>       <C>
   Revenue.................................................. $534,173  $401,884
   Income (loss) before other income and income taxes....... $(54,682) $ 59,920
   Net income (loss)........................................ $(83,435) $ 46,258
   Income (loss) per common share:
     Basic.................................................. $  (0.89) $   0.54
                                                             ========  ========
     Diluted................................................ $  (0.89) $   0.52
                                                             ========  ========
</TABLE>

  The Company also completed certain other acquisitions during 1998 for
aggregate cash consideration of $10 million. The effect of these acquisitions
was not material to the Company's results of operations for 1998. The excess
cost over net assets acquired in connection with these acquisitions is being
amortized in accordance with the Company's amortization policy for such costs.

 1997 Business Combinations

  In February 1997, the Company acquired for cash all of the outstanding stock
of Comfirst, a Paris, France based provider of communication and file transfer
software. In May 1997, the Company acquired Automated Catalogue Services L.P.,
a provider of electronic product catalogs and information databases delivered
via CD-ROM and the Internet. The aggregate purchase price was $48.2 million,
which consisted of $32.0 million in cash, 0.2 million shares of Common Stock
valued at $5 million and promissory notes due January 2, 1998 (the "Notes"), in
the amount of $11.2 million. The Notes were paid in full in July 1997. Both
acquisitions were accounted for under the purchase method of accounting. The
effect of the acquisitions were not material to the Company's results of
operations for 1997.

5. PLANNED DIVESTITURE

  The Company has determined that the product lines acquired in the 1998
XcelleNet acquisition are not sufficiently strategic to its future growth
plans. The Company found that the XcelleNet products are still primarily
utilized for information technology systems management, and the customers and
sales processes utilized are different than those for the Company's other
infrastructure products. Therefore, the Company has decided to sell the
XcelleNet business.

  Revenues and expenses for XcelleNet for 1999 were $61.6 million and $57.5
million, respectively. During 1998, revenues were $11.9 million and expenses
were $9.7 million, excluding $114.7 million of purchased research and
development costs.

  The carrying amount of the net assets of XcelleNet at September 30, 1999 was
$94.1 million excluding deferred income taxes. Assets held by XcelleNet were as
follows: $20.0 million of current assets, which consists primarily of accounts
receivable; $48.5 million of property, plant and equipment, net and computer
software, net; and $40.3 million of other assets, which primarily consists of
excess costs over net assets acquired, net. Liabilities of XcelleNet at
September 30, 1999, were as follows: $9.1 million primarily related to accounts
payable and accrued liabilities, and $5.6 million of deferred revenue. In
addition, the Company's deferred tax liabilities as of September 30, 1999
include $16.4 million relating to XcelleNet.


                                       50
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. LEGAL PROCEEDINGS AND CLAIMS

  From time to time the Company is subject to certain legal proceedings and
claims which arise in the normal course of its business. Pending matters
include claims against the Company involving alleged breaches of contract or
other nonperformance with respect to customer sales, alleged employment
discrimination and other matters. Such routine litigation matters are normally
settled or defended, depending on the circumstances of each claim.

  On February 20, 1997, David B. Shaev (the "Plaintiff") filed a derivative
complaint in the Court of Chancery in the State of Delaware (the "Delaware
Chancery Court") against the Company and its directors challenging the
Company's initial grant of stock options to the Company's directors. On April
6, 1998, the Plaintiff filed a motion to amend the complaint to challenge the
Company's grants of additional stock options to certain of the Company's
directors. In his complaint, the Plaintiff alleged that the individual
defendants breached their fiduciary duties and wasted corporate assets by
granting themselves an excessive number of options pursuant to the Company's
1996 Stock Option Plan. The complaint sought recission and injunctive relief
with respect to the stock options, as well as compensatory damages in an
unspecified amount.

  On June 3, 1997, the individual defendants in the action filed a motion for
summary judgement. The Delaware Chancery court denied the motion, which
decision was upheld on appeal. On March 5, 1999, the parties entered into a
Stipulation of Settlement which was amended as of September 1, 1999 (the
"Settlement"). The Settlement provides for, among other things, the terms of
certain options granted pursuant to the Company's 1996 Stock Option Plan to be
reduced from ten to seven years and the Company to follow certain procedural
requirements in connection with any future stock option grants to executive
officers and directors of the Company. The Delaware Chancery Court approved the
Settlement by order dated September 2, 1999, after notice to the Company's
stockholders and a hearing.

  While any legal proceeding has elements of uncertainty, in the opinion of
management, based on presently available information, the amount of any
liability with respect to any existing claims, net of any applicable reserves
and available insurance, will not have a material effect on the financial
condition or results of operations of the Company.

                                       51
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


7. MARKETABLE SECURITIES

  The Company's marketable securities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                           GROSS UNREALIZED
                                                           -------------------
                                     AGGREGATE  AMORTIZED  HOLDING    HOLDING
                                     FAIR VALUE COST BASIS  GAINS      LOSSES
                                     ---------- ---------- --------   --------
   <S>                               <C>        <C>        <C>        <C>
   SEPTEMBER 30, 1999
   Corporate commercial paper,
    scheduled maturities within one
    year...........................   $  9,982   $  9,982
   Government obligations,
    scheduled maturities within one
    year...........................     26,067     26,072              $      5
   Corporate debt securities,
    scheduled maturities within one
    year...........................     19,904     19,959   $     11         66
   Government obligations,
    scheduled maturities between
    one and five years.............     94,181     94,548          2        368
   Corporate debt securities,
    scheduled maturities between
    one and five years.............     50,310     50,692          2        385
                                      --------   --------   --------   --------
                                      $200,444   $201,253   $     15   $    824
                                      ========   ========   ========   ========
   SEPTEMBER 30, 1998
   Corporate commercial paper,
    scheduled maturities within one
    year...........................   $ 51,972   $ 51,972
   Government obligations,
    scheduled maturities within one
    year...........................    118,644    118,576   $     78   $     10
   Government obligations,
    scheduled maturities between
    one and five years.............     12,835     12,813         22
                                      --------   --------   --------   --------
                                      $183,451   $183,361   $    100   $     10
                                      ========   ========   ========   ========
</TABLE>

  Government obligations are debt securities of states of the United States and
political subdivisions of the states. Debt Securities whose issuers may call
the debt prior to the scheduled maturity date are reflected in the above table
as maturing on the earliest call date.

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
                                                                 1999    1998
                                                                ------- -------
   <S>                                                          <C>     <C>
   Trade accounts payable...................................... $23,763 $30,096
   Accrued compensation........................................  31,511  28,039
   Accrued reorganization and unusual costs....................  17,888  18,925
   Other accrued liabilities...................................  17,587  13,539
                                                                ------- -------
                                                                $90,749 $90,599
                                                                ======= =======
</TABLE>

                                       52
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


9. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                     YEARS ENDED SEPTEMBER 30,
                                                    ---------------------------
                                                      1999     1998     1997
                                                    -------- -------- ---------
   <S>                                              <C>      <C>      <C>
   Current:
     Federal....................................... $ 49,482 $ 52,917 $  41,547
     State.........................................    8,072    8,848     7,443
     Foreign.......................................    6,207      901       436
   Deferred:
     Federal.......................................    7,574      609   (13,174)
     State.........................................    2,451      872    (2,412)
                                                    -------- -------- ---------
                                                    $ 73,786 $ 64,147 $  33,840
                                                    ======== ======== =========
</TABLE>

  The provision for income taxes differs from the income taxes computed at the
federal income tax statutory rate for the following reasons (in thousands):

<TABLE>
<CAPTION>
                                                  YEARS ENDED SEPTEMBER 30,
                                                  ----------------------------
                                                    1999      1998      1997
                                                  --------  --------  --------
   <S>                                            <C>       <C>       <C>
   Tax expense at U.S. federal statutory rate...  $ 69,187  $  1,047  $ 31,249
   State income taxes, net of federal benefit...     6,840     6,318     3,384
   Reorganization and unusual costs.............       544    20,061
   Nondeductible goodwill and purchased research
    and development.............................     1,950    40,761
   Tax exempt interest income...................    (2,363)   (3,324)   (1,032)
   Other........................................    (2,372)     (716)      239
                                                  --------  --------  --------
                                                  $ 73,786  $ 64,147  $ 33,840
                                                  ========  ========  ========
</TABLE>

  Income before income taxes includes foreign pretax earnings of $9.0 million,
$2.5 million, and $1.0 million for 1999, 1998 and 1997, respectively.

                                       53
<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 liability as of September 30 are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                              1999      1998
                                                            --------  --------
   <S>                                                      <C>       <C>
   Deferred current income tax assets:
     Deferred revenue...................................... $    626  $    361
     Allowance for doubtful accounts.......................    3,649     3,052
     Reserves and accruals.................................    3,267     5,836
     Loss and credit carryforwards.........................              2,378
     Other.................................................    2,206
                                                            --------  --------
                                                               9,748    11,627
                                                            --------  --------
   Deferred noncurrent income tax assets:
     Deferred revenue......................................    1,330       484
     Accrued employee benefits.............................    4,169     2,454
     Other.................................................    3,137
                                                            --------  --------
                                                               8,636     2,938
                                                            --------  --------
   Deferred noncurrent income tax liabilities:
     Capitalized software costs............................  (17,199)  (14,963)
     Depreciation and amortization.........................  (29,918)  (18,310)
                                                            --------  --------
                                                             (47,117)  (33,273)
                                                            --------  --------
   Deferred noncurrent income tax liability, net...........  (38,481)  (30,335)
                                                            --------  --------
   Deferred income tax liability, net...................... $(28,733) $(18,708)
                                                            ========  ========
</TABLE>

10. COMMITMENTS

 Lease Obligations

  The Company leases certain facilities and equipment under operating leases.
Total rent expense, net of sublease income, for 1999, 1998 and 1997 was $25.1
million, $21.0 million and $17.3 million, respectively. At September 30, 1999,
minimum future rental payments due under all operating leases, net of future
sublease income, were as follows (in thousands):

<TABLE>
       <S>                                                              <C>
       2000............................................................ $ 26,689
       2001............................................................   22,340
       2002............................................................   18,253
       2003............................................................   16,089
       2004............................................................   15,249
       Thereafter......................................................   57,670
                                                                        --------
                                                                        $156,290
                                                                        ========
</TABLE>

  The above minimum future rental payments due under all operating leases
includes $9.3 million which has been accrued as a component of the 1999
Reorganization and Unusual Costs (see Note 3) and will be paid in fiscal years
2000 through 2004.

  Additionally, the minimum future rental payments due under all operating
leases presented above includes an operating lease for an office facility in
Irving, Texas. The initial term of the lease expires October 2004,

                                       54
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

with two optional five-year renewal periods. At the end of each renewal period
the Company is required to renew the lease (if a renewal option exists),
purchase the property for its original cost or arrange for the sale of the
property to a third party, with the Company remaining responsible for 85% of
the original cost of the leased facility. The total original cost is expected
to be $76.6 million. The Company could also be required to purchase the
property if the Company is in default with respect to certain obligations or
covenants contained in the lease or related agreements.

 Credit Agreement

  The Company cancelled its Revolving Credit and Term Loan Agreement on June
30, 1999.

11. STOCKHOLDER'S EQUITY

 Common Stock

  At the Company's Annual Meeting of Stockholders held on March 4, 1999, the
stockholders of the Company approved an amendment to the Company's Certificate
of Incorporation which increased the number of shares of common stock, par
value $0.01 per share ("Common Stock"), authorized for issuance from 150
million shares to 300 million shares.

  During 1999, the Company's Board of Directors approved a stock repurchase
program which authorizes the repurchase of up to 25 million shares of the
Company's Common Stock. Purchases may be made in open market, negotiated or
block transactions from time to time as market and business conditions warrant.
As of September 30, 1999, the Company had purchased 16.8 million shares of
Common Stock at an average price of $24.76 per share.

 Preferred Stock

  On March 4, 1999, pursuant to the terms of the Rights Agreement, dated as of
December 18, 1996, the Board of Directors of the Company designated an
additional 1.5 million shares of preferred stock, par value $0.01 per share
("Preferred Stock"), as Series A Junior Participating Preferred Stock ("Series
A Junior Preferred Stock"). At September 30, 1999, 3 million shares of Series A
Junior Preferred Stock were authorized to be issued. The Board of Directors of
the Company is also authorized, without action by the stockholders, to issue
Preferred Stock and fix for each series the number of shares, designation,
dividend rights, voting rights, redemption rights and other rights.

 Rights Plan

  On December 18, 1996, the Board of Directors of the Company declared a
dividend distribution of one right (a "Right") for each share of Common Stock
outstanding at the close of business on December 31, 1996 (the "Record Date"),
pursuant to the terms of the Rights Plan. The Rights Plan also provides,
subject to specified exceptions and limitations, that shares of Common Stock
issued after the Record Date will be entitled to and accompanied by Rights.
Pursuant to the Rights Plan, one Right to purchase 1/100th of a share of Series
A Junior Preferred Stock (structured so as to be substantially the equivalent
of a share of Common Stock) is attached to each issued and outstanding share of
Common Stock. Subject to certain conditions, each Right entitles the holder to
purchase 1/100th of a share of Series A Junior Preferred Stock at a price (the
"Purchase Price") of $200 per 1/100th of a share of Series A Junior Preferred
Stock (subject to adjustment).

  In general, the Rights will not become exercisable or transferable apart from
the shares of Common Stock, unless a person or group of affiliated or
associated persons becomes the beneficial owner of or commences a

                                       55
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

tender offer that would result in beneficial ownership of 15% or more of the
outstanding shares of Common Stock (any such person or group of persons being
referred to in the Rights Plan as an "Acquiring Person"). Thereafter, under
certain circumstances each Right (other than any Rights that are or were
beneficially owned by an Acquiring Person, which Rights will be void) could
become exercisable to purchase at the Purchase Price a number of shares of
Common Stock (or, in certain circumstances, the common stock of a company into
which the Company is merged or consolidated or to which the Company sells all
or substantially all of its assets) having a market value equal to two times
the Purchase Price. The Rights will expire on December 31, 2006, unless earlier
redeemed by the Company at a redemption price of $.01 per Right (subject to
adjustment), or otherwise exchanged or amended in accordance with the terms of
the Rights Plan.

 Employee Stock Purchase Plan

  In March 1998, the Company's stockholders approved the Company's Employee
Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, employees can purchase
Common Stock at a specified price through payroll deductions during an offering
period, currently established on a semi-annual basis. During 1999, the Company
issued 0.1 million shares for $5.1 million and during 1998, the Company issued
0.1 million shares for $3.8 million. Under the ESPP, the Company can issue up
to 4 million shares. At September 30, 1999, 3.8 million shares were reserved
for issuance.

 Stock Options

  The Company has stock option plans that provide for the grant of options to
officers, directors, employees and advisors to purchase shares of Common Stock.
All option grants were made at the fair market value of the Common Stock at the
date of the grant. Options granted pursuant to the plans generally become
exercisable at a rate of 25% per year or become exercisable immediately or
within one year from the date of grant. Options granted pursuant to the plans
generally expire five or ten years from the date of grant. At September 30,
1999, 9.0 million shares were reserved for future grants of options under the
stock option plans.

  Stock option transactions are summarized below for the three years ended
September 30, 1999:

<TABLE>
<CAPTION>
                                1999               1998               1997
                          ------------------ ------------------ ------------------
                                   WEIGHTED-          WEIGHTED-          WEIGHTED-
                                    AVERAGE            AVERAGE            AVERAGE
                          SHARES   EXERCISE  SHARES   EXERCISE  SHARES   EXERCISE
                          (000'S)    PRICE   (000'S)    PRICE   (000'S)    PRICE
                          -------  --------- -------  --------- -------  ---------
<S>                       <C>      <C>       <C>      <C>       <C>      <C>
Outstanding at beginning
 of year................. 17,479      $26    17,727      $26    12,252      $24
  Granted................  3,061      $30     1,241      $44     5,640      $27
  Options issued for
   XcelleNet
   acquisition...........                     1,287      $25
  Exercised.............. (2,079)     $24    (2,349)     $24       (75)     $24
  Canceled...............   (709)     $35      (427)     $33       (90)     $26
                          ------             ------             ------
Outstanding at end of
 year.................... 17,752      $27    17,479      $26    17,727      $26
                          ======             ======             ======
Options exercisable at
 year end................ 11,698      $25    11,672      $24     1,000      $24
                          ======             ======             ======
</TABLE>

                                       56
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  The following table summarizes information about stock options outstanding at
September 30, 1999:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                         ------------------------------------------- --------------------------
                                         WEIGHTED
                           NUMBER        AVERAGE         WEIGHTED      NUMBER       WEIGHTED
RANGE OF                 OUTSTANDING    REMAINING        AVERAGE     EXERCISABLE    AVERAGE
EXERCISE PRICES            (000'S)   CONTRACTUAL LIFE EXERCISE PRICE   (000'S)   EXERCISE PRICE
---------------          ----------- ---------------- -------------- ----------- --------------
<S>                      <C>         <C>              <C>            <C>         <C>
$1 to $23...............      732          6.2             $18             40         $14
$24.....................    8,764          5.8             $24          7,753         $24
$25 to $27..............    4,116          6.9             $26          3,117         $26
$28 to $48..............    4,140          4.4             $35            788         $36
                           ------                                      ------
                           17,752          5.8             $27         11,698         $25
                           ======                                      ======
</TABLE>

  Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123") requires disclosure of pro forma net earnings
and net earnings per common share information computed as if the Company had
accounted for its employee stock options and ESPP under the fair value method
as set forth in FAS 123.

  The fair value of the Company's employee stock options and ESPP was estimated
using a Black-Scholes option pricing model using the following weighted-average
assumptions for 1999, 1998 and 1997, respectively:

<TABLE>
<CAPTION>
                                           OPTIONS                  ESPP
                                  ---------------------------  ----------------
                                    1999      1998     1997    1999  1998  1997
                                  ---------  -------  -------  ----  ----  ----
   <S>                            <C>        <C>      <C>      <C>   <C>   <C>
   Expected life (in years)...... 1.43-4.43  2.0-5.0  2.0-5.0   0.5   0.5  N/A
   Expected volatility...........      38.7%    40.5%    36.8% 44.1% 40.5% N/A
   Risk free interest rate.......       5.0%     5.6%     6.1%  4.7%  5.4% N/A
</TABLE>

  No dividend payments have been assumed in estimating the fair value of the
options.

  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share
information):

<TABLE>
<CAPTION>
                                                      1999     1998     1997
                                                    -------- --------  -------
   <S>                                              <C>      <C>       <C>
   Net income (loss):
     As reported................................... $123,889 $(61,156) $55,444
     Pro forma..................................... $102,584 $(86,426) $10,570
   Basic income (loss) per common share:
     As reported................................... $   1.34 $  (0.67) $  0.66
     Pro forma..................................... $   1.11 $  (0.95) $  0.12
   Diluted income (loss) per common share:
     As reported................................... $   1.31 $  (0.67) $  0.64
     Pro forma..................................... $   1.08 $  (0.95) $  0.12
   Weighted-average fair value of options granted
    during the year:
     Stock options................................. $   9.51 $  15.28  $  8.45
     ESPP.......................................... $  11.26 $  10.60
</TABLE>

12. DEFINED CONTRIBUTION PLAN

  The Company maintains a plan (the "Plan") that provides retirement benefits
under the provisions of Section 401(k) of the Internal Revenue Code for all
full-time employees and for part-time employees that have

                                       57
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

completed a specified term of service. Pursuant to the Plan, eligible
participants may elect to contribute a percentage of their annual gross
compensation and the Company contributes additional amounts. A portion of the
Plan consisting of the Company's contribution has been designated as an
employee stock ownership plan. One half of the Company's contributions are
invested in Common Stock. Company contributions charged to expense during 1999,
1998 and 1997 were $2.7 million $2.5 million and $2.0 million, respectively.

 Change-in-Control and Severance Agreements

  As of September 30, 1999, the Company had change-in-control agreements with
29 current or former officers that grant the right to receive payments based on
the individual's respective cash compensation and benefits in the event a
change in control (as defined in such change-in-control agreements) of the
Company occurs and a covered officer's employment is terminated. In addition,
the Company has entered into a consulting agreement with its chairman that
grants similar rights as the change-in-control agreements described above. The
change-in-control agreements further provide that the Company will make certain
payments to the individual to compensate such individual for the economic
effect of the individual's liability to pay excise taxes to the extent such
payments received by such individual, pursuant to the change-in-control
agreements, stock option agreements or otherwise, are considered contingent on
a change in ownership or control under Section 280G of the Internal Revenue
Code (a "Tax Payment"). Based on certain assumptions, at September 30, 1999,
the maximum liability for cash compensation, benefits and Tax Payments under
these agreements was estimated to be $35.6 million. The actual liability, if
any, under these agreements will depend on a number of factors, including the
level of compensation and benefits being received by the covered individuals
prior to a change in control and the price at which any change-in-control
transaction occurs.

  As of September 30, 1999, the Company had entered into severance agreements
with 24 executive and other officers of the Company providing for payments
based on the individual officer's cash compensation and benefits. In addition,
the Company has entered into a consulting agreement with its chairman that
provides for annual base compensation plus agreed-upon bonuses. At September
30, 1999, the maximum estimated liability for future compensation including
bonuses and benefits under these agreements was estimated to be $26.0 million.

13. BUSINESS SEGMENTS

  On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards, No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers.

  The Company has identified its Chief Executive Officer as the chief operating
decision maker ("CODM"). The CODM evaluates the business segments' performance
and allocates resources based upon the segments' revenues from external
customers, intersegment revenues and income before taxes. The accounting
policies followed by the business segments are the same as those followed by
the Company which are described in Note 2. Intersegment transactions are
accounted for at the current market rate charged to external customers.

  The Company's four reportable business segments are COMMERCE, GENTRAN,
CONNECT and Managed Services. The business segments are organized based upon
products sold and services provided. These business segments are individually
managed. Each business segment offers a distinct family of products and/or
services to E-Business communities worldwide. Although each business segment
offers a distinct family of products and/or services, a business segment may
sell another business segment's products and services.

                                       58
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  COMMERCE markets and sells the Company's E-Community Management offerings. E-
Community Management offerings are services to build, manage and service
integrated business partner communities for Global 5000 and other companies.
GENTRAN is responsible for E-Business Process Integration ("BPI"). BPI is
software products and related services that facilitate end-to-end integration
of business processes within and among enterprises and organizations. CONNECT
offers the Company's E-Business Communications Infrastructure ("EBCI") products
and services. The Company's EBCI products and services focus specifically on
the complexities of managing data delivery within and between enterprises and
organizations. Managed Services provides E-Sourcing which consists of
consulting, implementation, education and outsourcing services in support of
the Company's other business segments. These services are marketed along with
products and services provided by the Company's other E-Business integration
solutions offered by the above mentioned business segments.

  The reportable business segment information is presented below (in
thousands).

<TABLE>
<CAPTION>
                                                     MANAGED
          1999           COMMERCE  GENTRAN  CONNECT  SERVICES OTHER (1)  CONSOLIDATED
          ----           --------  -------  -------- -------- ---------  ------------
<S>                      <C>       <C>      <C>      <C>      <C>        <C>
Revenues from external
 customers.............. $213,732  $77,290  $199,974 $54,182  $  77,894    $623,072
Revenues from
 intersegment
 transactions...........             8,407               272     (8,679)
Depreciation and
 amortization...........   18,293    7,769    12,764     490     17,639      56,955
Interest income
 (expense), net (2).....       (1)       4       170             22,893      23,066
Income (loss) before
 income taxes (3).......   90,955   13,963    79,395  16,420     (3,058)    197,675
Assets..................  320,346  127,591   306,128  23,797      2,869     780,731
Capital expenditures....   29,291   12,321    20,527     770     21,465      84,374
<CAPTION>
          1998
          ----
<S>                      <C>       <C>      <C>      <C>      <C>        <C>
Revenues from external
 customers.............. $186,311  $70,078  $170,792 $35,218  $  27,903    $490,302
Revenues from
 intersegment
 transactions...........             6,289                       (6,289)
Depreciation and
 amortization...........   19,286    7,452    10,895     423      2,662      40,718
Interest income
 (expense), net (2).....      (19)      (7)      281             25,214      25,469
Income (loss) before
 income taxes (3).......   75,876   22,251    61,610   8,980   (165,726)      2,991
Assets..................  248,529  106,537   226,351  11,886    373,701     967,004
Capital expenditures....   28,126    9,479    25,758   1,057      3,498      67,918
<CAPTION>
          1997
          ----
<S>                      <C>       <C>      <C>      <C>      <C>        <C>
Revenues from external
 customers.............. $153,917  $52,424  $112,896 $18,698  $  12,662    $350,597
Revenues from
 intersegment
 transactions...........        3    4,331                       (4,334)
Depreciation and
 amortization...........   14,338    6,688     7,885     310        993      30,214
Interest income
 (expense), net (2).....      (83)     (15)      154             16,900      16,956
Income (loss) before
 taxes income (3).......   58,085   18,851    48,832   3,426    (39,910)     89,284
Assets..................  172,748   74,922   154,358   4,773    341,765     748,566
Capital expenditures....   18,182    8,750    15,620     557      2,894      46,003
</TABLE>
--------
(1) Other is primarily comprised of corporate items which are not allocated to
    business segments (see 3 below), elimination of intersegment transactions
    and business segments which are not separately reported.
(2) Interest expense was not significant for any period presented.
(3) Income (loss) before taxes in the other column, includes for 1998 and 1997,
    purchased research and development charges of $116.5 million and $31.9
    million, respectively, and for 1999, 1998 and 1997, includes reorganization
    and unusual costs of $20.1 million, $67.4 million and $15.8 million,
    respectively (see Notes 3 and 4).

                                       59
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  The Company operates on a worldwide basis and attributes its revenues on the
basis of its customers' location. Long-lived assets are comprised of property
and equipment, net and computer software, net. The table presented below
displays the Company's major geographic data (in thousands):

<TABLE>
<CAPTION>
                                    REVENUE FROM EXTERNAL CUSTOMERS
                        -------------------------------------------------------
                                 CANADA
                         UNITED  & LATIN          ASIA
                         STATES  AMERICA EUROPE  PACIFIC OTHER (1) CONSOLIDATED
                        -------- ------- ------- ------- --------- ------------
   <S>                  <C>      <C>     <C>     <C>     <C>       <C>
   1999................ $491,463 $32,686 $85,512 $22,556  $(9,145)   $623,072
   1998................  395,199  27,737  63,884   9,714   (6,232)    490,302
   1997................  308,697  13,430  28,168   4,628   (4,326)    350,597
</TABLE>

<TABLE>
<CAPTION>
                                           LONG-LIVED ASSETS
                        -------------------------------------------------------
                                 CANADA
                         UNITED  & LATIN          ASIA
                         STATES  AMERICA EUROPE  PACIFIC OTHER (2) CONSOLIDATED
                        -------- ------- ------- ------- --------- ------------
   <S>                  <C>      <C>     <C>     <C>     <C>       <C>
   1999................ $158,468 $1,089  $14,591 $3,432   $13,710    $191,290
   1998................  146,455    610   13,630  2,000     5,249     167,944
   1997................  103,736    761    2,660    289       440     107,886
</TABLE>
--------
(1) Elimination of intersegment accounts.
(2) Corporate items which are not allocated to a segment.

                                       60
<PAGE>

                            STERLING COMMERCE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

  The Company's consolidated operating results for each quarter during 1999 and
1998 are summarized as follows (in thousands, except per share information):

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED
                                  ---------------------------------------------
                                  DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
                                  ------------ --------- -------- -------------
<S>                               <C>          <C>       <C>      <C>
Year ended September 30, 1999:
  Revenues.......................   $140,778   $152,616  $152,191   $177,487
  Costs of sales.................     29,292     32,641    33,327     34,035
  Product development and
   enhancement expenses..........      9,220      9,597     8,781     10,859
  Selling, general and
   administrative expenses.......     58,204     61,235    62,330     78,905
  Income before other income and
   income taxes (1)..............     44,062     49,143    50,203     31,138
  Net income.....................     31,933     35,173    36,957     19,826
  Income per common share:
    Basic........................   $   0.34   $   0.37  $   0.39   $   0.23
    Diluted......................       0.33       0.36      0.38       0.23
Year ended September 30, 1998:
  Revenues.......................   $106,283   $111,076  $122,095   $150,848
  Costs of sales.................     20,462     24,030    24,099     27,570
  Product development and
   enhancement expenses..........      7,648      6,392     7,343      8,334
  Selling, general and
   administrative expenses.......     45,577     44,789    47,666     63,657
  Income (loss) before other
   income and income taxes (2)...     32,596     35,865    42,987   (132,609)
  Net income (loss)..............     24,200     26,978    31,226   (143,560)
  Income (loss) per common share:
    Basic........................   $   0.27   $   0.30  $   0.34   $  (1.53)
    Diluted......................       0.26       0.29      0.33      (1.53)
</TABLE>
--------
(1) Includes $5.5 million and $0.5 million of reorganization and unusual costs
    reversed during the quarters ended June 30, 1999 and September 30, 1999,
    respectively, and $3.0 million and $23.1 million of reorganization and
    unusual costs charged to expense during the quarters ended June 30, 1999
    and September 30, 1999, respectively (see Notes 3 and 4).
(2) Includes $116.4 million of purchased research and development and $67.4
    million of reorganization and unusual costs charged to expense in the
    quarter ended September 30, 1998 (see Notes 3 and 4).

                                       61
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

  None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Information required by this Item 10 concerning the directors of the Company
will be set forth in the Proxy Statement to be provided to stockholders in
connection with the Company's 2000 Annual Meeting of Stockholders (the "Proxy
Statement"), under the heading "Election of Directors," which information is
incorporated herein by reference. Information concerning compliance with
Section 16 of the Securities Exchange Act of 1934, as amended, by persons
subject to such Section will be set forth in the Proxy Statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance," which
information is incorporated herein by reference. The name, age and position of
each executive officer of the Company is set forth under the heading "Executive
Officers" in Part I of this report, which information is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

  Information required by this Item 11 concerning executive compensation will
be set forth in the Proxy Statement under the headings "Management
Compensation" and "Election of Directors," which information is incorporated
herein by reference. Information contained in the Proxy Statement under the
caption "Management Compensation--Report of the Executive and Option Committees
on Executive Compensation" and "Stock Performance Chart" is not incorporated by
reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  Information required by this Item 12 concerning security ownership of certain
beneficial owners and management will be set forth in the Proxy Statement under
the heading "Security Ownership of Certain Beneficial Owners and Management,"
which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Information required by this Item 13 concerning certain relationships and
related transactions will be set forth in the Proxy Statement under the
headings "Management Compensation--Executive and Stock Option Committee
Interlocks and Insider Participation" and "Certain Transactions," which
information is incorporated herein by reference.

                                       62
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  (a) The following documents are filed as a part of this Annual Report on Form
10-K.

  1. Consolidated Financial Statements:

  See Index to Consolidated Financial Statements at Item 8.

  2. Consolidated Financial Statement Schedules:

  Schedule II--Valuation and Qualifying Accounts for the Years Ended September
30, 1999, 1998 and 1997

  All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.

  3. Exhibits

<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
  3.1    Fourth Amended and Restated Certificate of Incorporation of the
          Company(1)
  3.2    Amended and Restated Bylaws of the Company(14)
  4.1    Rights Agreement dated December 18, 1996 by and between the Company
          and The First National Bank of Boston, as Rights Agent(3)
 10.1.1  International Marketing Agreement dated March 4, 1996 between Sterling
          Commerce International, Inc. and Sterling Software International,
          Inc.(4)
 10.1.2  Amendment No. 1 to the International Distributor Agreement dated as of
          January 31, 1997 between Sterling Commerce B.V. and Sterling Software
          International, Inc. (a.k.a. the International Marketing Agreement)(5)
 10.2    Termination Agreement dated June 30, 1997 between Sterling Commerce
          B.V. and Sterling Software International, Inc.(6)
 10.3    Tax Allocation Agreement dated March 4, 1996 between the Company and
          Sterling Software(7)
 10.4    Indemnification Agreement dated March 4, 1996 between the Company and
          Sterling Software(4)
 10.5    Agreement dated as of September 19, 1996 by the Company for the
          benefit of Sterling Software(8)
 10.6.1  Form of Indemnification Agreement between the Company and each of its
          officers and directors(7), (9)
 10.6.2  Form of Amendment to Indemnification Agreement between the Company and
          each of its officers and directors(2), (9)
 10.7    Form of Director Agreement dated as of January 27, 1997 between the
          Company and each of Sam Wyly and Charles J. Wyly, Jr.(5), (9)
 10.8.1  Agreement dated May 31, 1998 between the Company and Sterling L.
          Williams(9), (13)
 10.8.2  Amendment dated September 1, 1999 to Agreement dated May 31, 1998
          between the Company and Sterling L. Williams(2), (9)
 10.9.1  Form of Change-in-Control Severance Agreement between the Company and
          each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
          Perkins, Steven P. Shiflet and certain other executive officers of
          the Company(4), (9)
 10.9.2  Form of Amendment to Change-in-Control Severance Agreement between the
          Company and each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson,
          Stephen R. Perkins, Steven P. Shiflet and certain other executive
          officers of the Company(2), (9)
</TABLE>


                                       63
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
 10.10.1 Form of Severance Agreement between the Company and each of Warner C.
          Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R. Perkins, Steven P.
          Shiflet and certain other executive officers of the Company(4), (9)
 10.10.2 Form of Amendment to Severance Agreement between the Company and each
          of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
          Perkins, Steven P. Shiflet and certain other executive officers of
          the Company(2), (9)
 10.11   Supplemental Executive Retirement Plan(9), (10)
 10.12   Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
          Plan(9), (11)
 10.13.1 Sterling Commerce, Inc. Deferred Compensation Plan(9), (12)
 10.13.2 First Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
          dated as of October 30, 1997(9), (10)
 10.13.3 Second Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
          dated as of June 1, 1998(9), (13)
 10.14.1 Revolving Credit and Term Loan Agreement dated as of October 1, 1996
          among the Company and The First National Bank of Boston, as agent,
          and Bank One, Texas, National Association(8)
 10.14.2 Amendment and Modification Agreement to the Revolving Credit and Term
          Loan Agreement among the Company and The First National Bank of
          Boston, as agent, and Bank One, Texas, National Association(11)
 10.15   Master Agreement, dated as of February 26, 1998, among Sterling
          Commerce, Inc., Atlantic Financial Group Ltd., the financial
          institutions party thereto, BankBoston, N.A. and SunTrust Bank,
          Atlanta and related agreements(2)
 21.1    Subsidiaries of the Company(2)
 23.1    Consent of Ernst & Young LLP(2)
 27.1    Financial Data Schedule(2)
</TABLE>
--------
 (1) Previously filed as an exhibit to the Company's Registration Statement No.
     333-74345 and incorporated herein by reference.

 (2) Filed herewith.

 (3) Previously filed as an exhibit to the Current Report on Form 8-K dated
     December 18, 1996 and incorporated herein by reference.

 (4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
     the quarter ended March 31, 1996 and incorporated herein by reference.

 (5) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
     the quarter ended December 31, 1996 and incorporated herein by reference.

 (6) Previously filed as an exhibit to the Current Report on Form 8-K dated
     June 30, 1997 and incorporated herein by reference.

 (7) Previously filed as an exhibit to the Company's Registration Statement No.
     33-80595 and incorporated herein by reference.

 (8) Previously filed as an exhibit to the Annual Report on Form 10-K, as
     amended, for the fiscal year ended September 30, 1996 and incorporated
     herein by reference.

 (9) Management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this form pursuant to Item 14(c) of the form.

(10) Previously filed as an exhibit to the Annual Report on Form 10-K for the
     fiscal year ended September 30, 1997 and incorporated herein by reference.

                                       64
<PAGE>

(11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
     the quarter ended June 30, 1997 and incorporated herein by reference.

(12) Previously filed as an exhibit to the Company's Registration Statement No.
     333-37523 and incorporated herein by reference.

(13) Previously filed as an exhibit to the Company's Annual Report on form 10-K
     for the fiscal year ended September 30, 1998.

(14) Previously filed as an exhibit to the Current Report on Form 8-K dated
     November 15, 1999 and incorporated by reference herein.

  (b) Reports on Form 8-K.

  On July 22, 1999 the Company filed a Current Report on Form 8-K dated July
22, 1999 which included information under Item 5 (Other Events).

  On August 16, 1999 the Company filed a Current Report on Form 8-K dated
August 16, 1999 which included information under Item 5 (Other Events).

  On September 2, 1999 the Company filed a Current Report on Form 8-K dated
September 2, 1999 which included information under Item 5 (Other Events).

  (c) Exhibits.

  The response to this portion of Item 14 is submitted as a separate section of
this report.

  (d) Financial Statement Schedules.

  The response to this portion of Item 14 is submitted as a separate section of
this report.

                                       65
<PAGE>

                                   SIGNATURES

  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                          STERLING COMMERCE, INC.


                                                   /s/ Warner C. Blow
                                          By: _________________________________
                                                       Warner C. Blow
                                                  Chief Executive Officer

Date: December 21, 1999

  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.


<TABLE>
<S>                                  <C>                           <C>
    /s/ Sterling L. Williams         Chairman of the Board and      December 21, 1999
____________________________________  Director
        Sterling L. Williams

       /s/ Warner C. Blow            Chief Executive Officer and    December 21, 1999
____________________________________  Director
           Warner C. Blow             (Principal Executive
                                      Officer)

    /s/ Charles J. Wyly, Jr.         Director                       December 21, 1999
____________________________________
        Charles J. Wyly, Jr.

          /s/ Sam Wyly               Director                       December 21, 1999
____________________________________
              Sam Wyly
        /s/ Evan A. Wyly             Director                       December 21, 1999
____________________________________
            Evan A. Wyly

       /s/ Honor R. Hill             Director                       December 21, 1999
____________________________________
           Honor R. Hill


       /s/ Robert E. Cook            Director                       December 21, 1999
____________________________________
           Robert E. Cook

     /s/ Steven P. Shiflet           Senior Vice President and      December 21, 1999
____________________________________  Chief Financial Officer
         Steven P. Shiflet            (Principal Financial and
                                      Accounting Officer)
</TABLE>

                                       66
<PAGE>

                                  SCHEDULE II

                            STERLING COMMERCE, INC.

                       VALUATION AND QUALIFYING ACCOUNTS

                 YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                         BALANCE AT               CHARGED TO
                         BEGINNING  ADDITION FROM COSTS AND                BALANCE AT END
                         OF PERIOD   ACQUISITION   EXPENSES  DEDUCTIONS      OF PERIOD
                         ---------- ------------- ---------- ----------    --------------
<S>                      <C>        <C>           <C>        <C>           <C>
Allowance for Doubtful
 Accounts:
  1999..................  $10,331                  $11,302    $(6,468)(1)     $15,165
  1998..................    4,789      $2,096        6,013     (2,567)(2)      10,331
  1997..................    2,416                    3,567     (1,194)(2)       4,789
</TABLE>
--------
(1) Includes $5.1 million for accounts written off and $1.4 million as an
    adjustment to the excess costs over net assets acquired related to the
    XcelleNet acquisition.
(2) Accounts written off.

                                      II-1
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
  3.1    Fourth Amended and Restated Certificate of Incorporation of the
          Company(1)
  3.2    Amended and Restated Bylaws of the Company(14)
  4.1    Rights Agreement dated December 18, 1996 by and between the Company
          and The First National Bank of Boston, as Rights Agent(3)
 10.1.1  International Marketing Agreement dated March 4, 1996 between Sterling
          Commerce International, Inc. and Sterling Software International,
          Inc.(4)
 10.1.2  Amendment No. 1 to the International Distributor Agreement dated as of
          January 31, 1997 between Sterling Commerce B.V. and Sterling Software
          International, Inc. (a.k.a. the International Marketing Agreement)(5)
 10.2    Termination Agreement dated June 30, 1997 between Sterling Commerce
          B.V. and Sterling Software International, Inc.(6)
 10.3    Tax Allocation Agreement dated March 4, 1996 between the Company and
          Sterling Software(7)
 10.4    Indemnification Agreement dated March 4, 1996 between the Company and
          Sterling Software(4)
 10.5    Agreement dated as of September 19, 1996 by the Company for the
          benefit of Sterling Software(8)
 10.6.1  Form of Indemnification Agreement between the Company and each of its
          officers and directors(7), (9)
 10.6.2  Form of Amendment to Indemnification Agreement between the Company and
          each of its officers and directors(2), (9)
 10.7    Form of Director Agreement dated as of January 27, 1997 between the
          Company and each of Sam Wyly and Charles J. Wyly, Jr.(5), (9)
 10.8.1  Agreement dated May 31, 1998 between the Company and Sterling L.
          Williams(9), (13)
 10.8.2  Amendment dated September 1, 1999 to Agreement dated May 31, 1998
          between the Company and Sterling L. Williams(2), (9)
 10.9.1  Form of Change-in-Control Severance Agreement between the Company and
          each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
          Perkins, Steven P. Shiflet and certain other executive officers of
          the Company(4), (9)
 10.9.2  Form of Amendment to Change-in-Control Severance Agreement between the
          Company and each of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson,
          Stephen R. Perkins, Steven P. Shiflet and certain other executive
          officers of the Company(2), (9)
 10.10.1 Form of Severance Agreement between the Company and each of Warner C.
          Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R. Perkins, Steven P.
          Shiflet and certain other executive officers of the Company(4), (9)
 10.10.2 Form of Amendment to Severance Agreement between the Company and each
          of Warner C. Blow, J. Brad Sharp, Paul L.H. Olson, Stephen R.
          Perkins, Steven P. Shiflet and certain other executive officers of
          the Company(2), (9)
 10.11   Supplemental Executive Retirement Plan(9), (10)
 10.12   Sterling Commerce, Inc. Amended and Restated 1996 Stock Option
          Plan(9), (11)
 10.13.1 Sterling Commerce, Inc. Deferred Compensation Plan(9), (12)
 10.13.2 First Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
          dated as of October 30, 1997(9), (10)
 10.13.3 Second Amendment to Sterling Commerce, Inc. Deferred Compensation Plan
          dated as of June 1, 1998(9), (13)
</TABLE>


                                       1
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                DESCRIPTION
 -------                              -----------
 <C>     <S>
 10.14.1 Revolving Credit and Term Loan Agreement dated as of October 1, 1996
          among the Company and The First National Bank of Boston, as agent,
          and Bank One, Texas, National Association(8)
 10.14.2 Amendment and Modification Agreement to the Revolving Credit and Term
          Loan Agreement among the Company and The First National Bank of
          Boston, as agent, and Bank One, Texas, National Association(11)
 10.15   Master Agreement, dated as of February 26, 1998, among Sterling
          Commerce, Inc., Atlantic Financial Group Ltd., the financial
          institutions party thereto, BankBoston, N.A. and SunTrust Bank,
          Atlanta and related agreements(2)
 21.1    Subsidiaries of the Company(2)
 23.1    Consent of Ernst & Young LLP(2)
 27.1    Financial Data Schedule(2)
</TABLE>
--------
 (1) Previously filed as an exhibit to the Company's Registration Statement No.
     333-74345 and incorporated herein by reference.

 (2) Filed herewith.

 (3) Previously filed as an exhibit to the Current Report on Form 8-K dated
     December 18, 1996 and incorporated herein by reference.

 (4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
     the quarter ended March 31, 1996 and incorporated herein by reference.

 (5) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
     the quarter ended December 31, 1996 and incorporated herein by reference.

 (6) Previously filed as an exhibit to the Current Report on Form 8-K dated
     June 30, 1997 and incorporated herein by reference.

 (7) Previously filed as an exhibit to the Company's Registration Statement No.
     33-80595 and incorporated herein by reference.

 (8) Previously filed as an exhibit to the Annual Report on Form 10-K, as
     amended, for the fiscal year ended September 30, 1996 and incorporated
     herein by reference.

 (9) Management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this form pursuant to Item 14(c) of the form.

(10) Previously filed as an exhibit to the Annual Report on Form 10-K for the
     fiscal year ended September 30, 1997 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
     the quarter ended June 30, 1997 and incorporated herein by reference.

(12) Previously filed as an exhibit to the Company's Registration Statement No.
     333-37523 and incorporated herein by reference.

(13) Previously filed as an exhibit to the Company's Annual Report on form 10-K
     for the fiscal year ended September 30, 1998.

(14) Previously filed as an exhibit to the Current Report on Form 8-K dated
     November 15, 1999 and incorporated by reference herein.


                                       2