<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 June 30, 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 August 3, 1998
       ----------------------------      ---------------------------------------
       Common Stock, $.01 par value                    91,627,557

                                     - 1 -
<PAGE>
 
                        PART I - FINANCIAL INFORMATION
                                        

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)

                         Index to Financial Statements
 
                                                                            Page
                                                                            ----
 
Sterling Commerce, Inc. Consolidated Balance Sheets at June 30, 1998 and
  September 30, 1997.......................................................    3
 
Sterling Commerce, Inc. Consolidated Statements of Income for the Three 
  and Nine Months Ended June 30, 1998 and 1997.............................    4
 
Sterling Commerce, Inc. Consolidated Statement of Stockholders' Equity 
  for the Nine Months Ended June 30, 1998..................................    5
 
Sterling Commerce, Inc. Consolidated Statements of Cash Flows for the 
  Nine Months Ended June 30, 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 6.   EXHIBITS AND REPORTS ON FORM 8-K.................................   17

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

                                        
                                  A S S E T S

<TABLE>
<CAPTION>
                                                                                  JUNE 30     SEPTEMBER 30 
                                                                                    1998          1997
                                                                                -----------   ------------
                                                                                (UNAUDITED)   
<S>                                                                             <C>           <C>
Current assets:                                                                               
 Cash and cash equivalents...................................................     $338,595      $250,348
 Marketable securities.......................................................      235,395       234,314
 Accounts and notes receivable, net..........................................      129,055       103,692
 Deferred income taxes.......................................................        9,381        10,431
 Prepaid expenses and other current assets...................................       24,212        16,332
                                                                                  --------      --------
   Total current assets......................................................      736,638       615,117
                                                                                              
Property and equipment, net of accumulated depreciation of $54,939 at                         
 June 30, 1998 and $42,986 at September 30, 1997.............................       80,356        59,723
                                                                                              
Computer software, net of accumulated amortization of $62,409 at                              
 June 30, 1998 and $51,306 at September 30, 1997.............................       51,567        48,163
                                                                                              
Excess cost over net assets acquired, net of accumulated amortization of                      
 $5,221 at June 30, 1998 and $4,212 at September 30, 1997....................       19,907        17,156
                                                                                              
                                                                                              
Other assets.................................................................       18,819         8,407
                                                                                  --------      --------
                                                                                  $907,287      $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....................................     $ 52,245      $ 57,397
 Income taxes payable........................................................       16,134         5,919
 Deferred revenue............................................................       65,964        60,000
                                                                                  --------      --------
   Total current liabilities.................................................      134,343       123,316
                                                                                              
Deferred income taxes........................................................       17,384        13,592
Other noncurrent liabilities.................................................       15,451        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; 91,591,000 and                  
  89,644,000 shares issued and outstanding at June 30, 1998 and September                     
  30, 1997, respectively.....................................................          916           896
 Additional paid-in capital..................................................      563,458       505,855
 Retained earnings...........................................................      175,735        94,111
                                                                                  --------      --------
   Total stockholders' equity................................................      740,109       600,862
                                                                                  --------      --------
                                                                                  $907,287      $748,566
                                                                                  ========      ========
</TABLE> 

                            See accompanying notes.

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

                                        
<TABLE>
<CAPTION>
                                                                    THREE MONTHS                   NINE MONTHS
                                                                    ENDED JUNE 30                 ENDED JUNE 30
                                                                ---------------------         --------------------- 
                                                                  1998         1997             1998         1997
                                                                --------     --------         --------     --------
<S>                                                             <C>          <C>              <C>          <C> 

Revenue:                                                                                                
 Products..............................................         $ 47,370     $ 25,023         $124,230     $ 66,275
 Product support.......................................           24,802       17,447           70,564       49,748
 Services..............................................           49,923       39,172          144,660      109,320
 Royalties from affiliated companies...................                         6,156                        16,758
                                                                --------     --------         --------     --------
                                                                 122,095       87,798          339,454      242,101
                                                                                                        
Costs and expenses:                                                                                     
 Cost of sales:                                                                                         
  Products and product support.........................           10,402        8,660           29,330       24,170
  Services.............................................           13,697        9,413           39,261       26,030
                                                                --------     --------         --------     --------
                                                                  24,099       18,073           68,591       50,200
                                                                                                        
 Product development and enhancement...................            7,343        7,147           21,383       18,409
 Selling, general and administrative...................           47,666       32,484          138,032       90,805
 Purchased research and development....................                        31,879                        31,879
 Reorganization costs..................................                        15,810                        15,810
                                                                --------     --------         --------     --------
                                                                  79,108      105,393          228,006      207,103
                                                                --------     --------         --------     --------
                                                                                                        
Income (loss) before other income and income taxes.....           42,987      (17,595)         111,448       34,998
                                                                                                        
Other income...........................................            6,254        6,022           18,173        9,895
                                                                --------     --------         --------     --------
                                                                                                        
Income (loss) before income taxes......................           49,241      (11,573)         129,621       44,893
Provision for (benefit of) income taxes................           18,015       (4,097)          47,217       17,492
                                                                --------     --------         --------     --------
Net income (loss)......................................         $ 31,226     $ (7,476)        $ 82,404     $ 27,401
                                                                ========     ========         ========     ========
                                                                                                        
Income (loss) per common share:                                                                         
                                                                                                        
 Net income (loss):                                                                                     
  Basic................................................         $    .34     $   (.08)        $    .91     $    .34
                                                                ========     ========         ========     ========
  Diluted..............................................         $    .33     $   (.08)        $    .87     $    .33
                                                                ========     ========         ========     ========
</TABLE> 


                            See accompanying notes.

                                     - 4 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        NINE MONTHS ENDED JUNE 30, 1998
                                (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                         COMMON STOCK
                                        ---------------
                                        NUMBER            ADDITIONAL               TOTAL
                                          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 $8,212...........................   1,870       19      55,062                 55,081
 Issuance of common stock pursuant                                              
   to employee stock purchase plan          77        1       2,541                  2,542
 Net income...........................                                  82,404      82,404
 Other................................                                    (780)       (780)
                                        ------     ----    --------   --------    --------
Balance at June 30, 1998..............  91,591     $916    $563,458   $175,735    $740,109
                                        ======     ====    ========   ========    ========
</TABLE>



                            See accompanying notes.

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

<TABLE>
<CAPTION>
                                                                                                  NINE MONTHS
                                                                                                 ENDED JUNE 30
                                                                                        -------------------------------
                                                                                           1998                  1997
                                                                                        ---------             ---------
<S>                                                                                     <C>                   <C>
Operating activities:
 Net income..................................................................           $  82,404             $  27,401
 Adjustments to reconcile net income to net cash provided by operating
  activities:
   Depreciation and amortization.............................................              30,291                21,953
   Provision for losses on accounts receivable...............................               1,769                 1,223
   Provision for (benefit of) deferred income taxes..........................               4,842               (14,298)
   Purchased research and development........................................                                    31,879
   Changes in operating assets and liabilities:
      Accounts and notes receivable..........................................             (27,788)              (21,145)
      Amounts due from Sterling Software.....................................                                    35,818
      Prepaids and other assets..............................................             (17,266)               (6,549)
      Accounts payable, accrued liabilities and income taxes payable.........               5,063                14,858
      Deferred revenue.......................................................               5,607                10,162
      Other..................................................................               4,655                 4,203
                                                                                        ---------             ---------
       Net cash provided by operating activities.............................              89,577               105,505
 
Investing activities:
 Purchases of property and equipment.........................................             (38,556)              (23,995)
 Purchases and capitalized cost of development of computer software..........             (14,825)              (10,076)
 Purchases of investments, net...............................................              (1,081)             (135,136)
 Business acquisitions, net of cash acquired.................................              (3,711)              (30,486)
                                                                                        ---------             ---------
       Net cash used in investing activities.................................             (58,173)             (199,693)
 
Financing activities:
 Proceeds from stock issuances...............................................              57,253               400,145
 Other.......................................................................                (410)                 (645)
                                                                                        ---------             ---------
       Net cash provided by financing activities.............................              56,843               399,500
 
Increase in cash and cash equivalents........................................              88,247               305,312
 
Cash and cash equivalents at beginning of period.............................             250,348                23,484
                                                                                        ---------             ---------
 
Cash and cash equivalents at end of period...................................           $ 338,595             $ 328,796
                                                                                        =========             =========
</TABLE>



                            See accompanying notes.

                                     - 6 -
<PAGE>
 
                            STERLING COMMERCE, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 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 June 30, 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 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                        NINE MONTHS
                                                                      ENDED JUNE 30                      ENDED JUNE 30
                                                                -------------------------          -------------------------
                                                                  1998             1997              1998             1997
                                                                --------         --------          --------         --------
<S>                                                            <C>              <C>               <C>              <C>
                                                    
Basic:
Weighted average common shares outstanding.............           91,370           89,492            90,495           81,516
                                                                ========         ========          ========         ========
                                                                                            
Net income (loss)......................................         $ 31,226         $ (7,476)         $ 82,404         $ 27,401
                                                                ========         ========          ========         ========
                                                                                            
Per share amount.......................................         $    .34         $   (.08)         $    .91         $    .34
                                                                ========         ========          ========         ========
                                                                                            
Diluted:                                                                                    
Weighted average common shares outstanding.............           91,370           89,492            90,495           81,516
Net effect of dilutive stock options...................            4,135                              3,897            2,150
                                                                --------         --------          --------         --------
Total..................................................           95,505           89,492            94,392           83,666
                                                                ========         ========          ========         ========
                                                                                            
Net income (loss)......................................         $ 31,226         $ (7,476)         $ 82,404         $ 27,401
                                                                ========         ========          ========         ========
                                                                                 
Per share amount.......................................         $    .33         $   (.08)         $    .87         $    .33
                                                                ========         ========          ========         ========
</TABLE>

In connection with the computation of the loss per share for the three months
ended June 30, 1997, all otherwise dilutive stock options have been excluded
because the impact on the Company's net loss per share is anti-dilutive.  In the
absence of this net loss, 2,633 additional shares related to dilutive stock
options would be included in the computation of diluted earnings per share.

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.

                                     - 8 -
<PAGE>
 
3.   GENERAL INFORMATION

Termination of International Marketing Agreement

     In contemplation of its initial public offering in March 1996, 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 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
proceeds on such sale at least equal to 85% of the original fair value of the
leased facility.  Such guarantee amount is estimated to be approximately
$55,000,000.   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.  The Company's minimum lease
payments will be approximately $3,900,000 per year.

5.   SUBSEQUENT EVENT

     On July 21, 1998, the Company acquired XcelleNet, Inc. ("XcelleNet"), which
was merged (the "Merger") with and into Sterling Commerce (Southern), Inc.
("Merger Sub"), a wholly owned subsidiary of the Company, pursuant to an
Agreement and Plan of Merger, dated as of April 16, 1998 (the "Merger
Agreement"), among the Company, Merger Sub and XcelleNet.  At the effective time
of the Merger (the "Effective Time"), each share of common stock, par value
$0.01 per share, of XcelleNet ("XcelleNet Stock"), issued and outstanding
immediately prior to the Effective Time, was converted into the right to receive
(i) a cash payment in an amount equal to $8.80 and (ii) 0.2885 of a share of
common stock, $0.01 par value, of the Company ("Common Stock").  The total
consideration paid by the Company in 

                                     - 9 -
<PAGE>
 
connection with the Merger was approximately $225,000,000, consisting of
approximately $74,000,000 in cash and approximately 2,400,000 shares of Common
Stock. In addition, in accordance with the terms of the Merger Agreement, the
Company assumed outstanding options to purchase XcelleNet Stock that were
converted at the Effective Time into options to acquire approximately 1,300,000
shares of Common Stock. The Company funded the cash portion of the consideration
and the payment of Merger related fees and expenses from the Company's existing
working capital.

     The Company will incur restructuring costs in the quarter ending September
30, 1998 related to the Merger and the restructuring of certain other parts of
its existing businesses.  Although the Company's management is still in the
process of evaluating the nature, scope and extent of the restructurings, it
currently estimates that the related charges will be in the range of $65,000,000
to $80,000,000 in the aggregate.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 AND 1997

     Total revenue increased $34,297,000 or 39% in the third quarter of fiscal
1998 over the same period in fiscal 1997. Products revenue increased $22,347,000
or 89%, product support revenue increased $7,355,000 or 42% and services revenue
increased $10,751,000 or 27%. The increases in products 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 third 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 $12,243,000 or 24% in the third quarter of
fiscal 1998 over the same quarter of fiscal 1997 and represented 51% of total
revenue in the third quarter of fiscal 1998 compared to 58% 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 third 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 June 30, 1998, 60% of the
Company's products revenue was derived from products designed for operating
platforms other than mainframe operating platforms, as compared to 62% for the
same quarter of fiscal 1997.  The Company's revenue from outside the United
States represented 20% of total revenue in the third 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 decreased $26,285,000 or 25% on revenue growth of
39%. The decrease in total costs and expenses is due in large part to the charge
of $47,689,000 for purchased in-process research and development and
reorganization costs in the third quarter of 1997 related to the acquisitions of
Comfirst S.A. ("Comfirst"), Automated Catalogue Services

                                     - 11 -
<PAGE>
 
L.P. ("ACS") and the international distribution operations acquired from
Sterling Software. Excluding this charge, total costs and expenses increased
$21,404,000 or 37% on revenue growth of 39% due primarily to a 47% increase in
selling, general and administration expenses and a 46% increase in cost of sales
for services.

     Total cost of sales in the third quarter of fiscal 1998 increased
$6,026,000 or 33% when compared with the same period last year. Cost of sales
for products and product support increased $1,742,000 or 20% 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 $4,284,000 or 46% due to higher costs
associated with providing education and consulting services. Cost of sales
includes $7,911,000 and $5,481,000 of depreciation and amortization for the
third quarter of fiscal 1998 and fiscal 1997, respectively.

     Product development and enhancement expense for the third quarter of fiscal
1998 of $7,343,000, net of $4,384,000 capitalized pursuant to FAS No. 86,
increased $196,000 or 3% compared to product development and enhancement expense
of $7,147,000, net of $3,496,000 capitalized for the third quarter of fiscal
1997.  The increase was primarily due to the higher gross product development
expense relating to products under development during the third quarter of
fiscal 1998.  Total capitalized costs represented 37% and 33% of total
development and enhancement expense for the quarters ended June 30, 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 $15,182,000 or 47%
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 $42,987,000 for the third
quarter of fiscal 1998 as compared to a loss before other income and income
taxes of $17,595,000 for the same period of fiscal 1997.  Excluding the one-time
charge of $47,689,000 for purchased in-process research and development and
reorganization costs in the third quarter of 1997 related to the acquisition of
Comfirst, ACS and the international distribution operations acquired from
Sterling Software, income before other income and income taxes increased
$12,893,000 or 43% in the third quarter of fiscal 1998 over the same period of
fiscal 1997.  Other income increased $232,000 in the third 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.

                                     - 12 -
<PAGE>
 
     Provision for income taxes increased $22,112,000 for the third quarter of
fiscal 1998 over the same period of fiscal 1997.  Excluding the impact of the
one-time charge, provision for income taxes increased $4,543,000 or 34%
primarily due to the increase in income before taxes for the 1998 period.

NINE MONTHS ENDED JUNE 30, 1998 AND 1997

     Total revenue increased $97,353,000 or 40% in the first nine months of
fiscal 1998 over the same period in fiscal 1997. Products revenue increased
$57,955,000 or 87%, product support revenue increased $20,816,000 or 42% and
services revenue increased $35,340,000 or 32%. The increases in products 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
nine 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 primarily from growth in existing commerce services customer volume,
the addition of new customers and additional revenues from additional education
and consulting services provided to new and existing customers.
 
     Recurring revenue increased $36,257,000 or 25% in the first nine months of
fiscal 1998 over the first nine months of fiscal 1997 and represented 53% of
total revenue in the first nine months 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 first nine 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 nine months ended June 30, 1998, 57% of the
Company's products revenue was derived from products designed for operating
platforms other than mainframe operating platforms, as compared to 58% for the
nine months ended June 30, 1997.  The Company's revenue from outside the United
States represented 20% of total revenue in the first nine 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 $20,903,000 or 10% on revenue growth of
40%.  The relatively small increase in total costs and expenses is due in large
part to the charge of $47,689,000 for purchased in-process research and
development and reorganization costs in the third quarter of 1997 related to the
acquisition of Comfirst, ACS and the international distribution operations
acquired from Sterling Software.  Excluding this charge, total costs and
expenses increased $68,592,000 or 43% due primarily to a 52% increase in
selling, general and administration expenses and a 51% increase in cost of sales
for services.

                                     - 13 -
<PAGE>
 
     Total cost of sales in the first nine months of fiscal 1998 increased
$18,391,000 or 37% when compared with the same period in the prior year. Cost of
sales for products and product support increased $5,160,000 or 21% 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 $13,231,000 or 51% due
primarily to higher costs associated with providing education and consulting
services. Cost of sales includes $21,583,000 and $15,629,000 of depreciation and
amortization for the first nine months of fiscal 1998 and fiscal 1997,
respectively.

     Product development and enhancement expense for the first nine months of
fiscal 1998 of $21,383,000, net of $12,792,000 capitalized pursuant to FAS No.
86, increased $2,974,000 or 16% compared to product development and enhancement
expense of $18,409,000, net of $9,833,000 capitalized for the first nine months
of fiscal 1997.  The increase was primarily due to the higher gross product
development expense relating to products under development during the first nine
months of fiscal 1998.  Total capitalized costs represented 37% and 35% of total
development and enhancement expense for the nine months ended June 30, 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 $47,227,000 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 $111,448,000 for the first
nine months of fiscal 1998 as compared to income before other income and income
taxes of $34,998,000 for the same period of fiscal 1997.  Excluding the one-time
charge of $47,689,000 for purchased in-process research and development and
reorganization costs in the third quarter of 1997 related to the acquisition of
Comfirst, ACS and the international distribution operations acquired from
Sterling Software, income before other income and income taxes increased
$28,761,000 or 35% in the first nine months of fiscal 1998 over the same period
of fiscal 1997.  Other income increased $8,278,000 in the first nine months of
fiscal 1998 over the same period of fiscal 1997 primarily due to an increase in
investment income from a higher average balance of investments in cash, cash
equivalents and marketable securities which resulted in large part from the
Company's follow-on offering in February, 1997.

     Provision for income taxes increased $29,725,000 for the first nine months
of fiscal 1998 over the same period of fiscal 1997. Excluding the impact of the
one-time charge, provision for income taxes increased $12,156,000 or 35%
primarily due to the increase in income before taxes for the 1998 period.

                                     - 14 -
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     The Company had $602,295,000 of working capital at June 30, 1998, including
$338,595,000 of cash and cash equivalents and $235,395,000 of marketable
securities. Days sales outstanding, measured on a quarterly basis, increased
slightly to 95 days for the quarter ended June 30, 1998, compared with 94 days
for the quarter ended March 31, 1998.

     Net cash flows from operations decreased $15,928,000 to $89,577,000 in the
first nine months of fiscal 1998 as compared to the first nine 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 $19,890,000 primarily as a result of higher operating
profits and non-cash charges, 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 three quarters of fiscal 1998 and 1997 was used
to fund software additions and capital expenditures.  Property and equipment
purchases of $38,556,000 in the first three quarters of fiscal 1998, as compared
to $23,995,000 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
three quarters of fiscal 1998 were $14,825,000 compared to $10,076,000 of
software expenditures in the same period of the prior year.  The expenditures
during the first three 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 rate, the Federal Funds Effective Rate plus one-half percent and,
for borrowings obtained for fixed periods of time, LIBOR plus one-half percent.
There were no amounts borrowed under the Credit Agreement as of June 30, 1998.

     At June 30, 1998, the Company's capital resource commitments consisted
primarily of commitments under lease arrangements for office space and
equipment, and approximately $74,000,000 in cash payable to the shareholders of
XcelleNet in connection with the Merger (see Note 5 to the Consolidated
Financial Statements  "Subsequent Events").  The Company presently intends to
meet such obligations from cash flows from operations and cash on hand.  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.

                                     - 15 -
<PAGE>
 
OTHER MATTERS

     Demand for many of the Company's products and services 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, product licensing and provision of services.

     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
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 {PRIVATE}

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 (the
                  "Merger Agreement"), by and among Sterling Commerce, Inc.,
                  Sterling Commerce (Southern), Inc. and XcelleNet, Inc.
                  (incorporated by reference to Exhibit 2.1 to the Sterling
                  Commerce, Inc. Current Report on Form 8-K, dated April 16,
                  1998). (In accordance with Item 601 of Regulation S-K, this
                  copy of the Merger Agreement does not include the schedules or
                  exhibits thereto. Sterling Commerce, Inc. agrees to furnish
                  supplementally to the Securities and Exchange Commission a
                  copy of such schedules and exhibits upon request.)

          27.1 -- Financial Data Schedule

     (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.

               On June 10, 1998, the Company filed a Current Report on Form 8-K
          dated June 10, 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:   August 6,  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 (the
              "Merger Agreement"), by and among Sterling Commerce, Inc.,
              Sterling Commerce (Southern), Inc. and XcelleNet, Inc.
              (incorporated by reference to Exhibit 2.1 to the Sterling
              Commerce, Inc. Current Report on Form 8-K, dated April 16, 1998).
              (In accordance with Item 601 of Regulation S-K, this copy of the
              Merger Agreement does not include the schedules or exhibits
              thereto. Sterling Commerce, Inc. agrees to furnish supplementally
              to the Securities and Exchange Commission a copy of such schedules
              and exhibits upon request.)

      27.1 -- Financial Data Schedule