<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

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

                         COMMISSION FILE NUMBER 0-23560

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

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


             5 CONCOURSE PARKWAY, SUITE 850, ATLANTA, GEORGIA 30328
                    (Address of principal executive offices)

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

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE

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

                    COMMON STOCK, PAR VALUE $.01 PER SHARE

                               (TITLE OF CLASS)

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant (assuming, for purposes of this calculation, without conceding, that
all 10% shareholders, executive officers and directors are "affiliates") was
$114,515,674 at January 31, 1997, based on a closing market price of $20.25 for
the Common Stock on such date, as reported by the Nasdaq National Market.

The number of shares of registrant's Common Stock $.01 par value per share,
outstanding at January 31, 1997 was 7,474,372.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None.
<PAGE>
 
                                    PART I
Item 1.  Business.

 
                                   BUSINESS
 
  XcelleNet develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information. These intermittently connected users have
traditionally included field sales and service workers and remote users in
branch offices or retail locations. The number of these users has grown
significantly as the ability to quickly and easily share information
throughout the enterprise has become a key asset. Increasingly, these users
may also include a broader constituency of both internal and external users
who access corporate intranets.
 
  The Company's products make many popular messaging, groupware, database and
web-based applications work more effectively for remote users who routinely
work offline and connect intermittently. The foundation of the Company's
products is its Queued Event Architecture ("QEA") and its session automation
technology. QEA facilitates the automated staging of various types of user-
and system-initiated events that are executed whenever communication sessions
occur. Session automation technology provides secure, fast and reliable file
transfers and advanced session scripting to control which tasks occur before,
during and after a communication session. Session scripting and automation
hide the technical complexities of remote access computing from the user and
provide scheduling capabilities for the system administrator. The Company
believes its products can reduce its customers' operating and support costs by
increasing user productivity and improving system management for many remote
users whose corporate information needs are not adequately addressed by
existing mainframe, client/server and internet technologies.
 
  The Company's original RemoteWare product family was introduced in 1989. The
first generation of RemoteWare products operates on the OS/2 server platform
and was marketed to corporations designing customized solutions for remote
sites and users. From its introduction, RemoteWare was designed to provide a
scalable, secure and user-friendly environment for the remote site automation
of business processes such as sales order entry, inventory query, field
activity reporting and catalog delivery. Consequently, the Company's early
marketing efforts were focused on industries with large numbers of remote
sites engaged in these activities. As of December 31, 1996, the Company had
licensed directly or through its Solution Providers RemoteWare for the IBM
OS/2 platform ("RemoteWare for OS/2") to approximately 1,300 organizations and
approximately 470,000 users.
 
  In 1995, the Company recognized the growing popularity of Windows NT as an
enterprise computing platform and the increased deployment of third-party and
customized applications based on industry standards. As a result, in early
1995 XcelleNet began committing significant resources to develop RemoteWare
products that (i) operate on Microsoft Windows NT servers and are integrated
with Microsoft Back Office products, (ii) embrace widely used Microsoft
standards, such as MAPI, ODBC and ActiveX, (iii) support industry leading
products with large installed bases of remote users such as IBM's Lotus Notes
and Sybase's SQL AnyWhere, and (iv) support internet standards and browser and
server offerings from Microsoft and Netscape.
 
  In March 1996, the Company introduced RemoteWare for the Windows NT platform
("RemoteWare for NT"), which the Company believes will expand its potential
market and the number of its potential marketing partners. Software license
fees from RemoteWare for NT products accounted for 17% and 41% of the
Company's total software license fees in the third and fourth quarters of
1996, respectively.
 
  The Company believes that the widespread adoption of internet technologies
by organizations with enterprise information networks and the emergence of
corporate intranets will create significant opportunities for the Company to
expand the applicability of its core technologies. The Company intends to
aggressively pursue these opportunities by developing and marketing a new
family of intranet system and application management utilities to be offered
under the NetEssentials name.
 
INDUSTRY BACKGROUND
 
  The ability to quickly and easily share information throughout the
enterprise has become a key asset in today's increasingly competitive business
environment. Accordingly, enterprise information systems have expanded to
include not only users who are local to central systems, but also those who
are remote. These remote users include branch office workers, mobile
professionals and telecommuters, and with the growing deployment of corporate
intranets, increasingly may include suppliers, distributors, customers and
sales prospects. The need to disseminate information to these remote users,
whether by electronic mail or more complex groupware or database applications,
is accelerating the deployment of remote access technology.
 
  The needs of remote users can be classified by the nature of their
connection to a central system and the nature of the software applications
they use remotely. Connection methods can either be intermittent (e.g., dial-
up lines) or continuous (e.g., leased lines). Software applications can be
classified as offline or interactive, depending upon the degree of network
interaction required between the user and the network while the application is
in use.
 
  Many dial-up users employ remote access software (generally known as "remote
node" software) to dial in to a network and function as a slow-speed,
interactive LAN user. This software provides transparent access to a network
and is a popular solution for interactive applications. Increasingly, many
client/server applications, such as electronic mail, workgroup software, and
databases, have been designed to allow users to download, review and modify
centrally stored data, and to synchronize any changes with the central data at
a later time. These applications are especially valuable for remote users who
need to work offline but also need access to the latest corporate information.
Such users need remote access utilities that can work over various
intermittent connections such as traditional dial-up lines and internet or
cellular services. They also need remote access utilities that can support and
coordinate multiple applications during a single, highly efficient connection.
Finally, they need remote access that is easy to use, secure, fast and
reliable.
 
  Dial-up users also pose a challenge to the system administrator since
monitoring and maintaining remote users' hardware, software and data files is
inherently difficult if the user is not continuously connected to the
enterprise network. As the number of remote dial-up users grows, system
administrators need efficient and reliable tools to manage and support them.
The Company believes that as the Internet and corporate intranets become
popular tools for disseminating corporate information, remote system
management for dial-up users will become increasingly important to intranet
managers.
 
THE XCELLENET SOLUTION
 
  XcelleNet markets, sells and supports software utilities that address the
remote user's needs and the system management issues associated with
intermittently connected users who routinely work offline. RemoteWare provides
advanced system management capabilities and performance enhancements for many
popular messaging, groupware, database and web-based applications. For many
remote users, RemoteWare can make remote computing easier and more reliable
while reducing connect time and increasing the remote user's productivity.
RemoteWare also provides remote system management features and is typically
marketed to system administrators within large enterprises.
 
  The following diagram illustrates the target market for the RemoteWare
family of products.
 
GRAPHIC: A set of horizontal and vertical axes is the basis for the graphic. The
vertical axis is labelled "Intermittent Connections (e.g., dial-up lines)" on
the top and "Continuous Connections (e.g., leased lines,)" on the bottom. The
horizontal axis is labelled "Interactive Applications" on the left and "Offline
Applications" on the right. Superimposed on the axes is a circle that is located
primarily in the "Northeast" quadrant but edges of which fall within the
"Northwest" and "Southeast" quadrants.
The word "RemoteWare" is centered in the circle.
 
  The foundation of the Company's products is its Queued Event Architecture
and its session automation technology. QEA facilitates the automated staging
of various types of user- and system-initiated events that are executed
whenever communication sessions occur. Automated staging increases remote user
efficiency by queuing user-initiated network transactions, thereby allowing
the user to work productively offline. Session automation technology provides
secure, fast and reliable file transfers and advanced session scripting to
control which tasks occur before, during and after a communication session.
The combination of QEA and session automation allows the RemoteWare server to
"push" applications and various types of content to individual dial-up users
based on pre-defined user profiles. Similarly, the RemoteWare client may
"pull" content from the server by requesting or subscribing to specified
content. The Company's products provide advanced system management
capabilities that allow system administrators to manage user sessions, and to
deploy user-specific implementations of software and data files based on
individual user profiles.
 
  Remote users sometimes require access to both interactive and offline
applications. For these users, RemoteWare can be used in conjunction with
remote node software to allow the user to work interactively in an application
during a communication session, while RemoteWare concurrently services the
offline applications and performs system management tasks in the background.
 
BUSINESS STRATEGY
 
  The Company's objective is to become the leading provider of software
utilities that improve the manageability and enhance the performance of remote
access computing for users who routinely work offline, but periodically need
to exchange and synchronize information with enterprise application resources.
 
  Important features of the Company's strategy are to:
 
  Enhance Functionality and Extend Applicability of RemoteWare for NT. The
Company intends to continue to enhance RemoteWare for NT by including more
robust software distribution and asset management capabilities and other
features. The Company also intends to pursue opportunities to adapt its system
management capabilities to work with other vendors' system management
products. The Company plans additional feature and performance improvements
that embrace industry standards and support popular messaging, groupware,
database and web-based applications. The Company also intends to focus its
RemoteWare development and marketing efforts on complementing and enhancing
third-party products that are designed for offline use and have large and
growing installed bases, such as Lotus Notes, SQL AnyWhere and Vantive On-the-
Go. Specifically, the Company has recently introduced products to improve the
replication efficiency of Lotus Notes for remote users. To further extend the
applicability of RemoteWare, the Company plans to pursue technology alliances
and OEM relationships with vendors of complementary hardware and software
products.
 
  Leverage Microsoft Technologies. The Company believes that Microsoft's
Windows NT environment is emerging as the predominant enterprise computing
platform. By leveraging Microsoft's enterprise platform, the Company believes
that its RemoteWare for NT products will be applicable to a broader range of
customers than its OS/2-based products. The Company intends to expand its
support for Microsoft technologies, including further integration with
Microsoft Back Office products such as Exchange Server, and to leverage the
Microsoft Solution Provider channel for complementary sales and support
services.
 
  Pursue Intranet System Management Opportunities. As corporate intranets are
increasingly used to disseminate information and software to remote users, the
Company is seeking to leverage its core technologies to address intranet
system management. The Company intends to aggressively pursue these
opportunities by developing and marketing a new family of intranet system
management and application enhancement utilities called NetEssentials. This
line of products, which is currently under development, is being designed to
support internet standards and browser and server offerings from Microsoft and
Netscape, and is derived from RemoteWare's QEA and session automation
technology. A trial version of SessionXpress Basic, the first of these
products, was released on the Company's web site in February 1997.
 
  Expand Distribution and Marketing Channels. The Company relies on its direct
sales force as its primary distribution channel and intends to increase the
number of its direct sales personnel in the future. In addition, the Company
is developing new distribution and marketing channels for its RemoteWare
product family and the NetEssentials product line. These new channels will
include a telesales function, indirect sales through OEM and bundling
arrangements, and web-based marketing. The Company's objectives for these new
channels are to facilitate product trials, generate qualified leads, and
generally increase market awareness and sales of the Company's products.
 
PRODUCTS
 
  The Company's products improve the manageability and enhance the performance
of remote access computing for users who routinely work offline and
periodically dial in to enterprise systems to exchange or synchronize
information.
 
  The foundation of the Company's products is its Queued Event Architecture
and its session automation technology. QEA's three-tier, client/agent/server
design facilitates the automated staging of various types of user- and system-
initiated events. Automated staging increases remote user efficiency by
queuing user-initiated network transactions, thereby allowing the user to work
productively offline. These events may include database transactions (such as
the entry of sales orders), the sending and receiving of electronic mail, the
replication of Lotus Notes databases or the request for web pages to be viewed
offline. Similarly, system-initiated transactions tailored to each remote user
are queued at the central site server. These events typically include software
upgrades and updates to standard corporate data such as product catalogs, price
lists, sales reports and administrative manuals. Whenever a connection takes
place, whether initiated by the user or the system, the events queued at the
user site and the events queued at the central site are executed automatically.
 
  The Company's session automation technology provides secure, fast, and
reliable file transfers and advanced session scripting to control which tasks
occur before, during and after communication sessions. XcelleNet's products
can reduce online connection time by performing pre-connection processing,
using compression algorithms and employing automated checkpoint restart and
recovery to avoid duplicate processing when a session is terminated
prematurely.
 
  The combination of QEA and session automation allows the RemoteWare server
to "push" applications and various types of content to individual dial-up
users based on pre-defined user profiles. Similarly, the RemoteWare client may
"pull" content from the server by requesting or subscribing to specified
content.
 
 RemoteWare Products
 
  In 1989, XcelleNet released its original version of RemoteWare for OS/2. The
Company designates its RemoteWare for OS/2 products as the 2.x family and the
most recently released version is RemoteWare 2.5. In March 1996, the Company
released its first version of RemoteWare for NT, designated as the 3.x family.
The most recent version of the 3.x family is RemoteWare 3.1. The Company
intends to continue to offer and support its RemoteWare 2.x family, but
believes that sales of RemoteWare for NT products will constitute an
increasing proportion of the Company's RemoteWare sales. 
 
  RemoteWare consists of two components: the RemoteWare server software
installed at the central site and the RemoteWare client software installed on
each user's personal computer. The RemoteWare server software provides
integrated facilities for:
 
  .  Session automation services providing a variety of flexible scheduling
     options through advanced session scripting; secure, fast, and reliable
     file transfers; checkpoint restart and recovery; and compression
     algorithms.
 
  .  System management services, enabling remote client systems to be managed
     through electronic software distribution and version management,
     providing disk and memory monitoring and offering problem logging and
     reporting capabilities.
 
  .  Communications services, providing support for multiple transports and
     protocols, such as asynchronous serial communications, TCP/IP, IPX/SPX
     and NetBios.
 
  .  Messaging services, providing support for Microsoft Messaging API
     ("MAPI"), which permits MAPI-enabled applications to benefit from the
     speed and reliability of RemoteWare's session automation services.
 
  .  Subscription and publishing services, enabling RemoteWare Subscriber
     users to select and automatically receive multiple types of content for
     offline viewing using "push" and "pull" methods (Extended Client only).
 
  .  User environment management services, allowing administrators to
     centrally create, manage and distribute password-protected graphical
     application menus to insulate RemoteWare Workshop users from the
     complexities of the client operating system (Extended Client only).
 
  RemoteWare servers support up to 32 simultaneous communication sessions per
server and are designed to support clustering of up to five servers. To date,
the largest installation of RemoteWare is on an OS/2 system that supports
approximately 13,000 licensed clients. The cluster feature for RemoteWare for
NT has been made available only to a limited number of customers in RemoteWare
3.1. Because RemoteWare 3.1 was commercially released in September 1996, many
customers licensing this version have not yet fully deployed the product and
there may remain undetected errors or compatibility issues in this version. 
 
  The RemoteWare client provides an easy-to-use interface that simplifies
communication sessions with the RemoteWare server and takes advantage of the
server's integrated services. Options available as add-ons to extend the
functionality of the RemoteWare client are:
 
  .  RemoteWare Extended Client, which includes both RemoteWare Subscriber
     and Workshop, allowing the client to utilize subscription and publishing
     services and user environment management services, respectively.
 
  .  RemoteWare Replication Agent for Lotus Notes, which reduces replication
     time by up to approximately 80% for remote Lotus Notes users through the
     intelligent preprocessing and compression of records.
 
  The replication capabilities of RemoteWare can also be purchased as a
standalone product, RemoteWare Essentials for Lotus Notes. This product
consists of a limited-function RemoteWare for NT server that performs only
Lotus Notes replication and a client component.
 
PRODUCTS UNDER DEVELOPMENT
 
  The Company's product development efforts are currently focused on
increasing the functionality of RemoteWare for NT and developing the
NetEssentials product line.
 
 RemoteWare
 
  The Company is currently investing significant product development resources
to produce version 3.2 of RemoteWare for NT, which is scheduled to be released
in the second quarter of 1997. The Company currently plans for this version to
include facilities for central management and distribution of web content to
RemoteWare users and integration of RemoteWare's messaging services with
Microsoft's Exchange Server. There can be no assurance, however, that the
release of RemoteWare for NT version 3.2 will be on a timely basis or that any
delay in its release would not adversely impact sales of the current version
of RemoteWare or that, upon release, it will achieve market acceptance. 
 
 NetEssentials
 
  The Company is currently developing the NetEssentials product line, a new
family of software utilities being designed to provide a tailored subset of
RemoteWare functionality to companies that are implementing intranets. The
NetEssentials products are derived from the Company's QEA and session
automation technology and will run on Microsoft Windows NT servers. It is
anticipated that these products would be sold individually or as a suite to
address specific customer needs. One of these planned products, SessionXpress,
is being developed to provide efficient "push" and "pull" delivery of content
and to include integrated capabilities for remote disk, file and directory
management. SessionXpress is expected to be offered in two versions,
SessionXpress and SessionXpress Basic, with SessionXpress Basic to have a more
limited set of features. A trial version of SessionXpress Basic was released
on the Company's web site in February 1997, and commercial availability of
SessionXpress Basic is scheduled for the second quarter of 1997.
 
  Due to the complexity of remote access computing software in general, and
the NT operating system and internet standards in particular, and the
difficulty in gauging the engineering effort required to develop these planned
products, the RemoteWare family of products and the NetEssentials family of
potential products, are subject to significant technical risks. Furthermore,
software products as complex as those currently under development by the
Company are subject to frequent delays and undetected errors or compatibility
issues following their introduction or as new versions are released. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of these planned products. Moreover, even if such planned products are
developed and introduced, there can be no assurance that there will be a
significant market for such products, that the planned NetEssentials products or
future RemoteWare products will achieve any significant degree of market
acceptance, or that the NetEssentials products will not result in price erosion
or reduced sales of the RemoteWare products. Failure to release these planned
products on a timely basis, failure of these planned products, if and when
released, to achieve any significant degree of market acceptance, or failure to
effectively manage the introduction of the NetEssentials products without
eroding the sales or sales prices of RemoteWare products, would have a material
adverse effect upon the Company's business, operating results and financial
condition. 
 
SERVICES
 
  In addition to its product offerings, the Company provides systems
integration services, a software maintenance program, help desk support and
training programs.
 
  Through 1996, the Company relied primarily upon a group of independent
channel partners ("Solution Providers") to provide application development and
systems integration services to RemoteWare customers and prospects. In mid-
1996, the Company established its own integration services group to offer a
range of consulting and integration services required by large customers. In
January 1997, the Company acquired Electronic Commerce, Inc., a 14-person
systems integrator that had been one of the Company's Solution Providers. This
acquisition significantly expanded the Company's ability to provide
integration services directly. The Company intends to focus its integration
services on new, large accounts as well as on customers migrating from
RemoteWare for OS/2 to RemoteWare for NT.
 
  The Company offers help desk support and software maintenance together under
its RemoteCare Assurance Plan ("RCAP") to customers and Solution Providers. In
December 1996, the Company began offering separate plans for software
maintenance and help desk support to all new customers and to existing
customers as their RCAP agreements expired. Software maintenance offered under
a RemoteWare Maintenance Agreement ("RMA") provides an extension of the
Company's software warranty and the right to receive upgrades during the 12-
month, renewable term of the agreement. Annual fees under RCAP and RMA are
based on the cumulative software license fees paid by the customer.
Separately, help desk support is available on an annual fee or per-incident
fee basis.
 
 
PRODUCT DEVELOPMENT
 
  All of the Company's products have been developed by its internal product
development staff, which has from time to time included a number of
independent development contractors. The Company's product development staff
consisted of 81 full-time employees and nine independent contractors as of
December 31, 1996. The Company's total product development expenditures were
$3.2 million, $5.4 million and $8.6 million in fiscal 1994, 1995 and 1996,
respectively, substantially all of which were attributable to the development
of RemoteWare products. Beginning in 1995, the Company substantially increased
its product development expenditures in order to develop its RemoteWare for NT
products and to increase the functionality of its existing RemoteWare for OS/2
products. In accordance with SFAS 86, the Company capitalizes software
development expenditures once a product has established technological
feasibility until such time as the resulting software product is available for
commercial sale. 
 
  The market for the Company's products is characterized by rapid change in
computer hardware and software technology, evolving industry standards and
changing customer requirements, and is highly competitive with respect to
timely product innovation. The introduction of competitive products embodying
new technologies, the emergence of new industry standards and the acceptance
of new communications and data delivery channels, such as the Internet, may
render the Company's existing products or underlying technologies obsolete or
unmarketable. For example, the Company may be required to change and improve
its products in response to changes in operating systems, application and
networking software, computer and communications hardware, programming tools
and computer language technology. Announced and unannounced changes or errors
in operating and other systems with which the Company's products are used may
adversely affect the performance of the Company's products and require the
Company to modify its products to compensate for such changes or errors. As a
result, the Company's future success will depend in part upon its ability to
enhance its current products and services and develop new products and
services that maintain technological leadership, address the increasingly
sophisticated needs of customers, keep pace with new competitive product
offerings and emerging industry standards, and achieve broad market
acceptance. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products or product
enhancements, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.
 
  In order to introduce and market new or enhanced products successfully with
minimal disruption in customer purchasing patterns, the Company must
effectively manage the transition from existing products. Announcements by the
Company or its competitors of new products, capabilities or technologies that
have the potential to replace or shorten the life cycles of the Company's
existing products may cause customers to defer purchases of existing Company
products. Furthermore, software products as complex as those offered by the
Company may contain undetected errors or compatibility issues following their
introduction or as new versions are released, which may result in reduced
orders, delays in collecting accounts receivable and additional service costs.
The Company has previously experienced delays in software development,
including delays in the commercial release of RemoteWare for NT, and has
discovered software errors in new products after commercial release. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of potential new products or product enhancements. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services on a timely basis that are
compatible with industry standards, to respond to technological advances by
others and to satisfy changing customer requirements, to successfully manage
product transitions, and to minimize the impact of errors in new products
would have a material adverse effect on the Company's business, operating
results and financial condition. 
 
  The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, a spell checker and X.400 gateway API libraries,
some of which perform key functions within the Company's products. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or attempt to internally develop a
replacement for the function of the licensed software. The loss of, or
inability to maintain, any of these technology licenses could result in
interruptions in the availability of the Company's existing products and
delays in the introduction of new products and services until equivalent
technology, if available, is identified, licensed or developed, and
integrated. There can be no assurance that an alternative source of a suitable
product would be available or that the Company would be able to develop an
alternative product in sufficient time or at a reasonable cost. The failure of
the Company to obtain or develop an alternative product on a timely basis and
at a reasonable cost would have a material adverse effect on the Company's
business, operating results and financial condition. 
 
PRICING
 
  The Company generally grants non-exclusive, perpetual licenses for the
RemoteWare products at license fees based upon the server and client
components licensed. List prices for RemoteWare licenses in North America
range from $5,000 to $30,000 for each server, depending on the number of ports
and clients supported. List prices for RemoteWare client licenses in North
America range from $200 to $550 per seat, depending upon the options selected.
Volume pricing discounts are also available for purchases of 100 clients or
more. A RemoteWare installation of approximately 300 clients licensed directly
by the Company would typically represent license fees ranging from $66,000 to
$110,000, depending on the options selected.
 
  RemoteWare licenses include a six-month warranty period. Customers may
obtain software maintenance for a twelve-month term through RCAP or RMA, which
are generally effective as of the date of the license agreement. For
RemoteWare for OS/2 customers only, RCAP and RMA also provide the right to
migrate to a RemoteWare for NT license without incurring additional license
fees. The annual cost of a subscription to either RCAP or RMA is 15% of
cumulative license fees.
 
  In 1996, the Company began to offer the RemoteWare Discovery System, which
allows customers to evaluate the full RemoteWare product suite for a maximum
of 20 clients. The RemoteWare Discovery System is priced at $3,750 for a ten-
client system and $3,750 for an additional ten-client pack. The purchase price
of the RemoteWare Discovery System can be credited against license fees due
for a full production RemoteWare system. No maintenance plan is available for
the RemoteWare Discovery System.
 
  The Company intends to price each of the planned NetEssentials products on a
per server basis, with separate prices for unlimited and limited concurrent
session capacity. The Company intends to price SessionXpress at $4,995 for
eight concurrent sessions and at $9,995 for unlimited concurrent sessions. The
Company also intends to offer SessionXpress Basic, a version of SessionXpress
with a limited set of features, at a lower price.
 
  The market for the Company's products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from current or future competitors. In addition, annual fees for
software support and maintenance have been a material part of the Company's
revenues in the past. These agreements are optional for the Company's
licensees and there can be no assurance that licensees who are currently
parties to RCAP or RMAs will renew those agreements or that new customers will
elect to enter into RMAs in the same numbers. 
 
SALES AND MARKETING
 
  The Company's sales and marketing efforts typically target Fortune 1000
companies with large numbers of remote and mobile users as potential customers
for the RemoteWare product line. XcelleNet relies predominantly on its direct
sales force to qualify and sell to prospective customers. The Company also has
a network of Solution Providers who provide remarketing and integration
services to RemoteWare customers. In addition, XcelleNet has recently created
a telesales function to augment its direct sales force. The Company conducts
comprehensive targeted marketing programs to generate sales leads, which
include advertising, direct mail, public relations, user and partner
conferences, seminars, trade shows and telemarketing.
 
  The Company has established informal marketing relationships with remote
access, database and sales force automation vendors, as well as with Microsoft
and IBM. These relationships are intended to promote awareness of the
Company's products among potential customers and to provide leads for the
Company's direct sales force.
 
  The Company is in the early stages of developing its sales and marketing
channels for its planned NetEssentials products, which the Company intends to
introduce during 1997. The Company is expanding its recently created telesales
function and intends to leverage the Web for building market awareness, as
well as for selling the planned NetEssentials products. The Company also intends
to pursue OEM and bundling opportunities with software and hardware vendors. The
planned NetEssentials product line will also be offered by the Company's direct
sales force.
 
  The Company's direct sales, Solution Provider and telesales sales efforts
are described in more detail below.
 
  The Company's direct sales force is divided into: (i) four regional "area
teams" in North America; (ii) a team responsible for Europe, the Middle East
and Africa; and (iii) a team responsible for Australia and New Zealand. The
Company intends to strengthen its direct selling efforts by increasing its
direct sales force in 1997. In 1996, 62% of the Company's license fee revenues
were attributable to sales made by the Company's direct sales force.
 
  The primary function of Solution Providers is to assist the Company's
customers in implementing RemoteWare by providing application development and
systems integration services. Certain Solution Providers are authorized to
remarket the Company's products in connection with providing their services.
The Company is changing its network of Solution Providers in two respects.
First, in order to increase the Microsoft support capability of the Company's
Solution Provider network, the Company is requiring that all Solution
Providers be Windows NT-qualified in order for their agreements with the
Company to be renewed. Second, the Company's experience has been that most of
the sales produced by the Company's Solution Provider network have been
generated by a small number of effective Solution Providers; therefore, the
Company is renewing the agreements of only those Solution Providers that the
Company expects to be the most effective. As a result, the Company expects
that license fees generated from Solution Providers as a percentage of total
license fees will decrease. There can be no assurance that the Company will be
able to attract or retain a sufficient number of NT-qualified Solution
Providers to adequately fill the Company's needs. 
 
  The Company's telesales effort focuses on sales of services, including
training and integration services, and RemoteWare Essentials for Lotus Notes.
The telesales effort was initiated in January 1997.
 
  Any failure by the Company to expand its direct sales and telesales force
and other distribution channels, or the failure by the Company to increase
revenues commensurate with such expansion, would have a material adverse
effect on the Company's business, operating results and financial condition.
 
CUSTOMERS
 
  As of December 31, 1996, XcelleNet, either directly or through its Solution
Providers, had licensed RemoteWare systems to over 1,400 organizations
supporting approximately 500,000 users. The Company receives license fees and
service revenues from end-user customers and in some cases through Solution
Partners. In 1996, no Solution Provider accounted for more than 8% of the
Company's total revenues and no customer licensed directly by the Company
accounted for more than 2% of the Company's revenues.
 
  The Company's products are predominantly used by field sales and service
workers and remote users in branch offices or retail locations spanning a
range of industries. The following is a representative list as of December 31,
1996 of the Company's customers in the indicated industries:
 
HEALTHCARE/PHARMACEUTICAL                 SERVICES
Coulter Corporation                       ADP, Inc.
Manor Care, Inc.                          HBO and Company
Minnesota Mining and Manufacturing CompanyJenny Craig, Inc.
Sandoz Corporation                        Mail Boxes, Etc.
Schering-Plough Corporation               Securities Industry Automation
                                          Corporation
 
RESTAURANTS (FOOD CHAINS)                 Vanstar Corporation
 
Black-Eyed Pea Management Corp.
Brinker International, Inc.               MANUFACTURING
Chick-Fil-A, Inc.                         Coors Brewing Company
Cracker Barrel Old Country Store, Inc.    Holophane Company, Inc.
Denny's, Inc.                             Lanier Worldwide, Inc.
Whataburger, Inc.                         Liebert Corporation
                                          Siemens Industrial Automation, Inc.
 
SPECIALTY RETAIL
General Nutrition Corporation
Kits Cameras, Inc.
Mrs. Fields, Inc.
Sharper Image Corp.
The Southland Corporation
Victoria's Secret Stores, Inc.
Wilson's House of Suede, Inc.
 
COMPETITION
 
  The market for remote access software, including the Company's specific area
of remote access utilities, is highly competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Many
software vendors offer products that are competitive with the products offered
by the Company. These competitors vary in size and in the scope and breadth of
the products and services offered. Within specific ranges of functionality,
the Company encounters competition from a number of sources including: (i)
enterprise system management tool vendors such as Microsoft, Tivoli and
Computer Associates; (ii) messaging-enabled application vendors such as Lotus
and Microsoft; (iii) groupware vendors such as Lotus; (iv) database
application vendors such as Oracle; (v) internet software vendors such as
Netscape and Microsoft; (vi) content distribution software vendors, such as
Microsoft, Pointcast and BackWeb; (vii) remote access software and hardware
vendors such as Microsoft, Shiva and Citrix; (viii) vendors of applications
software who incorporate remote access utilities in their software such as
Lotus; and (ix) custom software-based solutions developed by internal
management information system personnel or third-party professional service
organizations.
 
  As the Company offers new products in the future, it expects that in
addition to facing competition from existing competitors it will have
additional competitors. Many of the Company's current competitors are
broadening the functionality of their product offerings. In addition, vendors
of network operating systems, network management software or intranet server
software, such as Microsoft, IBM, Novell and Netscape, may enhance their
products to include some or all of the functionality currently provided by the
Company's products, which would render the Company's products obsolete or
unmarketable. Because there are relatively low barriers to entry in the software
market, the Company also expects additional competition from other established
and emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results or
financial condition. 
 
  The Company believes its principal competitive advantages are its focus on,
and experience with, the requirements of remote access computing for users who
intermittently dial in to enterprise information systems, its product
architecture, and its extensive customer base. Competition will continue to
intensify as the market for its products and services develops and competitors
focus more clearly on that market's specific requirements. There can be no
assurance that other companies will not develop experience, products and
marketing approaches that will be more successful than those of the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
remote computing needs of the Company's prospective customers. Accordingly, it
is possible that new competitors, alliances among competitors, or alliances
between competitors and third parties may emerge and rapidly acquire
significant market share. If this were to occur, it would have a material
adverse effect on the Company's business, operating results and financial
condition.
 
  The Company believes that the principal competitive factors affecting the
market it serves include vendor and product reputation, product architecture,
functionality and features, scalability, ease of use, quality of product and
support, performance, price, brand name recognition and effectiveness of sales
and marketing efforts. Although the Company believes that its products
currently compete favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources, or that competitive pressures faced by the Company would not have a
material adverse effect on the Company's business, operating results or
financial condition. 
 
INTELLECTUAL PROPERTY AND THIRD PARTY LICENSES
 
  The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and generally requires licensees to sign license
agreements that impose certain restrictions on licensees' right to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets, including but not limited to, generally requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
code.
 
  The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. In addition, the Company has applied for patents in the United
States and certain other countries with respect to certain aspects of its
software. None of these patents have been granted and there can be no
assurance that a patent will be issued pursuant to any of these applications
or that, if granted, such patent would survive a legal challenge to its
validity or provide significant protection to the Company.
 
  Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. While the Company's competitive
position may be affected by its ability to protect its proprietary
information, the Company believes that trade secret, copyright and, if
granted, patent protections are less significant to the Company's competitive
position than other factors such as the knowledge, ability and experience of
the Company's personnel, name recognition and ongoing product development and
support.
 
  For certain of its client products and the RemoteWare Discovery System, the
Company uses "shrinkwrap" licenses that are not signed by licensees to protect
its copyrights and trade secrets in those products. In addition, the Company
uses an electronic version of a shrinkwrap license for all users of the trial
version of its SessionXpress Basic product distributed electronically through
the Company's web site. In addition, the Company expects to use shrinkwrap
license agreements for its NetEssentials products when commercially released.
Since these shrinkwrap licenses are not signed by the licensee, many
authorities believe that they may not be enforceable under many state laws and
the laws of many foreign jurisdictions. The laws of the State of Georgia,
which govern these licenses for the Company's products, continue to be unclear
on this subject. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.
 
  In 1995, the Company received a claim that it is infringing upon a third
party's intellectual property rights, and there can be no assurance that other
third parties will not in the future claim infringement by the Company with
respect to current or future products, trademarks or other proprietary rights.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or available at all, which could have a
material adverse effect on the Company's business, operating results and
financial condition. 
 
  The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, spell checker and X.400 gateway API libraries, some
of which perform key functions within the Company's products. The Company
licenses the code for portions of its products from third parties where there
is no advantage to the Company in developing equivalent technology. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or to develop a replacement for the function
of the licensed software. The loss of or inability to maintain any of these
technology licenses could result in interruptions in the availability of the
Company's existing products and delays in the introduction of new products and
services until equivalent technology, if available, is identified, licensed or
developed, and integrated. There can be no assurance that an alternative
source of a suitable product would be available or that the Company would be
able to develop an alternative product in sufficient time or at a reasonable
cost. The failure of the Company to obtain or develop an alternative product
would have a material adverse effect on the Company's business, operating
results or financial condition. 
 
EMPLOYEES
 
  As of December 31, 1996, the Company had 280 full-time employees, including
81 in product development, 57 in sales, 45 in marketing, 50 in customer
service and 47 in finance and administration. The Company's employees are not
represented by any collective bargaining organization, and the Company has
never experienced a work stoppage.

ITEM 2.  PROPERTIES.
 
FACILITIES
 
  The Company's corporate headquarters are located in Atlanta, Georgia, in a
leased facility consisting of approximately 98,000 square feet of office space
under a lease expiring September 1, 2000. The Company also leases an
additional 2,700 square feet in Raleigh, North Carolina for its E-Comm
subsidiary under a lease expiring December 31, 1999 and an additional 2,500
square feet in High Wycombe, Buckinghamshire, in the United Kingdom for its
European operations center under a lease expiring in 2006. Additionally, the
Company leases direct sales offices with square footage ranging from 150 to
400 square feet and lease terms of one to two years, in 14 locations in the
United States and in Sydney, Australia, Montreal, Canada, and Dusseldorf and
Munich, Germany. The Company believes that its existing facilities and offices
and additional space available to it are adequate to meet its requirements
through December 1997, and that, if necessary, additional or alternative space
will be available on commercially reasonable terms.
 
ITEM 3.  LEGAL PROCEEDINGS.

     The Company is not a party to any material legal proceedings.


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

     No matters were submitted to a vote of security holders during the fourth
quarter of 1996.


                                    PART II

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

                          PRICE RANGE OF COMMON STOCK
 
  The Common Stock of XcelleNet has been traded on the Nasdaq National Market
under the symbol "XNET" since XcelleNet's initial public offering in April
1994. The following table sets forth the range of quarterly high and low sale
prices of the Common Stock of XcelleNet on the Nasdaq National Market since
the Company's initial public offering.
 
<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
   <S>                                                            <C>    <C>
   YEAR ENDED DECEMBER 31, 1994
    Second Quarter (from April 14, 1994)......................... $   14 $    8
    Third Quarter................................................ 15 3/4  6 3/4
    Fourth Quarter............................................... 17 5/8 12 3/4
   YEAR ENDED DECEMBER 31, 1995
    First Quarter................................................ 31 3/4 14 3/4
    Second Quarter............................................... 33 1/4 18 1/4
    Third Quarter................................................ 23 3/4 16 1/4
    Fourth Quarter...............................................     22 13 1/4
   YEAR ENDED DECEMBER 31, 1996
    First Quarter................................................ 15 1/4  8 3/4
    Second Quarter............................................... 15 1/2  9 1/2
    Third Quarter................................................ 14 1/2  8 3/4
    Fourth Quarter...............................................     20 13 1/2
   YEAR ENDED DECEMBER 31, 1997
    First Quarter (through February 21, 1997).................... 23 1/4 15 3/4
</TABLE>
 
  On February 21, 1997, the closing price of XcelleNet's Common Stock as
reported on the Nasdaq National Market was $17.125 per share. As of January
31, 1997, there were approximately 245 holders of record of the Company's
7,474,372 shares of outstanding Common Stock.

     On January 2, 1997, XcelleNet acquired all of the outstanding shares of
Electronic Commerce, Inc., a system integrator based in Raleigh, North Carolina,
for consideration that included 50,000 shares of unregistered common stock
issued in reliance upon Regulation D promulgated under the Securities Act of
1933, as amended.
 
                                DIVIDEND POLICY
 
  The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying cash dividends
in the foreseeable future.
 
ITEM 6.   SELECTED FINANCIAL DATA.

 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                                       ---------------------------------------
                                        1996     1995    1994    1993    1992
                                       -------  ------- ------- ------- ------
                                       (in thousands, except per share data)
<S>                                    <C>      <C>     <C>     <C>     <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
 Revenues:
  Software license fees............... $30,703  $25,612 $21,399 $14,222 $8,932
  Services............................  11,948    8,487   5,490   3,191  1,425
                                       -------  ------- ------- ------- ------
   Total revenues.....................  42,651   34,099  26,889  17,413 10,357
 Costs and expenses...................  43,585   29,331  21,707  14,484  9,514
                                       -------  ------- ------- ------- ------
 Operating income (loss)..............    (934)   4,768   5,182   2,929    843
 Other income, net....................     934    1,264     748     162     96
                                       -------  ------- ------- ------- ------
 Income before income taxes...........     --     6,032   5,930   3,091    939
 Provision for income taxes...........     --     2,230   2,375   1,149    100
                                       -------  ------- ------- ------- ------
 Net income........................... $   --   $ 3,802 $ 3,555 $ 1,942 $  839
                                       =======  ======= ======= ======= ======
 Net income per share................. $   --   $  0.45 $  0.45 $  0.30 $ 0.15
                                       =======  ======= ======= ======= ======
 Weighted average shares outstanding..   7,915    8,480   7,833   6,450  5,824
                                       =======  ======= ======= ======= ======
<CAPTION>
                                                    DECEMBER 31,
                                       ---------------------------------------
                                        1996     1995    1994    1993    1992
                                       -------  ------- ------- ------- ------
                                                   (in thousands)
<S>                                    <C>      <C>     <C>     <C>     <C>
CONSOLIDATED BALANCE SHEET DATA:
 Cash and cash equivalents............ $10,587  $ 9,304 $12,375 $ 4,381 $4,120
 Working capital......................  23,198   24,968  28,815   7,689  6,810
 Total assets.........................  36,683   33,461  36,144  12,208  9,489
 Long-term debt.......................      --       --      --      --     --
 Total shareholders' equity...........  31,130   29,849  32,473   9,869  7,465
</TABLE>
 

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

OVERVIEW
 
  The Company develops, markets and supports software utilities that improve
the manageability and enhance the performance of remote access computing for
users who routinely work offline and periodically dial in to enterprise
information systems to exchange or synchronize information. The Company was
incorporated in 1986 and began shipping its first product, RemoteWare for
OS/2, in 1989. In 1995, the Company began to develop RemoteWare for NT and
introduced its first such product, RemoteWare 3.0, in March 1996. In September
1996, the Company released version 3.1, and is currently investing a majority
of its software development resources to develop version 3.2.
 
  The Company's revenues are derived from software license fees and services
related to its RemoteWare products. All of the Company's software license fees
currently result from noncancelable license agreements , including agreements
obtained directly by the Company and agreements obtained through Solution
Providers. Historically, services revenues have been derived substantially
from the Company's RCAP program, which bundles software maintenance and help
desk support for customers and Solution Providers.  The Company's future
financial performance will depend in large part on the continued market
acceptance of its RemoteWare software and services, as well as the Company's
ability to adapt and modify this software to meet the evolving needs of its
customers. 
 
  The Company's revenues are largely dependent on software license fees, which
are difficult to predict. Historically, the Company has operated with
virtually no order backlog because its software products are shipped as orders
are received. Moreover, the Company has often recognized a substantial portion
of its license fee revenues in the last month of a quarter, with these
revenues frequently concentrated in the last two weeks of a quarter.
Additionally, the Company has experienced, and may continue to experience,
significant seasonality in its business and the Company's results of
operations may be affected by such trends in the future. In previous years,
the Company has experienced a significant decline in revenues, and
correspondingly net income, in the quarter ended September 30 compared to the
quarter ended June 30. 
 
  License fees from the RemoteWare for NT products accounted for 17% and 41%
of total license fees in the third and fourth quarters of 1996, respectively.
The Company believes that Microsoft's Windows NT environment is emerging as
the predominant enterprise computing platform, and that its RemoteWare for NT
products will be applicable to a broader range of customers than its
RemoteWare for OS/2 products. While the Company intends to continue to offer
and support its RemoteWare for OS/2 products, the Company anticipates that
sales of the RemoteWare for NT products will constitute an increasing
proportion of total license fees. Because a significant portion of the
Company's installed base is composed of customers (including those who license
RemoteWare through Solution Providers) of the 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 participate in the Company's software maintenance program. 
 
  The Company relies predominantly on its direct sales force to qualify and
sell to prospective customers. The Company also has a network of Solution
Providers who provide remarketing and/or integration services to RemoteWare
customers. During the second half of 1996, the Company began modifying its
Solution Provider channel model to place greater emphasis on Solution
Providers who offer substantial RemoteWare integration services. These and
other program changes that became effective January 1, 1997 have resulted in
fewer Solution Providers that are authorized to remarket RemoteWare and
remarketing discount rates that range from 20% to 30%, compared to 30% to 40%
in prior years. As a result, the Company expects that license fees generated
from Solution Providers as a percentage of total license fees will decrease.
 
  In accordance with generally accepted accounting principles, the Company
capitalizes certain costs incurred in developing computer software products.
Capitalized software development costs were $786,000, $319,000 and $2.1
million in 1994, 1995 and 1996, respectively. Capitalized software costs
increased in 1996 primarily due to the development of RemoteWare for NT.
 
  The Company is currently investing significant resources to develop its
NetEssentials family of products that are derived from RemoteWare and that are
targeted at companies implementing corporate intranets. These products are
planned for release throughout 1997, beginning with the first product in the
second quarter. The Company believes that the market for intranet system
management products in general, and for the planned NetEssentials products in
particular, is highly uncertain and the development of these new products is
subject to significant technical risks. As a result, the Company does not
anticipate that the software license fees generated from the NetEssentials
products in 1997 will be material compared to its total revenues. Furthermore,
there can be no assurance that any customer confusion over the similar
capabilities of the NetEssentials and RemoteWare products will not result in
price erosion or reduced sales of the RemoteWare products. 
 
  In the fourth quarter of 1996, the Company purchased the WorldLink product
line from The NetPlex Group, Inc. for approximately $3.0 million in cash. The
purchase price of the WorldLink technology was allocated to goodwill as of the
acquisition date and written off as a nonrecurring charge in the fourth
quarter due to uncertainties regarding its recoverability. In January 1997,
the Company acquired all of the outstanding shares of Electronic Commerce,
Inc. ("E-Comm"), a systems integration company that had been one of the
Company's Solution Providers, for stock and cash valued at approximately $2.7
million. As a result of the E-Comm acquisition, the Company anticipates that
revenues from the Company's systems integration business will increase as a
percentage of services revenues in 1997, and that costs of services will
increase as a percentage of services revenues. 
 
RESULTS OF OPERATIONS
 
  The following table sets forth for the periods indicated the percentage of
total revenues of the line items in the Company's Consolidated Statements of
Operations and the percentage changes from the preceding periods:
 
<TABLE>
<CAPTION>
                                      PERCENTAGE OF
                                      TOTAL REVENUES       YEAR-TO-YEAR CHANGES
                                      ----------------  ---------------------------
                                      1994  1995  1996  1995 VS. 1994 1996 VS. 1995
                                      ----  ----  ----  ------------- -------------
<S>                                   <C>   <C>   <C>   <C>           <C>
Revenues:
 Software license fees...............  80%   75%   72%        20%           20%
 Services............................  20    25    28         55            41
                                      ---   ---   ---        ---          ----
                                      100   100   100         27            25
                                      ---   ---   ---        ---          ----
Costs and expenses:
 Costs of license fees...............   4     5     5         48             9
 Costs of services...................   7     7     9         31            63
 Sales and marketing.................  43    43    51         25            49
 Product development.................   9    15    15        116            26
 General and administrative..........  18    16    14         18            12
 Nonrecurring charges................  --    --     8         --            --
                                      ---   ---   ---        ---          ----
                                       81    86   102         35            49
                                      ---   ---   ---        ---          ----
Operating income (loss)..............  19    14    (2)        (8)         (120)
Other income, net....................   3     4     2         69           (26)
                                      ---   ---   ---        ---          ----
Income before income taxes...........  22    18    --          2          (100)
Provision for income taxes...........   9     7    --         (6)         (100)
                                      ---   ---   ---        ---          ----
Net income...........................  13%   11%   --%         7%         (100%)
                                      ===   ===   ===        ===          ====
</TABLE>
 
 Revenues
 
  Total revenues were $26.9 million, $34.1 million and $42.7 million in 1994,
1995 and 1996, respectively, representing increases of 27% from 1994 to 1995
and 25% from 1995 to 1996. These increases in total revenues were due to
increases in both license fees and service revenues.
 
  The Company's revenues are derived from software license fees and services
related to its RemoteWare products. The Company recognizes revenue in
accordance with the Statement of Position 91-1 on "Software Revenue
Recognition" issued by the American Institute of Certified Public Accountants.
Software license fees are recognized when a noncancelable license agreement
has been signed, the product has been shipped and all significant contractual
obligations have been satisfied. The Company licenses its products directly to
licensees and through Solution Providers. All licensees, whether licensed
directly or through Solution Providers, are referred to throughout this
Prospectus as the Company's customers. Software licensed to a customer through
a Solution Provider is recognized net of the discount to the Solution
Provider. Services revenues are primarily derived from the RCAP program, which
includes help desk support and maintenance for customers and Solution
Providers, and to a lesser extent from training and systems integration
services. Revenues from the RCAP program are recognized proportionately over
the term of the 12-month agreement, while revenues for training and systems
integration services are recognized as services are performed. Starting in
December 1996, the Company began offering separate plans for software
maintenance and help desk support to all new customers and to existing
customers as their RCAP agreements expired. Software maintenance revenues will
be recognized over the term of their 12-month agreements.
 
  Software License Fees. The Company currently derives all of its software
license fees from noncancelable license agreements for its RemoteWare
products. Software license fees were $21.4 million, $25.6 million and $30.7
million in 1994, 1995 and 1996, respectively, representing increases of 20%
from 1994 to 1995 and from 1995 to 1996. The increases in software license
fees reflect increased market acceptance by new customers and additional sales
to the Company's installed base. Software license fees as a percentage of
total revenues were 80%, 75% and 72% in 1994, 1995 and 1996, respectively,
reflecting the effect of the growth of services revenues associated with the
Company's larger installed base and the high rate of participation of
RemoteWare customers in the RCAP program.
 
  In March 1996, the Company released its first version of RemoteWare for NT,
and the most recent version was released in September 1996. Software license
fees from the RemoteWare for NT products accounted for 17% and 41% of total
software license fees in the third and fourth quarters of 1996, respectively.
The Company believes that Microsoft's Windows NT environment is emerging as
the predominant enterprise computing platform, and that its RemoteWare for NT
products will be applicable to a broader range of customers than its
RemoteWare for OS/2 products. While the Company intends to continue to market
and support its RemoteWare for OS/2 products, the Company anticipates that
sales of the RemoteWare for NT products will constitute an increasing
proportion of total software license fees.
 
  Software license fees from new customers were $11.6 million, $11.1 million
and $13.3 million in 1994, 1995 and 1996, respectively, representing 54%, 43%
and 43% of total software license fees in those years, respectively. The
decline in the percentage of software license fees from new customers is
related to the growth of the Company's installed base and the additional
software purchased by this installed base of customers. The Company added 247,
301 and 296 new customers in 1994, 1995 and 1996, respectively. The average
initial RemoteWare purchase for these new customers was $46,000, $36,000 and
$45,000 during the same three years. Average initial purchase size varies as a
function of the number of clients and servers included in the sale, whether
the sale was direct or through a Solution Provider, and the specific products
and options licensed.
 
  Software license fees from existing customers were $9.8 million, $14.5
million and $17.4 million in 1994, 1995 and 1996, respectively, representing
increases of 48% from 1994 to 1995 and 20% from 1995 to 1996. Existing
customers that purchase additional RemoteWare products do so to complete
deployment of an initial pilot or limited production implementation and to
extend RemoteWare to additional clients and projects within the enterprise.
The vast majority of the Company's existing installed base is composed of
customers who purchased RemoteWare for OS/2. 
 
  Software license fees generated by Solution Providers represented 40%, 48%
and 38% of total software license fees in 1994, 1995 and 1996, respectively.
During the second half of 1996, the Company implemented changes to its
Solution Provider channel to place greater emphasis on Solution Providers who
offer substantial RemoteWare integration services. These changes, and
additional program changes that became effective January 1, 1997, have
resulted in fewer Solution Providers that are authorized to remarket
RemoteWare and remarketing discount rates that range from 20% to 30%, compared
to 30% to 40% in prior years. As a result, the Company expects that software
license fees generated from Solution Providers as a percentage of total
software license fees will decrease in the foreseeable future. 
 
  The Company is currently investing significant resources to develop its
NetEssentials family of products that are being derived from RemoteWare and
are being targeted to companies implementing corporate intranets. The Company
currently plans to release the first of such products, SessionXpress Basic, in
the second quarter of 1997 and the other NetEssentials products at various
times throughout 1997. The Company believes that the market for intranet
system management products in general, and the market for the planned
NetEssentials product line in particular, is highly uncertain. Furthermore,
the development of these new products is subject to significant technical
risks. As a result, the Company does not anticipate that the software license
fees generated from the NetEssentials products in 1997 will be material
compared to its total revenues. 
 
  Services. Services revenues have historically been derived substantially
from the Company's RCAP program, which bundles help desk support and software
maintenance for customers and Solution Providers. Services revenues were $5.5
million, $8.5 million and $11.9 million for 1994, 1995 and 1996, respectively,
representing increases of 55% from 1994 to 1995 and 41% from 1995 to 1996. The
percentage of total revenues derived from services increased from 20% in 1994
to 25% in 1995 and to 28% in 1996. The growth in services revenues, and the
relative significance of such revenues to total revenues, is primarily due to
the Company's growing customer base and their significant rate of
participation in the RCAP program. Because a significant portion of the
Company's installed base is composed of customers of the 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 software
maintenance program. There can be no assurance that such services revenues will
not decline in the future. 
 
  Services revenues also include field engineering and systems integration
services that are focused on selected RemoteWare customer implementations and
that facilitate Solution Provider development, certification and quality
assurance. The revenue generated from these activities totaled $152,000,
$343,000 and $438,000 in 1994, 1995 and 1996, respectively. In January 1997,
the Company acquired Electronic Commerce, Inc., a 14-person privately owned
systems integration company to provide project management and systems
expertise. Consequently, the Company anticipates that systems integration will
increase as a percentage of services revenues in 1997, and that the costs of
services will increase as a percentage of services revenues. 
 
 Costs and Expenses
 
  Costs of license fees. Costs of license fees consist of amortization of
capitalized software, packaging and documentation materials, royalties and
personnel costs for shipping. Costs of license fees were $1.2 million, $1.8
million and $2.0 million in 1994, 1995 and 1996, representing 6%, 7% and 6% of
license fees for those years, respectively. The increases reflect the higher
volume of products shipped in each year, as well as increased amortization of
capitalized software development costs in 1996 associated with the development
of RemoteWare for NT. As a result of the higher level of software
capitalization in 1996, the Company anticipates an increase in amortization of
capitalized software development costs in 1997. This increase in amortization
may increase the costs of license fees as a percentage of software license
fees.
 
  Costs of services. Costs of services consist primarily of personnel costs
for field services, customer support and training. In addition, a portion of
packaging and documentation materials and personnel costs for shipping are
allocated to costs of services for upgrades and enhancements shipped to
customers participating in the maintenance program. Costs of services were
$1.8 million, $2.3 million and $3.8 million in 1994, 1995 and 1996,
respectively, representing 33%, 28% and 32% of service revenues in those
years, respectively. These increases were primarily due to increased personnel
costs for field engineers, systems integration personnel and trainers. The
Company believes that costs of services will continue to increase as a
percentage of service revenues as a result of the Company's planned expansion
of its systems integration business.
 
  Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions of direct sales and marketing personnel and marketing
program costs. These expenses were $11.6 million, $14.5 million and $21.6
million in 1994, 1995 and 1996, respectively, representing 43%, 43% and 51% of
total revenues in those years, respectively. The increase in sales and
marketing expenses, in absolute dollars and as a percentage of total revenues,
in 1996 was due primarily to a new advertising campaign initiated in 1996,
personnel additions and investments in Europe. Advertising expenses were
$707,000, $194,000 and $2.0 million in 1994, 1995 and 1996, respectively. The
Company expects that sales and marketing expenses will increase in dollar
amount in 1997, but may decrease as a percentage of total revenues.
 
  Product development. The table below summarizes product development
expenditures:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER
                                                              31,
                                                       1994     1995     1996
                                                      ------   ------   ------
                                                         (in thousands)
<S>                                                   <C>      <C>      <C>
   Product development expenditures.................. $3,163   $5,447   $8,559
   Less: capitalized software development costs......   (786)    (319)  (2,108)
                                                      ------   ------   ------
   Net product development expenses.................. $2,377   $5,128   $6,451
                                                      ======   ======   ======
  As a percentage of total revenues:
   Product development expenditures..................     12%      16%      20%
   Less: capitalized software development costs......     (3%)     (1%)     (5%)
                                                      ------   ------   ------
   Net product development expenses..................      9%      15%      15%
                                                      ======   ======   ======
  Capitalized product development rate...............     25%       6%      25%
                                                      ======   ======   ======
</TABLE>
 
  Most product development costs are personnel related. Product development
expenditures (expenses plus capitalized software development costs) were $3.2
million, $5.4 million and $8.6 million in 1994, 1995 and 1996, respectively,
representing increases of 72% from 1994 to 1995 and 57% from 1995 to 1996.
These increases were primarily due to additional personnel costs (including
outside contractor costs) for development of RemoteWare for NT.
 
  In accordance with Statement of Financial Accounting Standards No. 86 ("SFAS
86"), "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", the Company capitalizes certain costs incurred in
developing computer software products. These rules require capitalization of
certain product development expenses from the time technological feasibility
is established for a new product or significant enhancement of an existing
product until it is generally available for all customers. The Company defines
technological feasibility as the release of product to selected customers for
beta testing. Thus, capitalization levels each year depend on product
development cycles. The Company amortizes capitalized software development
costs on a product-by-product basis over periods not exceeding three years,
with such amortization included in costs of license fees.
 
  Capitalized software development costs were $786,000, $319,000 and $2.1
million in 1994, 1995 and 1996, respectively. Capitalized software development
costs in 1994 related to the Company's RemoteWare for OS/2 products. The
substantial majority of the capitalized software development costs in 1995 and
1996 related to the Company's development of RemoteWare for NT.
 
  General and administrative. General and administrative expenses consist
primarily of personnel costs for general management, finance and
administration, information systems and human resources. General and
administrative expenses were $4.7 million, $5.5 million and $6.2 million in
1994, 1995 and 1996, respectively, representing increases of 18% from 1994 to
1995 and 12% from 1995 to 1996. General and administrative expenses as a
percentage of revenues were 18%, 16% and 14% in 1994, 1995 and 1996,
respectively. The Company expects that general and administrative expenses
will increase in absolute dollars, but may fluctuate as a percentage of
revenues.
 
  Nonrecurring charges. In November 1996, the Company purchased the WorldLink
product line from The NetPlex Group, Inc. for approximately $3.0 million in
cash. The purchase price of the WorldLink technology was allocated to goodwill
as of the acquisition date and written off as a nonrecurring charge in the
fourth quarter due to uncertainties regarding its recoverability. In addition,
the Company recorded nonrecurring charges of $459,000 primarily representing
severance and hiring costs associated with certain key employees. 
 
Provision for Income Taxes
 
  The effective tax rate was 40%, 37% and 0% in 1994, 1995 and 1996,
respectively. The 1994 rate exceeded the statutory rate primarily due to
losses in the Company's U.K. operations. Such losses will not provide a tax
benefit until those operations are profitable. The 1995 tax rate declined as a
result of increases in tax-exempt interest income and research and development
tax credits and a decrease in losses from the U.K. operation. Since the
Company reported no taxable income in 1996, no provision was made for income
taxes.

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
through cash generated from operations.
 
  At December 31, 1996, the Company had $10.6 million in cash and cash
equivalents and $23.2 million in working capital and had no debt. Net cash
provided by operating activities was $3.5 million, $4.9 million, and $1.6
million in 1994, 1995, and 1996, respectively. In 1994 and 1995, net cash
provided by operating activities consisted primarily of net income plus
depreciation and amortization, offset primarily by increases in trade
receivables. In 1996, net cash provided by operating activities resulted
primarily from depreciation and amortization, the write-off of the WorldLink
product line, and an increase in liabilities, offset primarily by an increase
in trade receivables.
 
  Net cash used in investing activities was $14.0 million, $1.9 million, and
$1.4 million in 1994, 1995, and 1996, respectively. In 1994, net cash used in
investing activities resulted primarily from the purchase of short-term
investments, fixed asset additions, and capitalized software. In 1995, the net
cash used in investing activities resulted primarily from the fixed asset
additions offset by a decrease in short-term investments. In 1996, net cash
used in investing activities resulted primarily from the purchase of the
WorldLink product line from The NetPlex Group, Inc., fixed asset additions,
and capitalized software, offset by a decrease in short-term investments. The
Company expects that its capital expenditures, primarily for computer
workstations and file servers, will remain approximately the same or increase
as the Company's employee base grows.
 
  Net cash provided by financing activities was $18.9 million and $1.1 million
in 1994 and 1996, respectively. Net cash used in financing activities in 1995
was $6.4 million. Net cash provided by financing activities in 1994 consisted
primarily of net proceeds from issuance of common stock and in 1995 consisted
of the proceeds from, and income tax benefits associated with, the exercise of
stock options. Net cash used in financing activities resulted primarily from
the Company's purchase of treasury stock.
 
  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, if any, 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 that the net proceeds from the sale of Common Stock
offered by the Company hereby, together with its current cash balances and
anticipated cash flows from operations will be sufficient to meet its working
capital and capital expenditure requirements through 1997. There can be no
assurance that, in the event additional financing is required, the Company
will be able to raise such additional financing on acceptable terms or at all.
 

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED
                            ------------------------------------------------------------------------
                            MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,  DEC. 31,
                              1995     1995     1995     1995     1996     1996     1996      1996
                            -------- -------- -------- -------- -------- -------- --------  --------
                                              (in thousands,except per share data)
CONSOLIDATED STATEMENTS OF
OPERATIONS:
<S>                         <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>
Revenues:
 Software license fees....   $6,851   $7,002   $4,918   $6,841   $6,931   $7,381   $6,133   $10,258
 Services.................    1,822    2,037    2,195    2,433    2,519    2,745    3,227     3,457
                             ------   ------   ------   ------   ------   ------   ------   -------
  Total revenues:.........    8,673    9,039    7,113    9,274    9,450   10,126    9,360    13,715
                             ------   ------   ------   ------   ------   ------   ------   -------
Costs and expenses:
 Costs of license fees....      484      440      417      476      477      524      387       598
 Costs of services........      591      529      581      638      731      856      938     1,281
 Sales and marketing......    3,501    3,759    3,281    3,959    4,368    5,471    5,384     6,405
 Product development......    1,189    1,315    1,251    1,373    1,341    1,561    1,500     2,049
 General and
  administrative..........    1,369    1,562    1,200    1,416    1,489    1,393    1,506     1,830
 Nonrecurring charges.....      --       --       --       --       --       --       384     3,112
                             ------   ------   ------   ------   ------   ------   ------   -------
  Total operating costs
   and expenses...........    7,134    7,605    6,730    7,862    8,406    9,805   10,099    15,275
                             ------   ------   ------   ------   ------   ------   ------   -------
Operating income (loss)...    1,539    1,434      383    1,412    1,044      321     (739)   (1,560)
Other income, net.........      304      334      330      296      288      265      204       177
                             ------   ------   ------   ------   ------   ------   ------   -------
Income (loss) before
 income taxes.............    1,843    1,768      713    1,708    1,332      586     (535)   (1,383)
Provision for (benefit
 from) income taxes.......      715      654      264      597      466      223     (160)     (529)
                             ------   ------   ------   ------   ------   ------   ------   -------
Net income (loss).........   $1,128   $1,114   $  449   $1,111   $  866   $  363   $ (375)  $  (854)
                             ======   ======   ======   ======   ======   ======   ======   =======
Net income (loss) per
 share....................   $ 0.13   $ 0.13   $ 0.05   $ 0.14   $ 0.11   $ 0.05   $(0.05)  $ (0.12)
                             ======   ======   ======   ======   ======   ======   ======   =======
Weighted average shares
 outstanding..............    8,624    8,602    8,502    8,160    7,852    7,883    7,238     7,345
                             ======   ======   ======   ======   ======   ======   ======   =======
<CAPTION>
                                                      THREE MONTHS ENDED
                            ------------------------------------------------------------------------
                            MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,  DEC. 31,
                              1995     1995     1995     1995     1996     1996     1996      1996
                            -------- -------- -------- -------- -------- -------- --------  --------
<S>                         <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>
PERCENTAGE OF TOTAL
 REVENUES:
Revenues:
 Software license fees....       79%      77%      69%      74%      73%      73%      66%       75%
 Services.................       21       23       31       26       27       27       34        25
                             ------   ------   ------   ------   ------   ------   ------   -------
 Total revenues:..........      100%     100%     100%     100%     100%     100%     100%      100%
Costs and expenses:
 Costs of license fees....        5        5        6        5        5        5        4         4
 Costs of services........        7        6        8        7        8        9       10         9
 Sales and marketing......       40       42       46       43       46       54       58        47
 Product development......       14       14       18       15       14       15       16        15
 General and
  administrative..........       16       17       17       15       16       14       16        13
 Nonrecurring charges.....       --       --       --       --       --       --        4        23
                             ------   ------   ------   ------   ------   ------   ------   -------
  Total operating costs
   and expenses...........       82       84       95       85       89       97      108       111
                             ------   ------   ------   ------   ------   ------   ------   -------
Operating income (loss)...       18       16        5       15       11        3       (8)      (11)
Other income, net.........        3        3        5        3        3        3        2         1
                             ------   ------   ------   ------   ------   ------   ------   -------
Income (loss) before
 income taxes.............       21       19       10       18       14        6       (6)      (10)
Provision for (benefit
 from) income taxes.......        8        7        4        6        5        2        2        (4)
                             ------   ------   ------   ------   ------   ------   ------   -------
Net income (loss).........       13%      12%       6%      12%       9%       4%      (4)%      (6)%
                             ======   ======   ======   ======   ======   ======   ======   =======
</TABLE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
  We have audited the accompanying consolidated balance sheets of XCELLENET,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XcelleNet, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
ARTHUR ANDERSEN LLP
 
Atlanta, Georgia
January 23, 1997
 

                        XCELLENET, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ----------------
                                                               1996     1995
                                                              -------  -------
<S>                                                           <C>      <C>
ASSETS
Current assets:
 Cash and cash equivalents................................... $10,587  $ 9,304
 Short-term investments......................................   2,157    9,115
 Trade receivables, less allowance for doubtful accounts of
  $503 and $325 at December 31, 1996 and 1995, respectively..  13,306    8,091
 Prepaid expenses and other current assets...................   1,049      714
 Income tax receivable.......................................     793      522
                                                              -------  -------
    Total current assets.....................................  27,892   27,746
                                                              -------  -------
Furniture, fixtures, and equipment, net......................   5,378    4,885
Capitalized software development costs, net of accumulated
 amortization of $1,566 and $922 at December 31, 1996 and
 1995, respectively..........................................   2,231      767
Deferred income tax assets...................................     754      --
Other noncurrent assets......................................     428       63
                                                              -------  -------
                                                              $36,683  $33,461
                                                              =======  =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable............................................ $ 1,207  $   991
 Accrued bonuses and commissions.............................   1,375      610
 Sales tax payable...........................................     360      146
 Deferred income tax liabilities.............................     --        33
 Other current liabilities...................................   1,752      998
                                                              -------  -------
    Total current liabilities................................   4,694    2,778
                                                              -------  -------
Long-term liabilities........................................     859      834
Commitments and contingencies
Shareholders' equity:
 Preferred stock, $.01 par value; 10,000,000 shares
  authorized; no shares issued or outstanding................     --       --
 Common stock, $.01 par value; 30,000,000 shares authorized,
  7,537,876 shares issued and 7,380,337 shares outstanding in
  1996 and 7,537,876 shares issued and 7,039,641 outstanding
  in 1995....................................................      75       75
 Additional paid-in capital..................................  24,211   28,093
 Retained earnings...........................................   9,232    9,232
 Treasury stock at cost, 157,539 shares in 1996 and 498,235
  shares in 1995.............................................  (2,388)  (7,551)
                                                              -------  -------
    Total shareholders' equity...............................  31,130   29,849
                                                              -------  -------
                                                              $36,683  $33,461
                                                              =======  =======
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 

                        XCELLENET, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                       ------------------------
                                                        1996     1995    1994
                                                       -------  ------- -------
<S>                                                    <C>      <C>     <C>
REVENUES
 Software license fees................................ $30,703  $25,612 $21,399
 Services.............................................  11,948    8,487   5,490
                                                       -------  ------- -------
    Total revenues....................................  42,651   34,099  26,889
                                                       -------  ------- -------
COSTS AND EXPENSES
 Costs of license fees................................   1,986    1,816   1,230
 Costs of services....................................   3,806    2,340   1,786
 Sales and marketing..................................  21,628   14,500  11,621
 Product development..................................   6,451    5,128   2,377
 General and administrative...........................   6,218    5,547   4,693
 Nonrecurring charges.................................   3,496      --      --
                                                       -------  ------- -------
    Total costs and expenses..........................  43,585   29,331  21,707
                                                       -------  ------- -------
Operating income (loss)...............................    (934)   4,768   5,182
Other income, net.....................................     934    1,264     748
                                                       -------  ------- -------
Income before income taxes............................     --     6,032   5,930
Provision for income taxes............................     --     2,230   2,375
                                                       -------  ------- -------
NET INCOME............................................ $   --   $ 3,802 $ 3,555
                                                       =======  ======= =======
NET INCOME PER SHARE.................................. $   --   $  0.45 $  0.45
                                                       =======  ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING...................   7,915    8,480   7,833
                                                       =======  ======= =======
</TABLE>
 
 
 The accompanying notes are an integral part of these consolidated statements.
 
 
                        XCELLENET, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                            CONVERTIBLE
                          PREFERRED STOCK     COMMON STOCK    TREASURY STOCK    ADDITIONAL
                         ------------------ ---------------- -----------------   PAID-IN   RETAINED
                           SHARES    AMOUNT  SHARES   AMOUNT  SHARES   AMOUNT    CAPITAL   EARNINGS  TOTAL
                         ----------  ------ --------- ------ --------  -------  ---------- -------- -------
<S>                      <C>         <C>    <C>       <C>    <C>       <C>      <C>        <C>      <C>
Balance, December 31,
 1993...................  1,062,594   $ 11  1,702,881  $17        --   $   --    $ 7,966    $1,875  $ 9,869
 Conversion of preferred
  stock to common stock. (1,062,594)   (11) 3,187,782   32                           (21)               --
 Initial public offering
  of common stock, net
  of issuance costs.....                    1,810,000   18                        17,748             17,766
 Stock options exercised
  for cash..............                      451,276    4                           172                176
 Compensation related to
  stock options.........                                                             121                121
 Income tax benefits
  related to exercise of
  stock options.........                                                             948                948
 Net income.............                                                                     3,555    3,555
 Foreign currency
  translation
  adjustment............                                                              38                 38
                         ----------   ----  ---------  ---   --------  -------   -------    ------  -------
Balance, December 31,
 1994...................        --     --   7,151,939   71        --       --     26,972     5,430   32,473
 Purchase of treasury
  shares................                                     (527,879)  (8,000)                      (8,000)
 Stock options exercised
  for cash..............                      385,937    4     17,100      259        37                300
 Employee stock purchase
  plan shares issued....                                       12,544      190        15                205
 Income tax benefits
  related to exercise of
  stock options.........                                                           1,131              1,131
 Net income.............                                                                     3,802    3,802
 Unrealized loss on
  short-term
  investments...........                                                             (50)               (50)
 Foreign currency
  translation
  adjustment............                                                             (12)               (12)
                         ----------   ----  ---------  ---   --------  -------   -------    ------  -------
Balance, December 31,
 1995...................        --     --   7,537,876   75   (498,235)  (7,551)   28,093     9,232   29,849
 Exercise of stock
  options...............                                      347,831    5,450    (4,282)             1,168
 Shares acquired related
  to stock option
  exercises.............                                      (47,926)    (906)                        (906)
 Employee stock purchase
  plan shares issued....                                       30,791      467       (94)               373
 Restricted stock
  issuance..............                                       10,000      152       (28)               124
 Income tax benefits
  related to exercise of
  stock options.........                                                             480                480
 Net income.............                                                                       --       --
 Unrealized loss on
  short-term
  investments...........                                                             (21)               (21)
 Foreign currency
  translation
  adjustment............                                                              63                 63
                         ----------   ----  ---------  ---   --------  -------   -------    ------  -------
Balance, December 31,
 1996...................        --    $--   7,537,876  $75   (157,539) ($2,388)  $24,211    $9,232  $31,130
                         ==========   ====  =========  ===   ========  =======   =======    ======  =======
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
 

                        XCELLENET, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ---------------------------
                                                     1996     1995      1994
                                                   --------  -------  --------
<S>                                                <C>       <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Income....................................... $    --   $ 3,802  $  3,555
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Writeoff of WorldLink product line..............    3,037      --        --
  Issuance of restricted stock....................      124      --        --
  Depreciation and amortization...................    3,030    2,330     1,351
  Increase in trade receivables...................   (5,215)  (1,601)   (2,101)
  Increase in prepaid expenses and other current
   assets.........................................     (335)     (55)     (251)
  (Increase) decrease in income taxes receivable..     (271)     494      (899)
  (Increase) decrease in deferred income tax
   assets.........................................     (754)     --        295
  Decrease in other long-term assets..............      --       --        186
  Increase (decrease) in current liabilities......    1,916      (77)    1,253
  Increase in long-term liabilities...............       25       18        83
                                                   --------  -------  --------
    Total adjustments.............................    1,557    1,109       (83)
                                                   --------  -------  --------
    Net cash provided by operating activities.....    1,557    4,911     3,472
                                                   --------  -------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Decrease (increase) in short-term investments....    6,958    1,655   (10,770)
 Purchase of WorldLink product line...............   (3,037)     --        --
 Purchases of furniture, fixtures, and equipment..   (2,879)  (3,217)   (2,749)
 Additions to capitalized software development
  costs...........................................   (2,108)    (319)     (786)
 Decrease (increase) in long-term investments.....     (225)     (35)      142
 Other............................................      (77)     (12)      114
                                                   --------  -------  --------
    Net cash used in investing activities.........   (1,368)  (1,928)  (14,049)
                                                   --------  -------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Purchase of treasury stock.......................      --    (8,000)      --
 Proceeds from issuance of common stock, net of
  related costs...................................      635      505    17,942
 Income tax benefits related to exercise of stock
  options.........................................      480    1,131       948
 Other............................................      (21)     (50)       41
                                                   --------  -------  --------
    Net cash provided by (used in) financing
     activities...................................    1,094   (6,414)   18,931
                                                   --------  -------  --------
Net increase (decrease) in cash and cash equiva-
 lents............................................    1,283   (3,431)    8,354
Cash and cash equivalents, beginning of year......    9,304   12,735     4,381
                                                   --------  -------  --------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 10,587  $ 9,304  $ 12,735
                                                   ========  =======  ========
SUPPLEMENTAL DISCLOSURES:
 Interest paid.................................... $    --   $   --   $      1
 Income taxes paid................................ $    887  $ 1,253  $  1,771
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
 
 
                       XCELLENET, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Organization
 
  The accompanying consolidated financial statements include the accounts of
XcelleNet, Inc. and its wholly owned subsidiaries (the "Company"). The Company
develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information.
 
  The Company's foreign subsidiaries accounted for approximately 9%, 9% and 7%
of consolidated revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. Thus, separate disclosure is not included.
 
  On April 14, 1994, the Securities and Exchange Commission declared effective
the Company's registration statement relating to the initial public offering
of its common stock. The offering was comprised of 2,300,000 shares (1,810,000
shares issued by the Company and 490,000 shares sold by certain existing
shareholders) at an initial offering price of $11.00 per share. The net
proceeds to the Company (after underwriters' discounts and commissions and
other costs associated with the offering of $2,144,000) totaled $17,766,000.
 
 Basis of Presentation
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Change in Company Year End
 
  Effective December 31, 1993, the Company changed its fiscal year-end from
June 30 to December 31. All prior year financial statements have been restated
to reflect a December 31 year-end.
 
 Recent Accounting Pronouncements
 
  In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of"
("SFAS 121"), which becomes effective for fiscal years beginning after
December 15, 1995. SFAS 121 established standards for determining when
impairment losses on long lived assets have occured and how impairment losses
should be measured. The Company adopted SFAS 121 effective January 1, 1996.
The financial statement impact of adopting SFAS 121 was not material.
 
  The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Effective in 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do
not choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings per share as if
SFAS 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
 Cash, Cash Equivalents, and Short-term Investments
 
  The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
investments consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                AT DECEMBER 31,
                                                                ---------------
                                                                 1996    1995
                                                                ------- -------
<S>                                                             <C>     <C>
Municipal securities........................................... $ 1,658 $ 5,860
U.S. Government agencies.......................................     499   1,751
Corporate notes and bonds......................................     --    1,005
U.S. Treasury securities.......................................     --      499
                                                                ------- -------
Short-term investments......................................... $ 2,157 $ 9,115
                                                                ======= =======
</TABLE>
 
  The fair value of financial instruments is estimated based on quoted market
prices. Differences between the fair value and the cost of investments are
recorded as unrealized gains (losses) in additional paid-in capital. All
investments are considered available for sale and have effective maturities of
less than one year.
 
 Furniture, Fixtures, and Equipment
 
  Furniture, fixtures, and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets ranging from three to five years. Maintenance and repairs are
charged to expense as incurred. Replacements and improvements are capitalized.
Furniture, fixtures, and equipment consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                               AT DECEMBER 31,
                                                               ----------------
                                                                1996     1995
                                                               -------  -------
<S>                                                            <C>      <C>
Computer equipment............................................ $ 7,814  $ 6,771
Furniture and fixtures........................................   2,540    2,408
Leasehold improvements........................................     676      600
Automobiles...................................................     168       81
                                                               -------  -------
                                                                11,198    9,860
Less accumulated depreciation.................................  (5,820)  (4,975)
                                                               -------  -------
Furniture, fixtures, and equipment, net....................... $ 5,378  $ 4,885
                                                               =======  =======
</TABLE>
 
 Capitalized Software Development Costs
 
  In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," the Company capitalizes
certain software development costs when a new or enhanced product is released
for customer testing and ceases capitalization when the product is released
for sale. Software development costs of $2,108,000, $319,000 and $786,000 were
capitalized in 1996, 1995, and 1994, respectively. Amortization of capitalized
software development costs begins as products are made available for sale,
with annual amortization equal to the greater of the amount computed using the
ratio that current gross revenues bear to the total of current and anticipated
future gross revenues for the product or the straight-line method over the
remaining estimated economic life of the product, which is a maximum of three
years. Amortization expense is included in costs of license fees. Amortization
totaled $644,000, $332,000, and $48,000 in 1996, 1995, and 1994, respectively.
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
 Revenue Recognition
 
  The Company's revenues are generated from the licensing of its software
products; from fees paid for extended warranties and rights to upgrades and
updates ("maintenance") of the software products; and from training,
installation, implementation, support, and consulting services related to such
software products. In accordance with AICPA Statement of Position No. 91-1,
Software Revenue Recognition, the Company recognizes revenue from software
licenses upon the execution of a license agreement and delivery of the product
to a customer, provided the Company has no significant future obligations and
collection of the license fees is probable. Maintenance fees are recognized on
a straight-line basis over the period covered by the related contract. Service
revenues are recognized when the specific service is performed.
 
 Advertising
 
  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 $2,171,000, $194,000 and $707,000
for 1996, 1995 and 1994, respectively. Advertising expense was $2,027,000,
$194,000 and $707,000 for 1996, 1995 and 1994, respectively. Unamortized
advertising costs included in prepaid expenses were $144,000 and $0 at
December 31, 1996 and 1995, respectively.
 
 Other Income, Net
 
  Other income primarily includes interest income. Interest income was
$911,000, $1,256,000, and $719,000 in 1996, 1995, and 1994, respectively.
 
 Income Taxes
 
  Deferred income tax assets and liabilities are recorded based on the
differences between the financial reporting and income tax bases of assets and
liabilities.
 
 Net Income Per Share
 
  Net income per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from convertible
preferred stock and stock options have been included in the computation when
dilutive. The difference between primary and fully diluted earnings per share
is not material for any of the periods presented, and fully diluted earnings
per share have therefore been excluded.
 
 Foreign Currency Translation
 
  Non-U.S. assets and liabilities are translated into U.S. dollars using the
balance sheet date exchange rates. Revenues and expenses are translated at
average rates during the period. Foreign currency translation adjustments are
reflected as increases (decreases) in additional paid-in capital and were
$63,000, $(12,000) and $38,000 in 1996, 1995 and 1994, respectively.
Cumulative foreign currency translation adjustments were $76,000 and $13,000
at December 31, 1996 and 1995, respectively.
 
 Reclassifications
 
  Certain prior year amounts have been reclassified to conform with the
current year presentation.
 

 
                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
2. SHAREHOLDERS' EQUITY
 
 Convertible Preferred Stock
 
  Upon closing of the Company's initial public offering in April 1994, all of
the outstanding shares of each series of convertible preferred stock were
converted, on a 3-for-1 basis, into a total of 3,187,782 shares of common
stock. The convertible preferred stock converted into common stock has been
returned to the status of authorized but unissued shares of preferred stock.
At December 31, 1996 and 1995, 10,000,000 shares were authorized and none were
issued or outstanding.
 
 Stock Options
 
  The Company maintains three stock option plans: the 1987 Stock Option Plan
(the "1987 Plan"), the 1994 Stock Option Plan for Outside Directors (the
"Director Plan"), and the 1996 Long-Term Incentive Plan (the "LTIP"). The 1987
Plan provides for the issuance of incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs"), and stock appreciation rights ("SARs")
to employees and officers of the Company. The Director Plan provides for the
issuance of NQSOs to non-employee members of the Company's Board of Directors
who are not prohibited by their employer from receiving options under the
Director Plan. The LTIP Plan provides for the issuance of ISOs, NQSOs, SARs
and other stock-based awards to employees, officers and directors of the
Company. Additionally, the Company has granted NQSOs to non-employee Directors
and consultants on an individual basis and not under a plan. A total of
516,945 options were exercisable at December 31, 1996.
 
  Under the 1987 Plan, ISOs, NQSOs, and SARs to purchase a total of 2,650,000
shares were authorized for issuance, of which 1,327,756 options were
outstanding and 345,773 options were exercisable at December 31, 1996. All
options have been granted at the fair market value of the Company's common
stock at the date of grant. The ISOs and NQSOs are generally exercisable
beginning one to three years from the date of grant, after which options vest
over a period not to exceed ten years from the date of grant and terminate ten
years from the date of grant. No SARs have been granted under the plan.
 
  During 1994, the Company adopted the Director Plan, under which 300,000
shares were authorized for issuance. Under the Director Plan, the Company
automatically grants nonqualified stock options to purchase 40,000 shares of
common stock, at the fair market value of the Company's common stock at the
date of grant, to each eligible non-employee member of the Company's Board of
Directors. These options vest over a four-year period and terminate five years
from the date of grant. A total of 240,000 options were outstanding, of which
70,000 options were exercisable, at December 31, 1996.
 
  During 1996, the Company adopted the LTIP Plan, under which 3,000,000 shares
were authorized for issuance, of which 437,950 options were outstanding, and
none were exercisable, at December 31, 1996. All options have been granted at
the fair market value or higher of the Company's common stock at the date of
grant. The ISOs and NQSOs are exercisable beginning one year from the date of
grant, after which options vest over a period not to exceed ten years from the
date of grant and terminate up to ten years from the date of grant. No SARs or
other stock-based awards have been granted under the plan.
 
  The Company has granted NQSOs to purchase shares on an individual basis and
not under a plan, on terms similar to the 1987 Plan. At December 31, 1996,
101,172 options were outstanding and exercisable.
 

 
                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
  Changes in all outstanding options are as follows:
 
<TABLE>
<CAPTION>
                                                          PRICE RANGE   SHARES
                                                          ------------ ---------
   <S>                                                    <C>          <C>
   Outstanding at December 31, 1993...................... $ .07-$ 4.00 1,962,138
    Granted..............................................  7.50- 14.50   437,800
    Exercised............................................   .07-  4.00   451,276
    Forfeited............................................   .32-  4.00   103,215
                                                          ------------ ---------
   Outstanding at December 31, 1994......................   .07- 14.50 1,845,447
    Granted.............................................. 15.50- 30.25   488,500
    Exercised............................................   .07- 11.00   403,037
    Forfeited............................................   .47- 23.50   197,071
                                                          ------------ ---------
   Outstanding at December 31, 1995......................   .07- 30.25 1,733,839
    Granted.............................................. 10.00- 19.00 1,172,007
    Exercised............................................   .32- 10.00   347,831
    Forfeited............................................   .47- 30.25   451,137
                                                          ------------ ---------
   Outstanding at December 31, 1996...................... $ .07-$23.50 2,106,878
                                                          ============ =========
</TABLE>
 
  In 1996, 1995 and 1994, the Company recognized income tax benefits of
$480,000, $1,131,000 and $948,000, respectively, related to disqualifying
dispositions of ISOs and NQSO exercises. These benefits were recorded as
increases to additional paid-in capital.
 
 Stock-Based Compensation
 
  During 1995, the FASB issued SFAS 123 which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB 25. Entities electing to remain with the accounting in APB 25 must make
pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in the statement had been applied.
 
  The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1995 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the
following weighted average assumptions used for grants in 1996 and 1995:
 
<TABLE>
   <S>                                                             <C>
   Risk free interest rate........................................   6.17%-6.48%
   Expected dividend yield........................................            0%
   Expected lives................................................. 4.2-5.8 years
   Expected volatility............................................         73.6%
</TABLE>
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
  The total fair value of the options granted during the years ended December
31, 1996 and 1995 were computed as approximately $7,580,000 and $4,938,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's reported pro forma net income (loss) and pro forma net income (loss)
per share for the years ended December 31, 1996 and 1995 would have been as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  --------------
                                                                   1996    1995
                                                                  ------  ------
<S>                                                               <C>     <C>
Net income (loss):
 As reported..................................................... $   --  $3,802
 Pro forma....................................................... (2,027)  2,817
Primary EPS:
 As reported.....................................................     --     .45
 Pro forma.......................................................   (.28)    .33
</TABLE>
 
  Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that expected in future years.
 
  The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                 ------------------------------------------- --------------------------
    ACTUAL         NUMBER    WEIGHTED-AVERAGE   WEIGHTED-      NUMBER      WEIGHTED-
   RANGE OF      OUTSTANDING    REMAINING        AVERAGE     EXERCISABLE    AVERAGE
EXERCISE PRICES  AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
---------------  ----------- ---------------- -------------- ----------- --------------
<S>              <C>         <C>              <C>            <C>         <C>
$  .07-
   0.47             176,689        2.9            $  .27       176,689       $  .27
  1.08-
   1.08             136,227        5.6              1.08        89,754         1.08
  2.33-
   2.33              34,095        6.2              2.33        14,101         2.33
  4.00-
   4.00             257,199        6.7              4.00       122,925         4.00
  7.50-
   7.50              81,150        7.6              7.50            --           --
 10.00-
  14.99           1,188,192        8.4             12.32        84,900        10.71
 15.50-
  19.00             180,076        6.8             16.99        17,926        15.81
 23.50-
  23.50              53,250        8.3             23.50        10,650        23.50
-------           ---------        ---            ------       -------       ------
$  .07-
  23.50           2,106,878        7.3            $ 9.90       516,945       $ 4.09
=======           =========        ===            ======       =======       ======
</TABLE>
 
 Restricted Stock
 
  During 1996, the Company issued 10,000 shares of restricted stock to an
executive officer at no cost. The fair market value of the stock at the date
of issuance was $12.375 per share and the Company recorded compensation
expense of $123,750 related to the stock issuance.
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
 Employee Stock Purchase Plan
 
  During 1995, the Company established an employee discount stock purchase
plan for eligible employees of XcelleNet, Inc. and designated subsidiaries and
authorized 300,000 shares for issuance under this plan. Participants may use
up to 10% of their compensation to purchase the Company's common stock at the
end of each six-month plan period for 85% of the lower of the beginning or
ending stock price in the plan period. At December 31, 1996, there were
256,665 shares of stock reserved for issuance under this plan. The weighted
average fair value of the purchase rights granted in 1996 and 1995 was $14.42
and $18.49, respectively.
 
 Treasury Stock
 
  In November 1995, the Company's Board of Directors approved the repurchase
of 527,879 shares of its common stock from Motorola, Inc. at a negotiated
price of approximately $15.15 per share. The closing price of the Company's
common stock on the date of the transaction was $15.50. After the transaction,
Motorola, Inc. owned 731,047 shares of the Company's common stock.
 
  Additionally, on October 27, 1995, the Company's Board of Directors
authorized a common stock repurchase program of up to 350,000 shares. The
stock repurchase plan authorizes the Company to periodically purchase shares
in the open market or through privately negotiated transactions to meet the
requirements of its stock-based compensation plans.
 
3. INCOME TAXES
 
  The components of the income tax provision are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                       -------------------------
                                                        1996     1995     1994
                                                       ------- -------- --------
   <S>                                                 <C>     <C>      <C>
   Current:
    Federal........................................... $  621  $  1,792 $  1,657
    State.............................................    113       303      278
    Foreign...........................................     33       --       --
                                                       ------  -------- --------
                                                          767     2,095    1,935
                                                       ------  -------- --------
   Deferred:
    Federal...........................................   (663)      128      410
    State.............................................   (104)        7       30
    Foreign...........................................    --        --       --
                                                       ------  -------- --------
                                                         (767)      135      440
                                                       ------  -------- --------
                                                       $  --   $  2,230 $  2,375
                                                       ======  ======== ========
</TABLE>
 
  The Company's effective tax rate varies from the statutory federal income
tax rate as a result of the following items:
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                   ---------------------------
                                                    1996      1995      1994
                                                   --------  -------   -------
   <S>                                             <C>       <C>       <C>
   Statutory federal income tax rate..............       34%      34%       34%
   Foreign losses providing no tax benefit........       25        1         2
   State income taxes, net of federal benefit.....        3        3         3
   R&D tax credits................................      (35)      (3)       (2)
   FSC tax benefit................................       (2)      --        --
   State tax credits..............................       (9)      --        --
   Tax exempt interest income.....................      (19)      (2)       --
   Other, net.....................................        3        4         3
                                                   --------  -------   -------
   Effective tax rate.............................       --%      37%       40%
                                                   ========  =======   =======
</TABLE>
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
  The sources of the difference between the financial reporting and income tax
bases of the Company's assets and liabilities that give rise to the deferred
income tax liabilities and assets and the tax effects of each are as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                              AT DECEMBER 31,
                                                              -----------------
                                                                1996     1995
                                                              --------  -------
<S>                                                           <C>       <C>
Deferred income tax liabilities:
 Capitalized software development costs...................... $    832  $   286
 Prepaid marketing expense...................................       55      121
 Other.......................................................       83       99
                                                              --------  -------
                                                                   970      506
                                                              --------  -------
Deferred income tax assets:
 Software acquisition........................................   (1,115)     --
 Net losses from foreign subsidiaries........................     (533)    (433)
 Deferred lease credits......................................     (302)    (316)
 Allowance for doubtful accounts receivable..................     (181)     (97)
 Other.......................................................     (126)     (60)
                                                              --------  -------
                                                                (2,257)    (906)
                                                              --------  -------
Valuation allowance for deferred income tax assets...........      533      433
                                                              --------  -------
Net deferred income tax (assets) liabilities................. $   (754) $    33
                                                              ========  =======
</TABLE>
 
  The losses from the Company's U.K. operations were $258,000, $190,000, and
$289,000 in 1996, 1995, and 1994, respectively. The income tax benefit related
to losses since inception of $533,000 and $433,000 at December 31, 1996 and
1995, respectively, has been offset by a valuation allowance due to the
uncertainty of realization.
 
4. COMMITMENTS AND CONTINGENCIES
 
 Operating Leases
 
  The Company leases certain office space and equipment under noncancelable
operating lease agreements, which expire at various dates through 2000. In
1996, 1995, and 1994, rent expense under these agreements totaled $1,754,000,
$1,131,000, and $790,000, respectively.
 
  For financial reporting purposes, rent expense and lease incentives related
to the office lease are being recognized on a straight-line basis over the
term of the lease. The lease incentives and accrued lease costs resulted in
deferred credits of $885,000 and $847,000 at December 31, 1996 and 1995,
respectively, the majority of which are included in long-term liabilities in
the accompanying balance sheets.
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
  Future minimum payments due under all noncancelable operating lease
agreements at December 31, 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       YEAR ENDING DECEMBER 31,
                                                       ------------------------
       <S>                                             <C>           
       1997........................................... $        2,412
       1998...........................................          2,411
       1999...........................................          2,472
       2000...........................................          1,737
       2001...........................................             41
       Thereafter.....................................            --
                                                       --------------
                                                       $        9,073
                                                       ==============
</TABLE>
 Employment Agreement
 
  The Company has entered into an agreement with its Chief Executive Officer
("CEO") that permits the CEO to obtain, at no cost, a license to use the full
range of the Company's products at one central site, and on up to 250 nodes
for his own internal business, charitable, or educational purposes. The CEO's
license right commences when his employment with the Company, any subsidiary
of the Company, or any 40% shareholder of the Company, is terminated other
than for cause, or in the event the CEO resigns from employment following a
change in control, as defined. This agreement has a term of twenty years
following the CEO's termination of employment.
 
 Legal Proceedings
 
  The Company is not a party to any material legal proceedings.
 
5. RELATED PARTY TRANSACTIONS
 
  Electronic Commerce, Inc. ("E-Comm"), a system integrator based in Raleigh,
North Carolina that remarkets the Company's software to end-user customers, is
partially owned by the brother of the Company's CEO. During 1995 the Company's
CEO personally loaned E-Comm $200,000 which was outstanding at December 31,
1996, in the form of an unsecured note for working capital purposes.
Subsequent to year end, this loan was paid back in full in conjunction with
the acquisition of E-Comm by the Company. See Note 7 "Subsequent Events."
 
  During 1996, 1995 and 1994, E-Comm purchased software from the Company
totaling $734,000, $852,000 and $63,000, respectively, of which $734,000,
$664,000 and $63,000 were remarketed to end-user customers and the balance was
used internally. All of these transactions were at the Company's standard
terms and conditions. At December 31, 1996 and 1995, $107,000 and $243,000,
respectively, were receivable from E-Comm and related to remarketing
activities. See Note 7 "Subsequent Events."
 
6. NONRECURRING CHARGES
 
  Effective November 5, 1996, the Company acquired all tangible and intangible
WorldLink software rights from The NetPlex Group, Inc. under the terms of an
asset purchase agreement for a total consideration of approximately
$3,037,000. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations" ("APB 16"), and accordingly, the purchase price was allocated to
goodwill as of the acquisition date. An amount equal to the purchase price was
recorded on the Company's statement of operations as nonrecurring charges due
to uncertainties regarding its recoverability.
 
 

                       XCELLENET, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
  In addition, the Company recorded nonrecurring charges of $459,000 primarily
representing severance plus hiring costs associated with certain key
employees.
 
7. SUBSEQUENT EVENTS
 
  The following events have occurred subsequent to December 31, 1996:
 
 Acquisition of E-Comm
 
  During January 1997, the Company acquired all of the outstanding shares of
E-Comm for a total consideration comprising cash and stock of approximately
$2,675,000. The Company will account for the acquisition as a purchase in
accordance with APB 16. See Note 5 "Related Party Transactions."
 
 Potential Public Stock Offering
 
  During January 1997, the Company commenced an underwritten offer to the
public of up to 655,953 shares of the Company's common stock (the "Offering")
(excluding shares that may be sold upon exercise of the underwriters' over-
allotment option and any selling shareholders' shares and including 157,539
shares currently classified as treasury stock in the Company's accompanying
Consolidated Balance Sheets). It is currently anticipated that up to 844,047
shares would be offered by selling shareholders, of which no more than 113,000
shares would be offered by officers and directors of the Company. The Offering
will commence as soon as practicable after a registration statement to be
filed with the Securities and Exchange Commission by the end of February 1997
becomes effective.
 
 Employment Agreements
 
  During February 1997, the Company entered into employment agreements with
certain of its executive officers that provide for compensation and benefit
arrangements upon a change in control as defined in the agreements.
 

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

     None.

<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  The executive officers and directors of the Company and their ages as of
February 24, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                       YEAR FIRST
          NAME           AGE                POSITION                ELECTED DIRECTOR
          ----           ---                --------                ----------------
<S>                      <C> <C>                                    <C>
Dennis M.                 44 Chairman of the Board, Chief Executive       1986
 Crumpler(3)(4).........     Officer and Director
Shereef W. Nawar(3).....  37 Chief Technical Officer and Director         1987
Corey M. Smith..........  40 President
Sidney V. Sack..........  51 Executive Vice President, Chief
                             Financial Officer and Assistant
                             Secretary
Stefanus F. Coetzee.....  44 Vice President--North American
                             Customer Operations
W. Michael Parham.......  43 Vice President--North American Sales
Jeanne N. Bateman.......  42 Vice President--Finance, Treasurer and
                             Secretary
Joel A. Miller..........  37 Vice President--Human Resources
Stephen P.                55 Director                                     1995
 Bradley(2)(3)..........
Donald L. House(1)(4)...  55 Director                                     1992
Richard C.                58 Director                                     1990
 Marcus(1)(2)(4)........
Geoffrey A. Moore(3)....  50 Director                                     1996
Richard L. Nolan(3).....  56 Director                                     1995
Jeffrey P. Parker(2)....  53 Director                                     1990
</TABLE>
--------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Strategic Oversight Committee.
(4) Member of the Nominating Committee.
 
  Each of the directors of the Company serves until the next annual meeting of
the shareholders of the Company or until his successor is elected and
qualifies. Each of the executive officers of the Company serves at the
pleasure of the Board of Directors.
 
  Mr. Crumpler is a co-founder of the Company and has served as Chairman of
the Board, a director and Chief Executive Officer of the Company since its
inception in 1986. Mr. Crumpler also served as the President of the Company
from September 1986 to October 1992 and from September 1996 to January 1997.
 
  Mr. Nawar is a co-founder of the Company. Mr. Nawar has served as a director
of the Company since 1987, and has served as the Company's Chief Technical
Officer since October 1992. Mr. Nawar served as the Company's Vice President
of Development from 1987 until October 1992.
 
  Mr. Smith joined the Company in September 1996 as its Executive Vice
President responsible for marketing and became President in January 1997.
Prior to joining the Company, Mr. Smith was the President of Decision Point
Data, a human resources decision support software company, from October 1995
until September 1996. He served as the President and Chief Executive Officer
of Creative Multimedia, Inc., a consumer CD-ROM multimedia company, from
December 1993 until September 1995. In July 1992 Mr. Smith founded Legacy
Venture Capital and served as its President and General Partner from July 1992
until September 1994 and continues to serve as General Partner. From January
1988 until May 1992, Mr. Smith was the President and Chief Executive Officer
of Central Point Software, Inc., a personal computer utilities
software company. From 1978 to October 1988, Mr. Smith served in various
positions at Hewlett-Packard Company including market development and product
marketing manager positions.
 
  Mr. Sack joined the Company in September 1990 as its Chief Financial
Officer. Mr. Sack has served as an Executive Vice President of the Company
since September 1996. Mr. Sack has served as Assistant Secretary of the
Company since January 1995 and from October 1990 to October 1991, and served
as the Secretary of the Company from October 1991 to January 1995. He also
served as Chief Operating Officer of the Company from September 1996 to
January 1997.
 
  Mr. Coetzee joined the Company in April 1992 as Managing Director of
XcelleNet Ltd. Mr. Coetzee served as the Company's Vice President--
International from January 1995 until August 1995, Vice President--Global
Customer Operations from August 1995 to April 1996, and has been Vice
President--North American Customer Operations since April 1996. From 1988
until 1992, he was employed by Dun & Bradstreet Europe Ltd., a business
information services company.
 
  Mr. Parham joined the Company in November 1988 as its Director of Sales,
served as the Vice President--Sales from December 1990 to April 1996, and has
served as Vice President--North American Sales since April 1996.
 
  Ms. Bateman joined the Company in December 1993 as its Vice President and
Treasurer, and has been Secretary of the Company since January 1995 and Vice
President--Finance since April 1995. Prior to joining the Company, Ms. Bateman
was employed by HBO & Company, a healthcare information systems company, from
December 1985 until August 1993, and served as its Vice President and
Treasurer from March 1993 to August 1993 and its Assistant Treasurer, Investor
Relations from January 1991 to March 1993.
 
  Mr. Miller joined the Company as its Director of Human Resources in February
1995 and has served as the Company's Vice President--Human Resources since
October 1995. Prior to joining the Company, he held various positions in
manufacturing, sales and administration with Procter & Gamble Company, a
consumer products company, over a period of fourteen years, including Manager
of Corporate Training & Development for P&G China, Ltd. from February 1992
until April 1994.
 
  Mr. Bradley has served as a director of the Company since October 1995. Mr.
Bradley is currently a professor at the Harvard Business School, a position he
has held since 1968. He also serves as the Chairman of the Harvard Business
School's Competition and Strategy Area. From September 1993 to January 1996,
Mr. Bradley served as the Senior Associate Dean for Faculty Development at the
Harvard Business School. Mr. Bradley is a director of RDM Sports Group, Inc.
(formerly Roadmaster Industries, Inc.), a sporting goods company.
 
  Mr. House has served as a director of the Company since 1992. Mr. House has
served as the Chairman of the Board of SQL Financials International, Inc., an
early-stage client/server software company since January 1993. From January
1992 until December 1992, he was President of Prentice Hall Professional
Software, a subsidiary of Simon and Schuster, Inc. Since 1988, he has been a
consultant and investor in a number of early-stage technology firms, including
the Company.
 
  Mr. Marcus has served as a director of the Company since 1990. Mr. Marcus is
a principal of InterSolve Group Inc., a firm that provides management
consulting services to companies in several industries. He has served in this
capacity since InterSolve was formed in 1991. From December 1994 until
December 1995, Mr. Marcus was also the Chief Executive Officer of Plaid
Clothing Group, Inc., a manufacturer of tailored clothing. Plaid Clothing
Group filed a voluntary federal bankruptcy petition in July 1995. From January
1989 to January 1992, Mr. Marcus was a principal of RCM Consulting, a provider
of consulting services to the retail industry. From 1979 until 1988, Mr.
Marcus was Chief Executive Officer of Neiman-Marcus, a department store
retailer. Mr. Marcus is a director of Zale Corporation and a member of its
compensation committee. He is also a director of Edisol Bros. Stores, a
specialty retailer of apparel.

  Mr. Moore has served as a director of the Company since March 1996. Mr.
Moore is a founder of The Chasm Group, a firm that provides marketing strategy
and organizational consulting to high-technology companies. He has served as
President of that firm since it was founded in 1992. From 1987 until 1992, Mr.
Moore was a principal and partner of Regis McKenna, Inc., a high-technology
marketing and communications company. Mr. Moore is a director of Broadvision,
Inc., a supplier of software applications for enabling personalized business
on the Web.
 
  Mr. Nolan has served as a director of the Company since 1995. Mr. Nolan is
currently a professor at the Harvard Business School, a position he has held
since July 1991. From 1977 to July 1991, Mr. Nolan served as a principal of
KPMG Peat Marwick, and as Chairman of the Board of Nolan, Norton & Co., a
technology-strategy consulting firm. Mr. Nolan was a general partner of
Lincoln North Associates Limited Partnership ("Lincoln") from 1986 to 1994,
and was a general partner of Cranberry Hill Associates Limited Partnership
("Cranberry") from 1984 to 1993. Lincoln and Cranberry owned office buildings
in Massachusetts. Lincoln and Cranberry filed voluntary federal bankruptcy
petitions in May 1993 and July 1992, respectively. Mr. Nolan is a director of
H.F. Ahmanson & Company, a bank holding company.
 
  Mr. Parker has served as a director of the Company since 1990. Mr. Parker is
a private investor focusing on start-up and early-stage investments. From
October 1986 until December 1990, Mr. Parker was the Chief Executive Officer
of Thomson Financial Services ("Thomson"), and from October 1986 to December
1991, Mr. Parker was also Chairman of the Board and Chief Executive Officer of
First Call Corporation ("First Call"). Both Thomson and First Call are
financial information service companies.
 

                            SECTION 16(a) REPORTING

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company.  Directors, executive officers and greater than ten percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) reports they file.  To the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company and
written representations that no other reports were required, during the fiscal
year ended December 31, 1996, all Section 16(a) filing requirements applicable
to directors, executive officers and greater than ten percent beneficial owners
were complied with by such persons except that Mr. Moore filed a late Form 3 in
connection with his initial election to the Company's Board of Directors on
March 9, 1996.

                                       2
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION.

The following table presents certain summary information concerning compensation
earned for services rendered in all capacities to the Company by the Company's
Chief Executive Officer and each of the other five most highly compensated
executive officers of the Company during 1996 (collectively, the "Named
Executive Officers") for the years ended December 31, 1996, 1995 and 1994.


                          Summary Compensation Table
<TABLE> 
<CAPTION> 
                                                                  Long Term      
                                                                 Compensation  
                                         Annual Compensation       Awards        
                                        ----------------------    Securities     
Name and                     Fiscal                               Underlying         All Other
Principal Position            Year      Salary ($)   Bonus ($)    Options (#)     Compensation ($)
------------------           ------     ----------   ---------   ------------     ----------------
<S>                          <C>        <C>          <C>         <C>              <C> 
Dennis M. Crumpler            1996       176,667      13,250       120,000          2,375 (1)
 Chairman,                    1995       160,000      16,320          -             2,234 (1)
 Chief Executive              1994       163,600      81,000          -               -          
 Officer and Director

Stefanus F. Coetzee           1996       147,500       7,375        50,000            -            
 Vice President --            1995        94,585      95,790        10,000        102,054 (2)
 North American               1994        88,395      59,651         6,000          4,061 (3)      
 Customer Operations
      
Shereef W. Nawar              1996       131,667       9,875        41,413          3,602 (1)
 Chief Technical              1995       115,000       8,797        25,000          3,741 (1)
 Officer and Director         1994       115,000      45,500          -             2,363 (4) 

W. Michael Parham             1996       114,996      75,300        40,000           1,155 (1)
 Vice President --            1995       117,491      93,896        10,000           1,304 (1)
 North American Sales         1994       110,000      78,885          -                282 (4) 

Sidney V. Sack                1996       145,000       7,250        90,000           3,572 (1)  
 Executive Vice President,    1995        76,815       6,222          -              3,928 (1)  
 Chief Financial Officer      1994       120,000      59,000        22,400           2,265 (4)   
 and Assistant Secretary

Corey M. Smith                1996        46,667     123,750       155,000          50,000 (5) 
 President
</TABLE> 

------------
(1)  Includes premiums paid by the Company for term life insurance for Messrs.
     Nawar, Parham and Sack in 1996 of   $2,257, $204 and $2,592, respectively,
     and in 1995 of $2,257, $300 and $2,255, respectively, and matching
     contributions under the Company's qualified salary deferral plan under
     Section 401(k) of the Internal Revenue Code for Messrs. Crumpler, Nawar,
     Parham and Sack in 1996 of $2,375, $1,345, $951 and $980, respectively, and
     in 1995 of $2,234, $1,484, $1,004 and $1,673, respectively.
(2)  Includes $97,079 of estimated relocation expenses from U.K. Customer
     Operations Center to Atlanta, $1,490 related to a Company supplied
     automobile, and $3,485 of matching contributions under the Company's U.K.
     subsidiary's retirement benefit program.
(3)  Matching contributions under the Company's U.K. subsidiary's retirement
     benefit program.
(4)  Premiums paid by the Company for term life insurance.
(5)  Relocation expenses from Portland to Atlanta.

                                      3
<PAGE>
 
                             OPTION GRANTS IN 1996

     The following table presents further information on grants of stock options
pursuant to the Company's 1987 Stock Option Plan and the Company's 1996 Long-
Term Incentive Plan during the  year ended December 31, 1996 to the Named
Executive Officers.  Such grants are reflected in the Summary Compensation Table
above.

<TABLE>
<CAPTION>
                                         Individual Grants
                       --------------------------------------------------    Potential Realizable
                                        % of                                    Value at Assumed
                       Number of       Options                                Annual Rates of Stock
                       Securities     Granted to     Exercise                Price Appreciation for
                       Underlying     Employees       or Base                    Option Term(1)
                        Options           in          Price    Expiration    -----------------------
Name                   Granted (#)    Fiscal Year     ($/Sh)      Date          5%($)       10%($)
----                   -----------    -----------    --------  ----------    ----------  -----------
<S>                    <C>            <C>           <C>         <C>          <C>         <C>
Dennis M. Crumpler     22,017 (2)        1.94%      $ 14.988     9/30/01     $  52,881    $  153,144
                       37,983 (3)        3.36%      $ 13.625     9/30/06     $ 325,465    $  824,791
                       60,000 (4)        5.30%      $ 13.625     9/30/06     $ 514,121    $1,302,884

Stefanus F. Coetzee    14,171 (5)        1.25%      $ 12.250     2/27/06     $ 109,173    $  276,665
                       10,829 (5)         .96%      $ 12.250     2/27/06     $  83,426    $  211,418
                       12,500 (3)        1.10%      $ 13.625     9/30/06     $ 107,109    $  271,434
                       12,500 (4)        1.10%      $ 13.625     9/30/06     $ 107,109    $  271,434

Shereef W. Nawar       15,547 (6)        1.37%      $ 12.250     2/27/06     $ 119,773    $  303,529
                          866 (6)         .08%      $ 12.250     2/27/06     $   6,672    $   16,907
                        9,761 (7)         .86%      $ 12.250     2/27/06     $  75,198    $  190,567
                       15,239 (7)        1.35%      $ 12.250     2/27/06     $ 117,401    $  297,516

W. Michael Parham       9,998 (8)         .88%      $ 12.250     2/27/06     $  77,024    $  195,194
                       10,002 (8)         .88%      $ 12.250     2/27/06     $  77,055    $  195,272
                       10,000 (3)         .88%      $ 13.625     9/30/06     $  85,687    $  217,147
                       10,000 (4)         .88%      $ 13.625     9/30/06     $  85,687    $  217,147

Sidney V. Sack         22,534 (9)        1.99%      $ 12.250     2/27/06     $ 173,601    $  439,939
                        2,466 (9)         .22%      $ 12.250     2/27/06     $  18,998    $   48,145
                       32,500 (3)        2.87%      $ 13.625     9/30/06     $ 278,482    $  705,729
                       32,500 (4)        2.87%      $ 13.625     9/30/06     $ 278,482    $  705,729

Corey M. Smith         24,240 (10)       2.14%      $ 12.375     9/16/06     $ 188,650    $  478,075
                       25,760 (10)       2.28%      $ 12.375     9/16/06     $ 200,479    $  508,053
                       80,000 (11)       7.07%      $ 12.375     9/16/06     $ 622,606    $1,577,805
                       25,000  (3)       2.21%      $ 14.000     9/29/06     $ 220,113    $  557,810
</TABLE>
___________
(1)  Amounts represent hypothetical gains that could be achieved for the
     respective options at the end of the  option term, which is ten years for
     all options listed, except for 22,017 options granted to Mr. Crumpler for
     which the option term is five years.  The assumed 5% and 10% rates of stock
     appreciation are mandated by the rules of the SEC and may not accurately
     reflect the appreciation of the price of the Common Stock from the grant
     date until the end of the option term.  These assumptions are not intended
     to forecast future price appreciation of the Company's Common Stock.

(2)  Incentive stock option granted at 10% above the fair market value of a
     share of the Company's Common Stock on the date of grant that will become
     exercisable on the first anniversary of the grant date, with 1/3 of the
     underlying shares becoming exercisable at that time, and an additional 1/3
     becoming exercisable on each successive anniversary date until fully vested
     on the third anniversary date.  The vesting of this option may be
     accelerated at the discretion of the Compensation and Stock Option
     Committee.

                                       4
<PAGE>
 
(3)  Nonqualified stock option granted at the fair market value of a share of
     the Company's Common Stock on the date of grant that will become
     exercisable on the first anniversary of the grant date, with 1/3 of the
     underlying shares becoming exercisable at that time, and an additional 1/3
     becoming exercisable on each successive anniversary date until fully vested
     on the third anniversary date.  The vesting of this option may be
     accelerated at the discretion of the Compensation and Stock Option
     Committee.

(4)  Nonqualified stock option granted at the fair market value of a share of
     the Company's Common Stock on the date of grant that will become
     exercisable on the first anniversary of the grant date, with 10% of the
     underlying shares becoming exercisable at that time, and an additional 10%
     becoming exercisable on each successive anniversary date through the ninth
     anniversary and the final 10% becoming exercisable one day prior to the
     tenth anniversary date.  The vesting of a portion of these options may be
     accelerated upon the achievement of certain market values of a share of the
     Company's Common Stock.  Additionally, the vesting of these options may be
     partially accelerated during the first 18 months after the grant date upon
     the occurrence of any event that changes control of the Company.  The
     vesting of these options may also be accelerated at the discretion of the
     Compensation and Stock Option Committee.

(5)  The option to acquire 14,171 shares is an incentive stock option, and the
     option to acquire 10,829 shares is a nonqualified stock option.  Each of
     these options was granted at the fair market value of a share of the
     Company's Common Stock on the date of grant.  The incentive stock option
     will become exercisable as to 634 shares on the first anniversary date,
     1,518 shares on the second anniversary date, 2,693 shares on the third
     anniversary date, 4,326 shares on the fourth anniversary date and 5,000
     shares on the fifth anniversary date, at which time the options will be
     fully exercisable.  The nonqualified stock option will become exercisable
     as to 4,366 shares on the first anniversary, 3,482 shares on the second
     anniversary, 2,307 shares on the third anniversary and 674 shares on the
     fourth anniversary, at which time the option will be fully exercisable.
     The vesting of these options may be accelerated upon the occurrence of any
     event that in the opinion of the Board of Directors is likely to lead to a
     change in control of the Company (whether or not such a change in control
     actually occurs).

(6)  The option to acquire 15,547 shares is an incentive stock option, and the
     option to acquire 866 shares is a nonqualified stock option. Each of such
     options was received in the Company's stock option repricing program in
     1996 under which adjustments to the exercise price and term of certain
     stock options previously awarded were made.  Each of these options was
     granted at the fair market value of a share of the Company's Common Stock
     on the date of grant.  The incentive stock option will become exercisable
     as to 2,416 shares on the first anniversary of the grant date, 3,283 shares
     on the second anniversary, 3,282 shares on the third anniversary, 3,283
     shares on the fourth anniversary and 3,283 shares on the fifth anniversary
     at which time the options will be fully exercisable. The nonqualified stock
     option will become fully exercisable on the first anniversary of the grant
     date. The vesting of these options may be accelerated upon the occurrence
     of any event that in the opinion of the Board of Directors is likely to
     lead to a change in control of the Company (whether or not such a change in
     control actually occurs).

(7)  The option to acquire 9,761 shares is an incentive stock option, and the
     option to acquire 15,239 shares is a nonqualified stock option.  Each of
     these options was granted at the fair market value of a share of the
     Company's Common Stock on the date of grant.  The incentive stock option
     will become exercisable as to 4,880 shares on the second anniversary date
     and 4,881 shares on the third anniversary date, at which time the option
     will be fully exercisable.  The nonqualified stock option will become
     exercisable as to 8,333 shares on the first anniversary, 3,453 shares on
     the second anniversary and 3,453 shares on the third anniversary, at which
     time the option will be fully exercisable.  The vesting of these options
     may be accelerated upon the occurrence of any event that in the opinion of
     the Board of Directors is likely to lead to a change in control of the
     Company (whether or not such a change in control actually occurs).

(8)  The option to acquire 9,998 shares is an incentive stock option, and the
     option to acquire 10,002 shares is a nonqualified stock option.  Each of
     these options was granted at the fair market value of a share of the
     Company's Common Stock on the date of grant.  The incentive stock option
     will become exercisable as to 2,668 shares on the first anniversary date,
     3,004 shares on the second anniversary date and 4,326 shares on the third
     anniversary date, at which time the option will be fully exercisable.  The
     nonqualified stock option will become exercisable as to 3,998 shares on the
     first anniversary, 3,663 shares on the second anniversary and 2,341 shares
     on the third anniversary, at which time the option will be fully
     exercisable.  The vesting of these options may be accelerated upon the
     occurrence of any event that in the opinion of the Board of Directors is
     likely to lead to a change in control of the Company (whether or not such a
     change in control actually occurs).

                                       5
<PAGE>
 
(9)  The option to acquire 22,534 shares is an incentive stock option, and the
     option to acquire 2,466 shares is a nonqualified stock option.  Each of
     these options was granted at the fair market value of a share of the
     Company's Common Stock on the date of grant.  The incentive stock option
     will become exercisable as to 6,208 shares on the first anniversary date,
     8,163  shares on the second anniversary date and 8,163  shares on the third
     anniversary date, at which time the option will be fully exercisable.  The
     nonqualified stock option will become exercisable as to 2,125 shares on the
     first anniversary, 170 shares on the second anniversary and 171 shares on
     the third anniversary, at which time the option will be fully exercisable.
     The vesting of these options may be accelerated upon the occurrence of any
     event that in the opinion of the Board of Directors is likely to lead to a
     change in control of the Company (whether or not such a change in control
     actually occurs).

(10) The option to acquire 24,240 shares is an incentive stock option, and the
     option to acquire 25,760 shares is a nonqualified stock option.  Each of
     these options was granted at the fair market value of a share of the
     Company's Common Stock on the date of grant.  Each option will become
     exercisable on the first anniversary of the grant date, with 1/3 of the
     underlying shares becoming exercisable at that time, and an additional 1/3
     becoming exercisable on each successive anniversary date until fully vested
     on the third anniversary date. The vesting of these options may be
     accelerated upon the occurrence of any event that in the opinion of the
     Board of Directors is likely to lead to a change in control of the Company
     (whether or not such a change in control actually occurs).

(11) Nonqualified stock option granted at the fair market value of a share of
     the Company's Common Stock on the date of grant that will become
     exercisable on the first anniversary of the grant date, with 10% of the
     underlying shares becoming exercisable at that time, and an additional 10%
     becoming exercisable on each successive anniversary date through the ninth
     anniversary and the final 10% becoming exercisable one day prior to the
     tenth anniversary date.  The vesting of a portion of these options may be
     accelerated upon the achievement of certain market values of a share of the
     Company's Common Stock.  Additionally, the vesting of these options may be
     partially accelerated during the first 18 months upon the occurrence of any
     event that changes control of the Company. The vesting of these options may
     be accelerated upon the occurrence of any event that in the opinion of the
     Board of Directors is likely to lead to a change in control of the Company
     (whether or not such a change in control actually occurs).

                                       6
<PAGE>
 
                      AGGREGATED OPTION EXERCISES IN 1996
                          AND YEAR-END OPTION VALUES

     The following table presents information with respect to options exercised
by the Named Executive Officers during 1996 and the unexercised options to
purchase the Company's Common Stock granted in 1996 and prior years under the
1987 Stock Option Plan and the 1996 Long-Term Incentive Plan and held by them as
of December 31, 1996.

<TABLE> 
<CAPTION> 
                                                               Number of Securities               Value of Unexercised
                                                              Underlying Unexercised              In-the-Money Options
                                                           Options at Fiscal Year-End (#)       at Fiscal Year-End ($)(2) 
                       Shares Acquired         Value       ------------------------------      ---------------------------
Name                   on Exercise (#)    Realized ($)(1)  Exercisable      Unexercisable      Exercisable   Unexercisable
----                   ---------------    ---------------  -----------      -------------      -----------   -------------
<S>                    <C>                <C>              <C>              <C>                <C>           <C> 
Dennis M. Crumpler                -                  -               -            120,000                -      $270,002

Stefanus F. Coetzee               -                  -          33,551             81,199         $451,830      $433,827

Shereef W. Nawar                  -                  -          53,046             65,392         $694,231      $476,736

W. Michael Parham                 -                  -          32,432             59,898         $449,098      $282,841

Sidney V. Sack                3,990            $29,925          28,385             95,985         $209,768      $331,943

Corey M. Smith                    -                  -               -            155,000                -      $540,625
</TABLE> 

------------
(1) "Value Realized" represents the amount equal to the excess of the fair
     market value of the shares at the time of exercise over the exercise price.

(2) Represents the fair market value as of December 31, 1996 ($16.125 per
    share closing stock price) of the option shares less the exercise price of
    the options.

                          TEN YEAR OPTION REPRICINGS

 The following table presents information with respect to adjustments to the
 exercise price and term of stock options previously awarded to any current
 executive officer since the Company became a reporting company, pursuant to the
 Securities Exchange Act of 1934 on April 14, 1994.

<TABLE> 
<CAPTION> 
                                 Number of                                                                         
                                Securities                                                    Length of Original  
                                Underlying     Market Price of   Exercise Price                   Option Term         
                                  Options       Stock at Time      at Time of      New         Remaining at Date   
                                Repriced or    of Repricing or    Repricing or    Exercise      of Repricing or     
Name                   Date     Amended (#)     Amendment ($)     Amendment ($)   Price ($)       Amendment
----                 -------    -----------    ---------------   ---------------  ---------   -------------------
<S>                  <C>        <C>            <C>               <C>              <C>         <C> 
Jeanne N. Bateman    2/29/96      3,939           $12.25            $23.50         $12.259    9 years, 2 months    
Joel A. Miller       2/29/96      9,848           $12.25            $23.50         $12.259    9 years, 2 months   
Shereef W. Nawar     2/29/96     16,413           $12.25            $23.50         $12.259    9 years, 2 months   
</TABLE> 


Compensation and Stock Option Committee Report on Stock Option Repricing
------------------------------------------------------------------------

The Company uses stock options as a significant element of compensation. Stock
options are used to attract, retain, and motivate key employees, as well as
helping to align the interests of employees and shareholders. As the 

                                       7
<PAGE>
 
Company's stock price falls below the employee's stock option exercise price,
the options may lose a relative portion of their motivational and retentive
value. As the difference between the two prices increases, the perceived value
of the options degrade. This situation occurred at XcelleNet in the fourth
quarter of 1995, as XcelleNet's stock price had dropped to the $11-$12 range
from a high of over $33 in February 1995. The Company needed to restore the
motivational and retentive value of the existing stock options in order to
promote the successful implementation of XcelleNet's growth strategies. As such,
in January 1996, the Committee approved a stock option repricing program which
was offered to all employees who held options. This program allowed the employee
to replace all options with an exercise price of $15 or higher (granted under
the 1987 Stock Option Plan) for a fewer number of options at the current fair
market value, conditioned on the surrender of the previously granted options.
There were two trade-offs to this program. First, the number of new options
granted were proportionally less than the original grant, using a future stock
valuation formula. Second, the vesting of the newly-granted options would start
anew, thus ensuring the long-term commitments intended. A total of 83 out of 136
eligible employees (61%) chose to reprice their options, resulting in the
repricing and reissuance of a total of 173,431 stock options and the net
cancellation of 81,319 options. For all executive officers the number of options
elected for repricing totaled 46,000, which converted to 30,200 after repricing,
yielding net cancellations of 15,800 options.


Compensation and Stock Option Committee
---------------------------------------

 Stephen P. Bradley
 Richard C. Marcus
 Jeffrey P. Parker


     INDEMNIFICATION OF OFFICERS

     The Company is obligated to indemnify each of its executive officers under
the Company's Amended and Restated Bylaws and separate indemnification
agreements with each executive officer.

     EMPLOYMENT ARRANGEMENTS

     In March 1994, the Company entered into an agreement with Mr. Crumpler (the
"Crumpler Agreement"), which provides that in the event that Mr. Crumpler's
employment with the Company, any subsidiary of the Company or any forty percent
(40%) shareholder of the Company is terminated other than for cause, or in the
event that Mr. Crumpler resigns from employment following a "change in control"
(as defined in the Crumpler Agreement) of the Company, Mr. Crumpler may obtain
at no cost a license to use the full range of the Company's RemoteWare products
at one central site and on up to 250 nodes for his own business, charitable or
educational purposes. In addition, under such circumstances, a business of which
Mr. Crumpler owns at least twenty percent (20%) and in which he is actively
involved in managing has the right to obtain licenses to use the Company's
RemoteWare products on terms that are no less favorable than any granted to a
licensee of similar size within the eighteen months prior to the grant of the
license to this business. Each of these licenses will be granted pursuant to the
Company's then standard software license agreement for its products, and Mr.
Crumpler or the related business will be entitled to the Company's standard
software support and maintenance agreements. The Crumpler Agreement has a term
of twenty (20) years following the termination of Mr. Crumpler's employment as
described above.

     In September 1996, the Company issued 10,000 shares of restricted Common
Stock at no cost to Corey M. Smith, current President of the Company. The fair
market value of the stock at the date of issuance was $12.375 per share, and the
Company recorded $123,750 of compensation expense related to the stock issuance.

     In September 1996, two executive officers of the Company resigned. The
Company entered into seperation agreements with them that included payments of
$172,000. These payments are included in nonrecurring charges.

     The Company is a party to Change in Control Employment Agreements with
certain of its executive officers. See Item 13 - Certain Relationships and
Related Transactions.

                                       8
<PAGE>
 
     COMPENSATION OF DIRECTORS

     In 1996, the Company reimbursed directors for travel and other out-of-
pocket expenses incurred in connection with their services as directors. In
addition, each non-employee director has received an option to purchase 40,000
shares of the Company's common stock pursuant to the Company's 1994 Stock Option
Plan for Outside Directors (the "Director Plan"). The Director Plan was adopted
by the Board of Directors on March 2, 1994, amended by the Board of Directors on
March 24, 1995, and approved by shareholders at the Company's 1995 Annual
Meeting. The Director Plan is intended to be a "formula plan" as defined by Rule
16b-3(c)(2)(ii) promulgated under the Securities Exchange Act of 1934, as
amended. Pursuant to the Director Plan, the Company automatically grants
nonqualified options to each non-employee member of the Company's Board of
Directors who is not prohibited by his employer from receiving options under the
Director Plan (an "Outside Director"). All of the Company's six current Outside
Directors have received options under the Director Plan. Each option granted
under the Director Plan vests in four installments of 10,000 shares on each of
the first four anniversaries of the first day of the first fiscal quarter of the
Company beginning after the date of grant. If, during the year prior to any
vesting date, any Outside Director fails to attend any regular meeting of the
Board of Directors, then, on the day prior to such vesting, the option will
terminate as to that number of shares equal to 10,000 multiplied by the
percentage of such meetings not attended by the Outside Director.


              COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS
                           AND INSIDER PARTICIPATION

     From January 1, 1996 until April 22, 1996, Messrs. Crumpler, Marcus and
Parker served on the Company's Compensation and Stock Option Committee. Since
April 22, 1996, Messrs. Bradley, Marcus and Parker have served on the
Compensation and Stock Option Committee.

     From time to time, certain members of the Company's Board of Directors,
including members of the Compensation and Stock Option Committee, have provided,
and been compensated for, consulting services to the Company. In 1996, Messrs.
Bradley, House and Marcus provided such services and were compensated $5,000,
$15,713 and $21,000, respectively. Mr. House also served in an ad hoc management
oversight role on behalf of the Board of Directors and was compensated for
$17,500 for meetings with management of the Company in that capacity. In
consideration for his past services rendered to the Company, in July 1992 the
Board of Directors resolved to provide Mr. Marcus a license at no cost to use
the RemoteWare product suite for his own purposes to create an information
system with up to 250 node sites. The Company has not yet provided any software
or services to Mr. Marcus in connection with that resolution. 

                                       9
<PAGE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.


     Based on available information, the Company believes that set forth in the
table below is information in connection with the beneficial ownership of Common
Stock of the Company as of January 31, 1997 by the Company's directors, the
Named Executive Officers (as defined herein), the directors and executive
officers of the Company as a group (14 persons) and certain persons known to the
Company to be beneficial owners of more than five percent of the outstanding
Common Stock of the Company:

<TABLE>
<CAPTION>
                       Name of Five Percent                                       Percentage of
                    Beneficial Owner, Director         Shares of Common Stock        Common
Title of Class      or Named Executive Officer         Beneficially Owned (1)   Stock Outstanding
--------------    -------------------------------      ----------------------   -----------------
<S>               <C>                                  <C>                      <C>
Common Stock,     Five Percent Beneficial Owners:
$0.01 par value
                  Motorola, Inc.                                 731,047                  9.8%
                   1303 East Algonquin Road
                   Schaumburg, Illinois 60196

                  GeoCapital Corporation (2)                     730,398                  9.8%
                   767 Fifth Avenue
                   New York, New York  10153

                  Robert Fleming Inc. (3)                        445,850                  6.0%
                   320 Park Avenue, 11th Floor
                   New York, NY  10022

                  Directors and Named Executive
                  Officers:

                  Dennis M. Crumpler (4)                       1,434,831                 19.2%
                  Stephen P. Bradley (5)                          10,000                   *
                  Donald L. House (6)                             36,599                   *
                  Richard C. Marcus (7)                           81,494                  1.1%
                  Geoffrey A. Moore (5)                           10,000                   *
                  Shereef W. Nawar (8)                           157,498                  2.1%
                  Richard L. Nolan (9)                            20,000                   *
                  Jeffrey P. Parker (10)                         136,751                  1.8%
                  Stefanus F. Coetzee (11)                        42,694                   *
                  W. Michael Parham (12)                          82,630                  1.1%
                  Sidney V. Sack (13)                            103,666                  1.4%
                  Corey M. Smith                                  10,000                   *

                  Directors and Executive
                   Officers as a Group (14)                    2,149,841                 27.5%
</TABLE>
--------
 *Less than one percent.
 (1) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission that deem shares to be beneficially
     owned by any person who has or shares voting or investment power with
     respect to such shares. Unless otherwise indicated below, the persons and
     entities named in the table have sole voting and sole investment power
     with respect to all shares beneficially owned, subject to community
     property laws where applicable. Shares of Common Stock subject to options
     that are currently exercisable or exercisable within 60 days of January
     31, 1997 are deemed to be outstanding and to be beneficially owned by the
     person holding such options for the purpose of computing the percentage
     ownership of such person but are not treated as outstanding for the
     purpose of computing the percentage ownership of any other person.
 (2) GeoCapital Corporation ("GeoCapital") is an investment advisor registered
     under Section 203 of the Investment Advisors Act of 1940. GeoCapital has
     sole investment power with respect to 730,398 shares and voting power
     with respect to none of the foregoing shares. The information herein
     regarding
     GeoCapital's stock ownership was obtained from a Schedule 13G filed by
     GeoCapital with the SEC and received by the Company on February 21, 1996.
     The Company makes no representation as to the accuracy or completeness of
     the information reported regarding GeoCapital.
 (3) Robert Fleming Inc. ("Fleming") is an investment advisor registered under
     Section 203 of the Investment Advisors Act of 1940. Fleming has shared
     investment power and shared voting power with respect to all of the
     foregoing shares. The information herein regarding Fleming's stock
     ownership was obtained from a Schedule 13G filed by Fleming with the SEC
     and received by the Company on February 16, 1996. The Company makes no
     representation as to the accuracy or completeness of the information
     reported regarding Fleming.
 (4) Includes 1,200,000 shares held by a limited partnership the general
     partner of which is a limited liability company of which Mr. Crumpler is
     the controlling manager. As such, Mr. Crumpler has voting and investment
     power over these shares. Also includes 104,800 shares owned by Mr.
     Crumpler's wife. In November 1989, Mr. Crumpler entered into an agreement
     with his wife that provides that Mr. Crumpler has sole voting power with
     respect to the shares of Common Stock presently held, or acquired in the
     future, by her. This agreement also places certain restrictions on the
     ability of Mr. Crumpler's wife to transfer her shares of Common Stock and
     provides Mr. Crumpler a right of first refusal in connection with such
     shares. Also includes 3,800 shares held by Mr. Crumpler as trustee of a
     trust for the benefit of his mother, as to which he retains sole voting
     and investment power. Also includes 3,000 shares held by Mr. Crumpler as
     custodian for his minor children and as to which he retains sole voting
     and investment power.
(5)  Consists of 10,000 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(6)  Includes 30,350 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(7)  Consists of 33,114 shares held jointly by Mr. Marcus and his spouse and
     48,380 shares subject to stock options that are currently exercisable or
     will become exercisable within 60 days of January 31, 1997.
(8)  Includes 64,661 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(9)  Consists of 20,000 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(10) Includes 21,050 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(11) Includes 900 shares held by Mr. Coetzee's spouse. Also includes 40,551
     shares subject to stock options that are currently exercisable or will
     become exercisable within 60 days of January 31, 1997.
(12) Includes 39,098 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(13) Includes 39,352 shares held jointly by Mr. Sack and his spouse. Also
     includes 36,718 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
(14) Includes 330,564 shares subject to stock options that are currently
     exercisable or will become exercisable within 60 days of January 31,
     1997.
<PAGE>
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


     In November 1995, the Company's Board of Directors approved the purchase of
527,879 shares of its common stock from Motorola, Inc. (the beneficial owner of
more than 5% of the Company's outstanding common stock) at a negotiated price of
approximately $15.15 per share, or an aggregate purchase price of approximately
$8 million.  The Company paid all of the foregoing purchase price at the closing
of the transaction.  The closing price of the Company's common stock on the date
of such transaction was $15.50.

     Mr. Crumpler is the Chairman of the Board and Chief Executive Officer of
the Company. Prior to January 2, 1997, Electronic Commerce, Inc. ("E-Comm"), a
Solution Partner that remarkets the Company's software to end-user customers,
was partially owned by Mr. Crumpler's brother. On January 2, 1997 the Company
acquired all the outstanding shares of E-Comm for a total consideration
comprising cash and stock of approximately $2,675,000. During 1995, Mr. Crumpler
personally loaned E-Comm $200,000, which was outstanding at December 31, 1996,
in the form of an unsecured note for working capital purposes. Subsequent to
year end, this loan was paid back in full in conjunction with the acquisition of
E-Comm by the Company. During 1996 and 1995, E-Comm purchased software from the
Company totaling $734,000 and $852,000, respectively, of which $734,000 and
$664,000, respectively, were remarketed to end-user customers (the balance was
used internally by E-Comm). All of these transactions were at the Company's
standard terms and conditions. At December 31, 1996 and 1995, the Company had
receivables of $107,000 and $243,000, respectively, from E-Comm, all of which
were related to remarketing activities.

     In September 1996, the Company issued 10,000 shares of restricted Common
Stock at no cost to Corey M. Smith, current President of the Company. The fair
market value of the stock at the date of issuance was $12.375 per share, and the
Company recorded compensation expense of $123,750 related to the stock issuance.

     In September 1996, two executive officers of the Company resigned. The
Company entered into seperation agreements with them that included payments of
$172,000. These payments are included in nonrecurring charges.

     In March 1994, the Company entered into an agreement with Mr. Crumpler (the
"Crumpler Agreement"), which provides that in the event that Mr. Crumpler's
employment with the Company, any subsidiary of the Company or any forty percent
(40%) shareholder of the Company is terminated other than for cause, or in the
event that Mr. Crumpler resigns from employment following a "change in control"
(as defined in the Crumpler Agreement) of the Company, Mr. Crumpler may obtain
at no cost a license to use the full range of the Company's RemoteWare products
at one central site and on up to 250 nodes for his own business, charitable or
educational purposes. In addition, under such circumstances, a business of which
Mr. Crumpler owns at least twenty percent (20%) and in which he is actively
involved in managing has the right to obtain licenses to use the Company's
RemoteWare products on terms that are no less favorable than any granted to a
licensee of similar size within the eighteen months prior to the grant of the
license to this business. Each of these licenses will be granted pursuant to the
Company's then standard software license agreement for its products, and Mr.
Crumpler or the related business will be entitled to the Company's standard
software support and maintenance agreements. The Crumpler Agreement has a term
of twenty (20) years following the termination of Mr. Crumpler's employment as
described above.

     In February 1997, the Company entered into Change in Control Employment
Agreements (each, an "Agreement") with Messrs. Crumpler, Smith, Sack and Nawar.
Each Agreement will become effective if and when a Change in Control (as defined
therein) occurs during the three-year period following the date of the Agreement
or during any of the one-year annual renewal periods (the "Change of Control
Period"), or if the employee's employment is terminated in connection with or in
anticipation of a Change of Control (in either case, the "Effective Date"). The
employee's employment period under the Agreement begins on the Effective Date
and continues for three years.   During the employment period, the 

                                       11
<PAGE>
 
employee will (i) receive a monthly base salary equal to or greater than the
highest monthly base salary paid to him by the Company during the previous 12
months; (ii) an annual cash bonus at least equal to the highest bonus paid to
him in any of the three fiscal years prior to the Effective Date, and (iii) the
ability to participate in all incentive, savings, welfare benefit, fringe
benefit and retirement plans of the Company. If the employee's employment
terminates during the employment period he will receive certain severance
benefits under the Agreement. If his employment terminates for any reason other
than cause (as defined in the Agreement) or the voluntary resignation of the
employee without good reason (as defined in the Agreement) other than during the
30-day period beginning on the first anniversary of the Effective Date, he will
receive only his accrued benefits, if applicable. If he is terminated by the
Company (i) without cause, (ii) resigns voluntarily for good reason , or (iii)
resigns for any reason during the 30-day period beginning on the first
anniversary of the Effective Date, he would receive a lump sum cash payment
equal to: (a) his base salary through the date of termination, (b) a prorata
bonus for the year of termination, based upon the greater of one-half of his
then-current base salary or the average of his actual bonuses earned in the
prior three years ("Bonus"), (c) the product of two and the sum of his base
salary and Bonus, (d) unpaid deferred compensation and vacation pay, and (e) a
contingent payment based upon 1.2 times the difference between the fair market
value of the securities issuable upon exercise of certain of the employee's
unvested stock options at the date of termination that would have become vested
within three years after the date of termination and the aggregate exercise
price of such options; provided that this last amount will not be payable if the
vesting of those unvested options is accelerated to a date not later than the
date of termination. In addition, the employee would be entitled to certain
continued employee benefits. In the event that payments to the employee are
subject to excise tax under Section 4999 of the Internal Revenue Code, the
Company will make an additional payment in an amount such that after the payment
of all income and excise taxes, the employee will be in the same after-tax
position as if no excise tax had been imposed.

                                       12
<PAGE>
 
                                   PART IV.

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
8-K.

(a)1. Financial Statements

 
                        XCELLENET, INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

Report of Independent Public Accountants
Consolidated Financial Statements
  Consolidated Balance Sheets as of December 31, 1996 and 1995
  Consolidated Statements of Operations for the years ended December 31,
   1996, 1995 and 1994
  Consolidated Statements of Shareholders' Equity for the years ended
   December 31, 1996, 1995 and 1994
  Consolidated Statements of Cash Flows for the years ended December 31,
   1996, 1995 and 1994
Notes to Consolidated Financial Statements

 
(a)2. Financial Statement Schedules

     All financial statement schedules have been omitted because they are not
required or the required information is included in the financial statements or
notes thereto.

(a)3. Exhibits

     The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.

Exhibit
Number                             Exhibit Description


3.01       Amended and Restated Articles of Incorporation of the Registrant
           (Incorporated herein by reference to Exhibit 3.01 to Registration
           Statement No. 33-76012).

3.02       Amended and Restated Bylaws of the Registrant (Incorporated herein
           by reference to Exhibit 3.02 to Registration Statement No. 33-
           76012).

4.01       Specimen Stock Certificate for the Common Stock of the Registrant
           (Incorporated herein by reference to Exhibit 4.01 to Registration
           Statement No. 33-76012).

4.02       Amended and Restated Articles of Incorporation of the Registrant
           (Incorporated herein by reference to Exhibit 3.01 to Registration
           Statement No. 33-76012).

4.03       Amended and Restated Bylaws of the Registrant (Incorporated herein by
           reference to Exhibit 3.02 to Registration Statement No. 33-76012).

4.04       Shareholder Agreement dated June 22, 1990 as amended by the Amendment
           to Shareholder Agreement dated February 11, 1994 (the "Amendment")
           among the Registrant and the persons listed on Exhibit A to the
           Amendment (Incorporated herein by reference to Exhibit 10.12 to
           Registration Statement No. 33-76012).

10.01      Lease Agreement, First Amendment to Lease Agreement, Commencement
           Date Agreement, Second Amendment to Lease Agreement and Third
           Amendment to Lease Agreement between the Registrant and Concourse V
           Associates dated August 17, 1990, September 30, 1992, January 27,
           1993, August 10, 1993 and September 9, 1993, respectively
           (Incorporated herein by reference to Exhibit 10.01 to Registration
           Statement No. 33-76012).

10.011     Fourth Amendment to Lease Agreement, Commencement Date Agreement and
           Acceptance of Premises and Fifth Amendment to the Lease Agreement
           between the Registrant and Concourse V Associates dated August 15,
           1994, January 18, 1995 and March 2, 1995, respectively (Incorporated
           herein by reference to Exhibit 10.011 to the Company's Annual Report
           on Form 10-K for the year ended December 31, 1994).

10.012     Sixth Amendment to the Lease Agreement between the Registrant and
           Concourse V Associates dated March 26, 1996 (Incorporated herein by
           reference to Exhibit 10.2 to the Company's Quarterly Report on Form
           10-Q for the quarter ended March 31, 1996).

10.013     Seventh Amendment to the Lease Agreement between the Registrant and
           Concourse V Associates dated July 1, 1996.

                                       13
<PAGE>
 
10.02      Underlease between XcelleNet Limited and Grant Thornton Nominees
           dated December 15, 1995 (Incorporated herein by reference to Exhibit
           10.02 to the Company's Annual Report on Form 10-K for the year ended
           December 31, 1995).

10.03      Q+E Database Library Distributor License Agreement between the
           Registrant and Q+E Software, Inc. effective as of July 1, 1993
           (Incorporated herein by reference to Exhibit 10.03 to Registration
           Statement No. 33-76012).

10.04      XcelleNet, Inc. 1994 Stock Option Plan for Outside Directors
           (Incorporated herein by reference to Exhibit 10.04 to Registration
           Statement No. 33-76012).

10.041     First Amendment to XcelleNet, Inc. 1994 Stock Option Plan for Outside
           Directors adopted by the Board of Directors on March 24, 1995
           (Incorporated herein by reference to Exhibit 10.041 to the Company's
           Annual Report on Form 10-K for the year ended December 31, 1994).

10.05*     XcelleNet, Inc. 1987 Stock Option Plan, as amended (Incorporated
           herein by reference to Exhibit 10.05 to Registration Statement No.
           33-76012).

10.051*    Tenth Amendment to XcelleNet, Inc. 1987 Stock Option Plan dated March
           24, 1995 (Incorporated herein by reference to Exhibit 10.2 to the
           Company's Quarterly Report on Form 10-Q for the quarter ended June
           30, 1995).

10.06*     Written description of XcelleNet, Inc. Key Employee Loan Program (the
           "Program") together with Form of Installment Note and Form of Pledge
           Agreement executed by participants in the Program (Incorporated
           herein by reference to Exhibit 10.06 to Registration Statement No. 
           33-76012).

10.07*     Form of Agreement to License Software between the Registrant and
           Dennis M. Crumpler dated March 1994 (Incorporated herein by reference
           to Exhibit 10.07 to Registration Statement No. 33-76012).

10.08      Form Non-Qualified Stock Option Agreement for individual options
           granted to directors of the Registrant in connection with their
           service as directors and not under any option plan of the Registrant
           (Incorporated herein by reference to Exhibit 10.08 to Registration
           Statement No. 33-76012).

10.09      Form Non-Qualified Stock Option Agreement for individual options
           granted to directors of the Registrant in connection with their
           service as consultants to the Registrant and not under any option
           plan of the Registrant (Incorporated herein by reference to Exhibit
           10.09 to Registration Statement No. 33-76012).

10.10*     Form Indemnity Agreement (Incorporated herein by reference to Exhibit
           10.10 to Registration Statement No. 33-76012). In addition to the
           individuals identified in Schedule 1 to this Exhibit, the following
           have entered into a form Indemnity Agreement with the Registrant
           substantially identical to this exhibit:
           Geoffrey A. Moore
           Robert I. Apollo
           Corey M. Smith
           Joseph W. Owen

10.11      Form Employment Agreement (Incorporated herein by reference to
           Exhibit 10.11 to Registration Statement No. 33-76012).

10.12      Shareholder Agreement dated June 22, 1990 as amended by the Amendment
           to Shareholder Agreement dated February 11, 1994 (the "Amendment")
           among the Registrant and the persons listed on Exhibit A to the
           Amendment (Incorporated herein by reference to Exhibit 10.12 to
           Registration Statement No. 33-76012).

10.13*     Compensation Plan for W. Michael Parham 1996.

10.15*     Written Description of XcelleNet, Inc. Performance Compensation
           Program (Incorporated herein by reference to Exhibit 10.15 to the
           Company's Annual Report on Form 10-K for the year ended December 31,
           1995).

10.16      Investment Management Agreement between the Registrant and Wells
           Fargo Bank, N.A. dated October 25, 1994 (Incorporated herein by
           reference to Exhibit 10.16 to the Company's Annual Report on Form 10-
           K for the year ended December 31, 1994).

                                       14
<PAGE>
 
10.17      Investment Management Agreement between the Registrant and Morgan
           Stanley & Co. Inc. dated October 24, 1994 (Incorporated herein by
           reference to Exhibit 10.17 to the Company's Annual Report on Form 10-
           K for the year ended December 31, 1994).

10.18      Linguistic System Licensing Agreement between the Registrant and
           Proximity Technology, Inc. effective as of December 14, 1994
           (Incorporated herein by reference to Exhibit 10.18 to the Company's
           Annual Report on Form 10-K for the year ended December 31, 1994).

10.19      North American OEM Program License Agreement between the Registrant
           and Retix effective as of March 31, 1994 (Incorporated herein by
           reference to Exhibit 10.19 to the Company's Annual Report on Form 10-
           K for the year ended December 31, 1994).

10.20      The Registrant's Software License Agreement and Software License
           Agreement Schedule A (Incorporated herein by reference to Exhibit
           10.20 to the Company's Annual Report on Form 10-K for the year ended
           December 31, 1994).

10.21      XcelleNet, Inc. 1995 Employee Stock Purchase Plan dated March 24,
           1995 (Incorporated herein by reference to Exhibit 10.1 to the
           Company's Quarterly Report on Form 10-Q for the quarter ended June
           30, 1995).

10.22      Basicscript Licensing Agreement between the Registrant and Summit
           Software Company effective as of February 27, 1996 (Incorporated
           herein by reference to Exhibit 10.2 to the Company's Quarterly Report
           on Form 10-Q for the quarter ended March 31, 1996).

10.23      Visiodbc Licensing Agreement between the Registrant and Visigenic
           Software, Inc. effective as of December 18, 1996.

10.24*     XcelleNet, Inc. 1996 Long Term Incentive Plan adopted by the Board of
           Directors on October 16, 1996.

10.25*     Form of Change in Control Employment Agreement between the Company
           and Messrs. Crumpler, Smith, Sack and Nawar.

11.01      Statement re:  computation of per share earnings.

21.01      Subsidiaries of the Registrant.

23.01      Consent of Arthur Andersen LLP.

27.01      Financial Data Schedule.

_________________
*  Indicates executive officer compensation plans and arrangements.

(b). REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1996.

Form 8-K dated November 5, 1996:

     Reporting under Item 5 that the Company entered into a definitive agreement
to acquire the WorldLink line of products from The NetPlex Group, Inc. and
Technology Development Systems, Inc.

                                       15
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        XCELLENET, INC.

                                        By: /s/ Dennis M. Crumpler
                                            ----------------------------
                                            Dennis M. Crumpler
                                            Chairman of the Board and 
                                            Chief Executive Officer

                                        Date:  February 24, 1997 
                                              --------------------------
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated.
<TABLE> 
<CAPTION> 


              Signature                    Title                               Date
              ---------                    -----                               ----
<S>                                   <C>                                 <C>    
/s/      Dennis M. Crumple          
-----------------------------------   Chairman of the Board and            February 24, 1997  
         Dennis M. Crumple            Chief Executive Officer
                                      (Principal Executive Officer)

  
/s/      Sidney V. Sack               Executive Vice President,            February 24, 1997  
-----------------------------------   Chief Financial Officer and
         Sidney V. Sack               Assistant Secretary (Principal
                                      Financial and Accounting Officer)

/s/      Shereef W. Nawar   
-----------------------------------   Chief Technical Officer and          February 24, 1997   
         Shereef W. Nawar             Director

/s/      Stephen P. Bradley 
-----------------------------------   Director                             February 24, 1997  
         Stephen P. Bradley 

/s/      Donald L. House 
-----------------------------------   Director                            February 24, 1997   
         Donald L. House  

/s/      Richard C. Marcus                                                February 24, 1997    
-----------------------------------   Director
         Richard C. Marcus 

/s/      Geoffrey A. Moore 
-----------------------------------   Director                            February 24, 1997  
         Geoffrey A. Moore 

/s/      Richard L. Nolan                                                 February 24, 1997  
-----------------------------------   Director
         Richard L. Nolan 

/s/      Jeffrey P. Parker                                                February 24, 1997   
-----------------------------------   Director    
         Jeffrey P. Parker 

</TABLE> 
                                       16
    
<PAGE>
 
    Exhibit
    Number                        Exhibit Description
    ------                        -------------------

3.01*     Amended and Restated Articles of Incorporation of the Registrant
          (Incorporated herein by reference to Exhibit 3.01 to Registration
          Statement No. 33-76012).

3.02*     Amended and Restated Bylaws of the Registrant (Incorporated herein by
          reference to Exhibit 3.02 to Registration Statement No. 33-76012).

4.01*     Specimen Stock Certificate for the Common Stock of the Registrant
          (Incorporated herein by reference to Exhibit 4.01 to Registration
          Statement No. 33-76012).

4.02*     See Exhibits 3.01 and 3.02 for provisions of the Amended and Restated
          Articles of Incorporation and Amended and Restated Bylaws of the
          Registrant defining the rights of holders of the Common Stock of the
          Registrant. Amended and Restated Articles of Incorporation of the
          Registrant (Incorporated herein by reference to Exhibit 3.01 to
          Registration Statement No. 33-76012).

4.03*     Amended and Restated Bylaws of the Registrant (Incorporated herein by
          reference to Exhibit 3.02 to Registration Statement No. 33-76012).

4.04*     Shareholder Agreement dated June 22, 1990 as amended by the Amendment
          to Shareholder Agreement dated February 11, 1994 (the "Amendment")
          among the Registrant and the persons listed on Exhibit A to the
          Amendment (Incorporated herein by reference to Exhibit 10.12 to
          Registration Statement No. 33-76012).

10.01*    Lease Agreement, First Amendment to Lease Agreement, Commencement Date
          Agreement, Second Amendment to Lease Agreement and Third Amendment to
          Lease Agreement between the Registrant and Concourse V Associates
          dated August 17, 1990, September 30, 1992, January 27, 1993, August
          10, 1993 and September 9, 1993, respectively (Incorporated herein by
          reference to Exhibit 10.01 to Registration Statement No. 33-76012).

10.011*   Fourth Amendment to Lease Agreement, Commencement Date Agreement and
          Acceptance of Premises and Fifth Amendment to the Lease Agreement
          between the Registrant and Concourse V Associates dated August 15,
          1994, January 18, 1995 and March 2, 1995, respectively (Incorporated
          herein by reference to Exhibit 10.011 to the Company's Annual Report
          on Form 10-K for the year ended December 31, 1994).

10.012*   Sixth Amendment to the Lease Agreement between the Registrant and
          Concourse V Associates dated March 26, 1996 (Incorporated herein by
          reference to Exhibit 10.2 to the Company's Quarterly Report on Form 
          10-Q for the quarter ended March 31, 1996).

10.013    Seventh Amendment to the Lease Agreement between the Registrant and
          Concourse V Associates dated July 1, 1996 .

10.02*    Underlease between XcelleNet Limited and Grant Thornton Nominees dated
          December 15, 1995 (Incorporated herein by reference to Exhibit 10.02
          to the Company's Annual Report on Form 10-K for the year ended
          December 31, 1995).

10.03*    Q+E Database Library Distributor License Agreement between the
          Registrant and Q+E Software, Inc. effective as of July 1, 1993
          (Incorporated herein by reference to Exhibit 10.03 to Registration
          Statement No. 33-76012).

10.04*    XcelleNet, Inc. 1994 Stock Option Plan for Outside Directors
          (Incorporated herein by reference to Exhibit 10.04 to Registration
          Statement No. 33-76012).

10.041*   First Amendment to XcelleNet, Inc. 1994 Stock Option Plan for Outside
          Directors adopted by the Board of Directors on March 24, 1995
          (Incorporated herein by reference to Exhibit 10.041 to the Company's
          Annual Report on Form 10-K for the year ended December 31, 1994).

10.05*    XcelleNet, Inc. 1987 Stock Option Plan, as amended (Incorporated
          herein by reference to Exhibit 10.05 to Registration Statement No. 33-
          76012).

10.051*   Tenth Amendment to XcelleNet, Inc. 1987 Stock Option Plan dated March
          24, 1995 (Incorporated herein by reference to Exhibit 10.2 to the
          Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
          1995).

                                       17
<PAGE>
 
10.06*    Written description of XcelleNet, Inc. Key Employee Loan Program (the
          "Program") together with Form of Installment Note and Form of Pledge
          Agreement executed by participants in the Program (Incorporated herein
          by reference to Exhibit 10.06 to Registration Statement No. 33-76012).

10.07*    Form of Agreement to License Software between the Registrant and
          Dennis M. Crumpler dated March 1994 (Incorporated herein by reference
          to Exhibit 10.07 to Registration Statement No. 33-76012) .

10.08*    Form Non-Qualified Stock Option Agreement for individual options
          granted to directors of the Registrant in connection with their
          service as directors and not under any option plan of the Registrant
          (Incorporated herein by reference to Exhibit 10.08 to Registration
          Statement No. 33-76012).

10.09*    Form Non-Qualified Stock Option Agreement for individual options
          granted to directors of the Registrant in connection with their
          service as consultants to the Registrant and not under any option plan
          of the Registrant (Incorporated herein by reference to Exhibit 10.09
          to Registration Statement No. 33-76012).

10.10*    Form Indemnity Agreement (Incorporated herein by reference to Exhibit
          10.10 to Registration Statement No. 33-76012). In addition to the
          individuals identified in Schedule 1 to this Exhibit, the following
          have entered into a form Indemnity Agreement with the Registrant
          substantially identical to this exhibit:
          Geoffrey A. Moore
          Robert I. Apollo
          Corey M. Smith
          Joseph W. Owen

10.11*    Form Employment Agreement (Incorporated herein by reference to Exhibit
          10.11 to Registration Statement No. 33-76012).

10.12*    Shareholder Agreement dated June 22, 1990 as amended by the Amendment
          to Shareholder Agreement dated February 11, 1994 (the "Amendment")
          among the Registrant and the persons listed on Exhibit A to the
          Amendment (Incorporated herein by reference to Exhibit 10.12 to
          Registration Statement No. 33-76012).

10.13     Compensation Plan for W. Michael Parham 1996.

10.15*    Written Description of XcelleNet, Inc. Performance Compensation
          Program. (Incorporated herein by reference to Exhibit 10.15 to the
          Company's Annual Report on Form 10-K for the year ended December 31,
          1995).

10.16*    Investment Management Agreement between the Registrant and Wells Fargo
          Bank, N.A. dated October 25, 1994 (Incorporated herein by reference to
          Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year
          ended December 31, 1994).

10.17*    Investment Management Agreement between the Registrant and Morgan
          Stanley & Co. Inc. dated October 24, 1994 (Incorporated herein by
          reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1994).

10.18*    Linguistic System Licensing Agreement between the Registrant and
          Proximity Technology, Inc. effective as of December 14, 1994
          (Incorporated herein by reference to Exhibit 10.18 to the Company's
          Annual Report on Form 10-K for the year ended December 31, 1994).

10.19*    North American OEM Program License Agreement between the Registrant
          and Retix effective as of March 31, 1994 (Incorporated herein by
          reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1994).

10.20*    The Registrant's Software License Agreement and Software License
          Agreement Schedule A (Incorporated herein by reference to Exhibit
          10.20 to the Company's Annual Report on Form 10-K for the year ended
          December 31, 1994).

10.21*    XcelleNet, Inc. 1995 Employee Stock Purchase Plan dated March 24, 1995
          (Incorporated herein by reference to Exhibit 10.1 to the Company's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).

10.22*    Basicscript Licensing Agreement between the Registrant and Summit
          Software Company effective as of February 27, 1996 (Incorporated
          herein by reference to Exhibit 10.2 to the Company's Quarterly Report
          on Form 10-Q for the quarter ended March 31, 1996).

                                       18
<PAGE>
 
10.23     Visiodbc Licensing Agreement between the Registrant and Visigenic
          Software, Inc. effective as of December 18, 1996.

10.24     XcelleNet, Inc. 1996 Long Term Incentive Plan adopted by the Board of
          Directors on October 16, 1996.

10.25     Form of Change in Control Employment Agreements between the Company
          and Messrs. Crumpler, Smith, Sack and Nawar.

11.01     Statement re: computation of per share earnings.

21.01     Subsidiaries of the Registrant.

23.01     Consent of Arthur Andersen LLP.

27.01     Financial Data Schedule.

_________________

* Indicates exhibit was previously filed and is incorporated by reference
  herein.

                                       19