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                      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, 1997

                                       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 $105,752,810 at March 9, 1998, 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 March 9, 1998 was 8,372,670.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Parts of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1998 (the "Proxy Statement") are
incorporated by reference in Part III of this Annual Report on Form 10-K.

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                                     PART I
ITEM 1.  BUSINESS.

                           FORWARD LOOKING STATEMENTS

  In addition to historical information, this Form 10-K contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements.  Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Business - Risk Factors."  Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof.  The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.  Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission. RemoteWare and XcelleNet are registered trademarks and RemoteWare
Express is a trademark of XcelleNet, Inc.  All other brands and product names
are the tradename, trademark or registered trademark of their respective owners.


                                    BUSINESS

  XcelleNet, Inc. ("XcelleNet(R)" or the "Company"), founded in 1986, provides
systems management solutions for remote users. Its RemoteWare(R) brand of
products enables system administrators to more effectively manage remote PCs,
thereby reducing total cost of ownership ("TCO") and increasing end-user
productivity. The Company's systems management tools address five key areas:
software distribution; asset and configuration management; diagnostics and
recovery; event and alarm management; and content and applications management.
The Company's products, based on a unique client/agent/server architecture, are
specifically designed to overcome the challenges inherent in managing remote
systems that are intermittently connected to the enterprise and complement the
solutions of enterprise systems management vendors who are primarily focused on
the management of LAN/WAN-attached systems.

  In 1989, the Company introduced its flagship RemoteWare product family, which
is targeted to companies with large numbers of remote or mobile users and was
originally based on the IBM(R) OS/2(R) server platform ("RemoteWare for OS/2").
In 1996, the Company introduced a version of RemoteWare based on the
Microsoft(R) Windows NT(R) server platform ("RemoteWare for NT"), which was
significantly enhanced with the release of the RemoteWare Managed Client in
December 1997. Also in 1997, the Company released RemoteWare Express(TM), which
is designed for web-based systems management. As of December 31, 1997, the
Company had licensed RemoteWare directly or through its Solution Provider
Resellers to approximately 1,700 organizations and approximately 650,000 users.
The Company's products have been sold to companies with large numbers of sales
and field force personnel, branch offices or store locations in a variety of
industries, including manufacturing, pharmaceutical, financial services,
insurance, healthcare and retail.

  The Company's objective is to be the leading provider of systems management
software for remote users.   Important features of the Company's strategy are as
follows:

  . Focus efforts on systems management for remote users;
  . Partner with enterprise systems management providers to extend their
    capabilities to remote users;
  . Leverage direct sales efforts with OEM and co-marketing relationships;
  . Expand systems management functionality of RemoteWare; and
  . Leverage Microsoft technologies.


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INDUSTRY BACKGROUND

  In an effort to better serve their customers, companies continue to deploy
more remote workers. These include branch office workers, retail store managers
and mobile professionals and, with the growing deployment of corporate
intranets, increasingly may include suppliers, distributors, customers and sales
prospects. According to industry analysts, the cost of managing the PCs, laptops
and other devices used by this growing constituency are significantly higher
than for LAN-based computers.  This higher cost is primarily due to the greater
burden these systems place on administrative and technical support resources.

  One of the biggest challenges for Information Technology ("IT") executives is
to control the high costs of managing PCs and servers. Companies that deploy
systems management solutions effectively can reduce technical support and system
administration expenditures, deploy staff to new projects and positively impact
end-user productivity.  Reflecting the growing desire on the part of IT
professionals to better manage and contain costs, the IT investment in systems
management solutions is projected by Gartner Group to grow from $4.5 billion in
1997 to over $9 billion by 2001.

  The leading suppliers of traditional systems management solutions either
ignore or provide minimal services for users who connect intermittently to
enterprise networks, focusing instead on managing LAN/WAN-attached systems where
connections are continuous and high-speed.  In this environment, management
tasks scheduled for execution at specific times can be readily accomplished as
the target systems are available and connected to the network.   However, as the
number of remote users increases, a growing number of remote PCs remain outside
of and isolated from the management domain.  Disconnected for the majority of
the time, these systems typically contend with low-bandwidth and unreliable
connections when they do connect. Coupled with the fact that IT professionals
cannot physically access the remote systems, these conditions present major
challenges to IT organizations.

THE XCELLENET SOLUTION

  The Company's remote systems management products are designed to address this
growing need for tools to consistently manage dispersed PCs and laptops from a
central location. The Company believes that the need for its products is
primarily driven by three key dynamics: 1) the number of remote and mobile users
is growing; 2) companies are increasingly investing in systems management
solutions to reduce the rising costs of managing PCs and servers; and 3)
traditional systems management tools inadequately address the unique challenges
of and higher costs associated with managing large numbers of dispersed PCs.

  The Company's flagship product, RemoteWare, relies on a unique architecture,
which is highly scalable and specifically optimized for remote users.  These
users typically connect only intermittently with network resources and rely on
slow (typically 28.8KB) and unreliable connections.  In comparison, enterprise
systems management solutions are architected assuming high-bandwidth (at least
10MB) and continuous connections.  RemoteWare's unique queued event architecture
("QEA") addresses the difficulties inherent in monitoring and maintaining remote
users' hardware and software when the user is not continuously connected to the
enterprise network. The three-tier, client/agent/server design of the QEA
architecture automates the staging of various types of system- and user-
initiated events.

  System-initiated transactions, tailored to a particular remote user or group
of remote users, are queued at the central site server, awaiting the next client
connection. These events may include commercial or custom software upgrades, new
virus signature distributions, document distributions and updates to data used
by field-based applications.  In the field, while remote users work offline,
events are also staged on the user's remote system. These events may include
incremental backups to key data, results of offline hardware and software
inventory scans, requests for documents and the sending and receiving of
electronic mail.  When the RemoteWare connection is made, the queued events are
executed, servicing all applications and performing systems management tasks in
a single session--all without requiring user intervention. Resulting updates,

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installations and reports are automatically completed offline, after the
connection is terminated, to minimize connect time, lower communication costs
and boost remote user productivity.

  The Company's products are architected to make the connection between the
client and the server as efficient as possible.  Optimization features include:

  .  Efficient compression of data and application files, both before and during
     the connection;
  .  Criteria checking to ensure that specified criteria are met before updates
     to remote systems are attempted;
  .  Incremental updates, transferring only missing or updated files to minimize
     data transfer volumes;
  .  Differencing technology to transmit only changed bytes of files rather than
     transmitting entire files; and
  .  Checkpoint restart, to resume failed transfers at the point of failure,
     rather than from the beginning.

PRODUCTS

  The Company has two primary product lines: RemoteWare and RemoteWare Express.

  REMOTEWARE is marketed to companies with large numbers of remote users.
Originally based on the IBM OS/2 server platform, the Company released a version
of RemoteWare based on Microsoft Windows NT in March 1996. While the Company
continues to sell and support its RemoteWare for OS/2 product, sales of
RemoteWare for NT constituted the majority of the Company's license fee revenue
in 1997. Additionally, many of the Company's RemoteWare for OS/2 customers have
been shipped the code necessary to migrate to RemoteWare for NT. The Company
expects migration to be an ongoing process in 1998, with the number of customers
who complete it increasing.

  RemoteWare consists of two components: the RemoteWare server software
installed at the central site and the RemoteWare client software installed on
the remote system. The RemoteWare server provides a powerful set of management
utilities giving administrators the ability to easily manage a large and
dispersed set of assets from a central location and includes the following:

  .  Advanced scripting capabilities enabling file and directory level
     management;
  .  Robust and flexible scheduling module to support the scheduling
     of communications sessions that are initiated either from the server or
     the client system;
  .  Support for multiple transports (e.g., Internet, VSAT, and POTS);
  .  Support for multiple protocols (e.g., asynchronous serial communications,
     TCP/IP, IPX/SPX and NetBios); and
  .  Comprehensive logging and reporting capabilities.

  The RemoteWare client software is available in three primary offerings: the
RemoteWare Basic Client, the RemoteWare Managed Client, and the RemoteWare
Extended Client.  The RemoteWare Basic Client enables basic systems management
services to the RemoteWare server, with support for a variety of platforms
including Windows (Windows NT, Windows 95(R), Windows 3.1), DOS, OS/2 and
SCO UNIX.

  The RemoteWare Managed Client, introduced in December 1997, provides a rich
set of functionality that extends RemoteWare's basic remote systems management
capabilities for Windows-based systems.  It is made up of the following four
components, which are also sold as separate add-ons to the RemoteWare Basic
Client:

  RemoteWare Software Manager.   Provides system administrators with the tools
  needed to automate the distribution, installation, and management of
  commercial and custom-built software applications for remote users.  Rules-
  based distribution allows administrators to specify the criteria under which
  software can be installed and operated (ie., available hard disk space,
  installed memory, operating system).  The system verifies that criteria are
  met on a remote PC before files are transferred to it.  During every
  subsequent client/server connection, Software Manager performs file-level
  incremental updates (if necessary) to replace missing, corrupted or out-of-
  date files that are part of the distributed software package.

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  RemoteWare Inventory Manager.   Automatically scans for and retrieves detailed
  information on hardware and software resident on remote systems.  Scans can
  occur on-line during a client/server connection, or can be specified to occur
  offline with the resulting inventory information retrieved during a subsequent
  connection.  Inventory information is deposited centrally into an ODBC-
  compliant relational database, ensuring that system administrators have a
  comprehensive repository of information on remote assets prior to performing
  hardware and software updates, troubleshooting, or performing other
  administrative tasks.

  RemoteWare Backup Manager.   Represents a powerful tool for automating and
  controlling the backup of remote system files to a central location.  Both the
  end user and the system administrator have separate access to file backup and
  restore functionality and to the management of multiple backup sets.  Volumes
  of data moved from the client to the server are greatly reduced through the
  incorporation of byte-level differencing technology that detects changes in
  files and backs up only the necessary data to bring a previously archived file
  up to its current state.

  RemoteWare AntiVirus Manager.   Allows system administrators to automatically
  and transparently distribute, install, maintain, and execute McAfee's
  VirusScan(R) software on remote systems. AntiVirus Manager checks VirusScan(R)
  configuration parameters during every connection and resets them to system
  administrator-specified values if necessary. Results of both forced and
  scheduled virus scans are retrieved and deposited centrally into an ODBC-
  compliant relational database for further review and action.

  The RemoteWare Extended Client includes the RemoteWare Basic Client
functionality and the following three components:

  RemoteWare Subscriber. Offers information subscription and publishing features
  that support both administrator-initiated ("push") and user-subscribed
  ("pull") distribution methods, enabling businesses to customize enterprise-
  wide information distribution strategies.

  RemoteWare Workshop. Allows system administrators to centrally create, manage
  and distribute password-protected graphical application menus to insulate
  users from the complexities of the client operating system.

  RemoteWare Web Offline. Allows system administrators to collect and distribute
  web content for offline viewing by remote users.

  In addition, the Company introduced RemoteWare Plus for Tivoli(TM) during the
first quarter of 1998. This certified TME 10 Plus(TM) module allows Tivoli users
to take advantage of RemoteWare's functionality by extending enterprise
management capabilities to remote and mobile users. The product allows Tivoli
users to manage the RemoteWare server from the Tivoli Enterprise Management
Console.

  REMOTEWARE EXPRESS is based on the Windows NT server platform and is marketed
to and designed for companies who want to manage software distribution and
content delivery to users via corporate intranets.  Using a centralized
transmitter, RemoteWare Express allows system administrators to define delivery
channels for software or information distribution.  Through the RemoteWare
Express Channel Administrator, channels can be made available for user
subscription ("pulled") or can be "pushed" to users by the system administrator.
The user can view the information from a browser, through the RemoteWare Express
Channel Viewer, or within the context of customer applications through the
RemoteWare Express API.

  The RemoteWare Express product line consists of two products: Software Manager
and Session Manager (formerly known as SessionXpress).   Software Manager
provides system administrators with the tools needed to automate the
distribution, installation, and management of commercial and custom-built
software applications.  Session Manager is a robust scripting tool that allows
administrators to automate complex communications sessions and events, which
eliminates the need for user intervention.

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Services

  In addition to its product offerings, the Company provides a software
maintenance program, help desk support, systems integration services, and
training. Revenues from services comprised 36%, 28% and 25% of total revenues
for the periods ended December 31, 1997, 1996 and 1995, respectively.

  Payment of maintenance and support fees entitles an XcelleNet customer to
enhanced versions of a product released during the maintenance period and
telephone support.  Such fees are an important source of recurring revenue to
the Company, and the Company invests significant resources to provide new
product versions and telephone support.  These services are important to those
customers who require prompt problem resolution because of their dependence on
the products to enable mission-critical business processes.  Annual fees for
this program are based on the cumulative software license fees paid by the
customer.

  Through 1996, the Company relied primarily upon 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 XcelleNet Integration
Services, Inc., formerly Electronic Commerce, Inc., a 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 focuses its integration services on new, large accounts as well as on
customers migrating from RemoteWare for OS/2 to RemoteWare for NT.

PRODUCT DEVELOPMENT

  The Company's products have been primarily 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 72
full-time employees and nine independent contractors as of December 31, 1997.
The Company licenses certain third-party technologies that are incorporated into
the Company's products and which, in some cases, substantially reduce the
product's time-to-market or increase its competitive position and market value.

  Since its inception, the Company has made substantial investments in product
development.  These expenditures totaled $9.8 million, $8.6 million and $5.4
million in fiscal 1997, 1996 and 1995, respectively.  In accordance with
Statement of Financial Accounting Standards No.  86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed," 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 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 RemoteWare for OS/2.
Consistent with that belief, during 1997 the Company's development efforts
consisted primarily of the following:

     RemoteWare for NT.  Beginning in 1995, the Company substantially increased
its product development expenditures in order to develop its RemoteWare for NT
products.  These efforts included the development and release of RemoteWare for
NT 3.0 and RemoteWare for NT 3.1 in 1996 and were substantially completed with
the May 1997 release of RemoteWare for NT 3.2.

     RemoteWare Managed Client.  The Company expended significant development
resources to enhance the systems management capabilities of RemoteWare for NT.
These efforts resulted in the December 1997 release of Software Manager,
Inventory Manager, Backup Manager and AntiVirus Manager, collectively known as
the RemoteWare Managed Client.

     RemoteWare Express.  Based on the Windows NT server platform, RemoteWare
Express incorporates certain key features of RemoteWare and is designed for
companies who want to manage software distribution and content delivery to users
via a corporate intranet.  This product was first available in 1997.

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  RemoteWare Plus for Tivoli.  A certified TME 10 Plus module, RemoteWare Plus
for Tivoli allows system administrators to manage both LAN-based and remote
clients from the Tivoli Enterprise Management Console.  This product was first
introduced in the first quarter of 1998.

  During 1998, the Company's product development efforts will continue to
leverage Microsoft technologies.  Current plans include further enhancements to
RemoteWare and RemoteWare Express and integration with Microsoft's Systems
Management Server, Windows NT 5.0, Zero Administration Windows and Management
Console.  The Company also currently plans to further enhance Tivoli integration
and to build interfaces with other network systems management framework
consoles.

SALES AND MARKETING

  The Company's sales and marketing efforts target companies with large numbers
of remote and mobile users. 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 reselling and integration services to
RemoteWare customers and has forged OEM relationships with Sterling Commerce,
Inc. and Norand Corporation, both of whom private label RemoteWare. The Company
receives license fees and service revenues from end-user customers and in some
cases through Reseller Solution Partners. In 1997, no Solution Provider
accounted for more than 3% 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 direct sales force is divided into four regional teams in North
America and an international team responsible for Europe, the Middle East,
Australia and New Zealand. In addition, the Company has a telesales function to
augment its direct selling efforts.  In 1997, 73% of the Company's license fee
revenues were attributable to sales made by the Company's direct sales force.
The Company intends to strengthen its direct selling efforts in 1998 by
expanding its direct sales program, establishing a major account sales function
to manage large multi-division accounts, and continuing its telesales efforts.
The Company's presence internationally is expanding with the introduction of a
new sales team in Germany that is focused on selling local-language versions of
RemoteWare.

  The primary function of its Solution Providers is to assist the Company's
customers with implementing RemoteWare by providing systems integration
services. Certain Solution Providers are authorized to remarket the Company's
products in connection with providing their services. The Company's recruiting
efforts are focused on Solution Providers who provide implementation services
for enterprise systems management vendors.

  In support of direct and indirect selling efforts, the Company conducts
targeted marketing programs to generate sales leads, which include advertising,
direct mail, public relations, seminars, trade shows and telemarketing. The
increased interest in and awareness of systems management solutions has
increased the efficiency of the marketing programs, allowing tighter targeting
of key systems management decision makers and influencers.

  The Company has established marketing relationships with key technology
vendors intended to promote awareness of the Company's products among potential
customers and to provide leads for the Company's direct sales force. These
relationships involve leaders in their respective markets and include systems
management vendors such a Tivoli Systems Inc. and Microsoft Corporation, network
security and management vendors such as Network Associates, infrastructure
vendors such as 3Com Corporation and ANS Communications, Inc., sales force
automation vendors such as Vantive Corporation, Aurum Software, Inc. and Siebel
Systems Inc., and retail vendors such as MICROS Systems Inc. and KPOS Computer
Systems Ltd.

INTERNATIONAL OPERATIONS

  The Company conducts business on a global basis. The Company's European
headquarters are located in High Wycombe, England. The Company also has offices
in Canada and Germany. The Company's foreign subsidiaries accounted for
approximately 14%, 9% and 9% of consolidated revenues for the years ended
December 31, 1997, 1996 and 1995, respectively.  For information regarding

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amounts of revenue, operating income (loss) and identifiable assets
attributable to foreign operations, see Note 1 to the Consolidated Financial
Statements.

COMPETITION

  The systems management market in which the Company competes is highly
competitive and characterized by rapidly changing technology and evolving
standards. Many software vendors offer products that are competitive with some
aspect of the products offered by the Company. These competitors vary in size as
well as in scope and breadth of their offerings and include: (1) enterprise
systems management vendors such as Tivoli Systems, Inc., Computer Associates
International, Inc. and Hewlett Packard Company; (2) desktop management vendors
such as Microsoft Corporation, Intel Corporation and Seagate Software, Inc.; (3)
Internet "push" start-ups, such as Marimba, Inc. and BackWeb Technologies, Inc.;
(4) remote access software and hardware vendors such as Microsoft Corporation,
Shiva Corporation and Citrix Systems, Inc.; (5) application software vendors who
incorporate data synchronization capabilities in their software such as Siebel
Systems, Inc. and Aurum Software, Inc.; and (6) custom software-based solutions
developed by internal management information system personnel or third-party
professional service organizations.

INTELLECTUAL PROPERTY

  The Company's products consist primarily of proprietary technology owned by
the Company.  The Company relies on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology.  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.  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 documentation and other written materials under trade secret and copyright
laws.  In addition, the Company has been granted two patents in the United
States and has a patent application pending in the United States. There can be
no assurance that  the pending patent will be issued or that such patents would
survive a legal challenge to their validity or provide significant protection to
the Company.

  The Company licenses certain third-party products that are integrated or
bundled with the Company's products.  These components include, but are not
limited to, remote backup utilities, anti-virus software, remote control
software, inventory tracking modules, a scripting engine, and a document viewer,
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.  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.

EMPLOYEES

  As of December 31, 1997, the Company had 270 full-time employees, consisting
of 72 in product development, 61 in sales, 37 in marketing, 62 in customer
service, and 38 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.

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RISK FACTORS

  Change in Competition.  The Company operates in a rapidly changing computer
software industry that is intensely competitive and involves numerous risks,
some of which are beyond its control.  Within this industry there has been a
trend toward consolidation for several years, which the Company expects to
continue as companies attempt to strengthen or hold their market positions.  The
Company sells its products in the systems management market for remote users,
which is not yet mature and may be impacted by emerging technology such as the
Internet, on-line services and electronic commerce.  Within that market, there
are several large vendors that do have a presence through their enterprise-wide
systems management applications and do have significantly more financial and
technical resources than the Company. In addition, vendors of network systems
management software, desktop management software, and network operating system
software may enhance their products to include some or all of the functionality
currently provided by the Company's products, which could render the Company's
products obsolete or unmarketable. The Company also expects that competition
will increase as current and potential competitors have established, or may
establish, cooperative relationships among themselves or with competitors.   The
adoption of new technology and the introduction of new competitive products from
these large vendors could have a material adverse effect on the Company's
business, results of operations 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. The Company believes its principal competitive advantages are its
focus on, and experience with, the management of dispersed systems that are
intermittently connected, 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. In addition, competitors through combinations with third
parties may increase the ability of their products to address remote computing
needs. 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 of
operations and financial condition.

  Change in Market.  The strength and profitability of the Company's business
depend on the overall demand for computer software and growth in the computer
industry. A softening of demand for computer software caused by a weakening of
the economy or otherwise, may result in decreased revenues or declining revenue
growth rates for the Company.  An unexpected decline in the growth rate of
revenues without a corresponding and timely slowdown in expenses could have a
material adverse effect on the Company's business, results of operations and
financial condition.

  Dependence upon Product Development.  The market for the Company's products is
characterized by rapid technological advances in hardware and software
development, evolving standards in computer hardware and software technology and
frequent new product introductions and enhancements.  Product introductions and
short product life cycles necessitate high levels of expenditure for research
and development. To maintain its competitive position, the Company must enhance
and improve existing products, continue to introduce complementary new products
and new versions of existing products, position and/or price its products
appropriately, successfully complete installations, keep pace with technological
developments and satisfy increasingly sophisticated customer requirements.
Failure to achieve these criteria, material defects or undetected errors in its
products or delays in new products or new versions of a product may affect
market acceptance of the Company's products and could have a material adverse
effect on the Company's business, results of operations and financial condition.

  Dependence on Proprietary Technology; Risk of Infringement Claims.  The
Company's success is dependent upon its proprietary technology.  Despite the

                                      -9-
<PAGE>

Company's efforts to protect its intellectual property rights, it may be
possible for unauthorized third parties to copy certain portions of its products
or to reverse engineer or obtain and use technology or other information that
the Company regards as proprietary.  In addition, the laws of certain countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States.  Accordingly, there can be no assurance that the
Company will be able to protect its proprietary technology against unauthorized
third-party copying or use, which could adversely affect the Company's
competitive position.  The Company expects that software products will
increasingly be subject to claims of infringement by third parties of patent and
other intellectual property rights as the number of products and competitors in
the Company's market grows and the functionality of products overlaps.
Regardless of its merit, responding to any such claim could be time consuming,
result in costly litigation and require the Company to enter into royalty and
licensing agreements, which may not be offered or available on terms acceptable
to the Company.  If a successful claim is made against the Company and the
Company fails to develop or license a substitute technology, the Company's
business, results of operations and financial condition could be materially
adversely affected.

  Dependence on Third-Party Technology; Risk of Infringement Claims.  The
Company also includes software and other intellectual property licensed from
third parties in its products. It may be necessary in the future to seek or
renew licenses relating to various aspects of its products.  While the Company
believes that based upon past experience and standard industry practice, such
licenses generally could be obtained on commercially reasonable terms, it can
offer no guarantee and failure to do so could have a material adverse effect on
the Company's business, results of operations or financial condition.  The
Company believes that the same issues regarding infringement claims against its
proprietary technology also exist for this third-party technology.  Because of
the existence of a large number of patents in the software industry and the
rapid rate of issuance of new patents, it is not economically practical for the
Company to determine in advance whether a product, or any of its components,
from a third party may infringe the rights of others.  The Company does request
infringement indemnification from such third parties.

  Dependence on Key Employees.  The Company's continued growth and success
depend to a significant extent on the continued service of its senior management
and other key employees and the hiring of new qualified employees. Competition
for highly skilled sales, business, product development, technical and other
personnel is intense. There can be no assurance that the Company will be
successful in continuously recruiting new personnel and in retaining existing
personnel, and the Company may experience increased compensation costs in order
to attract and retain skilled employees.  The loss of one or more key employees
or the Company's inability to attract additional qualified employees or retain
other employees could have a material adverse effect on the Company's business,
results of operations and financial condition.

  Expansion of Distribution.  The Company historically has relied heavily on its
direct sales force. The Company's ability to achieve revenue growth in the
future will depend in large part upon its success in recruiting, training and
retaining sufficient direct sales personnel.  Although the Company is presently
committing significant resources to expand its sales force, the Company may at
times experience difficulty in recruiting qualified sales personnel and it is
anticipated that there will be a delay before such personnel become productive.
The Company also has indirect and other distribution channels, including OEM
reseller relationships with Sterling Commerce, Inc. and Norand Corporation.
Although the Company has not relied significantly on revenue from these
channels, the Company does plan to continue to pursue opportunities to grow
them, with no assurance that it will be successful in doing so.  Any failure by
the Company to expand its direct sales, or the failure by the Company to
increase revenues commensurate with its expansion, would have a material adverse
effect upon the Company's business, operating results and financial condition.

  Fluctuation in Pricing.  Pricing in the systems management market is highly
competitive, which may put pressure on the Company to reduce prices on certain
products.  This pricing risk could worsen if certain systems management vendors
or other competitors offer deep discounts in an effort to capture market share.
In addition, the bundling of software products for promotional purposes or as a
long-term pricing strategy by certain of the Company's competitors could have
the effect over time of significantly reducing the prices that the Company can
charge for its products.  Any such price reductions and resulting lower license
revenues could have a material adverse effect on the Company's business, results
of operations and financial condition, particularly if the Company cannot offset
these price reductions with a corresponding increase in sales volumes.

                                      -10-
<PAGE>

  Changes with International Conditions and Operations.  Some of the Company's
revenues are derived from international sales and and therefore subject to
risks, including the general economic conditions in each country, import and
export licensing requirements, trade restrictions, changes in tariff rates, the
overlap of different tax structures, the difficulty of managing an organization
spread over various countries, changes in regulatory requirements, compliance
with a variety of foreign laws and regulations and longer payment cycles in
certain countries.  Additionally, changes in the value of foreign currencies
relative to the value of the U.S. dollar could adversely affect net revenues and
operating results since the Company does conduct business in foreign currencies
and would be affected by gains and losses through currency conversion.  The
Company could experience slower growth in certain international countries,
primarily as a result of weaker economies relative to the rest of the world,
slower adoption of information technology, a strong U.S. dollar and personnel
changes. There can be no assurance that the Company will be able to successfully
address such challenges in each international market, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.

  Fluctuations in Quarterly Operating Results; Seasonality. The Company's
revenues in general, and its software license fee revenues in particular, are
difficult to forecast and vary from quarter to quarter due to various factors,
including: (1) the size and timing of individual license transactions,
particularly since customers have historically tended to make buying decisions
near the end of the quarter; (2) the timing of the introduction of new products
or product enhancements by the Company or its competitors; (3) the potential for
delay or deferral of customer implementations of the Company's software; (4)
changes in customer budgets; and (5) seasonality of technology purchases and
other general economic conditions. Accordingly, the Company's quarterly results
are difficult to predict, and delays in product delivery or closing of sales
near the end of a quarter can cause quarterly revenues and net income to fall
significantly short of anticipated levels. The Company's software license fee
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter. Because the Company's operating expenses are based on
anticipated revenue levels and because a high percentage of the Company's
expenses are relatively fixed, a delay in the recognition of revenue from even a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could cause net income to fall
significantly short of anticipated levels.

  Volatility of Stock Price. The market price of the Company's common stock has
experienced significant fluctuations and may continue to fluctuate
significantly. The market price of the Company's common stock may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological innovation
by the Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in prices of the Company's or its
competitors' products and services, changes in revenue and revenue growth rates
for the Company as a whole or for specific geographic areas, business units,
products or product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. The stock
prices for many companies in the technology sector have experienced wide
fluctuations, which often have been unrelated to their operating performance.
Such fluctuations could adversely affect the market price of the Company's
common stock.

  Future Acquisitions and Managed Growth. The Company has a history of rapid
growth, and its future operating results will depend on its ability to manage
growth, continuously hire and retain significant numbers of qualified employees,
continue to implement additional internal management systems, forecast
revenues and control costs.  In order to accomplish its business strategy, the
Company may acquire or invest in businesses that offer complementary products,
services and technologies. Any acquisitions or investments will be accompanied
by the risks commonly encountered in acquisitions of businesses such as the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, the
inability of management to maximize the financial and strategic position of the
Company, the maintenance of uniform standards, controls, procedures and policies
and the impairment of relationships with employees and clients as a result of
any integration of new management personnel. These factors could have a material
adverse effect on the Company's business, results of operations or financial
condition. Consideration paid for future acquisitions, if any, could be in the
form of cash, stock, and rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result to the
extent that shares of stock or other rights to purchase stock are issued in
connection with any such future acquisitions.

                                      -11-
<PAGE>

  Year 2000. The Year 2000 issue is pervasive and presents both technical and
business risks that may affect much of the Company's business and industry. The
Year 2000 issue refers to the various problems that may result from improper
processing of dates and date-sensitive functions by computers and other
equipment before, during or after January 1, 2000 ("Millennium Date") with
respect to the change in century. The Company has already begun to address this
problem by examining the code in its products, communicating with vendors
regarding their handling of the issue and notifying customers of its preliminary
findings on the issue through Product Notes and otherwise. The Company expects
the Year 2000 issue to be an ongoing risk through and beyond the Millennium Date
that may require a significant investment of time and resources to correct. The
Company is unable to speculate as to the magnitude of the costs that may be
incurred at this time, to eliminate the risk and can offer no guarantee that
such efforts will be successful given the breadth of this worldwide issue.
Failure to successfully address the Year 2000 issue could have a material
adverse effect on the Company's business, results of operations and financial
condition.

                                      -12-
<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>

Name                               Age  Position with the Company
----                               ---  -------------------------
<S>                                <C> <C>
Jeanne N. Bateman                  43  Vice President - Finance and Human Resources,
                                       Treasurer and Secretary

Stefanus F. Coetzee                45  Senior Vice President - North American Customer
                                       Operations

Dennis M. Crumpler                 45  Chairman of the Board, Chief
                                       Executive Officer and Director

Scott L. Duma                      35  Vice President and General Counsel

Jethro J. Felton, III              42  Vice President -  North America Sales

David F. Held                      36  Chief Financial Officer and
                                       Assistant Secretary

Shereef W. Nawar                   38  Chief Technical Officer and Director

W. Michael Parham                  44  Senior Vice President - Business Development

Corey M. Smith                     41  President and Director

</TABLE>

     Ms. Bateman joined the Company in December 1993 as its Vice President and
Treasurer, and has been the Secretary of the Company since January 1995, the
Vice President - Finance since April 1995 and the Vice President - Human
Resources since July 1997.  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. Coetzee joined the Company in April 1992 as its Managing Director,
XcelleNet Ltd., served as the Company's Vice President - International from
January 1995 until August 1995 and Vice President - Global Customer Operations
from August 1995 until April 1996, and Vice President - North American Customer
Operations from April 1996 to July 1997 and has served as the Senior Vice
President - North American Customer Operations since July 1997.  From 1983 until
1992, he was employed by Dun & Bradstreet Europe Ltd., a business information
services company.

     Mr. Crumpler is a co-founder of the Company and has served as Chairman of
the Board, a director and Chief Executive Officer since its inception in 1986.
Mr. Crumpler also served as President of the Company from September 1986 to
October 1992 and from September 1996 to January 1997.

     Mr. Duma joined the Company in February 1998 as Vice President and General
Counsel. Prior to joining the Company, he held the positions of Corporate
Counsel at Medaphis Corporation from 1996 to 1998, Associate General Counsel at
Attachmate Corporation from 1994 to 1996 and Associate at the law firm of Ford &
Harrison from 1992 to 1994.

     Mr. Felton joined the Company in 1992 as a District Sales Representative.
He held the position of Area Sales Manager from October 1994 through June 1996

                                      -13-
<PAGE>

and National Sales Director from July 1996 through June 1997 prior to becoming
Vice President - North American Sales in July 1997.  Prior to joining XcelleNet
Mr. Felton held several sales and sales management positions at several
applications software companies, including Triad Systems Corporation and
Enterprise Computer Systems.

     Mr. Held joined the Company in July 1994 as its Controller, and has been
the Chief Financial Officer and Assistant Secretary of the Company since July
1997.  Prior to joining the Company, Mr. Held was employed as Controller of
Promega Corporation, a biotechnology company, from April 1992 until July 1994.
From 1989 through March 1992, Mr. Held held several financial positions with
Rohr, Inc., an aerospace company.

     Mr. Nawar, a co-founder of the Company, 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. Parham joined the Company in November 1988 as its Director of Sales,
served as the Vice President - Sales from December 1990 to April 1996, served as
the Vice President - North American Sales from April 1996 to July 1997 and has
been the Senior Vice President - Business Development since July 1997.

     Mr. Smith is President of the Company, a position he has held since January
1997.  He joined the Company in September 1996 as its Executive Vice President
responsible for marketing.  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 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 1988 until May 1992, Mr. Smith was the President and Chief
Executive Officer of Central Point Software, Inc., a personal computer utilities
software company.

ITEM 2.        PROPERTIES.

     The Company's corporate headquarters are located in Atlanta, Georgia, in a
leased facility consisting of approximately 99,000 square feet of office space
under a lease expiring September 1, 2000.  The Company sub-leases approximately
32,000 square feet of the corporate headquarters through signed lease agreements
expiring August 31, 2000.  The Company leases 2,700 square feet in Raleigh,
North Carolina for XcelleNet Integration Services, Inc. under a lease expiring
in October 1999.  The Company also leases an additional 2,500 square feet in
High Wycombe, England for its European direct sales and service support site
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, including locations in Manhattan Beach, Newport Beach,
Pleasanton and Sunnyvale, California; Orange, Connecticut; Englewood, Colorado;
Boston, Massachusetts; Rolling Meadows, Illinois; Okemos, Michigan;  Eden
Prairie, Minnesota; St. Louis, Missouri; Marlton and Princeton,  New Jersey;
Columbus, Ohio;  Dallas, Texas; Issaquah, Washington; Markham,
Canada; and Frankfurt, Germany.

ITEM 3.        LEGAL PROCEEDINGS.

The Company is subject to legal proceedings and claims that have arisen in the
ordinary course of business.  In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.


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 1997.

                                      -14-
<PAGE>

                                     PART II

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

     The Common Stock of XcelleNet has been traded on the Nasdaq National Market
under the symbol "XNET" since the Company's initial public offering in April
1994.  The following table sets forth the range of quarterly high and low sale
prices of the Company's common stock for each full quarterly period within the
two most recent fiscal years:

<TABLE>
<CAPTION>

Common Stock Information

Year Ended December 31, 1996              High            Low
------------------------------------------------------------------------
<S>                                    <C>              <C>
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              High            Low
------------------------------------------------------------------------
First Quarter                           $ 23 1/4        $ 15 3/4
Second Quarter                            19 1/4          11 3/4
Third Quarter                             16 1/4           7 3/4
Fourth Quarter                            14 1/8           9 3/8

</TABLE>

     At the close of business on March 9, 1998, there were 209 holders of record
of the Company's common stock.

     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.

     On January 2, 1997, XcelleNet acquired all of the outstanding shares of
XcelleNet Integration Services, Inc. (f/k/a Electronic Commerce, Inc.) a system
integrator based in Raleigh, North Carolina, for consideration that included
50,000 unregistered shares of the Company's common stock issued in reliance
upon Regulation D promulgated under the Securities Act of 1933, as amended.

ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>

Summary of Selected Financial Data
(in thousands, except per share data)
                                                               Year Ended December 31,
----------------------------------------------------------------------------------------------------
                                                   1997       1996       1995       1994       1993
----------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>        <C>          <C>        <C>

Consolidated Statement of Operations Data:
  Revenues:
    Software license fees                      $ 34,320   $ 30,703   $ 25,612   $ 21,399   $ 14,222
    Software upgrade fees and services           19,259     11,948      8,487      5,490      3,191
----------------------------------------------------------------------------------------------------
                                                 53,579     42,651     34,099     26,889     17,413

  Costs and expenses                             49,492     43,585     29,331     21,707     14,484
----------------------------------------------------------------------------------------------------
  Operating income (loss)                         4,087       (934)     4,768      5,182      2,929
  Other income, net                                 877        934      1,264        748        162
----------------------------------------------------------------------------------------------------
  Income before income taxes                      4,964         -       6,032      5,930      3,091
  Provision for income taxes                      1,819         -       2,230      2,375      1,149
----------------------------------------------------------------------------------------------------
  Net income                                   $  3,145   $     -    $  3,802   $  3,555   $  1,942
----------------------------------------------------------------------------------------------------

  Net income per share - basic                 $  0.39    $     -    $   0.51   $   0.55   $   1.18
  Net income per share - diluted               $  0.36    $     -    $   0.45   $   0.45   $   0.30

  Weighted average shares outstanding - basic    8,035       7,229      7,387      6,493      1,648
  Weighted average shares outstanding - diluted  8,692       7,915      8,480      7,833      6,450


(in thousands)                                                       December 31,
----------------------------------------------------------------------------------------------------
                                                 1997       1996       1995       1994       1993
----------------------------------------------------------------------------------------------------


Consolidated Balance Sheet Data:
  Cash, cash equivalents and short-term
    investments                                $ 29,289   $ 12,744   $ 18,419   $ 23,505   $  4,381
  Working capital                                37,066     23,198     24,968     28,815      7,689
  Total assets                                   55,583     36,683     33,461     36,144     12,208
  Long-term debt                                     -          -          -          -          -
  Total shareholders' equity                     46,258     31,130     29,849     32,473      9,869

</TABLE>

                                      -15-
<PAGE>

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

  This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained in this document that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this Annual Report on Form 10-K are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
Actual events and outcomes could differ materially from those anticipated in
these forward-looking statements as a result of many factors, including those
set forth in the risk factors described in Item 1 of this Annual Report on
Form 10-K.

 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>

     As a percentage                                                    Percentage changes
      of revenues                                                          year-to-year
------------------------------------------------------------------------------------------
  1997    1996    1995                                                    1996-97 1995-96
------------------------------------------------------------------------------------------
<S>        <C>    <C>       <C>                                           <C>        <C>
                            Revenues
  64%     72%     75%          Software license fees                         12%     20%
  36      28      25           Software upgrade fees and services            61      41
------------------------------------------------------------------------------------------
 100     100     100        Total revenues                                   26      25
                            Costs and expenses
   5       5       5           Costs of software license fees                31       9
  14       9       7           Costs of software upgrade fees and services   99      63
  41      51      43           Sales and marketing                            3      49
  16      15      15           Product development                           37      26
  13      14      16           General and administrative                    16      12
   2       8      --           Non-recurring charges                        (71)     --
------------------------------------------------------------------------------------------
  92     102      86        Total costs and expenses                         14      49
------------------------------------------------------------------------------------------
   8      (2)     14        Operating income (loss)                         538    (120)
   2       2       4        Other income, net                                (6)    (26)
------------------------------------------------------------------------------------------
   9      -       18        Income before income taxes                      100    (100)
   3      -        7        Provision for income taxes                      100    (100)
------------------------------------------------------------------------------------------
   6%     -%      11%       Net income                                      100%   (100)%
------------------------------------------------------------------------------------------
</TABLE>


 REVENUES

  Total revenues were $53.6 million, $42.7 million and $34.1 million in 1997,
1996 and 1995, respectively, representing increases of 26% from 1996 to 1997 and
25% from 1995 to 1996. These increases in total revenues were due to increases
in both license fees and software upgrade fees and services revenues, both
domestically and internationally.  The Company's international operations
accounted for approximately 14%, 9% and 9% of consolidated revenues for the
years ended December 31, 1997, 1996 and 1995, respectively.  See Note 1 in the
Notes to Consolidated Financial Statements.

   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. Effective for
periods beginning after December 15, 1997, the American Institute of Certified
Public Accountants has issued Statement of Position 97-2, "Software Revenue
Recognition." The statement sets new guidelines for the recognition of
software revenue. The adoption of the standards in this Statement of Position
is not expected to have a significant impact on the Company's consolidated
financial statements.

   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 document as the Company's customers.
Revenue related to software licensed to a customer through a Solution Provider
is recognized net of the discount to the Solution Provider. Software upgrade
fees and services revenues are primarily derived from fees paid for rights to
upgrades and updates ("maintenance"), telephone support, system integration
services, and training. Revenues from the maintenance program are recognized
proportionately over the term of the agreement which is typically 12-months.
Revenues for training and systems integration services are recognized as such
services are performed.

  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 $34.3 million, $30.7 million and $25.6 million in
1997, 1996 and 1995, respectively, representing increases of 12% from 1996 to
1997 and 20% from 1995 to 1996.  Software license fees as a percentage of total

                                      -16-
<PAGE>

revenues were 64%, 72% and 75% in 1997, 1996 and 1995, respectively, reflecting
the growth of software upgrade fees and services revenues associated with the
larger installed base, the high rate of participation in the maintenance
program, as well as the January 1997 purchase of a systems integration company,
XcelleNet Integration Services, Inc. ("XIS"), formerly Electronic Commerce, Inc.

  Software license fees from RemoteWare for NT products accounted for 71% and
18% of total license fee revenues for 1997 and 1996, respectively, reflecting
increasing market acceptance of RemoteWare for NT products released beginning in
1996.  While the Company intends to offer and support its RemoteWare for OS/2
products, the Company anticipates that sales of RemoteWare for NT will continue
to constitute an increasing proportion of total software license fees.

  Software license fees from new customers were $14.6 million, $13.3 million and
$11.1 million in 1997, 1996 and 1995, respectively, representing 43% of total
software license fees for all three years. The Company added 320, 296 and 301
new customers in 1997, 1996 and 1995, respectively. The average initial
RemoteWare purchase for these new customers was $46,000, $45,000 and $36,000
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 $19.7 million, $17.4
million and $14.5 million in 1997, 1996 and 1995, respectively, representing 57%
of total software license fees for all three years. 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.

  Software license fees generated by Solution Providers represented 27%, 38% and
48% of total software license fees in 1997, 1996 and 1995, 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 generally range from 20% to 30%, compared to 30% to 40% in
prior years. As a result, software license fees generated from Solution
Providers have decreased. During 1997, the Company took steps to leverage its
direct sales model by signing OEM agreements with two companies that private
label RemoteWare.  These agreements have not yet resulted in significant
revenue.

  Software Upgrade Fees and Services. Software upgrade fees and services
revenues were $19.3 million, $11.9 million and $8.5 million for 1997, 1996 and
1995, respectively, representing increases of 61% from 1996 to 1997 and 41% from
1995 to 1996. The percentage of total revenues derived from services increased
to 36% in 1997 from 28% in 1996 and 25% in 1995. The growth in software upgrade
fees and services revenues is due primarily to the Company's growing customer
base and their significant rate of participation in the maintenance program.
Because a significant portion of the Company's installed base is composed of
customers 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.

  Software upgrades fees and 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 $3.3 million, $438,000 and $343,000 in 1997, 1996 and 1995,
respectively.  Systems integration revenues increased in 1997 due to the
acquisition of XIS.

 Costs and Expenses

  Costs of software license fees. Costs of software license fees consist
primarily of amortization of capitalized software development costs, packaging
and documentation materials and royalties. Costs of software license fees were

                                      -17-
<PAGE>

$2.6 million, $2.0 million and $1.8 million in 1997, 1996 and 1995,
respectively, representing 8%, 6% and 7% of software license fees for those
years, respectively. These increases in absolute dollars are due primarily to
the increased amortization of capitalized software associated with the
RemoteWare for NT products and the increased royalties associated with new
products.

  Costs of software upgrade fees and services. Costs of software upgrade fees
and 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 software
upgrade fees and services for upgrades and enhancements shipped to customers
participating in the maintenance program. Costs of software upgrade fees and
services were $7.6 million, $3.8 million and $2.3 million in 1997, 1996 and
1995, respectively, representing 39%, 32% and 28% of software upgrade fees and
service revenues in those years, respectively. The 1997 increase is primarily
due to the Company's January 1997 acquisition of XIS, which expanded the
Company's system integration business.  The 1996 increase was primarily due to
increased personnel costs for field engineers, systems integration personnel and
trainers.

  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 $22.2 million, $21.6 million and $14.5
million in 1997, 1996 and 1995, respectively, representing 41%, 51% and 43% of
total revenues in those years, respectively. During 1997 sales and marketing
expenses decreased as a percentage of total revenues primarily due to lower
marketing personnel costs and lower marketing program costs resulting from a
more focused marketing campaign. 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 $1.9 million, $2.0 million
and $194,000 in 1997, 1996 and 1995, respectively.

  Product development.  The table below summarizes product development
expenditures:

<TABLE>
<CAPTION>
                                              Twelve Months Ended
                                              December 31,
(in thousands)                                  1997              1996              1995
--------------------------------------------------------------------------------------------
<S>                       <C>                 <C>               <C>               <C>
  Product development expenditures                $9,810            $8,559           $5,447
  Less:  capitalized software development costs     (970)           (2,108)            (319)
--------------------------------------------------------------------------------------------
  Net product development expenses                $8,840            $6,451           $5,128
--------------------------------------------------------------------------------------------

As a percentage of revenues:
  Product development expenditures                    18%               20%              16%
  Less:  capitalized software development costs      (2)%              (5)%             (1)%
--------------------------------------------------------------------------------------------
  Net product development expenses                    16%               15%              15%
--------------------------------------------------------------------------------------------
Capitalized product development rate                  10%               25%               6%
--------------------------------------------------------------------------------------------
</TABLE>


  Most product development costs are personnel-related. Product development
expenditures (expenses plus capitalized software development costs) were $9.8
million, $8.6 million and $5.4 million in 1997, 1996 and 1995, respectively,
representing increases of 15% from 1996 to 1997 and 57% from 1995 to 1996.
Beginning in 1995, the Company substantially increased its product development
expenditures in order to develop its RemoteWare for NT product.  These costs
were primarily personnel-related and included a number of independent
contractors.  The RemoteWare for NT development efforts were substantially
completed with the May 1997 release of RemoteWare for NT 3.2.

  In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed" ("SFAS 86"), 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
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 software license fees.

  Capitalized software development costs were $970,000, $2.1 million and
$319,000 in 1997, 1996 and 1995, respectively. The majority of the capitalized
software development costs in all three years related to the Company's
development of RemoteWare for NT, which was substantially completed in May 1997
with the release of RemoteWare for NT 3.2.

                                      -18-
<PAGE>

  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 $7.2 million, $6.2 million and $5.5 million in 1997, 1996 and 1995,
respectively, representing increases of 16% from 1996 to 1997 and 12% from 1995
to 1996. General and administrative expenses as a percentage of revenues were
13%, 14% and 16% in 1997, 1996 and 1995, respectively. The absolute dollar
increase in these costs during 1997 was primarily due to additional personnel
costs and the amortization of goodwill associated with the January purchase of
XIS.

  Non-recurring charges. The Company recorded non-recurring charges of $1.0
million during the third quarter of 1997 due primarily to severance and
facilities costs associated with the Company's organizational streamlining and
tighter focus on its remote systems management strategy.  During 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 non-recurring charge in the fourth quarter due to
uncertainties regarding its recoverability. In addition, during 1996, the
Company recorded non-recurring charges of $459,000 primarily representing
severance and hiring costs associated with certain key employees. See Note 6 to
the Consolidated Financial Statements.

   Provision for income taxes. The effective tax rate was 37%, 0% and 37% in
1997, 1996 and 1995, respectively. The effective tax rate varies from the
statutory tax rate of 34% due primarily to state income taxes, losses from
foreign operations, research and development tax credits and tax-exempt interest
income.  The effective tax rate in 1997 and 1995 exceeded the statutory rate due
primarily to state income taxes.  Since the Company reported no taxable income
in 1996, no provision was made for income taxes.

     Year 2000.  The Year 2000 issue is pervasive and presents both technical
and business risks that may affect much of the Company's business and industry.
The Year 2000 issue refers to the various problems that may result from improper
processing of dates and date-sensitive functions by computers and other
equipment before, during or after January 1, 2000 ("Millennium Date") with
respect to the change in century.  The Company has already begun to address this
problem by examining the code in its products, communicating with vendors
regarding their handling of the issue and notifying customers of its preliminary
findings on the issue through Product Notes and otherwise.  The Company expects
the Year 2000 issue to be an ongoing risk through and beyond the Millennium
Date, that may require a significant investment of time and resources to
correct.  The Company is unable to speculate as to the magnitude of the costs
that may be incurred at this time to eliminate the risk an can offer no
guarantee that such efforts will be successful given the breadth of this
worldwide issue.  Failure to successfully address the Year 2000 issue could have
a material adverse effect on the Company's business, results of operations and
financial condition.



LIQUIDITY AND CAPITAL RESOURCES

  Since 1994 the Company has financed its operations primarily through the
public sale of its common stock in its initial public offering in 1994 and its
follow-on public offering in 1997 and cash generated from operations.  At
December 31, 1997, the Company had $29.3 million in cash, cash equivalents and
short-term investments, $37.1 million in working capital and no long-term debt.

  Net cash provided by operating activities was $10.3 million, $1.7 million, and
$5.0 million in 1997, 1996, and 1995, respectively.  In 1997, cash provided by
operating activities resulted primarily from net income, depreciation and
amortization, and increases in current liabilities and deferred revenue.  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.  In 1995, net cash provided by operating activities consisted
primarily of net income plus depreciation and amortization, offset by an
increase in trade receivables.

  Net cash used in investing activities was $22.5 million, $1.5 million, and
$2.0 million in 1997, 1996, and 1995, respectively. In 1997, the net cash used
in investing activities resulted primarily from the investment of the proceeds

                                      -19-
<PAGE>

of the Company's public sale of its common stock in short-term investments and
fixed asset additions. 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.  In 1995, the net cash used in investing
activities resulted primarily from fixed asset additions 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 $10.1 million and $1.1 million
in 1997 and 1996, respectively. Net cash used in financing activities in 1995
was $6.4 million. Net cash provided by financing activities in 1997 consisted
primarily of the net proceeds from the issuance of common stock and in 1996
consisted of the proceeds from, and income tax benefits associated with, the
exercise of stock options. Net cash used in financing activities in 1995
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
will be invested in investment grade, interest-bearing securities.

  The Company's principal commitments consist primarily of leases on its
headquarters facilities. See Note 4 of Notes to Consolidated Financial
Statements.

  The Company believes cash flows from operations and existing cash and
investments will be sufficient to meet its cash requirements over at least the
next two years.




                                      -20-
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Public Accountants:

       To the Board of Directors of XcelleNet, Inc.:

       We have audited the accompanying consolidated balance sheets of
       XCELLENET, INC. (a Georgia corporation) AND SUBSIDIARIES as of December
       31, 1997 and 1996 and the related consolidated statements of operations,
       shareholders' equity, and cash flows for each of the three years in the
       period ended December 31, 1997.  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, 1997 and 1996 and the results of
       their operations and their cash flows for each of the three years in the
       period ended December 31, 1997 in conformity with generally accepted
       accounting principles.



       ARTHUR ANDERSEN LLP

       Atlanta, Georgia

       January 22, 1998


<TABLE>
<CAPTION>

Consolidated Balance Sheets
(in thousands, except share data)

                                                                                       December 31,
-------------------------------------------------------------------------------------------------------
                                                                                        1997      1996
-------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>         <C>
Assets
Current assets:
  Cash and cash equivalents                                                         $ 8,478   $10,587
  Short-term investments                                                             20,811     2,157
  Trade receivables, less allowance for doubtful accounts of $552 and $503
     at December 31, 1997 and 1996, respectively                                     14,395    13,306
  Prepaid expenses and other current assets                                           1,535     1,049
  Income tax receivable                                                                  -        793
-------------------------------------------------------------------------------------------------------
     Total current assets                                                            45,219    27,892
-------------------------------------------------------------------------------------------------------
Furniture, fixtures, and equipment, net                                               4,733     5,378
Capitalized software development costs, net of accumulated amortization of
  $2,785 and $1,566 at December 31, 1997 and 1996, respectively                       1,982     2,231
Intangible assets, net of accumulated amortization of $349
  at December 31, 1997                                                                2,415        -
Deferred income tax assets                                                              895       754
Other noncurrent assets                                                                 339       428
-------------------------------------------------------------------------------------------------------
                                                                                    $55,583   $36,683
-------------------------------------------------------------------------------------------------------


Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable                                                                  $   632   $ 1,207
  Accrued bonuses and commissions                                                     1,525     1,375
  Sales tax payable                                                                     353       360
  Note payable                                                                          400        -
  Deferred revenue                                                                    2,063       184
  Other current liabilities                                                           3,180     1,568
-------------------------------------------------------------------------------------------------------
     Total current liabilities                                                        8,153     4,694
-------------------------------------------------------------------------------------------------------
Long-term liabilities                                                                 1,172       859
Commitments and contingencies (Note 4)
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,
      8,300,421 shares issued and outstanding in 1997 and
      7,537,876 shares issued and 7,380,337 outstanding in 1996                          83        75
  Additional paid-in capital                                                         33,798    24,211
  Retained earnings                                                                  12,377     9,232
  Treasury stock at cost, no shares in 1997 and 157,539 shares in 1996                   -     (2,388)
-------------------------------------------------------------------------------------------------------
     Total shareholders' equity                                                      46,258    31,130
-------------------------------------------------------------------------------------------------------
                                                                                    $55,583   $36,683
-------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.


<TABLE>
<CAPTION>

Consolidated Statements of Operations
(in thousands, except per share data)

                                                               Year Ended December 31,
-------------------------------------------------------------------------------------------
                                                             1997        1996      1995
-------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>        <C>
Revenues
 Software license fees                                     $34,320     $30,703   $25,612
 Software upgrade fees and services                         19,259      11,948     8,487
-------------------------------------------------------------------------------------------
                                                            53,579      42,651    34,099
-------------------------------------------------------------------------------------------
Costs and expenses
 Costs of software license fees                              2,592       1,986     1,816
 Costs of software upgrade fees and services                 7,582       3,806     2,340
 Sales and marketing                                        22,231      21,628    14,500
 Product development                                         8,840       6,451     5,128
 General and administrative                                  7,222       6,218     5,547
 Non-recurring charges                                       1,025       3,496        -
-------------------------------------------------------------------------------------------
                                                            49,492      43,585    29,331
-------------------------------------------------------------------------------------------
Operating income (loss)                                      4,087        (934)    4,768
Other income, net                                              877         934     1,264
-------------------------------------------------------------------------------------------
Income before income taxes                                   4,964          -      6,032
Provision for income taxes                                   1,819          -      2,230
-------------------------------------------------------------------------------------------
Net income                                                 $ 3,145     $    -    $ 3,802
-------------------------------------------------------------------------------------------

Net income per share - basic                               $ 0.39      $    -    $  0.51
Net income per share - diluted                             $ 0.36      $    -    $  0.45

Weighted average shares outstanding - basic                  8,035       7,229     7,387
Weighted average shares outstanding - diluted                8,692       7,915     8,480

</TABLE>

The accompanying notes are an integral part of these consolidated statements.


Consolidated Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
--------------------------------------------------------------------------------------------
                                                                  1997      1996      1995
--------------------------------------------------------------------------------------------
<S>                                                             <C>       <C>       <C>
Cash Flows From Operating Activities:
  Net Income                                                   $  3,145  $    -    $ 3,802
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization                                4,496     3,202     2,373
    Writeoff of Worldlink product line                              -      3,037        -
    Issuance of restricted stock                                    -        124        -
  Change in assets and liabilities, net of acquisition
    Increase in trade receivables                                 (689)   (5,215)   (1,601)
    Increase in prepaid expenses and other current assets         (484)     (335)      (55)
    Decrease (increase)  in income taxes receivable                793      (271)      494
    Increase in deferred income tax assets                        (141)     (754)       -
    Increase in deferred revenue                                 1,879        64       114
    Increase (decrease) in current liabilities                   1,469     1,852      (191)
    (Decrease) increase in long-term liabilities                  (146)       25        18
--------------------------------------------------------------------------------------------
      Total adjustments                                          7,177     1,729     1,152
--------------------------------------------------------------------------------------------
      Net cash provided by operating activities                 10,322     1,729     4,954
--------------------------------------------------------------------------------------------

Cash Flows From Investing Activities:
  (Increase) decrease in short-term investments                (18,654)    6,958     1,655
  Purchases of furniture, fixtures, and equipment               (2,166)   (3,051)   (3,260)
  Additions to capitalized software development costs             (970)   (2,108)     (319)
  Purchase of Worldlink product line                                -     (3,037)       -
  Purchase of XIS net of cash acquired                            (719)       -         -
  Increase in long-term investments                                (47)     (225)      (35)
  Other                                                             39       (77)      (12)
--------------------------------------------------------------------------------------------
      Net cash used in investing activities                    (22,517)   (1,540)   (1,971)
--------------------------------------------------------------------------------------------

Cash Flows From Financing Activities:
  Proceeds from issuance of common stock, net
    of related costs                                            10,889       635       505
  Income tax benefits related to exercise of stock options         333       480     1,131
  Repayment of XIS assumed liabilities                            (388)       -         -
  Repayment of XIS note payable                                   (800)       -         -
  Purchase of treasury stock                                        -         -     (8,000)
  Other                                                             52       (21)      (50)
--------------------------------------------------------------------------------------------
      Net cash provided by (used in) financing activities       10,086     1,094    (6,414)
--------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents            (2,109)    1,283    (3,431)
Cash and cash equivalents, beginning of year                    10,587     9,304    12,735
--------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                         $ 8,478   $10,587   $ 9,304
--------------------------------------------------------------------------------------------

Supplemental disclosures:
  Interest paid                                                $    72   $    -    $    -
  Income taxes paid                                            $   486   $  887    $ 1,253
Non-cash investing activities:
  The Company purchased all of the capital stock
    of XIS.  In conjunction with the acquisition,
    liabilities were assumed as follows (in
    thousands):
  Fair value of non-cash assets acquired                           687
  Amount paid in excess of fair value                            2,565
  Less:  purchase price
    Cash paid, net                                      (719)
    Common stock issued                                 (775)
    Note payable issued                               (1,200)
                                                   ----------

      Total purchase price                                      (2,694)

                                                               =======
  Liabilities assumed                                          $   558
                                                               =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


<TABLE>
<CAPTION>

Consolidated Statements of Shareholders' Equity

(in thousands, except share data)

                                                        Common Stock       Treasury Stock      Additional
                                                  ------------------------------------------    Paid-In   Retained
                                                     Shares     Amount    Shares     Amount     Capital   Earnings     Total
  -----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>       <C>        <C>        <C>        <C>        <C>

Balance, December 31, 1994                         7,151,939    $71             -    $     -   $26,972    $ 5,430    $32,473
  Purchase of treasury shares                                            (527,879)    (8,000)                         (8,000)
  Exercise of stock options                          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                                               299,905      4,544    (4,282)                  262
  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
  Exercise of stock options                          122,623      1        52,995        803      (406)                  398
  Purchase of XIS                                                          50,000        758        17                   775
  Employee stock purchase plan shares issued          38,513      1                                464                   465
  Income tax benefits related to exercise
     of stock options                                                                              333                   333
  Net income                                                                                                3,145      3,145
  Sale of stock in public offering, net of expense   601,409      6        54,544        827     9,193                10,026
  Unrealized gain on short-term investments                                                         54                    54
  Foreign currency translation adjustment                                                          (68)                  (68)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                         8,300,421    $83             -    $    -    $33,798    $12,377    $46,258
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


<TABLE>
<CAPTION>

Quarterly Financial Information
(in thousands, except per share data)

(unaudited)
                                                                            Three Months Ended
 -----------------------------------------------------------------------------------------------------------------------------
                                               Mar. 31,  Jun. 30,  Sep. 30,  Dec. 31,  Mar. 31,  Jun. 30,  Sep. 30,  Dec. 31,
                                                 1996      1996      1996      1996      1997      1997      1997      1997
 -----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>        <C>        <C>       <C>       <C>       <C>       <C>       <C>
Revenues
 Software license fees                         $ 6,931   $ 7,381   $ 6,133   $10,258   $ 8,871   $ 7,695   $ 7,214   $10,540
 Software upgrade fees and services              2,519     2,745     3,227     3,457     4,479     4,344     4,969     5,467
-----------------------------------------------------------------------------------------------------------------------------
                                                 9,450    10,126     9,360    13,715    13,350    12,039    12,183    16,007
-----------------------------------------------------------------------------------------------------------------------------
Costs and expenses
 Costs of software license fees                    477       524       387       598       570       566       715       741
 Costs of software upgrade fees and services       731       856       938     1,281     1,688     1,812     2,055     2,027
 Sales and marketing                             4,368     5,471     5,384     6,405     5,407     5,938     4,867     6,019
 Product development                             1,341     1,561     1,500     2,049     2,041     2,363     2,259     2,177
 General and administrative                      1,489     1,393     1,506     1,830     1,867     1,666     1,712     1,977
 Non-recurring charges                              -         -        384     3,112        -         -      1,025        -
-----------------------------------------------------------------------------------------------------------------------------
                                                 8,406     9,805    10,099    15,275    11,573    12,345    12,633    12,941
-----------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                          1,044       321      (739)   (1,560)    1,777      (306)     (450)    3,066
Other income, net                                  288       265       204       177        90       250       249       288
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                1,332       586      (535)   (1,383)    1,867       (56)     (201)    3,354
Provision (benefit) for income taxes               466       223      (160)     (529)      738       (24)      (69)    1,174
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss)                              $   866   $   363   $  (375)  $  (854)  $ 1,129   $   (32)  $  (132)  $ 2,180
-----------------------------------------------------------------------------------------------------------------------------

Net income (loss) per share - basic            $  0.12   $  0.05   $ (0.05)  $ (0.12)  $  0.15   $    -    $ (0.02)  $  0.26
Net income (loss) per share - diluted          $  0.11   $  0.05   $ (0.05)  $ (0.12)  $  0.14   $    -    $ (0.02)  $  0.25

Weighted average shares outstanding - basic      7,129     7,204     7,238     7,345     7,467     8,160     8,218     8,282
Weighted average shares outstanding - diluted    7,852     7,883     7,238     7,345     8,352     8,160     8,218     8,860
-----------------------------------------------------------------------------------------------------------------------------

</TABLE>


Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995

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 remote systems management software that enables
systems administrators to more effectively and efficiently manage large numbers
of remote systems from a central site.  The Company conducts business worldwide
primarily in all regions of the United States as well as the United Kingdom,
Germany and Australia.

Basis of Presentation

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that

                                      -21-
<PAGE>

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.

Recent  Accounting Pronouncements

Effective for periods ending after December 15, 1997, the Financial Accounting
Standards Board ("FASB") has issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" ("SFAS 128").  This statement sets out
new guidelines for the calculation and presentation of earnings per share.  The
Company adopted SFAS 128 effective in the 1997 fourth quarter.  All prior period
earnings per share data were restated to conform with the provisions of SFAS
128.  The per share amounts reported under SFAS 128 are not materially different
from those calculated and presented under Accounting Principles Board Opinion
No. 15, "Earnings per Share."

Effective for periods beginning after December 15, 1997, the American Institute
of Certified Public Accountants has issued Statement of Position 97-2, "Software
Revenue Recognition."    The statement sets new guidelines for the recognition
of software revenue.  The adoption of the standards in this Statement of
Position is not expected to have a significant impact on the Company's
consolidated financial statements.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS 130").  SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.  SFAS 130 is effective
for the Company's fiscal year ending December 31, 1998.  Management does not
expect SFAS 130 to have a significant impact on the Company's consolidated
financial statements.

Also in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131").  SFAS 131 requires companies to determine reporting segments based
on the manner in which management makes decisions about allocating resources to
segments and measuring their performance.  Disclosures for each segment are
similar to those required under current standards, with the addition of certain
quarterly disclosure requirements.  SFAS 131 also requires entity-wide
disclosure about the products and services an entity provides, the countries in
which it holds material assets and reports material revenues, and its
significant customers. SFAS 131 is effective for financial statements for the
Company's fiscal year ending December 31, 1998.  The Company does not expect
that SFAS 131 will require significant revision of prior disclosures.

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:
<TABLE>
<CAPTION>
---------------------------------------------------------
in thousands                              At December 31,
                                          1997     1996
---------------------------------------------------------
<S>                                      <C>      <C>
Municipal securities                     $18,846   $1,658
U.S. Government agencies                     500      499
Corporate notes, bonds and securities      1,465        -
---------------------------------------------------------
Short-term investments                   $20,811   $2,157
---------------------------------------------------------
</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 or 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:

                                      -22-
<PAGE>

<TABLE>
<CAPTION>
in thousands                                 At December 31,
------------------------------------------------------------
                                             1997      1996
------------------------------------------------------------
<S>                                        <C>       <C>
Computer and other equipment               $ 9,378   $ 7,982
Furniture and fixtures                       3,223     2,540
Leasehold improvements                         729       676
------------------------------------------------------------
                                            13,330    11,198
Less:  accumulated depreciation             (8,597)   (5,820)
------------------------------------------------------------
Furniture, fixtures, and equipment, net    $ 4,733   $ 5,378
------------------------------------------------------------
</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 $970,000, $2,108,000 and $319,000 were
capitalized in 1997, 1996, and 1995, 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
$1,219,000, $644,000, and $332,000 in 1997, 1996, and 1995, respectively.

Long-Lived Assets and Intangible Assets

The Company assigns the carrying values to long-lived assets and certain
identifiable intangible assets based on expectations of undiscounted future cash
flows and operating income generated by the long-lived assets or the tangible
assets underlying the identifiable intangible assets.  These values are
periodically assessed to determine whether they are recoverable.

Revenue Recognition

The Company's revenues are generated from the licensing of its software
products; from fees paid for 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 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. Beginning in 1997
maintenance fees were billed annually. In 1996 and 1995 they were billed
quarterly. 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 $1,768,000, $2,171,000 and $194,000 for 1997,
1996 and 1995, respectively.  Advertising expense was $1,912,000, $2,027,000 and
$194,000 for 1997, 1996 and 1995, respectively.  Unamortized advertising costs
included in prepaid expenses were $0 and $144,000 at December 31, 1997 and 1996,
respectively.

                                      -23-
<PAGE>

Other Income, Net
Other income consists primarily of interest income. Interest income was
$925,000, $911,000, and $1,256,000 in 1997, 1996, and 1995, 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

Basic net income per share is computed based on net income and the weighted
average number of common shares outstanding.  Diluted net income per share
reflects the assumed issuance of common shares under incentive and stock option
plans.  The computation of diluted net income per share does not assume exercise
of securities that would have an antidilutive effect on net income per share.
The shares assumed issued related to stock options were 657,000, 686,000, and
1,093,000 in 1997, 1996, and 1995, respectively.

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
$(68,000), $63,000 and $(12,000) in 1997, 1996 and 1995, respectively.
Cumulative foreign currency translation adjustments were $8,000 and $76,000 at
December 31, 1997 and 1996, respectively.

Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.

Domestic and Foreign Operations

The Company's foreign subsidiaries accounted for approximately 14%, 9% and 9% of
consolidated revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company operates in a single industry segment, the computer
software industry.  A summary of the Company's operations by geographic area is
presented below.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------
       in thousands                   NORTH AMERICA    OTHER    CONSOLIDATED
--------------------------         -----------------------------------------
1997
<S>                                     <C>       <C>             <C>
Revenue                                 $46,149       $7,430      $53,579
Operating income                          3,350          737        4,087
Identifiable assets                      52,372        3,211       55,583
Depreciation expense                      2,704          194        2.898
Capital expenditures                      2,068           98        2,166

1996
Revenue                                  38,422        4,229       42,651
Operating loss                             (590)        (344)        (934)
Identifiable assets                      33,882        2,801       36,683
Depreciation expense                      2,400          158        2,558
Capital expenditures                      2,656          395        3,051
---------------------------------------------------------------------------

</TABLE>

                                      -24-
<PAGE>

<TABLE>
---------------------------------------------------------------------------
<S>                                   <C>           <C>           <C>
1995
Revenue                                  31,072        3,027       34,099
Operating income or loss                  4,916         (148)       4,768
Identifiable assets                      31,811        1,650       33,461
Depreciation expense                      1,887          154        2,041
Capital expenditures                      3,156          104        3,260
---------------------------------------------------------------------------
</TABLE>

The information presented above may not be indicative of results if the
geographic areas were independent organizations.  Intercompany transactions are
made at established transfer prices.

2. Shareholders' Equity

Follow-On Offering

On April 1, 1997, the Company successfully completed a follow on public offering
of its common stock.  The offering was comprised of 655,953 shares issued by the
Company (which included 54,544 shares issued from treasury stock) and 777,047
shares sold by existing shareholders at an offering price of $17.00 per share.
The net proceeds to the Company (after underwriting discounts and commissions
and other related costs ) totaled approximately $10,000,000.

Preferred Stock

At December 31, 1997 and 1996, 10,000,000,000 shares were authorized with a par
value of $.01 and none were issued or outstanding.

Stock Options

The Company maintains three stock option plans: the 1987 Stock Option Plan
("1987 Plan"), the 1994 Stock Option Plan for Outside Directors ("Director
Plan") and the 1996 Long-Term Incentive Plan ("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 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 725,453 options were exercisable at December 31, 1997.

Under the 1987 Plan, ISOs, NQSOs, and SARs to purchase a total of 2,650,000
shares were authorized for issuance, of which 942,058 options were outstanding
and 440,237 options were exercisable at December 31, 1997. Due to the expiration
of the 1987 Plan during 1997, there were no options available for grant at
December 31, 1997.  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 1987 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 NQSOs 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. There were
55,000 options available for grant at December 31, 1997.  A total of 237,500
options were outstanding, of which 127,500 options were exercisable at December
31, 1997.

During 1996, the Company adopted the LTIP, under which 3,000,000 shares were
authorized for issuance, of which 1,700,650 options were available for grant,
1,299,350 options were outstanding and 57,804 were exercisable at December 31,
1997. 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 generally
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 LTIP.

                                      -25-
<PAGE>

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, 1997, 99,912
options were outstanding and exercisable.

Changes in all outstanding options are as follows:
<TABLE>
<CAPTION>

                                       Price Range      Shares
---------------------------------------------------------------
<S>                                 <C>               <C>
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
    Granted                          8.25  -   20.50  1,139,325
    Exercised                         .07  -   16.25    177,618
    Forfeited                        1.08  -   23.50    489,765

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

Outstanding at December 31, 1997      .07  -   23.50  2,578,820
---------------------------------------------------------------
</TABLE>

In 1997, 1996 and 1995, the Company recognized income tax benefits of $333,000,
$480,000 and $1,131,000, respectively, related to disqualifying dispositions of
ISOs, NQSOs and Employee Stock Purchase Plan option exercises. These benefits
were recorded as increases to additional paid-in capital.

Stock - Based Compensation

During 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" ("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 Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("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.  The Company has computed for pro forma disclosure purposes the value of
all options granted during 1997, 1996 and 1995 using the Black-Scholes option
pricing model as prescribed by SFAS 123 using the following weighted average
assumptions:

                              Year Ended December 31,

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                 1997              1996              1995
------------------------------------------------------------------------------
<S>                        <C>               <C>               <C>
Risk free interest rate               6.13%             6.17%             6.48%
Expected dividend yield                  0%                0%                0%
Expected lives (years)           4.2 - 5.8         4.2 - 5.8         4.2 - 5.8
Expected volatility                   72.9%             73.6%             73.6%
</TABLE>

                                      -26-
<PAGE>

The total fair value of the options granted during the years ended December 31,
1997, 1996 and 1995 were computed as approximately $5,642,000, $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, 1997, 1996 and 1995 would have
been as follows:


<TABLE>
<CAPTION>
                      Year Ended  December 31,
----------------------------------------------
(in thousands)         1997     1996     1995
----------------------------------------------
<S>                   <C>     <C>       <C>
Net income (loss):
    As reported       $3,145  $     -   $3,802
    Pro forma          1,024   (2,027)   2,817
Basic EPS:
    As reported          .39        -      .51
    Pro forma            .13     (.28)     .38
Diluted EPS:
    As reported          .36        -      .45
    Pro forma            .12     (.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, 1997:
<TABLE>
<CAPTION>

                               Options Outstanding                         Options Exercisable
                   ------------------------------------------------  ----------------------------
                                Weighted-Average
     Actual          Number        Remaining                          Number
    Range of       Outstanding  Contractual Life  Weighted-Average  Exercisable  Weighted-Average
 Exercise Prices   at 12/31/97      In Years       Exercise Price   at 12/31/97   Exercise Price
-------------------------------------------------------------------------------------------------

<S>                <C>          <C>              <C>               <C>          <C>
$ .07 - $.07             40,362            .6            $  .07       40,362            $  .07
  .32 - .47              69,048           2.9               .42       69,048               .42
 1.08 - 1.08            104,085           4.5              1.08      104,085              1.08
 2.33 - 2.33             19,746           4.6              2.33       13,248              2.33
 4.00 - 4.00            173,562           5.7              4.00      138,717              4.00
 7.50 - 11.25         1,115,000           7.5              9.14      166,427             10.22
12.25 - 18.00           862,292           7.8             13.52      165,901             13.45
18.88 - 23.50           194,725           8.6             20.84       27,665             21.94
-------------------------------------------------------------------------------------------------
$ .07 - $23.50        2,578,820           7.2            $10.39      725,453            $ 7.26
-------------------------------------------------------------------------------------------------
</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.

Employee Stock Purchase Plan

During 1995, the Company established an employee discount stock purchase plan
for eligible employees of the Company and designated subsidiaries and authorized
300,000 shares for issuance under this plan. Participants may use up to 10% of

                                      -27-
<PAGE>

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, 1997, there were 218,152 shares of
stock reserved for issuance under this plan.  The weighted average fair value of
the purchase rights granted in 1997, 1996 and 1995 was $13.49, $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.  Motorola, Inc. subsequently
sold these shares in the Company's follow-on public offering effective April 1,
1997. 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.  To date, no shares have
been purchased under the plan.

Shareholder Protection Rights Agreement

On November 21, 1997, the Company entered into a Shareholder Protection Rights
Agreement pursuant to which one preferred stock purchase right was distributed
with respect to each outstanding share of the Company's common stock. When the
rights first become exercisable, unless a person or group has acquired 15% or
more of the Company's common stock,  each right will entitle holders of a share
of common stock to purchase one one-hundredth of a share of a new series of
junior participating preferred stock of the Company at an exercise price
initially equal to $75.00.  Each such fractional share of preferred stock is
equivalent in voting power to one share of the Company's common stock and would
be paid dividends at least equal to the dividends paid on each share of common
stock, if any.  The rights initially will trade together with the Company's
common stock and will not be exercisable unless certain triggering events occur.
Until exercisable, the rights will not have a dilutive effect on earnings per
share.

The rights will be exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's common stock, or announces a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company's common stock.  The rights are not
triggered by beneficial holders of 15% or more of the common stock at November
21, 1997, unless they subsequently increase their beneficial holdings. Following
the acquisition by any person or group of 15% or more of the Company's common
stock and control of the Company's Board of Directors, but prior to the
acquisition by such person or group of 50% of the common stock, the Board of
Directors may elect to exchange each outstanding right for one share of the
Company's common stock.  If a person or group acquires 15% or more of the
Company's common stock, the rights may become exercisable for common stock of
the Company having a market value of two times the right's exercise price. Under
certain circumstances the Company is acquired in a merger or other business
combination transaction and the rights have not been redeemed, each right not
previously exercised will entitle its holder to purchase, at the right's then
current exercise price, a number of the acquiring company's common shares having
a market value at the time of twice the right's exercise price.

The Company will be entitled to redeem the rights at one cent per right at any
time prior to the close of business on the tenth business day following an
announcement by the Company that a person or group has become the beneficial
owner of 15% or more of the Company's common stock.  The rights will expire on
November 21, 2007 unless earlier exchanged or redeemed.

3. Income Taxes
The components of the income tax provision are as follows:

<TABLE>
<CAPTION>

                  Year Ended December 31,
------------------------------------------
in thousands      1997     1996     1995
------------------------------------------

Current:
<S>             <C>      <C>     <C>
    Federal      $1,257  $ 621   $   1,792
    State           330    113         303
    Foreign           -     33           -
 -----------------------------------------
                  1,587    767       2,095
-------------------------------------------
</TABLE>

                                      -28-
<PAGE>

<TABLE>
<S>                <C>     <C>       <C>
Deferred:
    Federal         193   (663)        128
    State            39   (104)          7
    Foreign           -      -           -
------------------------------------------
                    232   (767)        135
------------------------------------------
                 $1,819  $   -   $   2,230
------------------------------------------
</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,
                                              1997   1996   1995
----------------------------------------------------------------
<S>                                           <C>    <C>    <C>
Statutory federal income tax rate               34%    34%    34%
Losses from foreign operations                  (3)    25      1
State income taxes, net of federal benefit       4      3      3
R&D tax credits                                 (5)   (35)    (3)
FSC tax benefit                                  -     (2)     -
State tax credits                               (1)    (9)     -
Nondeductible goodwill                           2      -      -
Tax exempt interest income                      (2)   (19)    (2)
Other, net                                       8      3      4
----------------------------------------------------------------
  Effective tax rate                            37%     -%    37%
----------------------------------------------------------------
</TABLE>

                                      -29-
<PAGE>

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:


<TABLE>
<CAPTION>

                                                        At December 31,
-----------------------------------------------------------------------
in thousands                                            1997      1996
-----------------------------------------------------------------------
<S>                                                   <C>       <C>

Deferred income tax liabilities:
    Capitalized software development costs            $   759   $   832
    Prepaid marketing expense                               -        55
    Other                                                 321        83
-----------------------------------------------------------------------
                                                        1,080       970
-----------------------------------------------------------------------

Deferred income tax assets:
    Software acquisition                               (1,081)   (1,115)
    Net losses from foreign subsidiaries                 (291)     (533)
    Deferred lease credits                               (256)     (302)
    Allowance for doubtful accounts receivable           (186)     (181)
    Deferred revenue                                     (166)        -
    Other                                                (286)     (126)
-----------------------------------------------------------------------
                                                       (2,266)   (2,257)
------------------------------------------------------------------------
Valuation allowance for deferred income tax assets        291       533
-----------------------------------------------------------------------
Net deferred income tax assets                        $  (895)  $  (754)
-----------------------------------------------------------------------
</TABLE>



Net income (loss) from the Company's foreign subsidiaries was $596,000,
$(258,000), and $(190,000) in 1997, 1996, and 1995, respectively. The income tax
benefit related to losses since inception of $291,000 and $533,000 at December
31, 1997 and 1996, respectively, has been offset by a valuation allowance due to
the uncertainty of realization.

                                      -30-
<PAGE>

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 2001. In 1997,
1996, and 1995, rent expense under these agreements totaled $2,358,000,
$1,754,000, and $1,131,000, respectively.

For financial reporting purposes, rent expense and lease incentives related to
the corporate headquarters 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 $739,000 and $885,000 at December 31, 1997 and
1996, respectively, the majority of which are included in long-term liabilities
in the accompanying balance sheets.

Future minimum payments due under all noncancelable operating lease agreements
at December 31, 1997 are as follows:

<TABLE>
<CAPTION>

Year Ending December 31
in thousands,
-----------------------
<S>           <C>
1998           $1,354
1999            1,317
2000              907
2001               41
2002                -
Thereafter          -
-----------------------
               $3,619
-----------------------
</TABLE>


Employment Agreements

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.


The Company has entered into change in control employment agreements with
certain officers.  An agreement becomes effective upon a change in control, as
defined in the agreement, or termination of employment in conjunction with or in
anticipation of, a change in control if such event occurs within the initial
two- or three-year term of the agreement or any one-year renewal period.  Once
an agreement is effective, an officer is deemed to have either a two- or three-
year employment period with the Company, depending upon the agreement.  If, at
any time during the employment period the officer is terminated by the Company
without cause or resigns for good reason (i.e. relocation or change in job
responsibilities), as such terms are defined in the agreements, or resigns
during the 30-day period after the first anniversary of the effective date of
the agreement, then the officer is entitled to receive a severance payment.  The
payment would be equal to the officer's base salary through the date of
termination, a prorata bonus (as defined in the agreements); one or two times
the officer's base salary and bonus, depending on the agreement; unpaid deferred
compensation and vacation pay; 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 the officer's unvested stock options at the date of
termination that otherwise would have vested within eighteen months or three
years of the date of termination, depending on the agreement,  or acceleration
of those unvested options to a date not later than the date of termination; and
certain continued employee benefits.

                                      -31-
<PAGE>

Legal Proceedings

The Company is subject to legal proceedings and claims that have arisen in the
ordinary course of business.  In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.


5. Related Party Transactions

On January 2, 1997, the Company completed the acquisition of XcelleNet
Integration Services, Inc.  ("XIS", formerly Electronic Commerce, Inc.) for a
total consideration comprising cash, future payments and stock of approximately
$2,675,000.  The transaction was accounted for as a purchase. The excess of the
purchase price over the tangible assets acquired totaled $2,565,000 and is being
amortized over 10 years.  The operating results of XIS since the date of
acquisition are included in the accompanying financial statements.

Prior to January 1997, Electronic Commerce, Inc. ("E-Comm") remarketed the
Company's software to end-user customers and was partially owned by the brother
of the Company's CEO. During 1995, the Company's CEO personally loaned E-Comm
$200,000 that was outstanding at December 31, 1996, in the form of an unsecured
note for working capital purposes. In conjunction with the acquisition of E-Comm
by the Company, this loan was paid back in full.

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 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.

6.  Non-recurring Charges

During the third quarter of 1997, the Company recorded non-recurring charges of
approximately $1,025,000 consisting of severance and facilities costs associated
with the Company's organizational streamlining and tighter focus on its remote
systems management strategy.

During the fourth quarter of 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," and accordingly, the purchase price was allocated to goodwill as
of the acquisition date.  An amount equal to the purchase price was included in
non-recurring charges on the Company's statement of operations due to
uncertainties regarding its recoverability.

In addition during  1996, the Company recorded non-recurring charges of $459,000
primarily representing severance and hiring costs associated with certain key
employees.





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

     None.

                                      -32-
<PAGE>

PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT.

          Information with respect to this item may be found in the sections
       captioned "Nominees for Director" appearing on pages 2 and 3 of the
       Company's Proxy Statement to be delivered to shareholders of the Company
       in connection with the Annual Meeting of Shareholders to be held April
       28, 1998 (the "Company's Proxy Statement"), and "Section 16 (a)
       Beneficial Ownership Reporting Compliance" appearing on page 15 of the
       Proxy Statement. Such information is incorporated herein by reference.
       Certain information regarding the executive officers of the Company is
       included in Item 1 of Part I of this Annual Report on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION.

          Information with respect to this item may be found in the sections
       captioned "Executive Compensation and Other Benefits" appearing on pages
       7 through 11 of the Company's Proxy Statement, "Other Information About
       the Board and Its Committees" appearing on pages 3 and 4 of the Company's
       Proxy Statement, and "Compensation and Stock Option Committee Interlocks
       and Insider Participation" appearing on page 13 of the Company's Proxy
       Statement.  Such information is incorporated herein by reference.  In no
       event shall the information contained in the sections captioned
       "Compensation and Stock Option Committee Report on Executive
       Compensation" on pages 11 and 12 of the Company's Proxy Statement, or
       "Performance Graph" on page 14 of the Company's Proxy Statement be
       incorporated herein by reference.



ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          Information with respect to this item may be found in the section
       captioned "Common Stock Ownership of Management and Certain Beneficial
       Owners" appearing on pages 5 and 6 of the Company's Proxy Statement. Such
       information is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          Information with respect to this item may be found in the sections
       captioned "Certain Relationships and Related Transactions" appearing on
       page 15 of the Company's Proxy Statement and "Compensation and Stock
       Option Committee Interlocks and Insider Participation" appearing on page
       13 of the Company's Proxy Statement.  Such information is incorporated
       herein by reference.




                                      -33-
<PAGE>

PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1.   LISTING OF FINANCIAL STATEMENTS.

     The following financial statements of XcelleNet, Inc. are set forth herein
in Part II,

Item 8:
     Consolidated Balance Sheets as of December 31, 1997 and 1996
     Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995
     Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
     Consolidated Statements of Cash Flows for the Years Ended December 31,
 1997, 1996 and 1995.

(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.

<TABLE>
<CAPTION>
Exhibit
Number   Exhibit Description
-------  -------------------
<C>      <S>
   3.01  Amended and Restated Articles of Incorporation of the Registrant.
   3.02  Amended and Restated Bylaws of the Registrant.
   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.
   4.03  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).
   4.04  Shareholder Protection Rights Agreement effective November 21, 1997 (Incorporated herein by
         reference to the Company's Form 8-K filed November 24, 1997).
  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 (Incorporated herein by reference to Exhibit 10.013 to the
         Company's Annual Report on Form 10-K for the year ended December 31, 1996).
</TABLE>

                                      -34-
<PAGE>

<TABLE>
<S>      <C>
 10.014  Eighth Amendment to the Lease Agreement between the Registrant and Concourse V Associates
         dated November 24, 1996 (Incorporated herein by reference to Exhibit 10.014 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
  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, as amended (the
         "Program") together with Form of Installment Note and Form of Pledge Agreement executed by
         participants in the Program.
 10.07*  Form of Agreement to License Software between the Registrant and Dennis M. Crumpler dated
         March 29, 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
         Corey M. Smith
         David F. Held
         Jethro J. Felton III
         Scott L. Duma
  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 January - June, 1997.
10.131*  Compensation Plan for W. Michael Parham July - December, 1997.
 10.14*  Compensation Plan for Jethro J. Felton, III July - December, 1997.
 10.15*  Written Description of XcelleNet, Inc. Performance Compensation Program.
</TABLE>

                                      -35-
<PAGE>

<TABLE>
<S>      <C>
  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).
 10.201  The Registrant's Software and Services Agreement.
  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 (Incorporated herein by reference to Exhibit 10.23 to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1996).
 10.24*  XcelleNet, Inc. 1996 Long-Term-Incentive-Compensation-Plan adopted by the Board of
         Directors on October 16, 1996 (Incorporated herein by reference to Exhibit 10.24 to the
         Company's Annual Report on Form 10-K for the year ended December 31, 1996).
 10.25*  Form of Change in Control Employment Agreements between the Company and Messrs.  Dennis
         M. Crumpler, Corey M. Smith, Shereef W. Nawar, W. Michael Parham, David F. Held and
         Stefanus F. Coetzee (Incorporated herein by reference to Exhibit 10.25 to the Company's Annual
         Report on Form 10-K for the year ended December 31, 1996).
  10.26* Restricted Stock Award Agreement effective September 17, 1996 between the Company and
         Corey M. Smith (Incorporated herein by reference to Exhibit 10.26 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 1997).
 10.261  OEM Software License Agreement Between the Registrant and McAfee Software, Inc. effective
         as of June 17, 1997 (Incorporated herein by reference to Exhibit 10.26 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
  10.27  System Integration Remarketer Agreement Between the Registrant and Avalan Technology
         effective as of May 5, 1997 (Incorporated herein by reference to Exhibit 10.27 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
  10.28* Form of Change in Control Employment Agreements between the Company and Mr.  Jethro J.
         Felton and Ms.  Jeanne N. Bateman (Incorporated herein by reference to Exhibit 10.28 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
  10.29* Form of Change in Control Employment Agreement between the Company and Mr. Scott L. Duma.
  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.
  27.02  Restated Financial Data Schedule for the quarter ended March 31, 1997.
  27.03  Restated Financial Data Schedule for the quarter ended September 30, 1997.
</TABLE>

(10).  Indicates executive officer compensation plans and arrangements.

                                      -36-
<PAGE>

(b)3. REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1997.
Form 8-K dated November 21, 1997:
     Reporting under Item 5 that the Company entered into a shareholder
protection rights agreement.

                                      -37-
<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:   March 30, 1998
                                ------------------------

     Pursuant to the requirements of Section 13 or 15(d) 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>
<S>  <C>                           <C>                                           <C>
     SIGNATURE                        TITLE                                       DATE
     ---------                        -----                                       ----

 /s/ Dennis M. Crumpler            Chairman of the Board and                     March 30, 1998
-------------------------------    Chief Executive Officer
   Dennis M. Crumpler              (Principal Executive Officer)

    /s/ David F. Held              Chief Financial Officer and                   March 30, 1998
-------------------------------    Assistant Secretary (Principal
      David  F. Held               Financial and Accounting Officer)

   /s/ Shereef W. Nawar            Chief Technical Officer and                   March 30, 1998
-------------------------------    Director
     Shereef W. Nawar

   /s/ Corey M. Smith              President and Director                        March 30, 1998
-------------------------------
      Corey M. Smith

  /s/ Stephen P. Bradley           Director                                      March 30, 1998
-------------------------------
    Stephen P. Bradley

    /s/ Donald L. House            Director                                      March 30, 1998
-------------------------------
      Donald L. House

   /s/ Richard C. Marcus           Director                                      March 26, 1998
-------------------------------
     Richard C. Marcus

   /s/ Geoffrey A. Moore           Director                                      March 30, 1998
-------------------------------
      Geoffrey A. Moore

    /s/ Richard L. Nolan           Director                                      March 30, 1998
-------------------------------
      Richard L. Nolan

    /s/ Jeffrey P. Parker          Director                                      March 30, 1998
-------------------------------
      Jeffrey P. Parker
</TABLE>
                                      -38-
<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


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

                                    EXHIBITS
                                       TO
                                 ANNUAL REPORT
                                       ON
                                   FORM 10-K

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

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


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

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number   Exhibit Description
-------  -------------------
<C>      <S>
   3.01    Amended and Restated Articles of Incorporation of the Registrant.
   3.02    Amended and Restated Bylaws of the Registrant.
   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.
  4.03*    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).
  4.04*    Shareholder Protection Rights Agreement effective November 21, 1997 (Incorporated herein by
           reference to the Company's Form 8-K filed November 24, 1997).
 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 (Incorporated herein by reference to Exhibit 10.013 to the
           Company's Annual Report on Form 10-K for the year ended December 31, 1996).
10.014*    Eighth Amendment to the Lease Agreement between the Registrant and Concourse V Associates
           dated November 24, 1996 (Incorporated herein by reference to Exhibit 10.014 to the Company's
           Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
 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).
</TABLE>
<PAGE>

<TABLE>
<S>        <C>
  10.06    Written description of XcelleNet, Inc. Key Employee Loan Program, as amended (the
           "Program") together with Form of Installment Note and Form of Pledge Agreement executed by
           participants in the Program.
 10.07*    Form of Agreement to License Software between the Registrant and Dennis M. Crumpler dated
           March 29, 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
           Corey M. Smith
           David F. Held
           Jethro J. Felton III
           Scott L. Duma
 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 January - June, 1997.
 10.131    Compensation Plan for W. Michael Parham July - December, 1997.
  10.14    Compensation Plan for Jethro J. Felton, III July - December, 1997.
  10.15    Written Description of XcelleNet, Inc. Performance Compensation Program
 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).
 10.201    The Registrant's Software and Services Agreement.
 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).
</TABLE>
<PAGE>

<TABLE>
<S>        <C>
 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 (Incorporated herein by reference to Exhibit 10.23 to the Company's
           Annual Report on Form 10-K for the year ended December 31, 1996).
 10.24*    XcelleNet, Inc. 1996 Long-Term-Incentive-Compensation-Plan adopted by the Board of
           Directors on October 16, 1996 (Incorporated herein by reference to Exhibit 10.24 to the
           Company's Annual Report on Form 10-K for the year ended December 31, 1996).
 10.25*    Form of Change in Control Employment Agreements between the Company and Messrs.  Dennis
           M. Crumpler, Corey M. Smith, Shereef W. Nawar, W. Michael Parham, David F. Held and
           Stefanus F. Coetzee (Incorporated herein by reference to Exhibit 10.25 to the Company's Annual
           Report on Form 10-K for the year ended December 31, 1996).
 10.26*    Restricted Stock Award Agreement effective September 17, 1996 between the Company and
           Corey M. Smith (Incorporated herein by reference to Exhibit 10.26 to the Company's Quarterly
           Report on Form 10-Q for the quarter ended March 31, 1997).
10.261*    OEM  Software License Agreement Between the Registrant and McAfee Software, Inc. effective
           as of June 17, 1997 (Incorporated herein by reference to Exhibit 10.26 to the Company's
           Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
 10.27*    System Integration Remarketer Agreement Between the Registrant and Avalan Technology
           effective as of May 5, 1997 (Incorporated herein by reference to Exhibit 10.27 to the Company's
           Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
 10.28*    Form of Change in Control Employment Agreements between the Company and Mr.  Jethro J.
           Felton and Ms. Jeanne N. Bateman (Incorporated herein by reference to Exhibit 10.28 to the
           Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
  10.29    Form of Change in Control Employment Agreement between the Company and Mr. Scott L. Duma.
  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.
  27.02    Restated Financial Data Schedule for the quarter ended March 31,
           1997.
  27.03    Restated Financial Data Schedule for the quarter ended September 30,
           1997.

</TABLE>


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