<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549
                                        
                                   FORM 10-Q
    (Mark One)
       (X)      Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                 For the quarterly period ended March 31, 1998

                                      or

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

            For the transition period from __________ to __________

                          COMMISSION FILE NO. 1-14196

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

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


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

                                (214) 981-1100
             (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                Yes    X                  No
                      ---                    ---

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

           Title                            Shares Outstanding as of May 1, 1998
----------------------------                ------------------------------------
Common Stock, $.01 par value                              91,479,121
<PAGE>
 
                        PART I - FINANCIAL INFORMATION
                                        

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)

                         Index to Financial Statements
 
                                                                            Page
                                                                            ----
 
Sterling Commerce, Inc. Consolidated Balance Sheets at March 31, 1998 and
  September 30, 1997........................................................  3
 
Sterling Commerce, Inc. Consolidated Statements of Income for the Three 
  and Six Months Ended March 31, 1998 and 1997..............................  4
 
Sterling Commerce, Inc. Consolidated Statements of Stockholders' Equity  
  for the Six Months Ended March 31, 1998 ..................................  5
 
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for the 
  Six Months Ended March 31, 1998 and 1997..................................  6
 
Sterling Commerce, Inc. Notes to Consolidated Financial Statements..........  7
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
  AND RESULTS OF OPERATIONS................................................. 11
 

                          PART II - OTHER INFORMATION
                                        
Item 4.   Submission of Matters to a Vote of Security Holders............... 17

Item 6.   Exhibits and Reports on Form 8-K.................................. 17

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

                                        
                                  A S S E T S
                                                  MARCH 31         SEPTEMBER 30
                                                    1998               1997
                                                 ----------        ------------
                                                 (UNAUDITED)
Current assets:
 Cash and cash equivalents......................  $269,122            $250,348
 Marketable securities..........................   273,061             234,314
 Accounts and notes receivable, net.............   116,280             103,692
 Deferred income taxes..........................     9,731              10,431
 Prepaid expenses and other current assets......    20,060              16,332
                                                  --------            --------
   Total current assets.........................   688,254             615,117
 
Property and equipment, net of accumulated 
  depreciation of $49,048 at March 31, 1998 and 
  $42,986 at September 30, 1997.................    74,186              59,723
 
Computer software, net of accumulated 
  amortization of $58,622 at March 31, 1998 and 
  $51,306 at September 30, 1997.................    48,735              48,163
 
Excess cost over net assets acquired, net of 
  accumulated amortization of $4,819 at March 31, 
  1998 and $4,212 at September 30, 1997.........    16,190              17,156
 
 
Other assets....................................    15,281               8,407
                                                  --------            --------
                                                  $842,646            $748,566
                                                  ========            ========

     L I A B I L I T I E S  A N D  S T O C K H O L D E R S '  E Q U I T Y

Current liabilities:
 Accounts payable and accrued liabilities.......  $ 52,308            $ 57,397
 Income taxes payable...........................     6,893               5,919
 Deferred revenue...............................    61,141              60,000
                                                  --------            --------
   Total current liabilities....................   120,342             123,316
 
Deferred income taxes...........................    16,733              13,592
Other noncurrent liabilities....................    13,975              10,796
 
Stockholders' equity:
 Preferred stock, $.01 par value; 50,000,000 
 shares authorized; no shares issued and 
 outstanding....................................
 Common stock, $.01 par value; 150,000,000 
  shares authorized; 90,988,000 and 89,644,000 
  shares issued and outstanding at March 31, 
  1998 and September 30, 1997, respectively.....       910                 896
 
 
 Additional paid-in capital.....................   546,342             505,855
 Retained earnings..............................   144,344              94,111
                                                  --------            --------
   Total stockholders' equity...................   691,596             600,862
                                                  --------            --------
                                                  $842,646            $748,566
                                                  ========            ========


                            See accompanying notes.

                                       3
<PAGE>
 
                            STERLING COMMERCE, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
                                  (UNAUDITED)

 
                                             THREE MONTHS         SIX MONTHS
                                            ENDED MARCH 31      ENDED MARCH 31
                                          ------------------  ------------------
                                            1998      1997      1998      1997
                                          --------  --------  --------  --------

Revenue:
 Products................................ $ 39,419  $ 21,252  $ 76,860  $ 41,252
 Product support.........................   23,768    16,752    45,762    32,301
 Services................................   47,889    35,542    94,737    70,148
 Royalties from affiliated companies.....              5,988              10,602
                                          --------  --------  --------  --------
                                           111,076    79,534   217,359   154,303
 
Costs and expenses:
 Cost of sales:
  Products and product support...........    9,952     7,948    18,928    15,510
  Services...............................   14,079     8,444    25,564    16,617
                                          --------  --------  --------  --------
                                            24,031    16,392    44,492    32,127
                                                      
 Product development and enhancement.....    6,392     6,191    14,040    11,262
 Selling, general and administrative.....   44,789    29,371    90,366    58,321
                                          --------  --------  --------  --------
                                            75,212    51,954   148,898   101,710
                                          --------  --------  --------  --------

Income before other income and 
 income taxes............................   35,864    27,580    68,461    52,593

Other income.............................    6,175     2,815    11,919     3,873
                                          --------  --------  --------  --------

Income before income taxes...............   42,039    30,395    80,380    56,466
Provision for income taxes...............   15,064    11,578    29,202    21,589
                                          --------  --------  --------  --------
Net income............................... $ 26,975  $ 18,817  $ 51,178  $ 34,877
                                          ========  ========  ========  ========

Income per common share:

 Net income:
  Basic                                   $    .30  $    .23  $    .57  $    .45
                                          ========  ========  ========  ========
  Diluted                                 $    .29  $    .23  $    .55  $    .44
                                          ========  ========  ========  ========



                            See accompanying notes.

                                       4
<PAGE>
 
                            STERLING COMMERCE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        SIX MONTHS ENDED MARCH 31, 1998
                                (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                         COMMON STOCK
                                       ----------------  ADDITIONAL               TOTAL    
                                       NUMBER OF   PAR    PAID-IN    RETAINED  STOCKHOLDERS'  
                                        SHARES    VALUE   CAPITAL    EARNINGS     EQUITY      
                                       ---------  -----  ----------  --------  -------------
<S>                                    <C>        <C>    <C>         <C>       <C>  
Balance at September 30, 1997.........   89,644    $896   $505,855   $ 94,111     $600,862
 Issuance of common stock pursuant to
  stock options including tax benefit
  of $7,862...........................    1,344      14     40,487                  40,501
 
 Net income...........................                                 51,178       51,178
 Other................................                                   (945)        (945)
                                         ------    ----   --------   --------     --------
Balance at March 31, 1998.............   90,988    $910   $546,342   $144,344     $691,596
                                         ======    ====   ========   ========     ========
</TABLE> 

                            See accompanying notes.

                                       5
<PAGE>
 
                            STERLING COMMERCE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)


                                                         Six Months
                                                       Ended March 31
                                                     1998          1997
                                                   --------      -------- 
Operating activities:
 Net income......................................  $ 51,178      $ 34,877
 Adjustments to reconcile net income 
  to net cash provided by operating
  activities:
   Depreciation and amortization.................    18,262        13,890
   Provision for losses on accounts 
    receivable...................................       584           780
   Provision for deferred income taxes...........     3,841         1,839
   Changes in operating assets and 
    liabilities:
      Accounts and notes receivable..............   (15,626)        1,025
      Amounts due from Sterling Software.........                  30,764
      Prepaids and other assets..................    (7,789)       (8,132)
      Accounts payable, accrued liabilities 
       and income taxes payable..................     3,747        (1,716)
      Deferred revenue...........................     1,141         1,131
      Other......................................     3,179         1,049
                                                   --------      -------- 
       Net cash provided by operating 
        activities...............................    58,517        75,507
  
Investing activities:
 Purchases of property and equipment.............   (20,859)      (15,840)
 Purchases and capitalized cost of 
  development of computer software...............   (11,831)       (6,504)
 Purchases of investments, net...................   (38,747)     (125,359)
 Business acquisitions, net of cash 
  acquired.......................................                  (4,247)
                                                   --------      -------- 
       Net cash used in investing activities.....   (71,437)     (151,950)
 
Financing activities:
 Proceeds from stock issuances...................    32,639       400,407
 Other...........................................      (945)       (1,134)
                                                   --------      -------- 
       Net cash provided by financing 
        activities...............................    31,694       399,273
 
Increase in cash and cash equivalents............    18,774       322,830
 
Cash and cash equivalents at beginning 
 of period.......................................   250,348        23,484
                                                   --------      -------- 
Cash and cash equivalents at end of period.......  $269,122      $346,314
                                                   ========      ========



                            See accompanying notes.

                                       6
<PAGE>
 
                            STERLING COMMERCE, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                MARCH 31, 1998
                                  (UNAUDITED)
                                        
1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation

     The consolidated financial statements include the accounts of Sterling
Commerce, Inc. and its wholly owned subsidiaries (collectively the "Company")
after elimination of all significant intercompany balances and transactions.
Certain amounts for periods ended prior to March 31, 1998 have been reclassified
to conform to the current period presentation.  The financial statements have
been prepared in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.  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, provided no significant future vendor obligations exist
and collection is probable.  If software product transactions include the right
to receive future products, a portion of the software product revenue is
deferred and recognized as products are delivered.  Services revenue and revenue
from products involving installation or other services are recognized as the
services are performed. Royalties revenue represents royalties earned from
Sterling Software, Inc.  ("Sterling Software") which acted as the exclusive
distributor of certain of the Company's products outside of the United States
and Canada prior to June 30, 1997 (see Note 3 to the Consolidated Financial
Statements - "General Information - Termination of International Marketing
Agreement").

     Earnings Per Common Share

     In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128").  FAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share.  Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities.  Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share.  Earnings per share
amounts for all prior year periods presented have been restated to conform with
the requirements of FAS 128.

                                       7
<PAGE>
 
     The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):


<TABLE>
<CAPTION>
 
                                                       THREE MONTHS                 SIX MONTHS
                                                      ENDED MARCH 31              ENDED MARCH 31
                                                   --------------------        --------------------
                                                    1998          1997          1998          1997
                                                   ------        ------        ------        ------
<S>                                                <C>           <C>           <C>           <C>
Basic:
Weighted average common shares outstanding.......   90,386        80,111        90,069        77,527
                                                   =======       =======       =======       =======
                                                                                             
Net income.......................................  $26,975       $18,817       $51,178       $34,877
                                                   =======       =======       =======       =======
                                                                                             
Per share amount.................................  $   .30       $   .23       $   .57       $   .45
                                                   =======       =======       =======       =======
                                                                                             
                                                                                             
Diluted:                                                                                     
Weighted average common shares outstanding.......   90,386        80,111        90,069        77,527
Net effect of dilutive stock options.............    4,122         2,623         3,717         2,245
                                                   -------       -------       -------       -------
Total............................................   94,508        82,734        93,786        79,772
                                                   =======       =======       =======       =======
                                                                                             
Net income.......................................  $26,975       $18,817       $51,178       $34,877
                                                   =======       =======       =======       =======
                                                                               
Per share amount.................................  $   .29       $   .23       $   .55       $   .44
                                                   =======       =======       =======       =======
</TABLE>

2.   UNAUDITED INTERIM FINANCIAL STATEMENTS

     The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments
(consisting only of normal recurring entries) necessary for a fair presentation
of the financial position and results of operations for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year.  The information
included in this report should be read in conjunction with the information
presented under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997.

3.   GENERAL INFORMATION

     Initial Public Offering and Distribution

     The Company was incorporated in December 1995 as a wholly owned subsidiary
of 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, $0.01 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 

                                       8
<PAGE>
 
Sterling Software on September 30, 1996, payable pro rata to the holders of
record of Sterling Software's common stock, $0.10 par value, as of the close of
business on such date. As a result, effective September 30, 1996, the Company
ceased to be a subsidiary of Sterling Software.

Follow-On Public Offering

     On February 28, 1997, the Company completed a public offering (the "Follow-
On Offering") of 14,375,000 previously unissued shares of Common Stock. The net
proceeds of $400,145,000 were added to the Company's working capital and are
being used for general corporate purposes, including acquisitions. Pending such
use, the funds are invested in investment grade debt securities and other
marketable securities.

Termination of International Marketing Agreement

     In contemplation of the Offering, the Company entered into an International
Distributor Agreement dated March 4, 1996 (as amended, the "International
Marketing Agreement") with Sterling Software 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 June 1997, the Company entered
into an agreement (the "Termination Agreement") with Sterling Software
terminating, effective as of June 30, 1997, the International Marketing
Agreement.  Under the Termination Agreement, the Company also acquired certain
assets and assumed certain liabilities associated with the distribution of
certain of the Company's products by Sterling Software outside the United States
and Canada. The Company also hired certain Sterling Software employees, most of
whom had been dedicated to the sales and marketing of the Company's products.
Under the terms of the Termination Agreement, the Company (i) paid Sterling
Software $5,226,000 for the early termination of the International Marketing
Agreement, (ii) paid Sterling Software approximately $10,076,000, which amount
was equal to the net book value of certain assets acquired from Sterling
Software (principally accounts receivable) and (iii) assumed certain liabilities
related to the international distribution of certain of the Company's products.

4.   LEASE COMMITMENTS

     The Company has entered into an operating lease for a new group office
facility in Dallas, Texas. The initial term of the lease extends through
February 2003, with two optional five-year renewal periods thereafter. 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 guaranteeing to
the lessor an amount (approximately $55 million) equal to 85% of the current
fair value of the leased facility. The Company could also be required to
purchase the property if the Company is in default under certain obligations or
covenants contained in the lease or related agreements. The Company's minimum
annual lease payments will be approximately $3.9 million.

                                       9
<PAGE>
 
5.   SUBSEQUENT EVENT

     On April 16, 1998, the Company, Sterling Commerce (Southern), Inc., a
Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub"),
and XcelleNet, Inc., a Georgia corporation ("XcelleNet"), entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
XcelleNet will merge with and into Merger Sub (the "Merger"), with Merger Sub as
the surviving corporation and remaining a wholly owned subsidiary of the
Company.

     Pursuant to the Merger Agreement, at the effective time of the Merger, each
share of common stock, par value $0.01 per share, of XcelleNet ("XcelleNet
Common Stock") issued and outstanding immediately before the effective time will
be converted into the right to receive $8.80 in cash and 0.2885 of a share of
Common Stock, with the ratio of cash and shares to be adjusted, if necessary, as
provided in the Merger Agreement (the "Merger Consideration").

     The obligations of the parties to the Merger Agreement to consummate the
Merger are conditioned upon, among other things, (i) approval of the Merger
Agreement by the holders of a majority of the outstanding shares of XcelleNet
Common Stock, (ii) the waiting period pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, having expired or been
terminated, and (iii) the receipt of opinions of counsel by each of the Company
and XcelleNet to the effect that the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that no gain or loss
will be recognized by the shareholders of XcelleNet upon their exchange of
shares for the Merger Consideration under Section 354 of the Code (except to the
extent that such shareholders receive cash for their shares).

     Dennis M. Crumpler (the Chairman and Chief Executive Officer of XcelleNet),
Maleah Crumpler and The Crumpler Investment Limited Partnership (collectively,
the "Crumpler Shareholders") have entered into an agreement (the "Shareholder
Agreement") with the Company, pursuant to which, among other things, the
Crumpler Shareholders have agreed to vote their shares of XcelleNet Common Stock
in favor of approval of the Merger Agreement. The Crumpler Shareholders held in
the aggregate approximately 17% of the outstanding shares of XcelleNet Common
Stock as of the date of the Merger Agreement.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

     Total revenue increased $31,542,000 or 40% in the second quarter of fiscal
1998 over the same period in fiscal 1997. Products revenue increased $18,167,000
or 85%, product support revenue increased $7,016,000 or 42% and services revenue
increased $12,347,000 or 35%.  The increases in products revenue and product
support revenue were primarily due to increased licensing of communications and
electronic commerce translation and message management software products.  In
addition, as a result of the termination of the International Marketing
Agreement in June 1997 (see Note 3 of consolidated financial statements), the
Company received 100% of the revenues from the licensing of these products
outside of the United States and Canada in the second quarter of fiscal 1998 as
opposed to a 50% royalty on such revenues from Sterling Software in the same
period of fiscal 1997.  The increase in services revenue was primarily from
growth in existing commerce services customer transaction volume, the addition
of new customers and additional education and consulting services provided to
new and existing customers.
 
     The Company's recurring revenue includes revenue from annual and multi-year
product support agreements having terms ranging generally from one to three
years, fixed term product lease and rental agreements having terms ranging
generally from month-to-month to year-to-year and electronic commerce services
agreements cancelable upon 30 days notice. The Company includes the entire
portion of the recognized revenue from commerce services agreements in recurring
revenue, although no assurances can be given that such agreements will not be
canceled. Recurring revenue increased $11,406,000 or 24% in the second quarter
of fiscal 1998 over the same quarter of fiscal 1997 and represented 53% of total
revenue in the second quarter of fiscal 1998 compared to 60% in the same period
of the prior year.  The decrease in the relative percentage is due primarily to
the Company receiving 100% of the revenues from the licensing of products
outside the United States and Canada in the second quarter of fiscal 1998 as
opposed to a 50% royalty on such revenues from Sterling Software in the same
period of fiscal 1997.  For the three months ended March 31, 1998, 57% of the
Company's products revenue was derived from products designed for operating
platforms other than mainframe operating platforms, as compared to 54% for the
same quarter of fiscal 1997.  The Company's revenue from outside the United
States represented 19% of total revenue in the second quarter of fiscal 1998 as
compared to 12% for the same period of fiscal 1997.  The increase is primarily
due to an increase in international licensing of communications and electronic
commerce translation and message management software products as well as to the
termination of the International Marketing Agreement.

     Total costs and expenses increased $23,258,000 or 45% on revenue growth of
40%.  The percentage increase in total costs and expenses is primarily due to a
52% increase in selling, general and administrative costs and a 47% increase in
cost of sales.

     Total cost of sales in the second quarter of fiscal 1998 increased
$7,639,000 or 47% when compared with the same period last year. Cost of sales
for products and product support

                                       11
<PAGE>
 
increased $2,004,000 or 25% due to increased costs to support expanding software
licensing, a larger installed customer base and higher amortization costs of
capitalized development of software products. Cost of sales for services
increased $5,635,000 or 67% due to higher network services costs to support a
growing customer base and greater customer volume, as well as additional costs
associated with providing electronic product catalogs, information databases,
education and consulting services. Cost of sales includes $7,334,000 and
$5,199,000 of depreciation and amortization for the second quarter of fiscal
1998 and fiscal 1997, respectively.

     Product development and enhancement expense for the second quarter of
fiscal 1998 of $6,392,000, net of $4,087,000 capitalized pursuant to FAS No. 86,
increased $201,000 or 3% compared to product development and enhancement expense
of $6,191,000, net of $3,104,000 capitalized for the second quarter of fiscal
1997. The increase was primarily due to the higher gross product development
expense relating to products under development during the second quarter of
fiscal 1998. Total capitalized costs represented 39% and 33% of total
development and enhancement expense for the quarters ended March 31, 1998 and
1997, respectively. Product development expense and the capitalization rates
fluctuate from period to period depending in part upon the number and status of
software development projects in process.

     Selling, general and administrative expense increased $15,418,000 or 52%
when compared with the same period of last year primarily due to an increase in
sales, marketing and administrative support activities needed to support the
domestic revenue growth and also due to an increase in such activities to
support the Company's direct operations outside the United States and Canada
following the termination of the International Marketing Agreement in June 1997.

     Income before other income and income taxes was $35,864,000 for the second
quarter of fiscal 1998 as compared to income before other income and income
taxes of $27,580,000 for the same period of fiscal 1997 due to the $31,542,000
increase in revenues offset by the $23,258,000 increase in total costs. Other
income increased $3,360,000 in the second quarter of fiscal 1998 over the same
period of fiscal 1997 primarily due to an increase in investment income
resulting from a higher average balance of investments in cash, cash equivalents
and marketable securities.

     Provision for income taxes increased $3,486,000 for the second quarter of
fiscal 1998 over the same period of fiscal 1997 primarily due to the increase in
income before taxes for the 1998 period.

SIX MONTHS ENDED MARCH 31, 1998 AND 1997

     Total revenue increased $63,056,000 or 41% in the first six months of
fiscal 1998 over the same period in fiscal 1997. Products revenue increased
$35,608,000 or 86%, product support revenue increased $13,461,000 or 42% and
services revenue increased $24,589,000 or 35%. The increases in products revenue
and product support revenue were primarily due to increased licensing of
communications and electronic commerce translation and message management
software products. In addition, as a result of the termination of the
International Marketing Agreement in June 1997 (see Note 3 of consolidated
financial statements), the Company received 100% of the revenues from the
licensing of these products outside of the United States and Canada in the first
six months of fiscal 1998 as opposed to a 50% royalty on such revenues from
Sterling Software in the same period of fiscal 1997. The increase in services
revenue was 

                                       12
<PAGE>
 
primarily from growth in existing commerce services customer volume, the
addition of new customers and additional revenues from electronic product
catalogs and additional education and consulting services provided to new and
existing customers.
 
     Recurring revenue increased $24,214,000 or 26% in the first six months of
fiscal 1998 over the first six months of fiscal 1997 and represented 54% of
total revenue in the first six months of fiscal 1998 compared to 61% in the same
period of the prior year.  The decrease in the relative percentage is due
primarily to the Company receiving 100% of the revenues from the licensing of
products outside the United States and Canada in the first six months of fiscal
1998 as opposed to a 50% royalty on such revenues from Sterling Software in the
same period of fiscal 1997.  For the six months ended March 31, 1998, 56% of the
Company's products revenue was derived from products designed for operating
platforms other than mainframe operating platforms, as compared to 53% for the
six months ended March 31, 1997.  The Company's revenue from outside the United
States represented 20% of total revenue in the first six months of fiscal 1998
as compared to 12% for the same period of fiscal 1997.  The increase is
primarily due to an increase in international licensing of communications and
electronic commerce translation and message management software products as well
as to the termination of the International Marketing Agreement.

     Total costs and expenses increased $47,188,000 or 46% on revenue growth of
41%.  The percentage increase in total costs and expenses is primarily due to a
55% increase in selling, general and administrative costs, and a 38% increase in
cost of sales.

     Total cost of sales in the first six months of fiscal 1998 increased
$12,365,000 or 38% when compared with the same period in the prior year. Cost of
sales for products and product support increased $3,418,000 or 22% due to
increased costs to support expanding software licensing, a larger installed
customer base and higher amortization costs of capitalized development of
software products.  Cost of sales for services increased $8,947,000 or 54% due
to higher network services costs to support a growing customer base and greater
customer volume, as well as additional costs associated with providing
electronic product catalogs, information databases, education, and consulting
services. Cost of sales includes $13,672,000 and $10,176,000 of depreciation and
amortization for the first six months of fiscal 1998 and fiscal 1997,
respectively.

     Product development and enhancement expense for the first six months of
fiscal 1998 of $14,040,000, net of $8,108,000 capitalized pursuant to FAS No.
86, increased $2,778,000 or 25% compared to product development and enhancement
expense of $11,262,000, net of $6,336,000 capitalized for the first six months
of fiscal 1997. The increase was primarily due to the higher gross product
development expense relating to products under development during the first six
months of fiscal 1998. Total capitalized costs represented 37% and 36% of total
development and enhancement expense for the six months ended March 31, 1998 and
1997, respectively. Product development expense and the capitalization rates
fluctuate from period to period depending in part upon the number and status of
software development projects in process.

     Selling, general and administrative expense increased $32,045,000 or 55%
when compared with the same period of last year primarily due to an increase in
sales, marketing and administrative support activities needed to support the
domestic revenue growth and also due to 

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<PAGE>
 
an increase in such activities to support the Company's direct operations
outside the United States and Canada following the termination of the
International Marketing Agreement in June 1997.

     Income before other income and income taxes was $68,461,000 for the first
six months of fiscal 1998 as compared to income before other income and income
taxes of $52,593,000 for the same period of fiscal 1997. Other income increased
$8,046,000 in the first six months of fiscal 1998 over the same period of fiscal
1997 primarily due to an increase in investment income resulting from a higher
average balance of investments in cash, cash equivalents and marketable
securities.

     Provision for income taxes increased $7,613,000 for the first six months of
fiscal 1998 over the same period of fiscal 1997 primarily due to the increase in
income before taxes for the 1998 period.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had $567,912,000 of working capital at March 31, 1998,
including $269,122,000 of cash and cash equivalents and $273,061,000 of
marketable securities.  Days sales outstanding, measured on a quarterly basis,
improved to 94 days for the quarter ended March 31, 1998, compared with 98 days
for the quarter ended December 31, 1997.  The improvement was due primarily to
increased collection activities for receivables outside the United States and
Canada resulting from the Company's expanded international infrastructure.

     Net cash flows from operations decreased $16,990,000 to $58,517,000 in the
first six months of fiscal 1998 as compared to the first six months of fiscal
1997, primarily due to collection of amounts due from Sterling Software in the
first quarter of fiscal 1997.  Excluding this one-time collection, net cash flow
from operations increased $13,774,000 primarily as a result of higher operating
profits and non-cash charges and increases in accounts payable, accrued
liabilities and income taxes, partially offset by an increase in accounts
receivable, prepaids and other assets.  A portion of the Company's cash flow
from operations during the first two quarters of fiscal 1998 and 1997 was used
to fund software additions and capital expenditures.  Property and equipment
purchases of $20,859,000 in the first two quarters of fiscal 1998, as compared
to $15,840,000 in the same period of fiscal 1997, included purchases made for
equipment upgrades for processing systems and computer equipment purchases to
support the continuing growth in revenue.  Software expenditures in the first
two quarters of fiscal 1998 were $11,831,000 compared to $6,504,000 of software
expenditures in the same period of the prior year.  The expenditures during the
first two quarters of fiscal 1998 were primarily for new products and
enhancements of existing products.

     The Company maintains a revolving credit and term loan agreement (the
"Credit Agreement") which provides for a domestic borrowing capacity of
$20,000,000 and an additional $10,000,000 international borrowing capacity. An
underlying letter of credit facility provides for letters of credit up to the
full domestic borrowing capacity. The Credit Agreement, with a stated maturity
of October 1, 1999, is unsecured and contains various restrictive covenants
including restrictions on certain additional borrowings, payment of cash
dividends and certain acquisitions without the lender's consent. The Credit
Agreement also requires that the Company maintain certain financial ratios.
Borrowings under the Credit Agreement bear interest at the higher of the
lender's prime 

                                       14
<PAGE>
 
rate, the Federal Funds Effective Rate plus one-half percent or, for borrowings
obtained for fixed periods of time, LIBOR plus one-half percent. There were no
amounts borrowed under the Credit Agreement as of March 31, 1998.

     At March 31, 1998, the Company's capital resource commitments consisted
primarily of commitments under lease arrangements for office space and
equipment, excluding the amount of approximately $74 million in cash that is
currently estimated to be payable to the shareholders of XcelleNet, Inc. upon
the closing of the pending merger agreement (see Note 5 to the Consolidated
Financial Statements - "Subsequent Events"). The Company presently intends to
meet such obligations from cash flows from operations. No significant
commitments exist for future capital expenditures. The Company believes
available balances of cash, cash equivalents and short-term investments combined
with cash flows from operations and amounts available under the Credit Agreement
are sufficient to meet the Company's working capital requirements for the
foreseeable future.

OTHER MATTERS

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

     The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at exchange rates in effect as of the respective
balance sheet dates, and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions occur.
Unrealized translation gains and losses are included as an adjustment to
retained earnings. The Company has mitigated a portion of its currency exposure
through decentralized sales, marketing and support operations in which all costs
are local currency based. In addition, the Company may from time to time employ
external hedging strategies. The Company believes that its results of operations
and financial position will not be materially affected by the recent decrease in
the relative value of certain Asian currencies as 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 has
contributed to the Company's growth in revenue and operating profit. The impact
of any future acquisitions on continued growth in revenue and operating profit
cannot presently be determined.

FORWARD-LOOKING INFORMATION

     This report and other reports and statements 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

                                       15
<PAGE>
 
Company or the Company's management, identify forward-looking statements.  Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions relating
to the Company's operations and results of operations, competitive factors and
pricing pressures, shifts in market demand, the performance and needs of the
industries served by the Company, the costs of product development and other
risks and uncertainties, including, in addition to any uncertainties
specifically identified in the text surrounding such statements, uncertainties
with respect to changes or developments in social, economic, business, industry,
market, legal and regulatory circumstances and conditions and actions taken or
omitted to be taken by third parties, including the Company's stockholders,
customers, suppliers, business partners, competitors and legislative,
regulatory, judicial and other governmental authorities and officials.  Should
one or more of these risks or uncertainties materialize, or should the
underlying estimates or assumptions prove incorrect, actual results or outcomes
may vary significantly from those anticipated, believed, estimated, expected,
intended or planned.

                                       16
<PAGE>
                          PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders

     The Company held its Annual Meeting of Stockholders on March 12, 1998, at 
which meeting the Stockholders of the Company elected three Class B directors 
for terms expiring at the Company's Annual Meeting of Stockholders in 2001 and 
approved the Company's Employee Stock Purchase Plan.

     The results of the votes were as follows:


Election of Class B Directors:

     NAME                  FOR                   WITHELD
     ----                  ---                   -------
Warner C. Blow          76,431,189              4,313,291
Robert E. Cook          76,297,131              4,447,349
Charles J. Wyly, Jr.    76,422,337              4,322,143


Approval of Employee Stock Purchase Plan:

     FOR                  AGAINST               ABSTAINED
     ---                  -------               ---------
 78,832,831              1,778,625               133,023

 
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

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

          2.1  -- Agreement and Plan of Merger, dated as of April 16, 1998 by
                  and among Sterling Commerce, Inc., Sterling Commerce
                  (Southern), Inc. and XcelleNet, Inc. (incorporated by
                  reference to Exhibit 2.1 to the Company's Current Report on
                  Form 8-K, dated April 16, 1998). (The copy of the Agreement
                  and Plan of Merger incorporated by reference in this report
                  does not include the Schedules thereto. The Company agrees to
                  furnish supplementally to the Commission any such omitted
                  Schedule upon request.)

          27.1 -- Financial Data Schedule

          99.1 -- Shareholder Agreement, dated as of April 16, 1998, by and
                  among Sterling Commerce, Inc., Dennis M. Crumpler, Maleah
                  Crumpler and the Crumpler Investment Limited Partnership
                  (incorporated by reference to Exhibit 99.1 to the Company's
                  Current Report on Form 8-K, dated April 16, 1998).

     (b)  Reports on Form 8-K.

               On April 21, 1998, the Company filed a current report on Form 8-K
          dated April 16, 1998 reporting information under Item 5.

 

                                       17
<PAGE>
 
                                  SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                            STERLING COMMERCE, INC.
 
 
 
 
 
Date:   May 7, 1998                         By   /s/  Steven P. Shiflet
                                               ---------------------------------
                                                    Steven P. Shiflet
                                                Senior Vice President and
                                                 Chief Financial Officer
 
 
                                                 /s/  Steven P. Shiflet
                                               ---------------------------------
                                                    Steven P. Shiflet
                                                Senior Vice President and
                                                 Chief Financial Officer
                                                 (Principal Financial and 
                                                    Accounting Officer)

                                       18
<PAGE>
 
                               INDEX TO EXHIBITS


     2.1   -- Agreement and Plan of Merger, dated as of April 16, 1998 by and
              among Sterling Commerce, Inc., Sterling Commerce (Southern), Inc.
              and XcelleNet, Inc. (incorporated by reference to Exhibit 2.1 to
              the Company's Current Report on Form 8-K, dated April 16, 1998).
              (The copy of the Agreement and Plan of Merger incorporated by
              reference in this report does not include the Schedules thereto.
              The Company agrees to furnish supplementally to the Commission any
              such omitted Schedule upon request.)

     27.1  -- Financial Data Schedule

     99.1  -- Shareholder Agreement, dated as of April 16, 1998, by and among
              Sterling Commerce, Inc., Dennis M. Crumpler, Maleah Crumpler and
              the Crumpler Investment Limited Partnership (incorporated by
              reference to Exhibit 99.1 to the Company's Current Report on Form
              8-K, dated April 16, 1998).

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