<PAGE>
 
                       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 NUMBER  0-23560


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

         GEORGIA                                    58-1749705
(State or other jurisdiction of                 (I.R.S. Employer
incorporation or organization)                  Identification No.)

 5 CONCOURSE PARKWAY, SUITE 850
          ATLANTA, GA                                     30328
(Address of principal executive offices)                (Zip Code)

                                 (770) 804-8100
              (Registrant's telephone number, including area code)


                                 Not applicable
      (Former name, former address and former fiscal year, if changed since 
            last report)

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 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.

Common Stock, $.01 par value: 8,381,193 shares as of April 16, 1998
<PAGE>
 
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS DOCUMENT THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ARE BASED ON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.  ACTUAL EVENTS AND
OUTCOMES COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE DESCRIBED HEREIN AND
THOSE SET FORTH IN THE RISKS FACTORS DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL
REPORT ON FORM10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH
31, 1998.



                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

<PAGE>
 
 
<TABLE>
<CAPTION>

XcelleNet, Inc. and Subsidiaries
Consolidated Statements of Operations - Unaudited
(in thousands, except per share data)
                                                                         Three Months Ended
                                                                              March 31,
                                                                         1998        1997
-------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C> 
Revenues
 Software license fees                                                  $ 8,175    $ 8,871
 Software upgrade fees and services                                       6,038      4,479
-------------------------------------------------------------------------------------------
                                                                         14,213     13,350
-------------------------------------------------------------------------------------------
Costs and expenses
 Costs of software license fees                                             731        570
 Costs of software upgrade fees and services                              2,109      1,688
 Sales and marketing                                                      5,976      5,407
 Product development                                                      2,206      2,041
 General and administrative                                               1,596      1,867
-------------------------------------------------------------------------------------------
                                                                         12,618     11,573
-------------------------------------------------------------------------------------------
Operating income                                                          1,595      1,777
Other income, net                                                           328         90
-------------------------------------------------------------------------------------------
Income before income taxes                                                1,923      1,867
Provision for income taxes                                                  663        738
-------------------------------------------------------------------------------------------
Net income                                                              $ 1,260    $ 1,129
-------------------------------------------------------------------------------------------

Net income per share - basic                                            $  0.15    $  0.15
Net income per share - diluted                                          $  0.14    $  0.14

Weighted average shares outstanding - basic                               8,341      7,468
Weighted average shares outstanding - diluted                             9,303      8,352
</TABLE> 
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
 

<TABLE>
<CAPTION>

XcelleNet, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(in thousands)
                                                                                         Unaudited
                                                                                          March 31, December 31,
  -------------------------------------------------------------------------------------------------------------
                                                                                            1998        1997
  -------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>        <C> 
Assets
Current assets
  Cash and cash equivalents                                                                 $16,678    $ 8,478
  Short-term investments                                                                     16,786     20,811
  Trade receivables, net of allowance for doubtful accounts of $552 and $552                 12,533     14,395
  Prepaid expenses and other current assets                                                   1,959      1,535
  Income tax receivable                                                                         227         -
---------------------------------------------------------------------------------------------------------------
     Total current assets                                                                    48,183     45,219
  -------------------------------------------------------------------------------------------------------------
Furniture, fixtures and equipment, net                                                        4,553      4,733
Capitalized software development costs, net of accumulated
  amortization of $3,073 and $2,785                                                           1,694      1,982
Intangible assets, net of accumulated amortization of  $445 and $349                          2,319      2,415
Deferred income tax assets                                                                      895        895
Other noncurrent assets                                                                         337        339
---------------------------------------------------------------------------------------------------------------
                                                                                            $57,981    $55,583
  -------------------------------------------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities                                                                         $ 8,521    $ 8,153
Long-term liabilities                                                                         1,094      1,172
Shareholders' equity                                                                         48,366     46,258
---------------------------------------------------------------------------------------------------------------
                                                                                            $57,981    $55,583
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated condensed balance sheets.
</TABLE>
<PAGE>
 
 
XCELLENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)

<TABLE> 
<CAPTION> 
                                                                                  THREE MONTHS ENDED
                                                                                       MARCH 31,
-----------------------------------------------------------------------------------------------------
                                                                                     1998      1997
-----------------------------------------------------------------------------------------------------
<S>                                                                              <C>       <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                      $  1,260   $ 1,129
  Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                                                    1,069     1,038
    Change in assets and liabilities, net of acquisition
      Decrease (increase) in trade receivables                                       1,862    (1,510)
      Increase in prepaid expenses and other current assets                           (424)     (279)
      (Increase) decrease in income tax receivable                                    (227)    1,099
      Increase in deferred revenue                                                   1,091       511
      (Decrease) increase in current liabilities                                      (521)      221
      Decrease in long-term liabilities                                                (78)      (34)
-----------------------------------------------------------------------------------------------------
        Total adjustments                                                            2,772     1,046
-----------------------------------------------------------------------------------------------------
        Net cash provided by operating activities                                    4,032     2,175
-----------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Decrease (increase) in short-term investments                                      4,025      (790)
  Purchases of furniture, fixtures, and equipment                                     (504)     (842)
  Additions to capitalized software development costs                                   -       (734)
  Purchase of XIS, net of cash acquired                                                 -       (719)
  Other                                                                                 (9)      (72)
-----------------------------------------------------------------------------------------------------
        Net cash provided by (used in) investing activities                          3,512    (3,157)
-----------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of common stock, net of related costs                         550        52
  Income tax benefits related to exercise of stock options                             303       100
  Repayment of XIS note payable                                                       (200)       -
  Repayment of XIS assumed liabilities                                                  -       (388)
  Other                                                                                  3        34
-----------------------------------------------------------------------------------------------------
        Net cash provided by (used in) financing activities                            656      (202)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                 8,200    (1,184)
Cash and cash equivalents, beginning of period                                       8,478    10,587
-----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                          $ 16,678   $ 9,403
-----------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURES
  Interest paid                                                                   $      8   $     1
  Income taxes paid                                                               $    824   $    39
</TABLE> 
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
 
 
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED


1.   In the Company's opinion, the accompanying consolidated interim financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary to present fairly the Company's consolidated results of
operations, condensed financial position and cash flows for the periods
indicated.  The results of operations for interim periods are not necessarily
indicative of results expected for the entire year.  The interim financial
statements should be read in conjunction with the audited consolidated financial
statements as of December 31, 1997 and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.  Certain prior year amounts have
been re-classified to conform to the current year presentations.

2.   Basic net income per share is computed based on net income and the weighted
average number of common shares outstanding.  Diluted net income per share
reflects the assumed issuance of common shares under stock option plans.  The
computation of diluted net income per share does not assume exercise of
securities that would have an anti-dilutive effect on net income per share.  The
shares assumed issued related to stock options were 962,000 and 884,000 for the
three months ended March 31, 1998 and 1997, respectively.

3.   The Company expenses the production costs of advertising at the time
incurred, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits.  Direct-response
advertising consists primarily of advertisements in business, financial, and
software magazines and newspapers.  The cost of each advertisement is amortized
over the four-month period following the issuance of the publication in which it
appears.  Advertising expenditures totaled $434,000 and $447,000 in the three
months ended March 31, 1998 and 1997, respectively.  Advertising expense was
$434,000 and $538,000 for the three months ended March 31, 1998 and 1997,
respectively. Unamortized advertising costs included in prepaid expenses were $0
at March 31, 1998 and 1997.

4.   On January 2, 1997, the Company completed the acquisition of XcelleNet
Integration Services, Inc.  ("XIS", formerly Electronic Commerce, Inc.) for a
total consideration comprising cash, future payments and stock of approximately
$2,675,000.  The transaction was accounted for as a purchase. The excess of the
purchase price over the tangible assets acquired totaled $2,535,684 and is being
amortized over 10 years.  The operating results of XIS since the date of
acquisition are included in the accompanying financial statements.

5.   Effective for periods beginning after December 15, 1997, the American
Institute of Certified Public Accountants has issued Statement of Position 97-2,
"Software Revenue Recognition," ("SOP 97-2").    SOP 97-2 sets new guidelines
for the recognition of software revenue.  The Company adopted SOP 97-2 effective
in the first quarter of 1998.  The adoption of the standards in SOP 97-2 did not
have a significant impact on the Company's consolidated financial statements.

6.   In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130").  SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements.  The Company adopted SFAS 130 effective in the
first quarter of 1998.  The table below presents the consolidated statements of
comprehensive income for the three months ended March 31, 1998 and 1997.
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                    THREE MONTHS ENDED       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED              MARCH 31,
----------------------------------------------------------------------------------------
(in thousands)                                                       1998        1997
----------------------------------------------------------------------------------------
<S>                                                               <C>        <C> 
NET INCOME                                                          $ 1,260    $ 1,129
                                                                    --------------------
OTHER COMPREHENSIVE INCOME (LOSS):
     Foreign currency translation adjustments, net                       (8)       (61)

     Unrealized gains on securities, net                                  3         33 

                                                                    --------------------
OTHER COMPREHENSIVE INCOME (LOSS)                                        (5)       (28)
                                                                    --------------------
COMPREHENSIVE INCOME                                                $ 1,255    $ 1,101
                                                                    ====================
</TABLE> 

7.   In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
("SFAS 131").  SFAS 131 requires companies to determine reporting segments based
on the manner in which management makes decisions about allocating resources to
segments and measuring their performance.  Disclosures for each segment are
similar to those required under current standards, with the addition of certain
quarterly disclosure requirements.  SFAS 131 also requires entity-wide
disclosure about the products and services an entity provides, the countries in
which it holds material assets and reports material revenues, and its
significant customers.  SFAS 131 does not require segment reporting in interim
financial statements in the initial year of application.

8.   On April 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement"), by and among Sterling Commerce, Inc., a Delaware
corporation ("Sterling"), Sterling Commerce (Southern), Inc., a Delaware
corporation and wholly owned subsidiary of Sterling ("Sub"), and the Company
providing for the acquisition of the Company by Sterling.  Pursuant to the
Merger Agreement, following the satisfaction of the conditions contained
therein, the Company will be merged with and into Sub, with the Sub to continue
as the surviving corporation wholly owned by Sterling  (the "Merger").

In the Merger, each share of the Company's common stock, par value $ .01 per
share (the "XcelleNet Common Stock"), issued and outstanding immediately prior
to the effective time of the Merger will be converted into the right to receive
(i) a cash payment in an amount equal to $8.80 (the "Cash Payment") and (ii)
0.2885 of a share of Sterling's common stock, par value of $.01 per share
("Sterling Common Stock"); with the ratio of cash and shares to be adjusted, if
necessary, as provided in Section 2.1 of the Merger Agreement. There were
8,381,193 shares of XcelleNet Common Stock outstanding on April 16, 1998.

The Merger Agreement contains customary representations and warranties of the
parties, which will not survive the effectiveness of the Merger. In addition,
pursuant to the Merger Agreement, the Company has agreed to operate its business
in the ordinary course pending consummation of the Merger, and the Company has
agreed not to solicit negotiations or agreements relating to a competing
business combination transaction. The Merger is conditioned upon, among other
things, (i) the approval of the holders of at least a majority of the
outstanding shares of Xcellenet Common Stock, (ii) the termination or expiration
of the waiting period pursuant to the Hart-Scott Rodino Antitrust Improvements
Act of 1976, as amended, and (iii) the receipt of opinions of counsel by each of
XcelleNet and Sterling 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). Subject to the
payment of certain termination fees, both XcelleNet and Sterling may terminate
the Merger Agreement in certain specified circumstances. Either party may
terminate the Merger Agreement if the Merger is not consummated on or prior to
October 31, 1998.

In connection with the Merger Agreement, Dennis M. Crumpler (the Chairman and
Chief Executive Officer of XcelleNet), Maleah Crumpler and The Crumpler
Investment Limited Partnership (together, the "Crumpler Shareholders") entered
into a Shareholder Agreement, dated as of April 16, 1998 (the "Shareholder
Agreement") with Sterling. Pursuant to the Shareholder Agreement, the Crumpler
Shareholders (who owned collectively 16.6% of the outstanding XcelleNet Common
Stock as of the date of the Merger Agreement) have agreed to vote, and have
granted an irrevocable proxy with respect to, their shares of XcelleNet Common
Stock in favor of approval of the Merger and the adoption of the Merger
Agreement and all transactions contemplated thereby, at a special meeting of
XcelleNet's shareholders. The Crumpler Shareholders also agreed, except pursuant
to the Merger Agreement, not to dispose of any shares of XcelleNet Common Stock
or to enter into any contract or arrangement to
<PAGE>
 
  dispose of any shares of XcelleNet Common Stock, and, except pursuant to the
  Shareholder Agreement, not to grant any proxy or power of attorney with
  respect thereto with respect to such shares.

  The Crumpler Shareholders also agreed to certain restrictions on their
  transfer of shares of Sterling Common Stock received in the Merger.  The
  Shareholder Agreement will automatically terminate upon the earlier of (i) the
  termination of the Merger Agreement pursuant to the terms thereof or (ii) the
  effective time of the Merger (except for the provisions relating to the
  representations and warranties of, and post-Merger share transfer restrictions
  on the Crumpler Shareholders, which provisions shall survive the effective
  time of the Merger).

  Prior to the execution and delivery of the Merger Agreement and the
  Shareholder Agreement, the Company amended its Shareholder Protection Rights
  Agreement, dated November 21, 1997 ("Amendment No. 1 to Rights Agreement"),
  such that the execution and delivery of, and the consummation of the
  transactions contemplated by, the Merger Agreement and the ancillary
  agreements thereto including, without limitation, the Shareholder Agreement,
  would not (i) result in Sterling or Sub or any of their respective Affiliates
  or Associates being an Acquiring Person, a Beneficial Owner or a Flip-Over
  Entity, (ii) result in the occurrence of a Flip-In Date, a Stock Acquisition
  Date, a Separation Time, a Flip-Over Transaction or Event, or (iii) in any
  other way effect any change or modification of the terms of the Rights or the
  rights of the holders thereof, including, without limitation, the Rights
  becoming exercisable. In addition, pursuant to the terms of Amendment No. 1 to
  Rights Agreement, the Expiration Time for the Rights will occur immediately
  prior to the effective time of the Merger. For purposes hereof, the terms
  "Acquiring Person," "Affiliate," "Associate," "Beneficial Owner," "Expiration
  Time," "Flip-In Date," "Separation Time," "Stock Acquisition Date," "Flip-Over
  Entity," "Flip-Over Transaction or Event," and "Rights" shall have the
  respective meanings ascribed thereto in the Shareholder Protection Rights
  Agreement.

  The Merger Agreement, the Shareholder Agreement and Amendment No. 1 to Rights
  Agreement are attached as Exhibits 2.1, 99.1 and 4.1, respectively, to the
  Company's Current Report on Form 8-K dated April 16, 1998, and are
  incorporated herein by reference.  The foregoing descriptions of such
  documents are qualified in their entirety by reference to those documents
  filed hereto as exhibits.

  Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations
<PAGE>
 
RESULTS OF OPERATIONS

REVENUES.  Total revenues increased 6% to $14,213,000 in the three months ended
March 31, 1998 as compared to the same period in 1997.  The increase in total
revenues was due to an increase in software upgrade fees and services offset by
a decrease in software license fees.  Software license fees decreased 8% to
$8,175,000 in the first quarter of 1998, compared with $8,871,000 in the first
quarter of 1997, due to a number of factors, the primary of which involved a
delay in the expansion of the Company's direct sales force until late in the
first quarter of 1998.  Software license fees from RemoteWare for NT products
accounted for 83% of total software license fees in the first quarter of 1998,
compared with 59% in the first quarter of 1997.  While the Company intends to
continue to offer and support its RemoteWare for OS/2 products, the Company
anticipates that sales of RemoteWare for NT will continue to constitute an
increasing proportion of total software license fees. Software license fees as a
percentage of total revenues were 58% in the first quarter, compared with 66% in
the first quarter of 1997. The decrease in the software license fees as a
percentage of total revenues reflects the Company's larger installed base and
the high participation rate of RemoteWare customers in the Company's software
upgrade and maintenance programs.

Software license fees from new customers decreased 54% to $2,047,000 in the
first quarter, compared with $4,493,000 in the first quarter of 1997.  Software
license fees from new customers as a percentage of total license fees decreased
to 25% from 51% for the three months ended March 31, 1998 as compared to the
same period in 1997.  The Company added 65 new customers in the first quarter,
compared with 84 in the first quarter of 1997.  The average initial RemoteWare
purchase for new customers was $31,000 in the first quarter, compared with
$53,000 in the same period in 1997.  The first quarter 1997 software license
fees from new customers and the average deal size were impacted by one license
transaction over $1,000,000, which accounted for 23% of new customer license
fees.

Software license fees from existing customers increased 40% to $6,128,000 in the
first quarter, compared with $4,378,000 in the first quarter of 1997, primarily
due to add-on purchases of the RemoteWare Managed Client, the Company's larger
installed base, and one license transaction over $500,000. The RemoteWare
Managed Client, released in December 1997, enhances the systems management
capabilities of RemoteWare for NT and includes Software Manager, Inventory
Manager, Backup Manager and AntiVirus Manager.  Software license fees from
existing customers increased as a percentage of total license fees to 75% from
49% in the three months ended March 31, 1998 as compared to the same period
during 1997.

Software license fees generated by Solution Providers decreased to 26% of total
software license fees from 27% in the three months ended March 31, 1998, as
compared to the prior year period.  During 1997, the Company took steps to
leverage its direct sales model by signing OEM agreements with two companies
that private label RemoteWare.  These agreements have not yet resulted in
significant revenue.

Software upgrade fees and services increased 35% to $6,038,000 in the three
months ended March 31, 1998 as compared to the same period in 1997.  The
software upgrade fee component increased 32% to $4,492,000 in the three months
ended March 31, 1998, as compared to the same period in 1997.  The growth in
software upgrade fees and services revenues is primarily due to the Company's
growing customer base and their significant rate of participation in the
maintenance program.  Because a significant portion of the Company's installed
base is composed of customers using RemoteWare for OS/2 products, the software
maintenance revenue that may be received from those customers in the future will
depend in large part on the Company's ability to introduce updates to, or
migration paths for, its OS/2 products that encourage these customers to
continue their participation in the Company's maintenance program.  There can be
no assurance that such services revenues will not decline in the future.

Software upgrade fees and services revenues also include field engineering and
systems integration services that focus on select RemoteWare customer
implementations and that facilitate Solution Provider development, certification
and quality assurance and training. Services revenues increased 42% to
$1,546,000 in the three months ended
<PAGE>
 



March 31, 1998 as compared to the same period in 1997 primarily related to the
growth of XcelleNet Integration Services, Inc. ("XIS") subsidiary acquired in
1997.

COSTS OF LICENSE FEES.  Costs of license fees increased 28% to $731,000 in the
three months ended March 31, 1998 as compared to the same period in 1997.  Costs
of license fees increased as a percentage of software license fees revenues to
9% from 6% in the three months ended March 31, 1998 as compared to the prior
year period.  The increase in costs of license fees is due primarily to the
increased royalties owed to third parties for the bundling of their technologies
with the RemoteWare for NT products.

COSTS OF SOFTWARE UPGRADE FEES AND SERVICES.  Costs of upgrade fees and services
increased 25% to $2,109,000 in the three months ended March 31, 1998 as compared
to the same period in 1997.  Costs of upgrade fees and services decreased as a
percentage of software upgrade fees and services revenues to 35% from 38% in the
three months ended March 31, 1998.  The increase in absolute dollar expense was
primarily due to growth in the XIS service business.

SALES AND MARKETING.  Sales and marketing expenses increased 11% to $5,976,000
in the three months ended March 31, 1998 as compared to the same period in 1997.
Sales and marketing expenses increased as a percentage of revenues to 42% from
41% in the three months ended March 31, 1998 as compared to the prior year
period.  The increase in absolute dollar expense was primarily due to personnel
costs, including salary, recruitment and training expense, related to the hiring
of several additional direct sales personnel late in the first quarter of 1998.

PRODUCT DEVELOPMENT.  The following table summarizes product development
expenditures:
 
<TABLE>
<CAPTION>
                                                               Three Months Ended
                                                                    March 31,
(in thousands)                                                 1998            1997
--------------------------------------------------------------------------------------
<S>                                                         <C>               <C>
  Product development expenditures                           $ 2,206           $ 2,775
  Less:  capitalized software development costs                    -              (734)
--------------------------------------------------------------------------------------
  Net product development expenses                           $ 2,206           $ 2,041
======================================================================================

As a percentage of revenues:
  Product development expenditures                               16%               21%
  Less:  capitalized software development costs                   -                (6)
--------------------------------------------------------------------------------------
  Net product development expenses                               16%               15%
======================================================================================
Capitalized product development rate                              -                26%
======================================================================================
</TABLE> 

Product development expenditures (expenses plus capitalized software development
costs) decreased 21% to $2,206,000 in the three months ended March 31, 1998 as
compared to the same period in 1997, primarily due to the substantial completion
of RemoteWare for NT development efforts with the release of RemoteWare for NT
3.2 in May 1997. Capitalized software development costs were $0 in the first
quarter of 1998 and $734,000 in the same prior year period.  Net product
development expenses (product development expenditures less capitalized
software) increased 8% to $2,206,000 for the three months ended March 31, 1998
as compared to the same period in 1997, primarily due to the absence of
capitalized software.  Net product development expenses as a percentage of
revenues increased to 16% from 15% for the three months ended March 31, 1998 as
compared to the prior year period.

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 15% to
$1,596,000 for the three months ended March 31, 1998 as compared to the same
period in 1997. General and administrative expenses decreased as a percentage of
revenues to 11% from 14% for the three months ended March 31, 1998 as compared
to the prior year period. The decrease in absolute dollar expense was primarily
due to increased efficiencies and an increase in the allowance for doubtful
accounts in the first quarter of 1997.

OTHER INCOME, NET.  Other income increased 264% to $328,000 in the three months
ended March 31, 1998 as compared to the same period in 1997, primarily due to
higher cash balances resulting from the completion of the follow-on public
offering in March 1997 and cash generated from operations.

OTHER MATTERS

On April 16, 1998, the Company entered into an Agreement and Plan of Merger by
and among Sterling Commerce, Inc., a Delaware corporation, Sterling Commerce
(Southern), Inc., a Delaware corporation and wholly owned subsidiary of
Sterling, and the Company providing for the acquisition of the Company by
Sterling.  (See Note 8 to Consolidated Interim Financial Statements; Exhibits
2.1, 4.1 and 99.1; and the Current Report on Form 8-K dated April 16, 1998 filed
by the Company).
<PAGE>
 
The Year 2000 issue remains pervasive and presents both technical and business
risks that may affect much of the Company's business and industry.  The Year
2000 issue refers to the various problems that may result from improper
processing of dates and date-sensitive functions by computers and other
equipment before, during or after January 1, 2000 ("Millennium Date") with
respect to the change in century.  The Company has already begun to address this
problem by examining the code in its products, communicating with vendors
regarding their handling of the issue and notifying customers of its preliminary
findings on the issue through Product Notes and otherwise.  The Company expects
the Year 2000 issue to be an ongoing risk through and beyond the Millennium Date
that may require a significant investment of time and resources to correct.  The
Company is unable to speculate as to the magnitude of the costs that may be
incurred at this time to eliminate the risk and can offer no guarantee that such
efforts will be successful given the breadth of this worldwide issue.  Failure
to successfully address the Year 2000 issue could have a material adverse effect
on the Company's business, results of operations and financial condition.


LIQUIDITY AND CAPITAL RESOURCES

Since 1994 the Company has financed its operations primarily through the public
sale of its common stock (in its initial public offering in 1994 and its follow-
on public offering in 1997) and cash generated from operations.  At March 31,
1998, the Company had $33.5 million in cash, cash equivalents and short-term
investments, $39.7 million in working capital and no long-term debt.

During the first three months of 1998, the Company generated $4,032,000 of cash
from operating activities, primarily from net income, depreciation and
amortization, a decrease in accounts receivable and an increase in deferred
revenue.  Net cash provided by investing activities was $3,512,000, primarily
due to an increase in short-term investments partially offset by fixed asset
additions.   Net cash provided by financing activities was $656,000 primarily
due to proceeds from, and income tax benefits associated with, the exercise of
stock options partially offset by the repayment of the XIS note payable.
 
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.

The Company's principal commitments consist primarily of leases on its
headquarters facilities.

The Company believes cash flows from operations and existing cash and
investments will be sufficient to meet its cash requirements over at least the
next two years. On April 16, 1998, the Company entered into an Agreement and
Plan of Merger by and among Sterling Commerce, Inc., a Delaware corporation,
Sterling Commerce (Southern), Inc., a Delaware corporation and wholly owned
subsidiary of Sterling, and the Company providing for the acquisition of the
Company by Sterling. (See Note 8 to Consolidated Interim Financial Statements).

<PAGE>
 

                          PART II - OTHER INFORMATION


Item 2.  Changes in Securities and Use of Proceeds
 
     Information with respect to this item may be found under Item 5 of
XcelleNet, Inc.'s Current Report on Form 8-K dated April 16, 1998 (date of
earliest event reported). Such information is incorporated herein by reference.

Item 6.  Exhibits and Reports on Form 8-K
  (a) Exhibits
 
 
            2.1     Agreement and Plan of Merger by and among Sterling Commerce,
                    Inc., Sterling Commerce (Southern), Inc., and XcelleNet,
                    Inc. dated April 16, 1998 (incorporated herein by reference
                    to Exhibit 2.1 to the registrant's Current Report on Form 8-
                    K dated April 16, 1998). (The copy of the Agreement and Plan
                    of Merger attached as Exhibit 2.1 to the registrant's
                    Current Report on Form 8-K dated April 16, 1998 does not
                    include schedules. The registrant agrees to furnish
                    supplementally a copy of any such schedule to the Securities
                    and Exchange Commission upon request.)

            4.1     Amendment No. 1, dated April 16, 1998 to Shareholder
                    Protection Rights Agreement between XcelleNet, Inc. and
                    SunTrust Bank, Atlanta, as Rights Agent, dated November 21,
                    1997 (incorporated herein by reference to Exhibit 4.1 to the
                    registrant's Current Report on Form 8-K dated April 16,
                    1998).

            10.1    Amendment 1 to the "VIRUSSCAN" and "EQUIP" OEM Software
                    License Agreement dated June 17, 1997 between XcelleNet Inc.
                    and McAfee Software, Inc., portions of which are the subject
                    of a request for confidential treatment.

            11.01   Statement re: computation of net income per share
            27.01   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 herein by reference to Exhibit 99.1 to the
                    registrant's Current Report on Form 8-K dated April 16,
                    1998).

 
  (b) Reports on Form 8-K
           The registrant filed no reports on Form 8-K during the quarter ended
           March 31, 1998.

                                   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.


                                           XcelleNet, Inc.
                                            (Registrant)


Date:  May 6, 1998                      By:   /s/ DAVID F. HELD
                                              -------------------------
                                        David F. Held
                                        Chief Financial Officer
                                        (Principal Financial and
                                        Authorized Officer)
<PAGE>
 
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                              ____________________



                                    Exhibits

                                       to

                                Quarterly Report

                                       on

                                   Form 10-Q

                             FOR THE QUARTER ENDED
                                 March 31, 1998


                              ____________________



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

================================================================================

<PAGE>
 
<TABLE>
<CAPTION>
Exhibit
Number                                           Exhibit Description
------                                           -------------------
 
<S>         <C>
2.1         Agreement and Plan of Merger by and among Sterling Commerce, Inc., Sterling Commerce
            (Southern), Inc., and XcelleNet, Inc. dated April 16, 1998 (incorporated herein by 
            reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated April 16, 
            1998). (The copy of the Agreement and Plan of Merger attached as Exhibit 2.1 to the 
            registrant's Current Report on Form 8-K dated April 16, 1998 does not include schedules. The
            registrant agrees to furnish supplementally a copy of any such schedule to the Securities 
            and Exchange Commission upon request.)
4.1         Amendment No. 1 dated April 16, 1998 to Shareholder Protection Rights Agreement between
            XcelleNet, Inc. and SunTrust Bank, Atlanta, as Rights Agent, dated November 21, 1997
            (incorporated herein by reference to Exhibit 4.1 to the registrant's Current Report on Form
            8-K dated April 16, 1998).
10.1        Amendment 1 to the "VIRUSSCAN" and "EQUIP" OEM Software License Agreement dated June 17, 1997
            between XcelleNet, Inc. and McAfee Software, Inc., portions of which are the subject of a
            request for confidential treatment.
11.01       Statement re: computation of  net income per share
27.01       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 herein by reference to Exhibit 99.1 to the registrant's Current Report on Form
            8-K dated April 16, 1998).
 
</TABLE>