XCELLENET INC /GA/, S-3, 1997-02-24

XCELLENET INC /GA/
S-3, 1997-02-24
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XCELLENET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

GEORGIA 57-1749705
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER
5 CONCOURSE PARKWAY
SUITE 850
ATLANTA, GEORGIA 30328
(770) 804-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DENNIS M. CRUMPLER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
XCELLENET, INC.
5 CONCOURSE PARKWAY
SUITE 850
ATLANTA, GEORGIA 30328
(770) 804-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:

WILLIAM H. AVERY ALSTON & BIRD LLP CARLA S. NEWELL GUNDERSON DETTMER
ONE ATLANTIC CENTER 1201 WEST STOUGHVILLENEUVE FRANKLIN &
PEACHTREE STREET ATLANTA, GEORGIA HACHIGIAN, LLP 155 CONSTITUTION
30309-3424 (404) 881-7000 DRIVE MENLO PARK, CALIFORNIA 94025
(415) 321-2400

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF SHARES MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE (1)(2) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value
$.01 per share ........ $29,217,187.50 $8,853.69
</TABLE>
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(1) Based on 1,725,000 shares (including 225,000 shares subject to the
Underwriters' over-allotment option) offered at a price equal to 16.9375
per share, the average of the high and low prices reported for XcelleNet,
Inc. Common Stock on the Nasdaq National Market on Friday, February 21,
1997.
(2) Estimated solely for the purpose of determining the registration fee.

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 24, 1997

[LOGO OF XCELLENET APPEARS HERE]

1,500,000 SHARES

COMMON STOCK

Of the 1,500,000 shares of Common Stock offered hereby, 655,953 shares are
being sold by XcelleNet, Inc. ("XcelleNet" or the "Company"), and 844,047
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Shareholders. The Common Stock is traded under the
Nasdaq National Market symbol "XNET." On February 21, 1997, the last reported
sale price for the Common Stock, as reported on the Nasdaq National Market, was
$17.125 per share.

----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS(1)
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total (2)....................... $ $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company and the Selling
Shareholders, estimated at $287,460 and $112,540, respectively.
(2) The Company has granted to the Underwriters a 30-day option to purchase an
aggregate of up to an additional 225,000 shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively.

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The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that the delivery of the shares of Common
Stock will be made through the offices of Robertson, Stephens & Company LLC
("Robertson, Stephens & Company"), San Francisco, California, on or about ,
1997.

ROBERTSON, STEPHENS & COMPANY

ALEX. BROWN & SONS
INCORPORATED
PUNK, ZIEGEL & KNOELL

The date of this Prospectus is , 1997
<PAGE>

The Company's RemoteWare products make many popular
applications work more efficiently for remote users who
routinely work offline and connect intermittently.

RemoteWare for
Windows NT

The central element of the graphic is a set six horizontal bars stacked
vertically. The bottom bar is slightly larger than the top five bars and is
labeled "Queued Event Architecture (QEA) and Session Automation." The bar is
marked with a footnote the text of which reads "XcelleNet QEA and session
automation technology are the foundation of the RemoteWare products." The top
five bars are labeled "Messaging," "Groupware Transactions," "Database
Transactions," "Content Delivery" and "System and Application Management."

To the left of the central element is a graphical depiction of a corporate
intranet including a System Management Console, Groupware and E-mail Server,
Database, Intranet Server, a globe labeled WWW and a RemoteWare NT Server.

To the right of the central element is a graphical depiction of a notebook
computer and the names of five types of applications that are supported by the
RemoteWare product. These names are "E-Mail","Groupware Applications","Database
Applications","Browsers"' and "Software Distribution". Each name is connected to
one of the five bars of the central element by a line.

Beneath the central element is a depiction of telephone poles and lines with the
words "28.8 Kbps Dial-Up Connections."

Beneath the depiction of the telephone poles and lines is a graphical depiction
of the Internet with a 28.8 Kbps line connecting the notebook computer to the
Internet and a line labeled T1 connecting the Internet to the depiction of the
corporate intranet.

Side by side at the bottom of the graphic are copies of screens of the
RemoteWare NT product as seen on the RemoteWare NT server and on the notebook
computer. The screens are connected by a line to the graphical depiction of the
respective computers on which the screens would be seen.

The caption beneath the RemoteWare NT server screen reads "The RemoteWare
server, through its session automation services, provides a variety of flexible
scheduling options. The caption beneath the notebook screen reads "RemoteWare
Subscriber, using "push" and "pull" methods, enables users to select and
automatically receive multiple types of content for offline viewing."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BY ANY SELLING SHAREHOLDER OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 28
Management................................................................ 42
Principal and Selling Shareholders........................................ 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 49
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Incorporation of Certain Documents by Reference........................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>

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XCELLENET, THE COMPANY'S LOGO, REMOTEWARE AND REMOTECARE ARE REGISTERED
TRADEMARKS OF THE COMPANY. REMOTEWARE DISCOVERY SYSTEM, NETESSENTIALS, QUEUED
EVENT ARCHITECTURE, SESSIONXPRESS, SESSIONXPRESS BASIC, SUBSCRIBER, WORKSHOP,
REPLICATION AGENT AND ESSENTIALS ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS ALSO CONTAINS THE FOLLOWING TRADEMARKS AND TRADE NAMES OF OTHER
ORGANIZATIONS: OS/2(R) AND IBM(R) ARE TRADEMARKS OF INTERNATIONAL BUSINESS
MACHINES CORPORATION ("IBM"); SYBASE(R) AND SQL ANYWHERE(R) ARE TRADEMARKS OF
SYBASE, INC. ("SYBASE"), LOTUS NOTES(R) IS A TRADEMARK OF LOTUS DEVELOPMENT
CORPORATION, A WHOLLY OWNED SUBSIDIARY OF IBM ("LOTUS"); WINDOWS NT(R), BACK
OFFICE(R), SQL SERVER(R), EXCHANGE SERVER(R), ACTIVEX(R), AND INTERNET
EXPLORER ARE TRADEMARKS OF MICROSOFT CORPORATION ("MICROSOFT"); AND VANTIVE
ON-THE-GO(R) IS THE TRADEMARK OF THE VANTIVE CORPORATION ("VANTIVE"). ALL
OTHER TRADEMARKS AND TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE
PROPERTY OF THEIR RESPECTIVE OWNERS.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."

3
<PAGE>

SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Consolidated Financial Statements and
Notes thereto, appearing elsewhere or incorporated by reference in this
Prospectus.

THE COMPANY

XcelleNet develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information. These intermittently connected users have
traditionally included field sales and service workers and remote users in
branch offices or retail locations. The number of these users has grown
significantly as the ability to quickly and easily share information throughout
the enterprise has become a key asset. Increasingly, these users may also
include a broader constituency of both internal and external users who access
corporate intranets.

The Company's products make many popular messaging, groupware, database and
web-based applications work more effectively for remote users who routinely
work offline and connect intermittently. The foundation of the Company's
products is its Queued Event Architecture ("QEA") and its session automation
technology. QEA facilitates the automated staging of various types of user- and
system-initiated events that are executed whenever communication sessions
occur. Session automation technology provides secure, fast and reliable file
transfers and advanced session scripting to control which tasks occur before,
during and after a communication session. Session scripting and automation hide
the technical complexities of remote access computing from the user and provide
scheduling capabilities for the system administrator. The Company believes its
products can reduce its customers' operating and support costs by increasing
user productivity and improving system management for many remote users whose
corporate information needs are not adequately addressed by existing mainframe,
client/server and internet technologies.

The Company's original RemoteWare product family was introduced in 1989. The
first generation of RemoteWare products operates on the OS/2 server platform
and was marketed to corporations designing customized solutions for remote
sites and users. From its introduction, RemoteWare was designed to provide a
scalable, secure and user-friendly environment for the remote site automation
of business processes such as sales order entry, inventory query, field
activity reporting and catalog delivery. Consequently, the Company's early
marketing efforts were focused on industries with large numbers of remote sites
engaged in these activities. As of December 31, 1996, the Company had licensed,
directly or through its Solution Providers, RemoteWare for the IBM OS/2
platform ("RemoteWare for OS/2") to approximately 1,300 organizations and
approximately 470,000 users.

In 1995, the Company recognized the growing popularity of Windows NT as an
enterprise computing platform and the increased deployment of third-party and
customized applications based on industry standards. As a result, in early 1995
XcelleNet began committing significant resources to develop RemoteWare products
that (i) operate on Microsoft Windows NT servers and are integrated with
Microsoft Back Office products, (ii) embrace widely used Microsoft standards,
such as MAPI, ODBC and ActiveX, (iii) support industry leading products with
large installed bases of remote users such as IBM's Lotus Notes and Sybase's
SQL AnyWhere, and (iv) support internet standards and browser and server
offerings from Microsoft and Netscape.

In March 1996, the Company introduced RemoteWare for the Windows NT platform
("RemoteWare for NT"), which the Company believes will expand its potential
market and the number of its potential marketing partners. Software license
fees from RemoteWare for NT products accounted for 17% and 41% of the Company's
total Software license fees in the third and fourth quarters of 1996,
respectively.

The Company believes that the widespread adoption of internet technologies by
organizations with enterprise information networks and the emergence of
corporate intranets will create significant opportunities for the Company to
expand the applicability of its core technologies. The Company intends to
aggressively pursue these opportunities by developing and marketing a new
family of intranet system and application management utilities to be offered
under the NetEssentials name.

The Company was incorporated in Georgia in 1986. The Company's mailing
address is 5 Concourse Parkway, Suite 850, Atlanta, Georgia 30328, and its
telephone number is (770) 804-8100.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the
Company................... 655,953 shares
Common Stock Offered by the
Selling Shareholders....... 844,047 shares
Common Stock Outstanding
after the Offering......... 8,130,325 shares(1)
Use of Proceeds............ For working capital and general corporate purposes,
including potential acquisitions.
Nasdaq National Market
symbol..................... XNET
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996(2) 1995 1994
------- ------- -------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues...................................... $42,651 $34,099 $26,889
Operating income (loss)............................. (934) 4,768 5,182
Other income, net................................... 934 1,264 748
Net income.......................................... -- 3,802 3,555
Net income per share................................ $ -- $ 0.45 $ 0.45
Weighted average shares outstanding(3).............. 7,915 8,480 7,833
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $10,587 $20,901
Working capital......................................... 23,198 33,512
Total assets............................................ 36,683 46,997
Long-term debt.......................................... -- --
Shareholders' equity.................................... 31,130 41,444
</TABLE>
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(1) Based on shares issued and outstanding as of January 31, 1997. Excludes as
of January 31, 1997, 1,278,392 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1987 Stock Option Plan
(the "1987 Plan"), 240,000 shares of Common Stock issuable upon exercise of
options outstanding under the Company's 1994 Stock Option Plan for Outside
Directors (the "Director Plan"), 578,075 shares of Common Stock issuable
upon exercise of options outstanding under the Company's 1996 Long-Term
Incentive Plan (the "Long-Term Incentive Plan") and 101,172 shares of
Common Stock issuable upon exercise of other outstanding stock options. The
weighted average exercise price of such options is $10.55 per share. Also
excludes up to 2,576,353 additional shares of Common Stock reserved for
issuance pursuant to the 1987 Plan, the Director Plan and the Long-Term
Incentive Plan and 256,665 additional shares of Common Stock that could be
issued pursuant to the Company's 1995 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan").

(2) Operating income (loss), net income and net income per share include
nonrecurring charges of approximately $3.0 million related to the
acquisition of the WorldLink product line from The NetPlex Group, Inc. and
$459,000 primarily representing severance and hiring costs associated with
certain key employees.

(3) See Note 1 of Notes to Consolidated Financial Statements.

(4) Adjusted to give effect to the estimated net proceeds of this offering
based upon the sale of 655,953 shares of Common Stock offered by the
Company hereby at an assumed offering price of $17.125 per share.

Unless otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." This Prospectus contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Prospectus
that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document 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. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this Prospectus.

5
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act including without
limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this document 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. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus. In evaluating the Company's
business, prospective investors should consider carefully the following
factors in addition to the other information set forth in this Prospectus.

DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS

The market for the Company's products is characterized by rapid change in
computer hardware and software technology, evolving industry standards and
changing customer requirements, and is highly competitive with respect to
timely product innovation. The introduction of competitive products embodying
new technologies, the emergence of new industry standards and the acceptance
of new communications and data delivery channels, such as the Internet, may
render the Company's existing products or underlying technologies obsolete or
unmarketable. For example, the Company may be required to change and improve
its products in response to changes in operating systems, application and
networking software, computer and communications hardware, programming tools
and computer language technology. Announced and unannounced changes or errors
in operating and other systems with which the Company's products are used may
adversely affect the performance of the Company's products and require the
Company to modify its products to compensate for such changes or errors. As a
result, the Company's future success will depend in part upon its ability to
enhance its current products and services and develop new products and
services that maintain technological leadership, address the increasingly
sophisticated needs of customers, keep pace with new competitive product
offerings and emerging industry standards, and achieve broad market
acceptance. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products or product
enhancements, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.

In order to introduce and market new or enhanced products successfully with
minimal disruption in customer purchasing patterns, the Company must
effectively manage the transition from existing products. Announcements by the
Company or its competitors of new products, capabilities or technologies that
have the potential to replace or shorten the life cycles of the Company's
existing products may cause customers to defer purchases of existing Company
products. Furthermore, software products as complex as those offered by the
Company may contain undetected errors or compatibility issues following their
introduction or as new versions are released, which may result in reduced
orders, delays in collecting accounts receivable and additional service costs.
The Company has previously experienced delays in software development,
including delays in the commercial release of RemoteWare for the Windows NT
platform ("RemoteWare for NT"), and has discovered software errors in new
products after commercial release. There can be no assurance that the Company
will not encounter difficulties that could delay or prevent the successful and
timely development, introduction and marketing of potential new products or
product enhancements. Failure of the Company, for technological or other
reasons, to develop and introduce new products and product enhancements and
new services on a timely basis that are compatible with industry standards, to
respond to technological advances by others and satisfy changing customer
requirements, to successfully manage product transitions, and to minimize the
impact of errors in new products would have a material adverse effect on the
Company's

6
<PAGE>

business, operating results and financial condition. See "Business--Products,"
"--Products Under Development" and "--Product Development."

RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NT SERVER-BASED
PRODUCTS; IMPACT ON INSTALLED BASE OF OS/2 CUSTOMERS

In 1989, the Company released its original version of RemoteWare for the IBM
OS/2 platform ("RemoteWare for OS/2"). The Company designates its RemoteWare
for OS/2 products as the 2.x family and the most recently released version is
RemoteWare 2.5. In March 1996, the Company released its first version of
RemoteWare for NT, designated as the 3.x family. The most recent version of
the 3.x family is RemoteWare 3.1. The Company is currently investing
significant product development resources to produce version 3.2 of RemoteWare
for NT, which is scheduled to be released in the second quarter of 1997. Due
to the complexity of remote access computing software in general, and the NT
operating system environment in particular, version 3.2 is subject to
significant technical risks. Furthermore, software products as complex as
those currently under development by the Company are subject to frequent
delays and undetected errors or compatibility issues following their
introduction or as new versions are released. Because RemoteWare 3.1 was first
released commercially in September 1996, many customers licensing this version
have not yet fully deployed the product and there may remain undetected errors
or compatibility issues in this version. The existence of any such errors or
compatibility issues may delay the release of RemoteWare 3.2 and adversely
affect the acceptance of RemoteWare 3.1, as well as other future products,
either of which could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the Company will not encounter difficulties that could delay or prevent
the successful and timely development, introduction and marketing of future
versions of RemoteWare for NT. Moreover, even if such future versions are
developed and introduced, there can be no assurance that they will achieve any
significant degree of market acceptance. Failure to release these new
versions of RemoteWare for NT on a timely basis, or the failure of these new
versions, if and when released, to achieve any significant degree of market
acceptance, would have a material adverse effect upon the Company's business,
operating results and financial condition.

As the Company focuses on RemoteWare for NT, it must manage the impact on
the approximately 1,300 organizations that have purchased RemoteWare for OS/2.
These customers accounted for a substantial majority of the Company's license
fees in 1996. A substantial portion of RemoteWare for OS/2 customers
participate in the Company's software maintenance program, which accounted for
substantially all of the Company's service revenue in 1996. There can be no
assurance that updates to and enhancements for the Company's OS/2 products
will be sufficient to encourage its OS/2 customers to continue participation
in the Company's software maintenance program, that they will continue to
purchase additional products from the Company, that the Company will provide
an economically reasonable and technologically feasible migration path from
the OS/2 products to the NT products, or that any significant portion of the
Company's current OS/2 customers will migrate to its NT products. The failure
of the Company, for any reason, to provide sufficient updates to and
enhancements for its OS/2 products, or to provide an economically reasonable
and technologically feasible migration path from OS/2 to NT, or the failure of
OS/2 customers to migrate to the Company's NT products, would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Products" and "--Products Under
Development."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY

7
<PAGE>

products sold, the mix between revenues generated from license fees and
services, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, renewal rates for service
agreements, software defects and other product quality problems, the Company's
ability to attract and retain key personnel, the extent of international
sales, changes in the level of operating expenses, trends in the computer
industry, general economic conditions, extraordinary events such as
acquisitions or litigation and the occurrence of unexpected events. The
Company has recently acquired Electronic Commerce, Inc., a systems integration
company. To the extent revenues from the Company's systems integration
business increase as a percentage of services revenues, costs of services are
expected to increase as a percentage of services revenues. Historically, the
Company's software support and maintenance revenues have accounted for a
significant portion of the Company's total revenues. However, there can be no
assurance that such rates will not decline in the future and any such decline
could have a material adverse effect on the Company's business, operating
results and financial condition.

Sales of the Company's software products generally involve a significant
commitment of management attention and resources by prospective customers.
Accordingly, the Company's sales process is often lengthy and subject to
delays associated with the long approval process that accompanies significant
customer initiatives or capital expenditures. The Company's sales cycle, from
initial trial to complete installation, varies substantially from customer to
customer as a result of the foregoing factors. The Company does not believe
that its past revenue results are indicative of future growth rates. Because
the Company's staffing and operating expenses are based on anticipated revenue
levels and a high percentage of the Company's costs are fixed in the short
term, small variations between anticipated order dates and actual order dates,
as well as non-recurring or unanticipated large orders, can cause significant
variations in the Company's operating results from quarter to quarter. In
addition, the Company's expenditures for product development are treated
differently under applicable accounting standards depending upon the stage of
product development. Certain of the Company's development expenditures may be
expensed as incurred, while others are capitalized subject to amortization
over the expected useful lives of the products, causing significant variations
in the Company's operating results. For example, capitalized software
increased significantly in 1996 as a result of reaching technological
feasibility for RemoteWare for NT. As a result, the Company believes that
period to period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.

The Company has experienced, and may continue to experience, significant
seasonality in its business in the future. In previous years, the Company has
experienced a significant decline in revenues, and correspondingly, net
income, in the quarter ended September 30 compared to the quarter ended June
30. Revenues may be lower in the summer months when many businesses defer
purchase decisions. In addition, the September 30 quarter is the first quarter
of the Company's annual quota-based sales compensation plan and may be
affected by the efforts of direct sales representatives to accelerate
prospects' buying decisions into the quarter ended June 30, which is the final
quarter of their preceding annual plan. In addition, revenues have in the past
been relatively flat from the quarter ended December 31 to the quarter ended
March 31 primarily as a result of customers' year-end purchasing patterns.

8
<PAGE>

Due to all of the foregoing factors, it is likely that in some future
quarter or quarters the Company's operating results may be below the
expectations of securities analysts and investors. The Company has previously
failed to meet the expectations of securities analysts and investors, and
there can be no assurance that the Company will meet such expectations in the
future. Failure of the Company to meet such expectations would have a material
adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Discussion" and "Risk Factors--Volatility of Stock Price."

RISK OF INCLUSION OF REMOTE ACCESS UTILITY FUNCTIONALITY IN NETWORK OPERATING
SYSTEMS, NETWORK MANAGEMENT SOFTWARE OR INTRANET SERVER SOFTWARE

In the future, vendors of network operating systems, network management
software or intranet server software, such as Microsoft, IBM, Novell, Inc.,
and Netscape, may enhance their products to include some or all of the
functionality that is currently provided by the Company's remote access
software utilities. The inclusion of the functionality of the Company's
products as a standard feature of network operating systems, network
management software or intranet server software could, particularly if the
quality of such functionality were comparable to that of the Company's
products, render the Company's products obsolete and unmarketable.
Furthermore, even if the remote access software utilities provided as standard
features in network operating systems, network management software or intranet
server software were more limited than that of the Company's products, there
can be no assurance that a significant number of customers would not elect to
accept such limited functionality in lieu of purchasing additional software
from another vendor such as the Company. If any of the foregoing events were
to occur, they would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

COMPETITION

The market for remote access software, including the Company's specific area
of remote access utilities, is highly competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Many
software vendors offer products that are competitive with the products offered
by the Company. These competitors vary in size and in the scope and breadth of
the products and services offered. Within specific ranges of functionality,
the Company encounters competition from a number of sources including:
(i) enterprise system management tool vendors such as Microsoft, Tivoli
Systems, Inc. ("Tivoli"), a wholly owned subsidiary of IBM, and Computer
Associates International, Inc. ("Computer Associates"); (ii) messaging-enabled
application vendors such as Lotus and Microsoft; (iii) groupware vendors such
as Lotus; (iv) database application vendors such as Oracle Corporation
("Oracle"); (v) Internet software vendors such as Netscape and Microsoft; (vi)
content distribution software vendors, such as Microsoft, Pointcast Network
Corporation ("Pointcast") and BackWeb Technologies, Inc. ("BackWeb"); (vii)
remote access software and hardware vendors such as Microsoft, Shiva
Corporation ("Shiva") and Citrix Systems, Inc. ("Citrix"); (viii) vendors of
applications software who incorporate remote access utilities in their
software, such as Lotus; and (ix) custom software-based solutions developed by
internal management information systems personnel or third-party professional
service organizations. As the Company offers new products in the future, it
expects that in addition to facing competition from existing competitors it
will have additional competitors. Many of the Company's current competitors
are broadening the functionality of their product offerings. Because there are
relatively low barriers to entry in the software market, the Company also
expects additional competition from other established and emerging companies.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.

The Company believes 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 products and marketing approaches that will be more
successful than those of the Company. Many of the Company's current and
potential competitors have

9
<PAGE>

significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
remote computing needs of the Company's prospective customers. Accordingly, it
is possible that new competitors, alliances among competitors or alliances
between competitors and third parties may emerge and rapidly acquire
significant market share. If this were to occur, it would have a material
adverse effect on the Company's business, operating results and financial
condition.

The Company believes that the principal competitive factors affecting the
market it serves include vendor and product reputation, product architecture,
functionality and features, scalability, ease of use, quality of product and
support, performance, price, brand name recognition and effectiveness of sales
and marketing efforts. There can be no assurance that the Company can maintain
its competitive position against current and potential competitors, especially
those with significantly greater financial, marketing, service, support,
technical and other competitive resources, or that competitive pressures faced
by the Company would not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business-- Pricing"
and "--Competition."

RISKS ASSOCIATED WITH THE DEVELOPMENT AND INTRODUCTION OF THE NETESSENTIALS
PRODUCTS; IMPACT ON REMOTEWARE MARKET

The Company is currently investing significant research and development
resources in developing its NetEssentials family of products, which the
Company currently anticipates will consist of several products that are
derived from RemoteWare and are targeted at companies implementing corporate
intranets. The Company currently plans to release the first of such products,
SessionXpress Basic, in the second quarter of 1997, and currently plans to
release the other NetEssentials products at various times throughout 1997. Due
to the complexity of remote access computing software in general, and the NT
operating system and Internet standards in particular, and the difficulty in
gauging the engineering effort required to develop these planned new products,
the NetEssentials family of products is subject to significant technical
risks. Furthermore, software products as complex as those currently under
development by the Company are subject to frequent delays and undetected
errors or compatibility issues following their introduction or as new versions
are released. There can be no assurance that the Company will not encounter
difficulties that could delay or prevent the successful and timely
development, introduction and marketing of these planned new products.
Moreover, even if such planned new products are developed and introduced, the
Company believes that the market for intranet system management products in
general, and the market for the planned NetEssentials product line in
particular, are uncertain and there can be no assurance that the planned
NetEssentials products will achieve any significant degree of market
acceptance. Failure to release these planned new products on a timely basis,
or failure of these planned new products, if and when released, to achieve any
significant degree of market acceptance, would have a material adverse effect
on the Company's business, operating results and financial condition.

Each of the NetEssentials products is being designed to provide a tailored
subset of RemoteWare's functionality, and accordingly the NetEssentials
product line is being developed to include many capabilities similar to those
found in the Company's RemoteWare products. The Company intends to offer the
planned NetEssentials products at prices substantially less than those charged
for its RemoteWare products. There can be no assurance that the similarities
between the Company's RemoteWare products and its planned NetEssentials
products will not lead to confusion between the two product families.
Accordingly, there can be no assurance that customers will not purchase one or
more of the function-specific, lower-priced NetEssentials products in
preference to the more fully functional RemoteWare products, or that such
confusion will not lead to delays in customer purchasing decisions or cause
customers not to purchase the Company's products at all. Furthermore, there
can no assurance that the Company will not be forced to lower its prices for
the RemoteWare family of products in response to such reaction. The failure of
the Company to

10
<PAGE>

effectively manage the introduction of the planned NetEssentials products to
avoid any such confusion would have a material adverse effect on the Company's
business, operating results and financial condition.

The Company anticipates that, assuming it is successful in developing and
introducing the NetEssentials products, it may market the NetEssentials
products through different marketing channels than the Company uses in
marketing its RemoteWare products. In particular, the Company expects to
market the NetEssentials products through its newly created telesales function
and through the World Wide Web (the "Web"). The Company has no prior
experience in marketing its products through such channels. Failure of the
Company to successfully market the NetEssentials products through such
channels could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Products Under Development."

DEPENDENCE ON EMERGING REMOTE ACCESS COMPUTING MARKET AND INTRANET EXPANSION

The market for products that address the needs of remote access computing
for users intermittently connected to a corporate network or intranet is
relatively new and rapidly evolving. There can be no assurance that such a
market will continue to expand, or if it does, that the Company's products
will receive widespread acceptance. The continued growth of this market will
depend, in large part, upon the continued growth in portable computing devices
and communications hardware and software, expansion of Internet usage and the
number of organizations adopting or expanding intranets, the ability of
enterprise computing and communications infrastructures to support an
increasing number of remote users, and the continued development of new and
improved applications addressing the work requirements of remote users who can
better perform their jobs when able to use their applications offline. If the
remote access computing market fails to grow, or grows more slowly than the
Company currently anticipates, or if the use of intranets fails to expand,
there would be a material adverse effect on the Company's business, operating
results and financial condition.

In addition, as the remote access computing market continues to evolve, the
Company faces competition from companies that seek to provide remote access
computing solutions based upon approaches different from that employed by the
Company. Some of the vendors providing remote access computing solutions
through alternative approaches have significantly greater financial,
marketing, technical and other resources than the Company. As a result, they
may be able to create a market perception that their approaches are more
appropriate for a potential customer's remote computing solutions. There can
be no assurance that the market for remote computing solutions will not
ultimately be dominated by approaches other than the approach marketed by the
Company. See "Business--Industry Background" and "--Competition."

DEPENDENCE UPON CERTAIN LICENSES

The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, a spell checker and X.400 gateway API libraries,
some of which perform key functions within the Company's products. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or attempt to internally develop a
replacement for the function of the licensed software. The loss of or
inability to maintain any of these technology licenses could result in
interruptions in the availability of the Company's existing products and
delays in the introduction of new products and services until equivalent
technology, if available, is identified, licensed or developed, and
integrated. There can be no assurance that an alternative source of a suitable
product would be available or that the Company would be able to develop an
alternative product in sufficient time or at a reasonable cost. The failure of
the Company to obtain or develop an alternative product on a timely basis and
at a reasonable cost would have a material adverse effect

11
<PAGE>

on the Company's business, operating results and financial condition. See
"Business--Product Development" and "--Intellectual Property and Third Party
Licenses."

PRODUCT CONCENTRATION

The Company has derived substantially all of its revenues since inception
from the licensing of its RemoteWare software products and the provision of
related services, and expects that revenues from these products and services
to both new and existing customers will continue to account for a substantial
majority of revenues for the foreseeable future. As a result, the Company's
future financial performance will depend in large part on the continued market
acceptance of its RemoteWare software and services, as well as the Company's
ability to adapt and modify this software to meet the evolving needs of its
customers. The life cycles of the Company's products are difficult to estimate
due in large measure to the recent emergence of the remote access market, the
future effect of product enhancements, including developments in the hardware
and software environments in which the RemoteWare products operate, and future
competition. Declines in demand for the Company's products or the failure of
the RemoteWare products to gain widespread market acceptance, whether as a
result of competition, technological change or otherwise, would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Products."

DEPENDENCE ON KEY EMPLOYEES

The Company's success is dependent to a significant extent upon a number of
key technical and management employees and technical contractors, the loss of
one or more of whom could have a material adverse effect upon the Company's
business, operating results and financial condition. The future success of the
Company will depend in large part on its ability to attract and retain
talented and qualified personnel, particularly managerial and technical
personnel. Competition for highly qualified personnel in the computer software
industry is intense. There can be no assurance that the Company can retain its
key employees or that it can attract, assimilate and retain qualified
personnel in the future. The failure of the Company to retain its key
employees or to hire key personnel in the future would have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Employees" and "Management."

RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION; IMPACT OF CHANGES IN SOLUTION
PROVIDER PROGRAMS

An integral part of the Company's strategy is to continue to develop both
its internal direct sales force and its telesales function, as well as to
expand the role of third-party channels in the marketing and distribution of
the Company's products. 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 and telesales personnel and in establishing
and maintaining relationships with indirect channel partners such as systems
integrators, software and hardware vendors and other third parties. Although
the Company is presently committing significant resources to expand its sales
force and to develop distribution relationships with indirect channel
partners, the Company may at times experience difficulty in recruiting
qualified sales personnel and in establishing necessary third party alliances.
There can be no assurance that the Company will be able to attract or retain a
sufficient number of NT-qualified Solution Providers to adequately meet the
Company's needs. In addition, as the Company hires new sales personnel, it is
anticipated that there will be a delay before such personnel become
productive. Any failure by the Company to expand its direct sales and
telesales force and other distribution channels or the failure by the Company
to increase revenues commensurate with such expansion would have a material
adverse effect upon the Company's business, operating results and financial
condition.

Although the Company will focus on increasing its direct sales efforts, it
will continue to be dependent upon indirect channel partners. Certain indirect
channel partners also offer competing products or systems produced either by
third parties or by themselves. In addition, software reseller marketing and
distribution channels historically have experienced rapid change,
consolidations and financial difficulties. There can be no

12
<PAGE>

assurance that the Company's existing or future indirect channel partners will
continue to or be able to provide the level of services and technical support
required by the Company's customers, that the Company will be able to
effectively manage potential conflicts between its direct sales efforts and
its indirect channel partners, or among these partners, or that these partners
will not emphasize their own or third party products to the detriment of the
Company's products. The loss of indirect channel partners, the failure of such
parties to perform under agreements with the Company, or the inability of the
Company to attract and retain new indirect channel partners with the
technical, industry and application expertise required for the Company's
purposes in the future, could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Business Strategy," "--Sales and Marketing" and "--Services."

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 authorized to remarket RemoteWare and
remarketing discount rates that range from 20% to 30%, compared to 30% to 40%
in prior years. As a result, the Company expects that license fees generated
from Solution Providers as a percentage of total license fees will decrease in
the foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."

RISKS ASSOCIATED WITH FAILURE TO MANAGE GROWTH; POTENTIAL FUTURE ACQUISITIONS

The Company has recently experienced a period of significant growth that has
placed, and could continue to place, a significant strain on its management
and operations, including its sales, marketing, customer support, research and
development, finance and administrative operations. The Company's ability to
manage future growth, if any, will require the Company to continually enhance
its operational and financial control systems, implement new systems as
necessary, and will depend on its ability to attract, assimilate and retain
additional qualified personnel. The failure of the Company's management to
respond effectively to future growth would have a material adverse effect upon
the Company's business, operating results and financial condition.

The Company may in the future undertake acquisitions that could present
challenges to the Company's management. Acquisitions involve numerous risks,
including difficulties assimilating new operations and personnel, implementing
new business processes, the need to manage geographically remote business
units and the diversion of management attention from other business concerns.
Any acquisition, depending on its size, could result in the use of a
significant portion of the Company's cash, or if such acquisition is made
utilizing the Company's securities, could result in significant dilution to
the Company's shareholders. Furthermore, there can be no assurance that any
acquired products or service capacity will gain acceptance in the Company's
markets. Should the Company's management fail to respond effectively to these
challenges, it is possible that a future acquisition could have a materially
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT CLAIMS

The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and generally requires licensees to sign license
agreements that impose certain restrictions on licensees' right to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets, including but not limited to generally requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
code. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. In addition, the Company has applied for patents in the
United States and certain other countries with respect to certain aspects of
its software. None of these patents have been granted and there can be no
assurance that a patent

13
<PAGE>

will be issued pursuant to any of these applications or that, if granted, such
patent would survive a legal challenge to its validity or provide significant
protection to the Company.

For certain of its client products and the RemoteWare Discovery System, the
Company uses "shrinkwrap" licenses that are not signed by licensees to protect
its copyrights and trade secrets in those products. The Company also uses an
electronic version of a shrinkwrap license for all users of the trial version
of its SessionXpress Basic product distributed electronically through the
Company's web site. In addition, the Company expects to use shrinkwrap license
agreements for its NetEssentials products when commercially released. Since
these shrinkwrap licenses are not signed by the licensee, many authorities
believe that they may not be enforceable under many state laws and the laws of
many foreign jurisdictions. The laws of the State of Georgia, which govern
these licenses for the Company's products, continue to be unclear on this
subject. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States.

In 1995, the Company received a claim that it is infringing upon a third
party's intellectual property rights, and there can be no assurance that other
third parties will not in the future claim infringement by the Company with
respect to current or future products, trademarks or other proprietary rights.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or available at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Business--Intellectual Property and Third Party
Licenses."

VOLATILITY OF STOCK PRICE

The trading price of the Company's Common Stock has been subject to
significant fluctuations in the past. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations, particularly
among software companies, which often have been unrelated to the operating
performance of particular companies. Any announcement with respect to any
variance in revenue or earnings from levels generally expected by securities
analysts for a given period would have an immediate and significant effect on
the trading price of the Common Stock. In addition, factors such as
announcements of technological innovations or new products by the Company, its
competitors or other third parties, changing market conditions in the computer
software or hardware industries, changes in estimates by securities analysts,
announcements of extraordinary events, such as acquisitions or litigation, or
general economic conditions may have a significant impact on the market price
of the Common Stock. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against such companies. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Price Range of Common Stock."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

Approximately 9% of the Company's 1996 revenues were attributable to
revenues from outside of North America. The Company anticipates that over the
next several years it will increase its investment in international operations
and that an increasing percentage of its sales may be made outside North
America. There can be no assurance, however, that the Company will be able to
maintain or increase international

14
<PAGE>

market demand for the Company's products. International operations generally
are subject to certain risks, including difficulties in staffing and managing
foreign operations, fluctuations in foreign currency exchange rates,
compliance with foreign regulatory and market requirements, longer receivables
collection periods and greater difficulty in accounts receivable collection,
reduced protection for intellectual property rights in some countries,
potentially adverse tax consequences, variability of foreign political and
economic conditions and changing restrictions imposed by United States export
laws. There can be no assurance that the Company or its indirect channel
partners will be able to sustain or increase international revenues, or that
the foregoing factors will not have a material adverse effect on the Company's
future international revenues and, consequently, on the Company's business,
operating results and financial condition.

CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS

Upon completion of this offering, the Company's executive officers,
directors and their affiliates as a group, will beneficially own approximately
24.1%, of the Company's outstanding Common Stock (23.5% if the Underwriters'
over-allotment option is exercised in full). As a result, these shareholders
will be able to exercise significant influence over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. See "Management" and "Principal and
Selling Shareholders."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for
sale in the public market is limited by restrictions under the Securities Act
of 1933, as amended (the "Securities Act"), and lock-up agreements under which
the officers and directors of the Company have agreed not to sell or otherwise
dispose of any of their shares for a period of 90 days after the date of this
Prospectus without the prior written consent of Robertson, Stephens & Company.
However, Robertson, Stephens & Company may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. As a result of these restrictions, based on shares
outstanding and options granted as of January 31, 1997, the following shares
of Common Stock will be eligible for future sale. On the date of this
Prospectus, in addition to the 1,500,000 shares offered hereby, 4,874,048
shares of outstanding Common Stock will be eligible for sale and, to the
extent vested, an additional 1,867,075 shares subject to outstanding stock
options as of January 31, 1997. An additional 1,706,277 shares and, to the
extent vested, an additional 330,564 shares subject to outstanding stock
options as of January 31, 1997, will be eligible for sale 90 days after the
effective date of this offering upon expiration of the lock-up agreements and
in compliance with certain limitations set forth in the Securities Act. The
holders of certain shares of the Company's Common Stock are entitled to
include such shares in any registered offerings of the Company's Common Stock.
See "Shares Eligible for Future Sale."

ANTI-TAKEOVER PROVISIONS

The Board of Directors has authority to issue up to 10,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the Preferred Stock without further
vote or action by the Company's shareholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. While
the Company has no present intention to issue shares of Preferred Stock, such
issuance, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. See "Description of Capital Stock--Preferred
Stock." In addition, the Company's Amended and Restated Articles of
Incorporation and Bylaws contain provisions that may discourage proposals or
bids to acquire the Company. This could limit the price that certain acquirors
might be willing to pay in the future for shares of the Company's Common Stock
and there can be no assurance that such provisions will not have an adverse
effect on the market value of the Company's Common Stock in the future. See
"Description of Capital Stock--Certain Charter and Bylaw Provisions."

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<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 655,953 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$10.3 million (approximately $14.0 million if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
commissions and estimated offering expenses. The Company will not receive any
of the proceeds from the sale of shares by the Selling Shareholders. The
Company expects to use the net proceeds of this offering for general corporate
purposes, including working capital. A portion of the net proceeds may also be
used for the acquisition of businesses, products and technologies that are
complementary to those of the Company. The Company has no present plans,
agreements or commitments and is not currently engaged in any negotiations
with respect to any such transaction. Pending such uses, the net proceeds of
this offering will be invested in investment grade, interest-bearing
securities.

PRICE RANGE OF COMMON STOCK

The Common Stock of XcelleNet has been traded on the Nasdaq National Market
under the symbol "XNET" since XcelleNet's initial public offering in April
1994. The following table sets forth the range of quarterly high and low sale
prices of the Common Stock of XcelleNet on the Nasdaq National Market since
the Company's initial public offering.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Second Quarter (from April 14, 1994)......................... $ 14 $ 8
Third Quarter................................................ 15 3/4 6 3/4
Fourth Quarter............................................... 17 5/8 12 3/4
YEAR ENDED DECEMBER 31, 1995
First Quarter................................................ 31 3/4 14 3/4
Second Quarter............................................... 33 1/4 18 1/4
Third Quarter................................................ 23 3/4 16 1/4
Fourth Quarter............................................... 22 13 1/4
YEAR ENDED DECEMBER 31, 1996
First Quarter................................................ 15 1/4 8 3/4
Second Quarter............................................... 15 1/2 9 1/2
Third Quarter................................................ 14 1/2 8 3/4
Fourth Quarter............................................... 20 13 1/2
YEAR ENDED DECEMBER 31, 1997
First Quarter (through February 21, 1997).................... 23 1/4 15 3/4
</TABLE>

On February 21, 1997, the closing price of XcelleNet's Common Stock as
reported on the Nasdaq National Market was $17.125 per share. As of January
31, 1997, there were approximately 245 holders of record of the Company's
7,474,372 shares of outstanding Common Stock.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying cash dividends
in the foreseeable future.

16
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1996: (i) on an actual basis, and (ii) as adjusted to reflect the
sale by the Company of 655,953 shares of Common Stock offered hereby at an
assumed offering price of $17.125 per share (157,539 of which were reflected
as treasury stock as of December 31, 1996) and application of the estimated
net proceeds therefrom as described under "Use of Proceeds." This table should
be read in conjunction with the consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
Shareholders' equity:
<S> <C> <C>
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued
and outstanding actual or as adjusted.................. $ -- $ --
Common Stock, $.01 par value; 30,000,000 shares
authorized; 7,537,876 shares issued and 7,380,337
shares outstanding; 8,036,290 shares issued and
outstanding as adjusted(1)............................. 75 81
Additional paid-in capital.............................. 24,211 32,131
Retained earnings....................................... 9,232 9,232
Treasury stock at cost, 157,539 shares; none as
adjusted............................................... (2,388) --
------- -------
Total shareholders' equity............................... $31,130 $41,444
------- -------
Total capitalization.................................... $31,130 $41,444
======= =======
</TABLE>
- --------
(1) Assumes no exercise of options after December 31, 1996. Excludes as of
December 31, 1996, 1,327,756 shares of Common Stock issuable upon exercise
of options outstanding under the 1987 Plan, 240,000 shares of Common Stock
issuable upon exercise of options outstanding under the Director Plan,
437,950 shares of Common Stock issuable upon exercise of options
outstanding under the Long-Term Incentive Plan and 101,172 shares of
Common Stock issuable upon exercise of other outstanding stock options.
The weighted average exercise price of such options is $9.90 per share.
Also excludes up to 2,713,149 additional shares of Common Stock that could
be issued upon exercise of additional options available for grant under
the 1987 Plan, the Director Plan and the Long-Term Incentive Plan and
256,665 additional shares of Common Stock that could be issued pursuant to
the Employee Stock Purchase Plan.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statement of operations data for the years ended December
31, 1994, 1995 and 1996, and the consolidated balance sheet data at December
31, 1995 and 1996 are derived from the audited consolidated financial
statements included elsewhere in this Prospectus and should be read in
conjunction with those consolidated financial statements and notes thereto.
The consolidated statement of operations data for the years ended December 31,
1992 and 1993, and the consolidated balance sheet data at December 31, 1992,
1993 and 1994, are derived from audited consolidated financial statements not
included herein. The selected consolidated financial data set forth below
should also be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations.

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

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this document 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. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below, under "Risk
Factors" and elsewhere in this Prospectus.

OVERVIEW

The Company develops, markets and supports software utilities that improve
the manageability and enhance the performance of remote access computing for
users who routinely work offline and periodically dial in to enterprise
information systems to exchange or synchronize information. The Company was
incorporated in 1986 and began shipping its first product, RemoteWare for
OS/2, in 1989. In 1995, the Company began to develop RemoteWare for NT and
introduced its first such product, RemoteWare 3.0, in March 1996. In September
1996, the Company released version 3.1, and is currently investing a majority
of its software development resources to develop version 3.2.

The Company's revenues are derived from software license fees and services
related to its RemoteWare products. All of the Company's software license fees
currently result from noncancelable license agreements , including agreements
obtained directly by the Company and agreements obtained through Solution
Providers. Historically, services revenues have been derived substantially
from the Company's RCAP program, which bundles software maintenance and help
desk support for customers and Solution Providers. The Company's future
financial performance will depend in large part on the continued market
acceptance of its RemoteWare software and services, as well as the Company's
ability to adapt and modify this software to meet the evolving needs of its
customers. See "Risk Factors--Product Concentration."

License fees from the RemoteWare for NT products accounted for 17% and 41%
of total license fees in the third and fourth quarters of 1996, respectively.
The Company believes that Microsoft's Windows NT environment is emerging as
the predominant enterprise computing platform, and that its RemoteWare for NT
products will be applicable to a broader range of customers than its
RemoteWare for OS/2 products. While the Company intends to continue to offer
and support its RemoteWare for OS/2 products, the Company anticipates that
sales of the RemoteWare for NT products will constitute an increasing
proportion of total license fees. Because a significant portion of the
Company's installed base is composed of customers (including those who license
RemoteWare through Solution Providers) of the RemoteWare for OS/2 products,
the software maintenance revenue that may be received from those customers in
the future will depend in large part on the Company's ability to introduce
updates to or migration paths for its OS/2 products that encourage these
customers to participate in the Company's software maintenance program. See
"Risk Factors--Risks Associated with Development and Introduction of NT
Server-based Products; Impact on Installed Base of OS/2 Customers."

19
<PAGE>

The Company relies predominantly on its direct sales force to qualify and
sell to prospective customers. The Company also has a network of Solution
Providers who provide remarketing and/or integration services to RemoteWare
customers. During the second half of 1996, the Company began modifying its
Solution Provider channel model to place greater emphasis on Solution
Providers who offer substantial RemoteWare integration services. These and
other program changes that became effective January 1, 1997 have resulted in
fewer Solution Providers that are authorized to remarket RemoteWare and
remarketing discount rates that range from 20% to 30%, compared to 30% to 40%
in prior years. As a result, the Company expects that license fees generated
from Solution Providers as a percentage of total license fees will decrease.
See "Risk Factors--Risks Associated with Expanding Distribution; Impact of
Changes in Solution Provider Programs."

In accordance with generally accepted accounting principles, the Company
capitalizes certain costs incurred in developing computer software products.
Capitalized software development costs were $786,000, $319,000 and $2.1
million in 1994, 1995 and 1996, respectively. Capitalized software costs
increased in 1996 primarily due to the development of RemoteWare for NT.

The Company is currently investing significant resources to develop its
NetEssentials family of products that are derived from RemoteWare and that are
targeted at companies implementing corporate intranets. These products are
planned for release throughout 1997, beginning with the first product in the
second quarter. The Company believes that the market for intranet system
management products in general, and for the planned NetEssentials products in
particular, is highly uncertain and the development of these new products is
subject to significant technical risks. As a result, the Company does not
anticipate that the software license fees generated from the NetEssentials
products in 1997 will be material compared to its total revenues. Furthermore,
there can be no assurance that any customer confusion over the similar
capabilities of the NetEssentials and RemoteWare products will not result in
price erosion or reduced sales of the RemoteWare products. See "Risk Factors--
Risks Associated with the Development and Introduction of the NetEssentials
Products; Impact on RemoteWare Market."

In the fourth quarter of 1996, the Company purchased the WorldLink product
line from The NetPlex Group, Inc. for approximately $3.0 million in cash. The
purchase price of the WorldLink technology was allocated to goodwill as of the
acquisition date and written off as a nonrecurring charge in the fourth
quarter due to uncertainties regarding its recoverability. In January 1997,
the Company acquired all of the outstanding shares of Electronic Commerce,
Inc. ("E-Comm"), a systems integration company that had been one of the
Company's Solution Providers, for stock and cash valued at approximately $2.7
million. As a result of the E-Comm acquisition, the Company anticipates that
revenues from the Company's systems integration business will increase as a
percentage of services revenues in 1997, and that costs of services will
increase as a percentage of services revenues. See "Risk Factors--Fluctuations
in Quarterly Operating Results; Seasonality."

20
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total revenues of the line items in the Company's Consolidated Statements of
Operations and the percentage changes from the preceding periods:

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES YEAR-TO-YEAR CHANGES
---------------- ---------------------------
1994 1995 1996 1995 VS. 1994 1996 VS. 1995
---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees............... 80% 75% 72% 20% 20%
Services............................ 20 25 28 55 41
--- --- --- --- ----
100 100 100 27 25
--- --- --- --- ----
Costs and expenses:
Costs of license fees............... 4 5 5 48 9
Costs of services................... 7 7 9 31 63
Sales and marketing................. 43 43 51 25 49
Product development................. 9 15 15 116 26
General and administrative.......... 18 16 14 18 12
Nonrecurring charges................ -- -- 8 -- --
--- --- --- --- ----
81 86 102 35 49
--- --- --- --- ----
Operating income (loss).............. 19 14 (2) (8) (120)
Other income, net.................... 3 4 2 69 (26)
--- --- --- --- ----
Income before income taxes........... 22 18 -- 2 (100)
Provision for income taxes........... 9 7 -- (6) (100)
--- --- --- --- ----
Net income........................... 13% 11% --% 7% (100%)
=== === === === ====
</TABLE>

Revenues

Total revenues were $26.9 million, $34.1 million and $42.7 million in 1994,
1995 and 1996, respectively, representing increases of 27% from 1994 to 1995
and 25% from 1995 to 1996. These increases in total revenues were due to
increases in both license fees and service revenues.

The Company's revenues are derived from software license fees and services
related to its RemoteWare products. The Company recognizes revenue in
accordance with the Statement of Position 91-1 on "Software Revenue
Recognition" issued by the American Institute of Certified Public Accountants.
Software license fees are recognized when a noncancelable license agreement
has been signed, the product has been shipped and all significant contractual
obligations have been satisfied. The Company licenses its products directly to
licensees and through Solution Providers. All licensees, whether licensed
directly or through Solution Providers, are referred to throughout this
Prospectus as the Company's customers. Software licensed to a customer through
a Solution Provider is recognized net of the discount to the Solution
Provider. Services revenues are primarily derived from the RCAP program, which
includes help desk support and maintenance for customers and Solution
Providers, and to a lesser extent from training and systems integration
services. Revenues from the RCAP program are recognized proportionately over
the term of the 12-month agreement, while revenues for training and systems
integration services are recognized as services are performed. Starting in
December 1996, the Company began offering separate plans for software
maintenance and help desk support to all new customers and to existing
customers as their RCAP agreements expired. Software maintenance revenues will
be recognized over the term of their 12-month agreements.

Software License Fees. The Company currently derives all of its software
license fees from noncancelable license agreements for its RemoteWare
products. Software license fees were $21.4 million, $25.6 million and $30.7
million in 1994, 1995 and 1996, respectively, representing increases of 20%
from 1994 to 1995 and from 1995 to 1996. The increases in software license
fees reflect increased market acceptance by new customers and additional sales
to the Company's installed base. Software license fees as a percentage of
total revenues were 80%, 75% and 72% in 1994, 1995 and 1996, respectively,
reflecting the effect of the growth of services revenues associated with the
Company's larger installed base and the high rate of participation of
RemoteWare customers in the RCAP program.

21
<PAGE>

In March 1996, the Company released its first version of RemoteWare for NT,
and the most recent version was released in September 1996. Software license
fees from the RemoteWare for NT products accounted for 17% and 41% of total
software license fees in the third and fourth quarters of 1996, respectively.
The Company believes that Microsoft's Windows NT environment is emerging as
the predominant enterprise computing platform, and that its RemoteWare for NT
products will be applicable to a broader range of customers than its
RemoteWare for OS/2 products. While the Company intends to continue to market
and support its RemoteWare for OS/2 products, the Company anticipates that
sales of the RemoteWare for NT products will constitute an increasing
proportion of total software license fees.

Software license fees from new customers were $11.6 million, $11.1 million
and $13.3 million in 1994, 1995 and 1996, respectively, representing 54%, 43%
and 43% of total software license fees in those years, respectively. The
decline in the percentage of software license fees from new customers is
related to the growth of the Company's installed base and the additional
software purchased by this installed base of customers. The Company added 247,
301 and 296 new customers in 1994, 1995 and 1996, respectively. The average
initial RemoteWare purchase for these new customers was $46,000, $36,000 and
$45,000 during the same three years. Average initial purchase size varies as a
function of the number of clients and servers included in the sale, whether
the sale was direct or through a Solution Provider, and the specific products
and options licensed.

Software license fees from existing customers were $9.8 million, $14.5
million and $17.4 million in 1994, 1995 and 1996, respectively, representing
increases of 48% from 1994 to 1995 and 20% from 1995 to 1996. Existing
customers that purchase additional RemoteWare products do so to complete
deployment of an initial pilot or limited production implementation and to
extend RemoteWare to additional clients and projects within the enterprise.
The vast majority of the Company's existing installed base is composed of
customers who purchased RemoteWare for OS/2. See "Risk Factors--Risks
Associated with Development and Introduction of NT Server-based Products;
Impact on Installed Base of OS/2 Customers."

Software license fees generated by Solution Providers represented 40%, 48%
and 38% of total software license fees in 1994, 1995 and 1996, respectively.
During the second half of 1996, the Company implemented changes to its
Solution Provider channel to place greater emphasis on Solution Providers who
offer substantial RemoteWare integration services. These changes, and
additional program changes that became effective January 1, 1997, have
resulted in fewer Solution Providers that are authorized to remarket
RemoteWare and remarketing discount rates that range from 20% to 30%, compared
to 30% to 40% in prior years. As a result, the Company expects that software
license fees generated from Solution Providers as a percentage of total
software license fees will decrease in the foreseeable future. See "Business--
Sales and Marketing."

The Company is currently investing significant resources to develop its
NetEssentials family of products that are being derived from RemoteWare and
are being targeted to companies implementing corporate intranets. The Company
currently plans to release the first of such products, SessionXpress Basic, in
the second quarter of 1997 and the other NetEssentials products at various
times throughout 1997. The Company believes that the market for intranet
system management products in general, and the market for the planned
NetEssentials product line in particular, is highly uncertain. Furthermore,
the development of these new products is subject to significant technical
risks. As a result, the Company does not anticipate that the software license
fees generated from the NetEssentials products in 1997 will be material
compared to its total revenues. See "Risk Factors--Risks Associated with the
Development and Introduction of the NetEssentials Products; Impact on
RemoteWare Market."

Services. Services revenues have historically been derived substantially
from the Company's RCAP program, which bundles help desk support and software
maintenance for customers and Solution Providers. Services revenues were $5.5
million, $8.5 million and $11.9 million for 1994, 1995 and 1996, respectively,
representing increases of 55% from 1994 to 1995 and 41% from 1995 to 1996. The
percentage of total revenues derived from services increased from 20% in 1994
to 25% in 1995 and to 28% in 1996. The growth in services revenues, and the
relative significance of such revenues to total revenues, is primarily due to
the Company's growing customer base and their significant rate of
participation in the RCAP program. Because a significant portion of the
Company's installed base is composed of customers of the RemoteWare for OS/2
products, the software maintenance revenue that may be received from those
customers in the future will depend in large part on the Company's ability to
introduce updates to or migration paths for its OS/2 products

22
<PAGE>

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. See "Risk Factors--Risks
Associated with Development and Introduction of NT Server-based Products;
Impact on Installed Base of OS/2 Customers."

Services revenues also include field engineering and systems integration
services that are focused on selected RemoteWare customer implementations and
that facilitate Solution Provider development, certification and quality
assurance. The revenue generated from these activities totaled $152,000,
$343,000 and $438,000 in 1994, 1995 and 1996, respectively. In January 1997,
the Company acquired Electronic Commerce, Inc., a 14-person privately owned
systems integration company to provide project management and systems
expertise. Consequently, the Company anticipates that systems integration will
increase as a percentage of services revenues in 1997, and that the costs of
services will increase as a percentage of services revenues. See Note 7 of
Notes to Consolidated Financial Statements.

Costs and Expenses

Costs of license fees. Costs of license fees consist of amortization of
capitalized software, packaging and documentation materials, royalties and
personnel costs for shipping. Costs of license fees were $1.2 million, $1.8
million and $2.0 million in 1994, 1995 and 1996, representing 6%, 7% and 6% of
license fees for those years, respectively. The increases reflect the higher
volume of products shipped in each year, as well as increased amortization of
capitalized software development costs in 1996 associated with the development
of RemoteWare for NT. As a result of the higher level of software
capitalization in 1996, the Company anticipates an increase in amortization of
capitalized software development costs in 1997. This increase in amortization
may increase the costs of license fees as a percentage of software license
fees.

Costs of services. Costs of services consist primarily of personnel costs
for field services, customer support and training. In addition, a portion of
packaging and documentation materials and personnel costs for shipping are
allocated to costs of services for upgrades and enhancements shipped to
customers participating in the maintenance program. Costs of services were
$1.8 million, $2.3 million and $3.8 million in 1994, 1995 and 1996,
respectively, representing 33%, 28% and 32% of service revenues in those
years, respectively. These increases were primarily due to increased personnel
costs for field engineers, systems integration personnel and trainers. The
Company believes that costs of services will continue to increase as a
percentage of service revenues as a result of the Company's planned expansion
of its systems integration business.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions of direct sales and marketing personnel and marketing
program costs. These expenses were $11.6 million, $14.5 million and $21.6
million in 1994, 1995 and 1996, respectively, representing 43%, 43% and 51% of
total revenues in those years, respectively. The increase in sales and
marketing expenses, in absolute dollars and as a percentage of total revenues,
in 1996 was due primarily to a new advertising campaign initiated in 1996,
personnel additions and investments in Europe. Advertising expenses were
$707,000, $194,000 and $2.0 million in 1994, 1995 and 1996, respectively. The
Company expects that sales and marketing expenses will increase in dollar
amount in 1997, but may decrease as a percentage of total revenues.

Product development. The table below summarizes product development
expenditures:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
1994 1995 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Product development expenditures.................. $3,163 $5,447 $8,559
Less: capitalized software development costs...... (786) (319) (2,108)
------ ------ ------
Net product development expenses.................. $2,377 $5,128 $6,451
====== ====== ======
As a percentage of total revenues:
Product development expenditures.................. 12% 16% 20%
Less: capitalized software development costs...... (3%) (1%) (5%)
------ ------ ------
Net product development expenses.................. 9% 15% 15%
====== ====== ======
Capitalized product development rate............... 25% 6% 25%
====== ====== ======
</TABLE>

23
<PAGE>

Most product development costs are personnel related. Product development
expenditures (expenses plus capitalized software development costs) were $3.2
million, $5.4 million and $8.6 million in 1994, 1995 and 1996, respectively,
representing increases of 72% from 1994 to 1995 and 57% from 1995 to 1996.
These increases were primarily due to additional personnel costs (including
outside contractor costs) for development of RemoteWare for NT.

In accordance with Statement of Financial Accounting Standards No. 86 ("SFAS
86"), "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", the Company capitalizes certain costs incurred in
developing computer software products. These rules require capitalization of
certain product development expenses from the time technological feasibility
is established for a new product or significant enhancement of an existing
product until it is generally available for all customers. The Company defines
technological feasibility as the release of product to selected customers for
beta testing. Thus, capitalization levels each year depend on product
development cycles. The Company amortizes capitalized software development
costs on a product-by-product basis over periods not exceeding three years,
with such amortization included in costs of license fees.

Capitalized software development costs were $786,000, $319,000 and $2.1
million in 1994, 1995 and 1996, respectively. Capitalized software development
costs in 1994 related to the Company's RemoteWare for OS/2 products. The
substantial majority of the capitalized software development costs in 1995 and
1996 related to the Company's development of RemoteWare for NT.

General and administrative. General and administrative expenses consist
primarily of personnel costs for general management, finance and
administration, information systems and human resources. General and
administrative expenses were $4.7 million, $5.5 million and $6.2 million in
1994, 1995 and 1996, respectively, representing increases of 18% from 1994 to
1995 and 12% from 1995 to 1996. General and administrative expenses as a
percentage of revenues were 18%, 16% and 14% in 1994, 1995 and 1996,
respectively. The Company expects that general and administrative expenses
will increase in absolute dollars, but may fluctuate as a percentage of
revenues.

Nonrecurring charges. In November 1996, the Company purchased the WorldLink
product line from The NetPlex Group, Inc. for approximately $3.0 million in
cash. The purchase price of the WorldLink technology was allocated to goodwill
as of the acquisition date and written off as a nonrecurring charge in the
fourth quarter due to uncertainties regarding its recoverability. In addition,
the Company recorded nonrecurring charges of $459,000 primarily representing
severance and hiring costs associated with certain key employees. See Note 6
to the Consolidated Financial Statements.

Provision for Income Taxes

The effective tax rate was 40%, 37% and 0% in 1994, 1995 and 1996,
respectively. The 1994 rate exceeded the statutory rate primarily due to
losses in the Company's U.K. operations. Such losses will not provide a tax
benefit until those operations are profitable. The 1995 tax rate declined as a
result of increases in tax-exempt interest income and research and development
tax credits and a decrease in losses from the U.K. operation. Since the
Company reported no taxable income in 1996, no provision was made for income
taxes.

24
<PAGE>

QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data
for each of the eight quarters beginning January 1, 1995 and ending December
31, 1996, and the percentage of the Company's total revenues represented by
each item. This information has been derived from unaudited consolidated
quarterly financial statements of the Company, which include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the information when read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter are
not necessarily indicative of the results to be expected for any future
period.

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

25
<PAGE>

QUARTERLY DISCUSSION

License fees in the first half of 1995 increased 34% compared to the first
half of 1994 and 6% in the second half of 1995 compared to the same period in
1994. The slower growth rate experienced in the second half of 1995 continued
through the first half of 1996, with license fees increasing only 3% compared
to the first half of 1995. The Company believes that this 12-month period of
lower growth rates partly reflects purchasing delays of networking and remote
access systems as corporate information system departments evaluated the
applicability of Internet technology to enterprise information systems and the
impact of the Company's shift from its OS/2 product family to the RemoteWare
for NT products, which were initially released in March 1996.

The Company has experienced, and may continue to experience, significant
seasonality in its business and the Company's results of operations may be
affected by such trends in the future. In previous years, the Company has
experienced a significant decline in revenues, and correspondingly, net
income, in the quarter ended September 30 compared to the quarter ended June
30. Revenues may be lower in the summer months when many businesses defer
purchase decisions. In addition, the September 30 quarter is the first quarter
of the Company's annual quota-based sales compensation plan and may be
affected by the efforts of direct sales representatives to accelerate
prospects' buying decisions into the quarter ended June 30, which is the final
quarter of their preceding annual plan. In addition, revenues have in the past
been relatively flat from the quarter ended December 31 to the quarter ended
March 31 primarily as a result of customers' year-end purchasing patterns.

The Company has experienced and expects to continue to experience
significant fluctuations in quarterly operating results that may be caused by
many factors including, among others, the number, timing and significance of
product enhancements and new product announcements by the Company or its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of the Company's products on a timely basis, the length
of the Company's sales cycle, market acceptance of and demand for the
Company's products, the growth rate of the market for remote access products,
the mix of the Company's products sold, the mix between revenues generated
from license fees and services, customer order deferrals in anticipation of
enhancements or new products offered by the Company or its competitors,
renewal rates for service agreements, software defects and other product
quality problems, the Company's ability to attract and retain key personnel,
the extent of international sales, changes in the level of operating expenses,
trends in the computer industry, general economic conditions, extraordinary
events such as acquisitions or litigation and the occurrence of unexpected
events. Historically, the Company's software support and maintenance revenues
have accounted for a significant portion of the Company's total revenues.
However, there can be no assurance that such rates will not decline in the
future.

The Company's revenues are largely dependent on software license fees, which
are difficult to predict. Historically, the Company has operated with
virtually no order backlog because its software products are shipped as orders
are received. Moreover, the Company has often recognized a substantial portion
of its revenues in the last month of a quarter, with these revenues frequently
concentrated in the last two weeks of a quarter. As a result, license fee
revenues in any quarter are dependent on orders booked and shipped in that
quarter, and the revenues for any quarter may not be predictable until the end
of the quarter. Sales of the Company's software products generally involve a
significant commitment of management attention and resources by prospective
customers. Accordingly, the Company's sales process is often lengthy and
subject to delays associated with the long approval process that accompanies
significant customer initiatives or capital expenditures. The Company's sales
cycle, from initial trial to complete installation, varies substantially from
customer to customer as a result of the foregoing factors. The Company does
not believe that its past revenue results are indicative of future growth
rates. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short term, small variations between anticipated order dates and
actual order dates, as well as non-recurring or unanticipated large orders,
can cause significant variations in the Company's operating results from
quarter to quarter. In addition, the Company's expenditures for product
development are treated differently under applicable accounting standards
depending upon the stage of product development. Certain of the Company's
development expenditures may be expensed as incurred, while others are
capitalized subject to amortization

26
<PAGE>

over the expected useful lives of the products, causing significant variations
in the Company's operating results. For example, capitalized software
increased significantly in 1996 as a result of reaching technological
feasibility for RemoteWare for NT. As a result, the Company believes that
period to period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.

Due to all of the foregoing factors, it is likely that in some future
quarter or quarters the Company's operating results may be below the
expectations of securities analysts and investors. The Company has previously
failed to meet the expectations of securities analysts and investors, and
there can be no assurance that the Company will meet such expectations in the
future. Failure of the Company to meet such expectations would have a material
adverse effect on the price of the Company's Common Stock. See "Risk Factors--
Fluctuations in Quarterly Operating Results; Seasonality."

LIQUIDITY AND CAPITAL RESOURCES

Since 1994, the Company has financed its operations primarily through the
public sale of its Common Stock in its initial public offering in 1994, and
through cash generated from operations.

At December 31, 1996, the Company had $10.6 million in cash and cash
equivalents and $23.2 million in working capital and had no debt. Net cash
provided by operating activities was $3.5 million, $4.9 million, and $1.6
million in 1994, 1995, and 1996, respectively. In 1994 and 1995, net cash
provided by operating activities consisted primarily of net income plus
depreciation and amortization, offset primarily by increases in trade
receivables. In 1996, net cash provided by operating activities resulted
primarily from depreciation and amortization, the write-off of the WorldLink
product line, and an increase in liabilities, offset primarily by an increase
in trade receivables.

Net cash used in investing activities was $14.0 million, $1.9 million, and
$1.4 million in 1994, 1995, and 1996, respectively. In 1994, net cash used in
investing activities resulted primarily from the purchase of short-term
investments, fixed asset additions, and capitalized software. In 1995, the net
cash used in investing activities resulted primarily from the fixed asset
additions offset by a decrease in short-term investments. In 1996, net cash
used in investing activities resulted primarily from the purchase of the
WorldLink product line from The NetPlex Group, Inc., fixed asset additions,
and capitalized software, offset by a decrease in short-term investments. The
Company expects that its capital expenditures, primarily for computer
workstations and file servers, will remain approximately the same or increase
as the Company's employee base grows.

Net cash provided by financing activities was $18.9 million and $1.1 million
in 1994 and 1996, respectively. Net cash used in financing activities in 1995
was $6.4 million. Net cash provided by financing activities in 1994 consisted
primarily of net proceeds from issuance of common stock and in 1995 consisted
of the proceeds from, and income tax benefits associated with, the exercise of
stock options. Net cash used in financing activities resulted primarily from
the Company's purchase of treasury stock.

To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current
requirements, if any, will be invested in investment grade, interest-bearing
securities. The Company's principal commitments consist primarily of leases on
its headquarters facilities. See Note 4 of Notes to Consolidated Financial
Statements.

The Company believes that the net proceeds from the sale of Common Stock
offered by the Company hereby, together with its current cash balances and
anticipated cash flows from operations will be sufficient to meet its working
capital and capital expenditure requirements through 1997. There can be no
assurance that, in the event additional financing is required, the Company
will be able to raise such additional financing on acceptable terms or at all.

27
<PAGE>

BUSINESS

XcelleNet develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information. These intermittently connected users have
traditionally included field sales and service workers and remote users in
branch offices or retail locations. The number of these users has grown
significantly as the ability to quickly and easily share information
throughout the enterprise has become a key asset. Increasingly, these users
may also include a broader constituency of both internal and external users
who access corporate intranets.

The Company's products make many popular messaging, groupware, database and
web-based applications work more effectively for remote users who routinely
work offline and connect intermittently. The foundation of the Company's
products is its Queued Event Architecture ("QEA") and its session automation
technology. QEA facilitates the automated staging of various types of user-
and system-initiated events that are executed whenever communication sessions
occur. Session automation technology provides secure, fast and reliable file
transfers and advanced session scripting to control which tasks occur before,
during and after a communication session. Session scripting and automation
hide the technical complexities of remote access computing from the user and
provide scheduling capabilities for the system administrator. The Company
believes its products can reduce its customers' operating and support costs by
increasing user productivity and improving system management for many remote
users whose corporate information needs are not adequately addressed by
existing mainframe, client/server and internet technologies.

The Company's original RemoteWare product family was introduced in 1989. The
first generation of RemoteWare products operates on the OS/2 server platform
and was marketed to corporations designing customized solutions for remote
sites and users. From its introduction, RemoteWare was designed to provide a
scalable, secure and user-friendly environment for the remote site automation
of business processes such as sales order entry, inventory query, field
activity reporting and catalog delivery. Consequently, the Company's early
marketing efforts were focused on industries with large numbers of remote
sites engaged in these activities. As of December 31, 1996, the Company had
licensed directly or through its Solution Providers RemoteWare for the IBM
OS/2 platform ("RemoteWare for OS/2") to approximately 1,300 organizations and
approximately 470,000 users.

In 1995, the Company recognized the growing popularity of Windows NT as an
enterprise computing platform and the increased deployment of third-party and
customized applications based on industry standards. As a result, in early
1995 XcelleNet began committing significant resources to develop RemoteWare
products that (i) operate on Microsoft Windows NT servers and are integrated
with Microsoft Back Office products, (ii) embrace widely used Microsoft
standards, such as MAPI, ODBC and ActiveX, (iii) support industry leading
products with large installed bases of remote users such as IBM's Lotus Notes
and Sybase's SQL AnyWhere, and (iv) support internet standards and browser and
server offerings from Microsoft and Netscape.

In March 1996, the Company introduced RemoteWare for the Windows NT platform
("RemoteWare for NT"), which the Company believes will expand its potential
market and the number of its potential marketing partners. Software license
fees from RemoteWare for NT products accounted for 17% and 41% of the
Company's total software license fees in the third and fourth quarters of
1996, respectively.

The Company believes that the widespread adoption of internet technologies
by organizations with enterprise information networks and the emergence of
corporate intranets will create significant opportunities for the Company to
expand the applicability of its core technologies. The Company intends to
aggressively pursue these opportunities by developing and marketing a new
family of intranet system and application management utilities to be offered
under the NetEssentials name.

28
<PAGE>

INDUSTRY BACKGROUND

The ability to quickly and easily share information throughout the
enterprise has become a key asset in today's increasingly competitive business
environment. Accordingly, enterprise information systems have expanded to
include not only users who are local to central systems, but also those who
are remote. These remote users include branch office workers, mobile
professionals and telecommuters, and with the growing deployment of corporate
intranets, increasingly may include suppliers, distributors, customers and
sales prospects. The need to disseminate information to these remote users,
whether by electronic mail or more complex groupware or database applications,
is accelerating the deployment of remote access technology.

The needs of remote users can be classified by the nature of their
connection to a central system and the nature of the software applications
they use remotely. Connection methods can either be intermittent (e.g., dial-
up lines) or continuous (e.g., leased lines). Software applications can be
classified as offline or interactive, depending upon the degree of network
interaction required between the user and the network while the application is
in use.

Many dial-up users employ remote access software (generally known as "remote
node" software) to dial in to a network and function as a slow-speed,
interactive LAN user. This software provides transparent access to a network
and is a popular solution for interactive applications. Increasingly, many
client/server applications, such as electronic mail, workgroup software, and
databases, have been designed to allow users to download, review and modify
centrally stored data, and to synchronize any changes with the central data at
a later time. These applications are especially valuable for remote users who
need to work offline but also need access to the latest corporate information.
Such users need remote access utilities that can work over various
intermittent connections such as traditional dial-up lines and internet or
cellular services. They also need remote access utilities that can support and
coordinate multiple applications during a single, highly efficient connection.
Finally, they need remote access that is easy to use, secure, fast and
reliable.

Dial-up users also pose a challenge to the system administrator since
monitoring and maintaining remote users' hardware, software and data files is
inherently difficult if the user is not continuously connected to the
enterprise network. As the number of remote dial-up users grows, system
administrators need efficient and reliable tools to manage and support them.
The Company believes that as the Internet and corporate intranets become
popular tools for disseminating corporate information, remote system
management for dial-up users will become increasingly important to intranet
managers.

29
<PAGE>

THE XCELLENET SOLUTION

XcelleNet markets, sells and supports software utilities that address the
remote user's needs and the system management issues associated with
intermittently connected users who routinely work offline. RemoteWare provides
advanced system management capabilities and performance enhancements for many
popular messaging, groupware, database and web-based applications. For many
remote users, RemoteWare can make remote computing easier and more reliable
while reducing connect time and increasing the remote user's productivity.
RemoteWare also provides remote system management features and is typically
marketed to system administrators within large enterprises.

The following diagram illustrates the target market for the RemoteWare
family of products.

GRAPHIC: A set of horizontal and vertical axes is the basis for the graphic. The
vertical axis is labelled "Intermittent Connections (e.g., dial-up lines)" on
the top and "Continuous Connections (e.g., leased lines,)" on the bottom. The
horizontal axis is labelled "Interactive Applications" on the left and "Offline
Applications" on the right. Superimposed on the axes is a circle that is located
primarily in the "Northeast" quadrant but edges of which fall within the
"Northwest" and "Southeast" quadrants.
The word "RemoteWare" is centered in the circle.

The foundation of the Company's products is its Queued Event Architecture
and its session automation technology. QEA facilitates the automated staging
of various types of user- and system-initiated events that are executed
whenever communication sessions occur. Automated staging increases remote user
efficiency by queuing user-initiated network transactions, thereby allowing
the user to work productively offline. Session automation technology provides
secure, fast and reliable file transfers and advanced session scripting to
control which tasks occur before, during and after a communication session.
The combination of QEA and session automation allows the RemoteWare server to
"push" applications and various types of content to individual dial-up users
based on pre-defined user profiles. Similarly, the RemoteWare client may
"pull" content from the server by requesting or subscribing to specified
content. The Company's products provide advanced system management
capabilities that allow system administrators to manage user sessions, and to
deploy user-specific implementations of software and data files based on
individual user profiles.

Remote users sometimes require access to both interactive and offline
applications. For these users, RemoteWare can be used in conjunction with
remote node software to allow the user to work interactively in an application
during a communication session, while RemoteWare concurrently services the
offline applications and performs system management tasks in the background.

BUSINESS STRATEGY

The Company's objective is to become the leading provider of software
utilities that improve the manageability and enhance the performance of remote
access computing for users who routinely work offline, but periodically need
to exchange and synchronize information with enterprise application resources.

30
<PAGE>

Important features of the Company's strategy are to:

Enhance Functionality and Extend Applicability of RemoteWare for NT. The
Company intends to continue to enhance RemoteWare for NT by including more
robust software distribution and asset management capabilities and other
features. The Company also intends to pursue opportunities to adapt its system
management capabilities to work with other vendors' system management
products. The Company plans additional feature and performance improvements
that embrace industry standards and support popular messaging, groupware,
database and web-based applications. The Company also intends to focus its
RemoteWare development and marketing efforts on complementing and enhancing
third-party products that are designed for offline use and have large and
growing installed bases, such as Lotus Notes, SQL AnyWhere and Vantive On-the-
Go. Specifically, the Company has recently introduced products to improve the
replication efficiency of Lotus Notes for remote users. To further extend the
applicability of RemoteWare, the Company plans to pursue technology alliances
and OEM relationships with vendors of complementary hardware and software
products.

Leverage Microsoft Technologies. The Company believes that Microsoft's
Windows NT environment is emerging as the predominant enterprise computing
platform. By leveraging Microsoft's enterprise platform, the Company believes
that its RemoteWare for NT products will be applicable to a broader range of
customers than its OS/2-based products. The Company intends to expand its
support for Microsoft technologies, including further integration with
Microsoft Back Office products such as Exchange Server, and to leverage the
Microsoft Solution Provider channel for complementary sales and support
services.

Pursue Intranet System Management Opportunities. As corporate intranets are
increasingly used to disseminate information and software to remote users, the
Company is seeking to leverage its core technologies to address intranet
system management. The Company intends to aggressively pursue these
opportunities by developing and marketing a new family of intranet system
management and application enhancement utilities called NetEssentials. This
line of products, which is currently under development, is being designed to
support internet standards and browser and server offerings from Microsoft and
Netscape, and is derived from RemoteWare's QEA and session automation
technology. A trial version of SessionXpress Basic, the first of these
products, was released on the Company's web site in February 1997.

Expand Distribution and Marketing Channels. The Company relies on its direct
sales force as its primary distribution channel and intends to increase the
number of its direct sales personnel in the future. In addition, the Company
is developing new distribution and marketing channels for its RemoteWare
product family and the NetEssentials product line. These new channels will
include a telesales function, indirect sales through OEM and bundling
arrangements, and web-based marketing. The Company's objectives for these new
channels are to facilitate product trials, generate qualified leads, and
generally increase market awareness and sales of the Company's products.

PRODUCTS

The Company's products improve the manageability and enhance the performance
of remote access computing for users who routinely work offline and
periodically dial in to enterprise systems to exchange or synchronize
information.

The foundation of the Company's products is its Queued Event Architecture
and its session automation technology. QEA's three-tier, client/agent/server
design facilitates the automated staging of various types of user- and system-
initiated events. Automated staging increases remote user efficiency by
queuing user-initiated network transactions, thereby allowing the user to work
productively offline. These events may include database transactions (such as
the entry of sales orders), the sending and receiving of electronic mail, the
replication of Lotus Notes databases or the request for web pages to be viewed
offline. Similarly,

31
<PAGE>

system-initiated transactions tailored to each remote user are queued at the
central site server. These events typically include software upgrades and
updates to standard corporate data such as product catalogs, price lists,
sales reports and administrative manuals. Whenever a connection takes place,
whether initiated by the user or the system, the events queued at the user
site and the events queued at the central site are executed automatically.

The Company's session automation technology provides secure, fast, and
reliable file transfers and advanced session scripting to control which tasks
occur before, during and after communication sessions. XcelleNet's products
can reduce online connection time by performing pre-connection processing,
using compression algorithms and employing automated checkpoint restart and
recovery to avoid duplicate processing when a session is terminated
prematurely.

The combination of QEA and session automation allows the RemoteWare server
to "push" applications and various types of content to individual dial-up
users based on pre-defined user profiles. Similarly, the RemoteWare client may
"pull" content from the server by requesting or subscribing to specified
content.

RemoteWare Products

In 1989, XcelleNet released its original version of RemoteWare for OS/2. The
Company designates its RemoteWare for OS/2 products as the 2.x family and the
most recently released version is RemoteWare 2.5. In March 1996, the Company
released its first version of RemoteWare for NT, designated as the 3.x family.
The most recent version of the 3.x family is RemoteWare 3.1. The Company
intends to continue to offer and support its RemoteWare 2.x family, but
believes that sales of RemoteWare for NT products will constitute an
increasing proportion of the Company's RemoteWare sales. "See Risk Factors--
Risks Associated with Development and Introduction of NT Server-based
Products; Impact on Installed Base of OS/2 Customers."

RemoteWare consists of two components: the RemoteWare server software
installed at the central site and the RemoteWare client software installed on
each user's personal computer. The RemoteWare server software provides
integrated facilities for:

. Session automation services providing a variety of flexible scheduling
options through advanced session scripting; secure, fast, and reliable
file transfers; checkpoint restart and recovery; and compression
algorithms.

. System management services, enabling remote client systems to be managed
through electronic software distribution and version management,
providing disk and memory monitoring and offering problem logging and
reporting capabilities.

. Communications services, providing support for multiple transports and
protocols, such as asynchronous serial communications, TCP/IP, IPX/SPX
and NetBios.

. Messaging services, providing support for Microsoft Messaging API
("MAPI"), which permits MAPI-enabled applications to benefit from the
speed and reliability of RemoteWare's session automation services.

. Subscription and publishing services, enabling RemoteWare Subscriber
users to select and automatically receive multiple types of content for
offline viewing using "push" and "pull" methods (Extended Client only).

. User environment management services, allowing administrators to
centrally create, manage and distribute password-protected graphical
application menus to insulate RemoteWare Workshop users from the
complexities of the client operating system (Extended Client only).

RemoteWare servers support up to 32 simultaneous communication sessions per
server and are designed to support clustering of up to five servers. To date,
the largest installation of RemoteWare is on an OS/2 system that supports
approximately 13,000 licensed clients. The cluster feature for RemoteWare for
NT has

32
<PAGE>

been made available only to a limited number of customers in RemoteWare 3.1.
Because RemoteWare 3.1 was commercially released in September 1996, many
customers licensing this version have not yet fully deployed the product and
there may remain undetected errors or compatibility issues in this version.
See "Risk Factors--Risks Associated with Development and Introduction of NT
Server-based Products; Impact on Installed Base of OS/2 Customers."

The RemoteWare client provides an easy-to-use interface that simplifies
communication sessions with the RemoteWare server and takes advantage of the
server's integrated services. Options available as add-ons to extend the
functionality of the RemoteWare client are:

. RemoteWare Extended Client, which includes both RemoteWare Subscriber
and Workshop, allowing the client to utilize subscription and publishing
services and user environment management services, respectively.

. RemoteWare Replication Agent for Lotus Notes, which reduces replication
time by up to approximately 80% for remote Lotus Notes users through the
intelligent preprocessing and compression of records.

The replication capabilities of RemoteWare can also be purchased as a
standalone product, RemoteWare Essentials for Lotus Notes. This product
consists of a limited-function RemoteWare for NT server that performs only
Lotus Notes replication and a client component.

PRODUCTS UNDER DEVELOPMENT

The Company's product development efforts are currently focused on
increasing the functionality of RemoteWare for NT and developing the
NetEssentials product line.

RemoteWare

The Company is currently investing significant product development resources
to produce version 3.2 of RemoteWare for NT, which is scheduled to be released
in the second quarter of 1997. The Company currently plans for this version to
include facilities for central management and distribution of web content to
RemoteWare users and integration of RemoteWare's messaging services with
Microsoft's Exchange Server. There can be no assurance, however, that the
release of RemoteWare for NT version 3.2 will be on a timely basis or that any
delay in its release would not adversely impact sales of the current version
of RemoteWare or that, upon release, it will achieve market acceptance. See
"Risk Factors--Dependence upon Product Development; Risks of Technological
Change and Evolving Industry Standards" and "--Risks Associated with
Development and Introduction of NT Server-based Products; Impact on Installed
Base of OS/2 Customers."

NetEssentials

The Company is currently developing the NetEssentials product line, a new
family of software utilities being designed to provide a tailored subset of
RemoteWare functionality to companies that are implementing intranets. The
NetEssentials products are derived from the Company's QEA and session
automation technology and will run on Microsoft Windows NT servers. It is
anticipated that these products would be sold individually or as a suite to
address specific customer needs. One of these planned products, SessionXpress,
is being developed to provide efficient "push" and "pull" delivery of content
and to include integrated capabilities for remote disk, file and directory
management. SessionXpress is expected to be offered in two versions,
SessionXpress and SessionXpress Basic, with SessionXpress Basic to have a more
limited set of features. A trial version of SessionXpress Basic was released
on the Company's web site in February 1997, and commercial availability of
SessionXpress Basic is scheduled for the second quarter of 1997.

Due to the complexity of remote access computing software in general, and
the NT operating system and internet standards in particular, and the
difficulty in gauging the engineering effort required to develop these planned
products, the RemoteWare family of products and the NetEssentials family of
potential products, are subject to significant technical risks. Furthermore,
software products as complex as those currently under development by the
Company are subject to frequent delays and undetected errors or compatibility
issues following their introduction or as new versions are released. There can
be no assurance

33
<PAGE>

that the Company will not encounter difficulties that could delay or prevent
the successful and timely development, introduction and marketing of these
planned products. Moreover, even if such planned products are developed and
introduced, there can be no assurance that there will be a significant market
for such products, that the planned NetEssentials products or future
RemoteWare products will achieve any significant degree of market acceptance,
or that the NetEssentials products will not result in price erosion or reduced
sales of the RemoteWare products. Failure to release these planned products on
a timely basis, failure of these planned products, if and when released, to
achieve any significant degree of market acceptance, or failure to effectively
manage the introduction of the NetEssentials products without eroding the
sales or sales prices of RemoteWare products, would have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Risk Factors--Dependence upon Product Development; Risks of Technological
Change and Evolving Industry Standards," "--Risks Associated with Development
and Introduction of NT Server-based Products; Impact on Installed Base of OS/2
Customers," and "--Risks Associated with the Development and Introduction of
the NetEssentials Products; Impact on RemoteWare Market."

SERVICES

In addition to its product offerings, the Company provides systems
integration services, a software maintenance program, help desk support and
training programs.

Through 1996, the Company relied primarily upon a group of independent
channel partners ("Solution Providers") to provide application development and
systems integration services to RemoteWare customers and prospects. In mid-
1996, the Company established its own integration services group to offer a
range of consulting and integration services required by large customers. In
January 1997, the Company acquired Electronic Commerce, Inc., a 14-person
systems integrator that had been one of the Company's Solution Providers. This
acquisition significantly expanded the Company's ability to provide
integration services directly. The Company intends to focus its integration
services on new, large accounts as well as on customers migrating from
RemoteWare for OS/2 to RemoteWare for NT.

The Company offers help desk support and software maintenance together under
its RemoteCare Assurance Plan ("RCAP") to customers and Solution Providers. In
December 1996, the Company began offering separate plans for software
maintenance and help desk support to all new customers and to existing
customers as their RCAP agreements expired. Software maintenance offered under
a RemoteWare Maintenance Agreement ("RMA") provides an extension of the
Company's software warranty and the right to receive upgrades during the 12-
month, renewable term of the agreement. Annual fees under RCAP and RMA are
based on the cumulative software license fees paid by the customer.
Separately, help desk support is available on an annual fee or per-incident
fee basis.

PRODUCT DEVELOPMENT

All of the Company's products have been developed by its internal product
development staff, which has from time to time included a number of
independent development contractors. The Company's product development staff
consisted of 81 full-time employees and nine independent contractors as of
December 31, 1996. The Company's total product development expenditures were
$3.2 million, $5.4 million and $8.6 million in fiscal 1994, 1995 and 1996,
respectively, substantially all of which were attributable to the development
of RemoteWare products. Beginning in 1995, the Company substantially increased
its product development expenditures in order to develop its RemoteWare for NT
products and to increase the functionality of its existing RemoteWare for OS/2
products. In accordance with SFAS 86, the Company capitalizes software
development expenditures once a product has established technological
feasibility until such time as the resulting software product is available for
commercial sale. See "Risk Factors--Fluctuations in Quarterly Operating
Results; Seasonality," "--Dependence upon Certain Licenses," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Costs and Expenses" and Note 1 of Notes to Consolidated Financial Statements.

34
<PAGE>

new technologies, the emergence of new industry standards and the acceptance
of new communications and data delivery channels, such as the Internet, may
render the Company's existing products or underlying technologies obsolete or
unmarketable. For example, the Company may be required to change and improve
its products in response to changes in operating systems, application and
networking software, computer and communications hardware, programming tools
and computer language technology. Announced and unannounced changes or errors
in operating and other systems with which the Company's products are used may
adversely affect the performance of the Company's products and require the
Company to modify its products to compensate for such changes or errors. As a
result, the Company's future success will depend in part upon its ability to
enhance its current products and services and develop new products and
services that maintain technological leadership, address the increasingly
sophisticated needs of customers, keep pace with new competitive product
offerings and emerging industry standards, and achieve broad market
acceptance. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products or product
enhancements, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.

In order to introduce and market new or enhanced products successfully with
minimal disruption in customer purchasing patterns, the Company must
effectively manage the transition from existing products. Announcements by the
Company or its competitors of new products, capabilities or technologies that
have the potential to replace or shorten the life cycles of the Company's
existing products may cause customers to defer purchases of existing Company
products. Furthermore, software products as complex as those offered by the
Company may contain undetected errors or compatibility issues following their
introduction or as new versions are released, which may result in reduced
orders, delays in collecting accounts receivable and additional service costs.
The Company has previously experienced delays in software development,
including delays in the commercial release of RemoteWare for NT, and has
discovered software errors in new products after commercial release. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of potential new products or product enhancements. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services on a timely basis that are
compatible with industry standards, to respond to technological advances by
others and to satisfy changing customer requirements, to successfully manage
product transitions, and to minimize the impact of errors in new products
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Dependence upon Product
Development; Risks of Technological Change and Evolving Industry Standards."

The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, a spell checker and X.400 gateway API libraries,
some of which perform key functions within the Company's products. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or attempt to internally develop a
replacement for the function of the licensed software. The loss of, or
inability to maintain, any of these technology licenses could result in
interruptions in the availability of the Company's existing products and
delays in the introduction of new products and services until equivalent
technology, if available, is identified, licensed or developed, and
integrated. There can be no assurance that an alternative source of a suitable
product would be available or that the Company would be able to develop an
alternative product in sufficient time or at a reasonable cost. The failure of
the Company to obtain or develop an alternative product on a timely basis and
at a reasonable cost would have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--
Dependence upon Certain Licenses."

35
<PAGE>

PRICING

The Company generally grants non-exclusive, perpetual licenses for the
RemoteWare products at license fees based upon the server and client
components licensed. List prices for RemoteWare licenses in North America
range from $5,000 to $30,000 for each server, depending on the number of ports
and clients supported. List prices for RemoteWare client licenses in North
America range from $200 to $550 per seat, depending upon the options selected.
Volume pricing discounts are also available for purchases of 100 clients or
more. A RemoteWare installation of approximately 300 clients licensed directly
by the Company would typically represent license fees ranging from $66,000 to
$110,000, depending on the options selected.

RemoteWare licenses include a six-month warranty period. Customers may
obtain software maintenance for a twelve-month term through RCAP or RMA, which
are generally effective as of the date of the license agreement. For
RemoteWare for OS/2 customers only, RCAP and RMA also provide the right to
migrate to a RemoteWare for NT license without incurring additional license
fees. The annual cost of a subscription to either RCAP or RMA is 15% of
cumulative license fees.

In 1996, the Company began to offer the RemoteWare Discovery System, which
allows customers to evaluate the full RemoteWare product suite for a maximum
of 20 clients. The RemoteWare Discovery System is priced at $3,750 for a ten-
client system and $3,750 for an additional ten-client pack. The purchase price
of the RemoteWare Discovery System can be credited against license fees due
for a full production RemoteWare system. No maintenance plan is available for
the RemoteWare Discovery System.

The Company intends to price each of the planned NetEssentials products on a
per server basis, with separate prices for unlimited and limited concurrent
session capacity. The Company intends to price SessionXpress at $4,995 for
eight concurrent sessions and at $9,995 for unlimited concurrent sessions. The
Company also intends to offer SessionXpress Basic, a version of SessionXpress
with a limited set of features, at a lower price.

The market for the Company's products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from current or future competitors. In addition, annual fees for
software support and maintenance have been a material part of the Company's
revenues in the past. These agreements are optional for the Company's
licensees and there can be no assurance that licensees who are currently
parties to RCAP or RMAs will renew those agreements or that new customers will
elect to enter into RMAs in the same numbers. See "Risk Factors--Risks
Associated with Development and Introduction of NT Server-based Products;
Impact on Installed Base of OS/2 Customers."

SALES AND MARKETING

The Company's sales and marketing efforts typically target Fortune 1000
companies with large numbers of remote and mobile users as potential customers
for the RemoteWare product line. XcelleNet relies predominantly on its direct
sales force to qualify and sell to prospective customers. The Company also has
a network of Solution Providers who provide remarketing and integration
services to RemoteWare customers. In addition, XcelleNet has recently created
a telesales function to augment its direct sales force. The Company conducts
comprehensive targeted marketing programs to generate sales leads, which
include advertising, direct mail, public relations, user and partner
conferences, seminars, trade shows and telemarketing.

The Company has established informal marketing relationships with remote
access, database and sales force automation vendors, as well as with Microsoft
and IBM. These relationships are intended to promote awareness of the
Company's products among potential customers and to provide leads for the
Company's direct sales force.

The Company is in the early stages of developing its sales and marketing
channels for its planned NetEssentials products, which the Company intends to
introduce during 1997. The Company is expanding its recently created telesales
function and intends to leverage the Web for building market awareness, as
well as

36
<PAGE>

for selling the planned NetEssentials products. The Company also intends to
pursue OEM and bundling opportunities with software and hardware vendors. The
planned NetEssentials product line will also be offered by the Company's
direct sales force.

The Company's direct sales, Solution Provider and telesales sales efforts
are described in more detail below.

The Company's direct sales force is divided into: (i) four regional "area
teams" in North America; (ii) a team responsible for Europe, the Middle East
and Africa; and (iii) a team responsible for Australia and New Zealand. The
Company intends to strengthen its direct selling efforts by increasing its
direct sales force in 1997. In 1996, 62% of the Company's license fee revenues
were attributable to sales made by the Company's direct sales force.

The primary function of Solution Providers is to assist the Company's
customers in implementing RemoteWare by providing application development and
systems integration services. Certain Solution Providers are authorized to
remarket the Company's products in connection with providing their services.
The Company is changing its network of Solution Providers in two respects.
First, in order to increase the Microsoft support capability of the Company's
Solution Provider network, the Company is requiring that all Solution
Providers be Windows NT-qualified in order for their agreements with the
Company to be renewed. Second, the Company's experience has been that most of
the sales produced by the Company's Solution Provider network have been
generated by a small number of effective Solution Providers; therefore, the
Company is renewing the agreements of only those Solution Providers that the
Company expects to be the most effective. As a result, the Company expects
that license fees generated from Solution Providers as a percentage of total
license fees will decrease. There can be no assurance that the Company will be
able to attract or retain a sufficient number of NT-qualified Solution
Providers to adequately fill the Company's needs. See "Risk Factors--Risks
Associated with Expanding Distribution; Impact of Changes in Solution Provider
Programs."

The Company's telesales effort focuses on sales of services, including
training and integration services, and RemoteWare Essentials for Lotus Notes.
The telesales effort was initiated in January 1997.

Any failure by the Company to expand its direct sales and telesales force
and other distribution channels, or the failure by the Company to increase
revenues commensurate with such expansion, would have a material adverse
effect on the Company's business, operating results and financial condition.
See "Risk Factors--Risks Associated with Expanding Distribution; Impact of
Changes in Solution Provider Programs."

37
<PAGE>

CUSTOMERS

As of December 31, 1996, XcelleNet, either directly or through its Solution
Providers, had licensed RemoteWare systems to over 1,400 organizations
supporting approximately 500,000 users. The Company receives license fees and
service revenues from end-user customers and in some cases through Solution
Partners. In 1996, no Solution Provider accounted for more than 8% of the
Company's total revenues and no customer licensed directly by the Company
accounted for more than 2% of the Company's revenues.

The Company's products are predominantly used by field sales and service
workers and remote users in branch offices or retail locations spanning a
range of industries. The following is a representative list as of December 31,
1996 of the Company's customers in the indicated industries:

HEALTHCARE/PHARMACEUTICAL SERVICES
Coulter Corporation ADP, Inc.
Manor Care, Inc. HBO and Company
Minnesota Mining and Manufacturing CompanyJenny Craig, Inc.
Sandoz Corporation Mail Boxes, Etc.
Schering-Plough Corporation Securities Industry Automation
Corporation

RESTAURANTS (FOOD CHAINS) Vanstar Corporation

Black-Eyed Pea Management Corp.
Brinker International, Inc. MANUFACTURING
Chick-Fil-A, Inc. Coors Brewing Company
Cracker Barrel Old Country Store, Inc. Holophane Company, Inc.
Denny's, Inc. Lanier Worldwide, Inc.
Whataburger, Inc. Liebert Corporation
Siemens Industrial Automation, Inc.

SPECIALTY RETAIL
General Nutrition Corporation
Kits Cameras, Inc.
Mrs. Fields, Inc.
Sharper Image Corp.
The Southland Corporation
Victoria's Secret Stores, Inc.
Wilson's House of Suede, Inc.

COMPETITION

As the Company offers new products in the future, it expects that in
addition to facing competition from existing competitors it will have
additional competitors. Many of the Company's current competitors are
broadening the functionality of their product offerings. In addition, vendors
of network operating systems,

38
<PAGE>

network management software or intranet server software, such as Microsoft,
IBM, Novell and Netscape, may enhance their products to include some or all of
the functionality currently provided by the Company's products, which would
render the Company's products obsolete or unmarketable. Because there are
relatively low barriers to entry in the software market, the Company also
expects additional competition from other established and emerging companies.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results or financial condition.
See "Risk Factors--Risk of Inclusion of Remote Access Utility Functionality in
Network Operating Systems, Network Management Software or Intranet Server
Software."

The Company believes its principal competitive advantages are its focus on,
and experience with, the requirements of remote access computing for users who
intermittently dial in to enterprise information systems, its product
architecture, and its extensive customer base. Competition will continue to
intensify as the market for its products and services develops and competitors
focus more clearly on that market's specific requirements. There can be no
assurance that other companies will not develop experience, products and
marketing approaches that will be more successful than those of the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
remote computing needs of the Company's prospective customers. Accordingly, it
is possible that new competitors, alliances among competitors, or alliances
between competitors and third parties may emerge and rapidly acquire
significant market share. If this were to occur, it would have a material
adverse effect on the Company's business, operating results and financial
condition.

The Company believes that the principal competitive factors affecting the
market it serves include vendor and product reputation, product architecture,
functionality and features, scalability, ease of use, quality of product and
support, performance, price, brand name recognition and effectiveness of sales
and marketing efforts. Although the Company believes that its products
currently compete favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources, or that competitive pressures faced by the Company would not have a
material adverse effect on the Company's business, operating results or
financial condition. See "Risk Factors--Competition."

INTELLECTUAL PROPERTY AND THIRD PARTY LICENSES

The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. In addition, the Company has applied for patents in the United
States and certain other countries with respect to certain aspects of its
software. None of these patents have been granted and there can be no
assurance that a patent will be issued pursuant to any of these applications
or that, if granted, such patent would survive a legal challenge to its
validity or provide significant protection to the Company.

39
<PAGE>

Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. While the Company's competitive
position may be affected by its ability to protect its proprietary
information, the Company believes that trade secret, copyright and, if
granted, patent protections are less significant to the Company's competitive
position than other factors such as the knowledge, ability and experience of
the Company's personnel, name recognition and ongoing product development and
support.

For certain of its client products and the RemoteWare Discovery System, the
Company uses "shrinkwrap" licenses that are not signed by licensees to protect
its copyrights and trade secrets in those products. In addition, the Company
uses an electronic version of a shrinkwrap license for all users of the trial
version of its SessionXpress Basic product distributed electronically through
the Company's web site. In addition, the Company expects to use shrinkwrap
license agreements for its NetEssentials products when commercially released.
Since these shrinkwrap licenses are not signed by the licensee, many
authorities believe that they may not be enforceable under many state laws and
the laws of many foreign jurisdictions. The laws of the State of Georgia,
which govern these licenses for the Company's products, continue to be unclear
on this subject. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.

In 1995, the Company received a claim that it is infringing upon a third
party's intellectual property rights, and there can be no assurance that other
third parties will not in the future claim infringement by the Company with
respect to current or future products, trademarks or other proprietary rights.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or available at all, which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Dependence on Proprietary Technology;
Risks of Infringement Claims."

The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, spell checker and X.400 gateway API libraries, some
of which perform key functions within the Company's products. The Company
licenses the code for portions of its products from third parties where there
is no advantage to the Company in developing equivalent technology. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or to develop a replacement for the function
of the licensed software. The loss of or inability to maintain any of these
technology licenses could result in interruptions in the availability of the
Company's existing products and delays in the introduction of new products and
services until equivalent technology, if available, is identified, licensed or
developed, and integrated. There can be no assurance that an alternative
source of a suitable product would be available or that the Company would be
able to develop an alternative product in sufficient time or at a reasonable
cost. The failure of the Company to obtain or develop an alternative product
would have a material adverse effect on the Company's business, operating
results or financial condition. See "Risk Factors--Dependence upon Certain
Licenses."

40
<PAGE>

EMPLOYEES

As of December 31, 1996, the Company had 280 full-time employees, including
81 in product development, 57 in sales, 45 in marketing, 50 in customer
service and 47 in finance and administration. The Company's employees are not
represented by any collective bargaining organization, and the Company has
never experienced a work stoppage.

FACILITIES

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

LEGAL PROCEEDINGS

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

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as of
February 24, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION ELECTED DIRECTOR
---- --- -------- ----------------
<S> <C> <C> <C>
Dennis M. 44 Chairman of the Board, Chief Executive 1986
Crumpler(3)(4)......... Officer and Director
Shereef W. Nawar(3)..... 37 Chief Technical Officer and Director 1987
Corey M. Smith.......... 40 President
Sidney V. Sack.......... 51 Executive Vice President, Chief
Financial Officer and Assistant
Secretary
Stefanus F. Coetzee..... 44 Vice President--North American
Customer Operations
W. Michael Parham....... 43 Vice President--North American Sales
Jeanne N. Bateman....... 42 Vice President--Finance, Treasurer and
Secretary
Joel A. Miller.......... 37 Vice President--Human Resources
Stephen P. 55 Director 1995
Bradley(2)(3)..........
Donald L. House(1)(4)... 55 Director 1992
Richard C. 58 Director 1990
Marcus(1)(2)(4)........
Geoffrey A. Moore(3).... 50 Director 1996
Richard L. Nolan(3)..... 56 Director 1995
Jeffrey P. Parker(2).... 53 Director 1990
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Strategic Oversight Committee.
(4) Member of the Nominating Committee.

Each of the directors of the Company serves until the next annual meeting of
the shareholders of the Company or until his successor is elected and
qualifies. Each of the executive officers of the Company serves at the
pleasure of the Board of Directors.

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

Mr. Nawar is a co-founder of the Company. Mr. Nawar has served as a director
of the Company since 1987, and has served as the Company's Chief Technical
Officer since October 1992. Mr. Nawar served as the Company's Vice President
of Development from 1987 until October 1992.

Mr. Smith joined the Company in September 1996 as its Executive Vice
President responsible for marketing and became President in January 1997.
Prior to joining the Company, Mr. Smith was the President of Decision Point
Data, a human resources decision support software company, from October 1995
until September 1996. He served as the President and Chief Executive Officer
of Creative Multimedia, Inc., a consumer CD-ROM multimedia company, from
December 1993 until September 1995. In July 1992 Mr. Smith founded Legacy
Venture Capital and served as its President and General Partner from July 1992
until September 1994 and continues to serve as General Partner. From January
1988 until May 1992, Mr. Smith was the President and Chief Executive Officer
of Central Point Software, Inc., a personal computer utilities

42
<PAGE>

software company. From 1978 to October 1988, Mr. Smith served in various
positions at Hewlett-Packard Company including market development and product
marketing manager positions.

Mr. Sack joined the Company in September 1990 as its Chief Financial
Officer. Mr. Sack has served as an Executive Vice President of the Company
since September 1996. Mr. Sack has served as Assistant Secretary of the
Company since January 1995 and from October 1990 to October 1991, and served
as the Secretary of the Company from October 1991 to January 1995. He also
served as Chief Operating Officer of the Company from September 1996 to
January 1997.

Mr. Coetzee joined the Company in April 1992 as Managing Director of
XcelleNet Ltd. Mr. Coetzee served as the Company's Vice President--
International from January 1995 until August 1995, Vice President--Global
Customer Operations from August 1995 to April 1996, and has been Vice
President--North American Customer Operations since April 1996. From 1988
until 1992, he was employed by Dun & Bradstreet Europe Ltd., a business
information services company.

Mr. Parham joined the Company in November 1988 as its Director of Sales,
served as the Vice President--Sales from December 1990 to April 1996, and has
served as Vice President--North American Sales since April 1996.

Ms. Bateman joined the Company in December 1993 as its Vice President and
Treasurer, and has been Secretary of the Company since January 1995 and Vice
President--Finance since April 1995. Prior to joining the Company, Ms. Bateman
was employed by HBO & Company, a healthcare information systems company, from
December 1985 until August 1993, and served as its Vice President and
Treasurer from March 1993 to August 1993 and its Assistant Treasurer, Investor
Relations from January 1991 to March 1993.

Mr. Miller joined the Company as its Director of Human Resources in February
1995 and has served as the Company's Vice President--Human Resources since
October 1995. Prior to joining the Company, he held various positions in
manufacturing, sales and administration with Procter & Gamble Company, a
consumer products company, over a period of fourteen years, including Manager
of Corporate Training & Development for P&G China, Ltd. from February 1992
until April 1994.

Mr. Bradley has served as a director of the Company since October 1995. Mr.
Bradley is currently a professor at the Harvard Business School, a position he
has held since 1968. He also serves as the Chairman of the Harvard Business
School's Competition and Strategy Area. From September 1993 to January 1996,
Mr. Bradley served as the Senior Associate Dean for Faculty Development at the
Harvard Business School. Mr. Bradley is a director of RDM Sports Group, Inc.
(formerly Roadmaster Industries, Inc.), a sporting goods company.

Mr. House has served as a director of the Company since 1992. Mr. House has
served as the Chairman of the Board of SQL Financials International, Inc., an
early-stage client/server software company since January 1993. From January
1992 until December 1992, he was President of Prentice Hall Professional
Software, a subsidiary of Simon and Schuster, Inc. Since 1988, he has been a
consultant and investor in a number of early-stage technology firms, including
the Company.

Mr. Marcus has served as a director of the Company since 1990. Mr. Marcus is
a principal of InterSolve Group Inc., a firm that provides management
consulting services to companies in several industries. He has served in this
capacity since InterSolve was formed in 1991. From December 1994 until
December 1995, Mr. Marcus was also the Chief Executive Officer of Plaid
Clothing Group, Inc., a manufacturer of tailored clothing. Plaid Clothing
Group filed a voluntary federal bankruptcy petition in July 1995. From January
1989 to January 1992, Mr. Marcus was a principal of RCM Consulting, a provider
of consulting services to the retail industry. From 1979 until 1988, Mr.
Marcus was Chief Executive Officer of Neiman-Marcus, a department store
retailer. Mr. Marcus is a director of Zale Corporation and a member of its
compensation committee. He is also a director of Edisol Bros. Stores, a
specialty retailer of apparel.

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<PAGE>

Mr. Moore has served as a director of the Company since March 1996. Mr.
Moore is a founder of The Chasm Group, a firm that provides marketing strategy
and organizational consulting to high-technology companies. He has served as
President of that firm since it was founded in 1992. From 1987 until 1992, Mr.
Moore was a principal and partner of Regis McKenna, Inc., a high-technology
marketing and communications company. Mr. Moore is a director of Broadvision,
Inc., a supplier of software applications for enabling personalized business
on the Web.

Mr. Nolan has served as a director of the Company since 1995. Mr. Nolan is
currently a professor at the Harvard Business School, a position he has held
since July 1991. From 1977 to July 1991, Mr. Nolan served as a principal of
KPMG Peat Marwick, and as Chairman of the Board of Nolan, Norton & Co., a
technology-strategy consulting firm. Mr. Nolan was a general partner of
Lincoln North Associates Limited Partnership ("Lincoln") from 1986 to 1994,
and was a general partner of Cranberry Hill Associates Limited Partnership
("Cranberry") from 1984 to 1993. Lincoln and Cranberry owned office buildings
in Massachusetts. Lincoln and Cranberry filed voluntary federal bankruptcy
petitions in May 1993 and July 1992, respectively. Mr. Nolan is a director of
H.F. Ahmanson & Company, a bank holding company.

Mr. Parker has served as a director of the Company since 1990. Mr. Parker is
a private investor focusing on start-up and early-stage investments. From
October 1986 until December 1990, Mr. Parker was the Chief Executive Officer
of Thomson Financial Services ("Thomson"), and from October 1986 to December
1991, Mr. Parker was also Chairman of the Board and Chief Executive Officer of
First Call Corporation ("First Call"). Both Thomson and First Call are
financial information service companies.

44
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of
January 31, 1997, and as adjusted to reflect the sale of the Common Stock
offered hereby (assuming no exercise of the underwriters' over-allotment
option) by (i) each Selling Shareholder, (ii) all persons known by the Company
to be the beneficial owners of more than 5% of the outstanding Common Stock of
the Company, (iii) each director of the Company, (iv) the Chief Executive
Officer and each of the Company's four most highly compensated executive
officers other than the Chief Executive Officer who were serving as executive
officers at the end of the last completed fiscal year, and (v) all executive
officers and directors as a group.

<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) NUMBER OF OFFERING (1)
NAME AND ADDRESS OF ----------------- SHARES -----------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Motorola, Inc.................... 731,047 9.8% 731,047 -- *
1303 East Algonquin Road
Schaumburg, Illinois 60196
GeoCapital Corporation (2)....... 730,398 9.8 -- 730,398 9.0%
767 Fifth Avenue
New York, New York 10153
Robert Fleming Inc. (3).......... 445,850 6.0 -- 445,850 5.5
320 Park Avenue, 11th Floor
New York, New York 10022
Dennis M. Crumpler (4)........... 1,434,831 19.2 100,000 1,334,831 16.4
Stephen P. Bradley (5)........... 10,000 * -- 10,000 *
Donald L. House (6).............. 36,599 * -- 36,599 *
Richard C. Marcus (7)............ 81,494 1.1 -- 81,494 1.0
Geoffrey A. Moore (5)............ 10,000 * -- 10,000 *
Shereef W. Nawar (8)............. 157,498 2.1 3,000 154,498 1.9
Richard L. Nolan (9)............. 20,000 * -- 20,000 *
Jeffrey P. Parker (10)........... 136,751 1.8 -- 136,751 1.7
Stefanus F. Coetzee (11)......... 42,694 * -- 42,694 *
W. Michael Parham (12)........... 82,630 1.1 -- 82,630 1.0
Sidney V. Sack (13).............. 103,666 1.4 -- 103,666 1.3
Corey M. Smith................... 10,000 * 10,000 -- *
All executive officers and
directors as a group
(14 persons)(14)................ 2,149,841 27.5 113,000 2,036,841 24.1
</TABLE>

- --------
*Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable. Shares of Common Stock subject to options
that are currently exercisable or exercisable within 60 days of January
31, 1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) GeoCapital Corporation ("GeoCapital") is an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940. GeoCapital has
sole investment power with respect to 730,398 shares and voting power
with respect to none of the foregoing shares. The information herein
regarding

45
<PAGE>

GeoCapital's stock ownership was obtained from a Schedule 13G filed by
GeoCapital with the SEC and received by the Company on February 21, 1996.
The Company makes no representation as to the accuracy or completeness of
the information reported regarding GeoCapital.
(3) Robert Fleming Inc. ("Fleming") is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940. Fleming has shared
investment power and shared voting power with respect to all of the
foregoing shares. The information herein regarding Fleming's stock
ownership was obtained from a Schedule 13G filed by Fleming with the SEC
and received by the Company on February 16, 1996. The Company makes no
representation as to the accuracy or completeness of the information
reported regarding Fleming.
(4) Includes 1,200,000 shares held by a limited partnership the general
partner of which is a limited liability company of which Mr. Crumpler is
the controlling manager. As such, Mr. Crumpler has voting and investment
power over these shares. Also includes 104,800 shares owned by Mr.
Crumpler's wife. In November 1989, Mr. Crumpler entered into an agreement
with his wife that provides that Mr. Crumpler has sole voting power with
respect to the shares of Common Stock presently held, or acquired in the
future, by her. This agreement also places certain restrictions on the
ability of Mr. Crumpler's wife to transfer her shares of Common Stock and
provides Mr. Crumpler a right of first refusal in connection with such
shares. Also includes 3,800 shares held by Mr. Crumpler as trustee of a
trust for the benefit of his mother, as to which he retains sole voting
and investment power. Also includes 3,000 shares held by Mr. Crumpler as
custodian for his minor children and as to which he retains sole voting
and investment power.
(5) Consists of 10,000 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(6) Includes 30,350 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(7) Consists of 33,114 shares held jointly by Mr. Marcus and his spouse and
48,380 shares subject to stock options that are currently exercisable or
will become exercisable within 60 days of January 31, 1997.
(8) Includes 64,661 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(9) Consists of 20,000 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(10) Includes 21,050 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(11) Includes 900 shares held by Mr. Coetzee's spouse. Also includes 40,551
shares subject to stock options that are currently exercisable or will
become exercisable within 60 days of January 31, 1997.
(12) Includes 39,098 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(13) Includes 39,352 shares held jointly by Mr. Sack and his spouse. Also
includes 36,718 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(14) Includes 330,564 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.

46
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share.

COMMON STOCK

As of January 31, 1997, there were 7,474,372 shares of Common Stock
outstanding, held of record by approximately 245 shareholders. Holders of
Common Stock are entitled to one vote for each share held on all matters
submitted to a vote of shareholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock, as such, have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue from time to time in the
future.

PREFERRED STOCK

The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 10,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. No shares of Preferred Stock are currently
outstanding.

CERTAIN CHARTER AND BYLAW PROVISIONS

Shareholders' rights and related matters are governed by the Georgia
Business Corporation Code and the Company's Amended and Restated Articles of
Incorporation and Bylaws. Certain provisions of the Amended and Restated
Articles of Incorporation and Bylaws of the Company, which are summarized
below, could, either alone or in combination with each other, have the effect
of preventing a change in control of the Company or making changes in
management more difficult.

Corporate Takeover Provisions

The Company's Amended and Restated Bylaws make applicable to the Company
provisions authorized by the Georgia Business Corporation Code relating to
business combinations with interested shareholders ("Corporate Takeover
Provisions"). The Corporate Takeover Provisions are designed to encourage any
person, before acquiring 10% of the Company's voting shares, to seek approval
of the Board of Directors for the terms of any contemplated business
combination. The Corporate Takeover Provisions will prevent for five years
certain business combinations with an "interested shareholder" (as defined in
the Corporate Takeover Provisions) unless (i) prior to the time such
shareholder became an interested shareholder the Board of Directors approved
either the business combination or the transaction that resulted in the
shareholder becoming an interested shareholder, (ii) in the transaction that
resulted in the shareholder becoming an interested shareholder, the interested
shareholder became the beneficial owner of at least 90% of the outstanding
voting shares of the Company excluding, however, shares owned by the Company's
officers,

47
<PAGE>

directors, affiliates, subsidiaries and certain employee stock plans or (iii)
subsequent to becoming an interested shareholder, such shareholder acquired
additional shares resulting in the interested shareholder becoming the owner
of at least 90% of the Company's outstanding voting shares and the business
combination is approved by the holders of a majority of the Company's voting
shares, excluding from said vote the stock owned by the interested shareholder
or by the Company's officers, directors, affiliates, subsidiaries and certain
employee stock plans.

Constituency Considerations

The Company's Amended and Restated Articles of Incorporation provide for the
right of the Board of Directors to consider the interests of various
constituencies, including employees, customers, suppliers and creditors of the
Company, as well as the communities in which the Company is located, in
addition to the interest of the Company and its shareholders, in discharging
their duties in determining what is in the Company's best interests.

Limitation of Directors' Liability

The Company's Amended and Restated Articles of Incorporation eliminate,
subject to certain exceptions, the personal liability of directors to the
Company or its shareholders for monetary damages for breaches of such
directors' duty of care or other duties as a director. The Articles do not
provide for the elimination of or any limitation on the personal liability of
a director for (i) any appropriation, in violation of the director's duties,
of any business opportunity of the Company, (ii) acts or omissions that
involve intentional misconduct or a knowing violation of law, (iii) unlawful
corporate distributions or (iv) any transaction from which the director
received an improper benefit. In addition, the Company's Amended and Restated
Bylaws provide broad indemnification rights to directors and officers so long
as the director or officer acted in a manner believed in good faith to be in
or not opposed to the best interest of the Company, and with respect to
criminal proceedings, if the director had no reasonable cause to believe his
or her conduct was unlawful. The personal liability of directors for monetary
damages for violations of federal securities laws is not affected by these
provisions. These provisions of the Articles and Bylaws will limit the
remedies available to a shareholder who is dissatisfied with a Board decision
protected by these provisions, and such shareholder's only remedy in that
circumstance may be to bring a suit to prevent the Board's action. In many
situations, this remedy may not be effective, as, for example, when
shareholders have no prior awareness of the Board's consideration of the
particular transaction or event.

REGISTRATION RIGHTS

Certain holders of the Company's Common Stock will be entitled to piggyback
registration rights with respect to shares of the Company's Common Stock that
they have held since before the Company's initial public offering in 1994.
While the Company expects to obtain waivers of these piggyback registration
rights, any shareholder that does not waive such rights will be entitled to
include certain of their shares in this Offering or in future registered
offerings by the Company which are declared effective prior to April 14, 1999.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is SunTrust Bank,
Atlanta, Georgia.

48
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 8,130,325 shares of
Common Stock outstanding (assuming no exercise of options after January 31,
1997). In addition to the 1,500,000 shares sold in this offering, 4,874,048 of
such outstanding shares will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares
purchased by "affiliates" of the Company, as that term is defined under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.

Of the remaining outstanding shares of Common Stock, 50,000 are deemed
"Restricted Shares" under Rule 144. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act and, with respect to shares held by officers and directors of
the Company, lock-up agreements under which the officers and directors have
agreed not to sell or otherwise dispose of any of their shares for a period of
90 days after the effective date of this offering without the prior written
consent of Robertson, Stephens & Company. Because of these restrictions, on
the date of this Prospectus, all of the outstanding shares of the Company's
Common Stock other than the shares that are Restricted Securities or subject
to lock up agreements will be eligible for sale. Beginning 90 days after the
effective date of this offering (or earlier with the prior written consent of
Robertson, Stephens & Company), 1,706,277 shares held by executive officers
and directors, but none of the Restricted Shares, will become available for
sale in the public market subject to Rule 144 of the Securities Act.

In general, under Rule 144 of the Securities Act as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
"restricted" shares for at least two years (one year beginning when amendments
to Rule 144 take effect on April 20, 1997) , including a person who may be
deemed an Affiliate of the Company, is entitled to sell within any three-month
period a number of shares of Common Stock that does not exceed the greater of
1% of the then-outstanding shares of Common Stock of the Company
(approximately shares after giving effect to this offering) or the average
weekly trading volume of the Common Stock as reported through the Nasdaq
National Market during the four calendar weeks preceding such sale. Sales
under Rule 144 of the Securities Act are subject to certain restrictions
relating to manner of sale, notice and the availability of current public
information about the Company. In addition, under Rule 144(k) of the
Securities Act, a person who is not an Affiliate of the Company at any time
90 days preceding a sale, and who has beneficially owned shares for at least
three years (two years beginning April 20, 1997), would be entitled to sell
such shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act.

As of January 31, 1997, options to purchase a total of 484,733 shares of
Common Stock pursuant to the 1987 Plan, the Director Plan, the Long-Term
Incentive Plan (collectively, the "Option Plans") and pursuant to options
granted on an individual basis outside of these plans were outstanding and
exercisable. An additional 2,576,353 shares of Common Stock were available for
future option grants or direct issuances under the Option Plans, and an
additional 256,665 shares of Common Stock available for sale pursuant to the
company's Employee Stock Purchase Plan. See Note 2 of Notes to Consolidated
Financial Statements.

The Company has registered on registration statements on Form S-8, a total
of 2,030,657 shares of Common Stock reserved for issuance under the Company's
Option Plans, Employee Stock Purchase Plan and options granted on an
individual basis outside of the Option Plans (assuming no exercise of
outstanding stock options after January 31, 1997).

Any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.

After this offering, certain holders of shares of Common Stock will be
entitled to piggyback registration rights with respect to shares of the
Company's Common Stock that they have held since before the Company's initial
public offering in 1994. While the Company expects to obtain waivers of these
piggyback registration rights, any shareholder that does not waive such rights
will be entitled to include certain of its shares in this Offering or in
future registered offerings by the Company. If the Company were required to
include in a Company-initiated registration shares held by such holders
pursuant to the exercise of their piggyback registration rights, such sales
may have an adverse effect on the Company's ability to raise needed capital.

49
<PAGE>

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Alex. Brown & Sons Incorporated and Punk,
Ziegel & Knoell, L.P. (the "Representatives"), have severally agreed with the
Company and the Selling Shareholders, subject to the terms and conditions of
the Underwriting Agreement, to purchase the number of shares of Common Stock
set forth opposite their respective names below. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC..................................
Alex. Brown & Sons Incorporated....................................
Punk, Ziegel & Knoell, L.P.........................................
---------
Total............................................................ 1,500,000
=========
</TABLE>

The Representatives have advised the Company and the Selling Shareholders
that they propose to offer the shares of Common Stock to the public at the
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Underwriters. No such reduction shall change the amount of proceeds to be
received by the Company or the Selling Shareholders as set forth on the cover
page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock, at the same price per share as will be paid
for the 1,500,000 shares that the Underwriters have agreed to purchase from
the Company and the Selling Shareholders. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above
table represents as a percentage of the 1,500,000 shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the 1,500,000 shares are being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended.

Each officer and director of the Company has agreed with the Representatives
that for a period of 90 days after the effective date of the Registration
Statement of which this Prospectus is a part (the "Lock-up Period"), subject
to certain limited exceptions, they will not offer to sell, contract to sell,
or otherwise sell, dispose of, loan, pledge or grant any rights with respect
to any shares of Common Stock, any options or warrants to purchase any shares
of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock without the prior written consent of
the Representatives. The Representatives may, at their sole discretion and at
any time or from time to time, without notice, release all or any portion of
the shares subject to the lock-up agreements. In addition, the Company has
agreed that during the Lock-Up Period, the Company will not, without the prior
written consent of the Representatives, subject to certain limited exceptions,
issue, sell, contract to sell or otherwise dispose of any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock other than the issuance of Common Stock upon

50
<PAGE>

the exercise of outstanding options and under the existing Employee Stock
Purchase Plan, and the Company's issuance of options under the Option Plans.

The offering price for the Common Stock will be determined by negotiations
among the Company, the Selling Shareholders and the Representatives of the
Underwriters, based largely upon the market price for the Common Stock as
reported on the Nasdaq National Market.

In connection with this offering, certain underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
Stock Market may engage in passive market making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended during the qualifying period which
is two business days before commencement of sales in this offering. The
passive market making transactions must comply with applicable price and
volume limits and be identified as such. In general, a passive market maker
may display its bid at a price not in excess of the highest independent bid
for the security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded. Net purchases by a passive market maker on each day are
generally limited to 30% of the passive market maker's average daily trading
volume in the Common Stock during a prior period and must be discontinued when
such limit is reached. Passive market making may stabilize the market price of
the Common Stock at a level above that which might otherwise prevail, and, if
commenced, may be discontinued at any time.

The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Alston & Bird LLP,
Atlanta, Georgia. Certain legal matters will be passed upon for the
Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.

EXPERTS

The consolidated financial statements of the Company included in this
Prospectus and Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said report.

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form S-3 under the
Securities Act with the Securities and Exchange Commission (the "Commission")
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus regarding the contents of any contract or other document to which
reference is made are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference. A copy of the Registration Statement and the
exhibits thereto may be inspected without charge at the offices of the
Commission at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and
copies of all

51
<PAGE>

or any part of the Registration Statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon the payment
of the fees prescribed by the Commission.

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also makes electronic filings publicly available on the
Internet within 24 hours of acceptance. The Commission's Internet address is
http://www.sec.gov. The Commission web site also contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is quoted
on the Nasdaq National Market. Reports, proxy and information statements and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington,
D.C. 20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission (File No. 0-
23560) pursuant to the Exchange Act are hereby incorporated in this Prospectus
by reference: (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as filed with the Commission on February 24, 1997, and (ii)
the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A as filed with the Commission on March 2,
1994.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of this offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Prospectus.

The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and
all of the information that has been incorporated by reference in this
Prospectus (excluding exhibits unless such exhibits are specifically
incorporated by reference into such documents). Please direct such requests to
XcelleNet, Inc., 5 Concourse Parkway, Suite 850, Atlanta, Georgia 30328, Attn:
Investor Relations, telephone (770) 804-8100.

52
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994..................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

We have audited the accompanying consolidated balance sheets of XCELLENET,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XcelleNet, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 23, 1997

F-2
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

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

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

F-3
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES
Software license fees................................ $30,703 $25,612 $21,399
Services............................................. 11,948 8,487 5,490
------- ------- -------
Total revenues.................................... 42,651 34,099 26,889
------- ------- -------
COSTS AND EXPENSES
Costs of license fees................................ 1,986 1,816 1,230
Costs of services.................................... 3,806 2,340 1,786
Sales and marketing.................................. 21,628 14,500 11,621
Product development.................................. 6,451 5,128 2,377
General and administrative........................... 6,218 5,547 4,693
Nonrecurring charges................................. 3,496 -- --
------- ------- -------
Total costs and expenses.......................... 43,585 29,331 21,707
------- ------- -------
Operating income (loss)............................... (934) 4,768 5,182
Other income, net..................................... 934 1,264 748
------- ------- -------
Income before income taxes............................ -- 6,032 5,930
Provision for income taxes............................ -- 2,230 2,375
------- ------- -------
NET INCOME............................................ $ -- $ 3,802 $ 3,555
======= ======= =======
NET INCOME PER SHARE.................................. $ -- $ 0.45 $ 0.45
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING................... 7,915 8,480 7,833
======= ======= =======
</TABLE>

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

F-4
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------ ---------------- ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ --------- ------ -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 1,062,594 $ 11 1,702,881 $17 -- $ -- $ 7,966 $1,875 $ 9,869
Conversion of preferred
stock to common stock. (1,062,594) (11) 3,187,782 32 (21) --
Initial public offering
of common stock, net
of issuance costs..... 1,810,000 18 17,748 17,766
Stock options exercised
for cash.............. 451,276 4 172 176
Compensation related to
stock options......... 121 121
Income tax benefits
related to exercise of
stock options......... 948 948
Net income............. 3,555 3,555
Foreign currency
translation
adjustment............ 38 38
---------- ---- --------- --- -------- ------- ------- ------ -------
Balance, December 31,
1994................... -- -- 7,151,939 71 -- -- 26,972 5,430 32,473
Purchase of treasury
shares................ (527,879) (8,000) (8,000)
Stock options exercised
for cash.............. 385,937 4 17,100 259 37 300
Employee stock purchase
plan shares issued.... 12,544 190 15 205
Income tax benefits
related to exercise of
stock options......... 1,131 1,131
Net income............. 3,802 3,802
Unrealized loss on
short-term
investments........... (50) (50)
Foreign currency
translation
adjustment............ (12) (12)
---------- ---- --------- --- -------- ------- ------- ------ -------
Balance, December 31,
1995................... -- -- 7,537,876 75 (498,235) (7,551) 28,093 9,232 29,849
Exercise of stock
options............... 347,831 5,450 (4,282) 1,168
Shares acquired related
to stock option
exercises............. (47,926) (906) (906)
Employee stock purchase
plan shares issued.... 30,791 467 (94) 373
Restricted stock
issuance.............. 10,000 152 (28) 124
Income tax benefits
related to exercise of
stock options......... 480 480
Net income............. -- --
Unrealized loss on
short-term
investments........... (21) (21)
Foreign currency
translation
adjustment............ 63 63
---------- ---- --------- --- -------- ------- ------- ------ -------
Balance, December 31,
1996................... -- $-- 7,537,876 $75 (157,539) ($2,388) $24,211 $9,232 $31,130
========== ==== ========= === ======== ======= ======= ====== =======
</TABLE>

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

F-5
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income....................................... $ -- $ 3,802 $ 3,555
Adjustments to reconcile net income to net cash
provided by operating activities:
Writeoff of WorldLink product line.............. 3,037 -- --
Issuance of restricted stock.................... 124 -- --
Depreciation and amortization................... 3,030 2,330 1,351
Increase in trade receivables................... (5,215) (1,601) (2,101)
Increase in prepaid expenses and other current
assets......................................... (335) (55) (251)
(Increase) decrease in income taxes receivable.. (271) 494 (899)
(Increase) decrease in deferred income tax
assets......................................... (754) -- 295
Decrease in other long-term assets.............. -- -- 186
Increase (decrease) in current liabilities...... 1,916 (77) 1,253
Increase in long-term liabilities............... 25 18 83
-------- ------- --------
Total adjustments............................. 1,557 1,109 (83)
-------- ------- --------
Net cash provided by operating activities..... 1,557 4,911 3,472
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments.... 6,958 1,655 (10,770)
Purchase of WorldLink product line............... (3,037) -- --
Purchases of furniture, fixtures, and equipment.. (2,879) (3,217) (2,749)
Additions to capitalized software development
costs........................................... (2,108) (319) (786)
Decrease (increase) in long-term investments..... (225) (35) 142
Other............................................ (77) (12) 114
-------- ------- --------
Net cash used in investing activities......... (1,368) (1,928) (14,049)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock....................... -- (8,000) --
Proceeds from issuance of common stock, net of
related costs................................... 635 505 17,942
Income tax benefits related to exercise of stock
options......................................... 480 1,131 948
Other............................................ (21) (50) 41
-------- ------- --------
Net cash provided by (used in) financing
activities................................... 1,094 (6,414) 18,931
-------- ------- --------
Net increase (decrease) in cash and cash equiva-
lents............................................ 1,283 (3,431) 8,354
Cash and cash equivalents, beginning of year...... 9,304 12,735 4,381
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 10,587 $ 9,304 $ 12,735
======== ======= ========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................... $ -- $ -- $ 1
Income taxes paid................................ $ 887 $ 1,253 $ 1,771
</TABLE>

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

F-6
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The accompanying consolidated financial statements include the accounts of
XcelleNet, Inc. and its wholly owned subsidiaries (the "Company"). The Company
develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information.

The Company's foreign subsidiaries accounted for approximately 9%, 9% and 7%
of consolidated revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. Thus, separate disclosure is not included.

On April 14, 1994, the Securities and Exchange Commission declared effective
the Company's registration statement relating to the initial public offering
of its common stock. The offering was comprised of 2,300,000 shares (1,810,000
shares issued by the Company and 490,000 shares sold by certain existing
shareholders) at an initial offering price of $11.00 per share. The net
proceeds to the Company (after underwriters' discounts and commissions and
other costs associated with the offering of $2,144,000) totaled $17,766,000.

Basis of Presentation

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Change in Company Year End

Effective December 31, 1993, the Company changed its fiscal year-end from
June 30 to December 31. All prior year financial statements have been restated
to reflect a December 31 year-end.

Recent Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of"
("SFAS 121"), which becomes effective for fiscal years beginning after
December 15, 1995. SFAS 121 established standards for determining when
impairment losses on long lived assets have occured and how impairment losses
should be measured. The Company adopted SFAS 121 effective January 1, 1996.
The financial statement impact of adopting SFAS 121 was not material.

The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Effective in 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do
not choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings per share as if
SFAS 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.

F-7
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Cash, Cash Equivalents, and Short-term Investments

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
investments consist of the following (in thousands):

<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Municipal securities........................................... $ 1,658 $ 5,860
U.S. Government agencies....................................... 499 1,751
Corporate notes and bonds...................................... -- 1,005
U.S. Treasury securities....................................... -- 499
------- -------
Short-term investments......................................... $ 2,157 $ 9,115
======= =======
</TABLE>

The fair value of financial instruments is estimated based on quoted market
prices. Differences between the fair value and the cost of investments are
recorded as unrealized gains (losses) in additional paid-in capital. All
investments are considered available for sale and have effective maturities of
less than one year.

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets ranging from three to five years. Maintenance and repairs are
charged to expense as incurred. Replacements and improvements are capitalized.
Furniture, fixtures, and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Computer equipment............................................ $ 7,814 $ 6,771
Furniture and fixtures........................................ 2,540 2,408
Leasehold improvements........................................ 676 600
Automobiles................................................... 168 81
------- -------
11,198 9,860
Less accumulated depreciation................................. (5,820) (4,975)
------- -------
Furniture, fixtures, and equipment, net....................... $ 5,378 $ 4,885
======= =======
</TABLE>

Capitalized Software Development Costs

In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," the Company capitalizes
certain software development costs when a new or enhanced product is released
for customer testing and ceases capitalization when the product is released
for sale. Software development costs of $2,108,000, $319,000 and $786,000 were
capitalized in 1996, 1995, and 1994, respectively. Amortization of capitalized
software development costs begins as products are made available for sale,
with annual amortization equal to the greater of the amount computed using the
ratio that current gross revenues bear to the total of current and anticipated
future gross revenues for the product or the straight-line method over the
remaining estimated economic life of the product, which is a maximum of three
years. Amortization expense is included in costs of license fees. Amortization
totaled $644,000, $332,000, and $48,000 in 1996, 1995, and 1994, respectively.

F-8
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Revenue Recognition

The Company's revenues are generated from the licensing of its software
products; from fees paid for extended warranties and rights to upgrades and
updates ("maintenance") of the software products; and from training,
installation, implementation, support, and consulting services related to such
software products. In accordance with AICPA Statement of Position No. 91-1,
Software Revenue Recognition, the Company recognizes revenue from software
licenses upon the execution of a license agreement and delivery of the product
to a customer, provided the Company has no significant future obligations and
collection of the license fees is probable. Maintenance fees are recognized on
a straight-line basis over the period covered by the related contract. Service
revenues are recognized when the specific service is performed.

Advertising

The Company expenses the production costs of advertising at the time
incurred, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits. Direct-response
advertising consists primarily of advertisements in business, financial, and
software magazines and newspapers. The cost of each advertisement is amortized
over the four-month period following the issuance of the publication in which
it appears. Advertising expenditures totaled $2,171,000, $194,000 and $707,000
for 1996, 1995 and 1994, respectively. Advertising expense was $2,027,000,
$194,000 and $707,000 for 1996, 1995 and 1994, respectively. Unamortized
advertising costs included in prepaid expenses were $144,000 and $0 at
December 31, 1996 and 1995, respectively.

Other Income, Net

Other income primarily includes interest income. Interest income was
$911,000, $1,256,000, and $719,000 in 1996, 1995, and 1994, respectively.

Income Taxes

Deferred income tax assets and liabilities are recorded based on the
differences between the financial reporting and income tax bases of assets and
liabilities.

Net Income Per Share

Net income per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from convertible
preferred stock and stock options have been included in the computation when
dilutive. The difference between primary and fully diluted earnings per share
is not material for any of the periods presented, and fully diluted earnings
per share have therefore been excluded.

Foreign Currency Translation

Non-U.S. assets and liabilities are translated into U.S. dollars using the
balance sheet date exchange rates. Revenues and expenses are translated at
average rates during the period. Foreign currency translation adjustments are
reflected as increases (decreases) in additional paid-in capital and were
$63,000, $(12,000) and $38,000 in 1996, 1995 and 1994, respectively.
Cumulative foreign currency translation adjustments were $76,000 and $13,000
at December 31, 1996 and 1995, respectively.

Reclassifications

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

F-9
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

2. SHAREHOLDERS' EQUITY

Convertible Preferred Stock

Upon closing of the Company's initial public offering in April 1994, all of
the outstanding shares of each series of convertible preferred stock were
converted, on a 3-for-1 basis, into a total of 3,187,782 shares of common
stock. The convertible preferred stock converted into common stock has been
returned to the status of authorized but unissued shares of preferred stock.
At December 31, 1996 and 1995, 10,000,000 shares were authorized and none were
issued or outstanding.

Stock Options

The Company maintains three stock option plans: the 1987 Stock Option Plan
(the "1987 Plan"), the 1994 Stock Option Plan for Outside Directors (the
"Director Plan"), and the 1996 Long-Term Incentive Plan (the "LTIP"). The 1987
Plan provides for the issuance of incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs"), and stock appreciation rights ("SARs")
to employees and officers of the Company. The Director Plan provides for the
issuance of NQSOs to non-employee members of the Company's Board of Directors
who are not prohibited by their employer from receiving options under the
Director Plan. The LTIP Plan provides for the issuance of ISOs, NQSOs, SARs
and other stock-based awards to employees, officers and directors of the
Company. Additionally, the Company has granted NQSOs to non-employee Directors
and consultants on an individual basis and not under a plan. A total of
516,945 options were exercisable at December 31, 1996.

Under the 1987 Plan, ISOs, NQSOs, and SARs to purchase a total of 2,650,000
shares were authorized for issuance, of which 1,327,756 options were
outstanding and 345,773 options were exercisable at December 31, 1996. All
options have been granted at the fair market value of the Company's common
stock at the date of grant. The ISOs and NQSOs are generally exercisable
beginning one to three years from the date of grant, after which options vest
over a period not to exceed ten years from the date of grant and terminate ten
years from the date of grant. No SARs have been granted under the plan.

During 1994, the Company adopted the Director Plan, under which 300,000
shares were authorized for issuance. Under the Director Plan, the Company
automatically grants nonqualified stock options to purchase 40,000 shares of
common stock, at the fair market value of the Company's common stock at the
date of grant, to each eligible non-employee member of the Company's Board of
Directors. These options vest over a four-year period and terminate five years
from the date of grant. A total of 240,000 options were outstanding, of which
70,000 options were exercisable, at December 31, 1996.

During 1996, the Company adopted the LTIP Plan, under which 3,000,000 shares
were authorized for issuance, of which 437,950 options were outstanding, and
none were exercisable, at December 31, 1996. All options have been granted at
the fair market value or higher of the Company's common stock at the date of
grant. The ISOs and NQSOs are exercisable beginning one year from the date of
grant, after which options vest over a period not to exceed ten years from the
date of grant and terminate up to ten years from the date of grant. No SARs or
other stock-based awards have been granted under the plan.

The Company has granted NQSOs to purchase shares on an individual basis and
not under a plan, on terms similar to the 1987 Plan. At December 31, 1996,
101,172 options were outstanding and exercisable.

F-10
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Changes in all outstanding options are as follows:

<TABLE>
<CAPTION>
PRICE RANGE SHARES
------------ ---------
<S> <C> <C>
Outstanding at December 31, 1993...................... $ .07-$ 4.00 1,962,138
Granted.............................................. 7.50- 14.50 437,800
Exercised............................................ .07- 4.00 451,276
Forfeited............................................ .32- 4.00 103,215
------------ ---------
Outstanding at December 31, 1994...................... .07- 14.50 1,845,447
Granted.............................................. 15.50- 30.25 488,500
Exercised............................................ .07- 11.00 403,037
Forfeited............................................ .47- 23.50 197,071
------------ ---------
Outstanding at December 31, 1995...................... .07- 30.25 1,733,839
Granted.............................................. 10.00- 19.00 1,172,007
Exercised............................................ .32- 10.00 347,831
Forfeited............................................ .47- 30.25 451,137
------------ ---------
Outstanding at December 31, 1996...................... $ .07-$23.50 2,106,878
============ =========
</TABLE>

In 1996, 1995 and 1994, the Company recognized income tax benefits of
$480,000, $1,131,000 and $948,000, respectively, related to disqualifying
dispositions of ISOs and NQSO exercises. These benefits were recorded as
increases to additional paid-in capital.

Stock-Based Compensation

During 1995, the FASB issued SFAS 123 which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB 25. Entities electing to remain with the accounting in APB 25 must make
pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in the statement had been applied.

The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1995 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the
following weighted average assumptions used for grants in 1996 and 1995:

<TABLE>
<S> <C>
Risk free interest rate........................................ 6.17%-6.48%
Expected dividend yield........................................ 0%
Expected lives................................................. 4.2-5.8 years
Expected volatility............................................ 73.6%
</TABLE>

F-11
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The total fair value of the options granted during the years ended December
31, 1996 and 1995 were computed as approximately $7,580,000 and $4,938,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's reported pro forma net income (loss) and pro forma net income (loss)
per share for the years ended December 31, 1996 and 1995 would have been as
follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Net income (loss):
As reported..................................................... $ -- $3,802
Pro forma....................................................... (2,027) 2,817
Primary EPS:
As reported..................................................... -- .45
Pro forma....................................................... (.28) .33
</TABLE>

Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that expected in future years.

The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
ACTUAL NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .07-
0.47 176,689 2.9 $ .27 176,689 $ .27
1.08-
1.08 136,227 5.6 1.08 89,754 1.08
2.33-
2.33 34,095 6.2 2.33 14,101 2.33
4.00-
4.00 257,199 6.7 4.00 122,925 4.00
7.50-
7.50 81,150 7.6 7.50 -- --
10.00-
14.99 1,188,192 8.4 12.32 84,900 10.71
15.50-
19.00 180,076 6.8 16.99 17,926 15.81
23.50-
23.50 53,250 8.3 23.50 10,650 23.50
- ------- --------- --- ------ ------- ------
$ .07-
23.50 2,106,878 7.3 $ 9.90 516,945 $ 4.09
======= ========= === ====== ======= ======
</TABLE>

Restricted Stock

During 1996, the Company issued 10,000 shares of restricted stock to an
executive officer at no cost. The fair market value of the stock at the date
of issuance was $12.375 per share and the Company recorded compensation
expense of $123,750 related to the stock issuance.

F-12
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Employee Stock Purchase Plan

During 1995, the Company established an employee discount stock purchase
plan for eligible employees of XcelleNet, Inc. and designated subsidiaries and
authorized 300,000 shares for issuance under this plan. Participants may use
up to 10% of their compensation to purchase the Company's common stock at the
end of each six-month plan period for 85% of the lower of the beginning or
ending stock price in the plan period. At December 31, 1996, there were
256,665 shares of stock reserved for issuance under this plan. The weighted
average fair value of the purchase rights granted in 1996 and 1995 was $14.42
and $18.49, respectively.

Treasury Stock

In November 1995, the Company's Board of Directors approved the repurchase
of 527,879 shares of its common stock from Motorola, Inc. at a negotiated
price of approximately $15.15 per share. The closing price of the Company's
common stock on the date of the transaction was $15.50. After the transaction,
Motorola, Inc. owned 731,047 shares of the Company's common stock.

Additionally, on October 27, 1995, the Company's Board of Directors
authorized a common stock repurchase program of up to 350,000 shares. The
stock repurchase plan authorizes the Company to periodically purchase shares
in the open market or through privately negotiated transactions to meet the
requirements of its stock-based compensation plans.

3. INCOME TAXES

The components of the income tax provision are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ 621 $ 1,792 $ 1,657
State............................................. 113 303 278
Foreign........................................... 33 -- --
------ -------- --------
767 2,095 1,935
------ -------- --------
Deferred:
Federal........................................... (663) 128 410
State............................................. (104) 7 30
Foreign........................................... -- -- --
------ -------- --------
(767) 135 440
------ -------- --------
$ -- $ 2,230 $ 2,375
====== ======== ========
</TABLE>

The Company's effective tax rate varies from the statutory federal income
tax rate as a result of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.............. 34% 34% 34%
Foreign losses providing no tax benefit........ 25 1 2
State income taxes, net of federal benefit..... 3 3 3
R&D tax credits................................ (35) (3) (2)
FSC tax benefit................................ (2) -- --
State tax credits.............................. (9) -- --
Tax exempt interest income..................... (19) (2) --
Other, net..................................... 3 4 3
-------- ------- -------
Effective tax rate............................. --% 37% 40%
======== ======= =======
</TABLE>

F-13
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The sources of the difference between the financial reporting and income tax
bases of the Company's assets and liabilities that give rise to the deferred
income tax liabilities and assets and the tax effects of each are as follows
(in thousands):

<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Deferred income tax liabilities:
Capitalized software development costs...................... $ 832 $ 286
Prepaid marketing expense................................... 55 121
Other....................................................... 83 99
-------- -------
970 506
-------- -------
Deferred income tax assets:
Software acquisition........................................ (1,115) --
Net losses from foreign subsidiaries........................ (533) (433)
Deferred lease credits...................................... (302) (316)
Allowance for doubtful accounts receivable.................. (181) (97)
Other....................................................... (126) (60)
-------- -------
(2,257) (906)
-------- -------
Valuation allowance for deferred income tax assets........... 533 433
-------- -------
Net deferred income tax (assets) liabilities................. $ (754) $ 33
======== =======
</TABLE>

The losses from the Company's U.K. operations were $258,000, $190,000, and
$289,000 in 1996, 1995, and 1994, respectively. The income tax benefit related
to losses since inception of $533,000 and $433,000 at December 31, 1996 and
1995, respectively, has been offset by a valuation allowance due to the
uncertainty of realization.

4. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain office space and equipment under noncancelable
operating lease agreements, which expire at various dates through 2000. In
1996, 1995, and 1994, rent expense under these agreements totaled $1,754,000,
$1,131,000, and $790,000, respectively.

For financial reporting purposes, rent expense and lease incentives related
to the office lease are being recognized on a straight-line basis over the
term of the lease. The lease incentives and accrued lease costs resulted in
deferred credits of $885,000 and $847,000 at December 31, 1996 and 1995,
respectively, the majority of which are included in long-term liabilities in
the accompanying balance sheets.

F-14
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Future minimum payments due under all noncancelable operating lease
agreements at December 31, 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997........................................... $ 2,412
1998........................................... 2,411
1999........................................... 2,472
2000........................................... 1,737
2001........................................... 41
Thereafter..................................... --
--------------
$ 9,073
==============
</TABLE>
Employment Agreement

The Company has entered into an agreement with its Chief Executive Officer
("CEO") that permits the CEO to obtain, at no cost, a license to use the full
range of the Company's products at one central site, and on up to 250 nodes
for his own internal business, charitable, or educational purposes. The CEO's
license right commences when his employment with the Company, any subsidiary
of the Company, or any 40% shareholder of the Company, is terminated other
than for cause, or in the event the CEO resigns from employment following a
change in control, as defined. This agreement has a term of twenty years
following the CEO's termination of employment.

Legal Proceedings

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

5. RELATED PARTY TRANSACTIONS

Electronic Commerce, Inc. ("E-Comm"), a system integrator based in Raleigh,
North Carolina that remarkets the Company's software to end-user customers, is
partially owned by the brother of the Company's CEO. During 1995 the Company's
CEO personally loaned E-Comm $200,000 which was outstanding at December 31,
1996, in the form of an unsecured note for working capital purposes.
Subsequent to year end, this loan was paid back in full in conjunction with
the acquisition of E-Comm by the Company. See Note 7 "Subsequent Events."

During 1996, 1995 and 1994, E-Comm purchased software from the Company
totaling $734,000, $852,000 and $63,000, respectively, of which $734,000,
$664,000 and $63,000 were remarketed to end-user customers and the balance was
used internally. All of these transactions were at the Company's standard
terms and conditions. At December 31, 1996 and 1995, $107,000 and $243,000,
respectively, were receivable from E-Comm and related to remarketing
activities. See Note 7 "Subsequent Events."

6. NONRECURRING CHARGES

Effective November 5, 1996, the Company acquired all tangible and intangible
WorldLink software rights from The NetPlex Group, Inc. under the terms of an
asset purchase agreement for a total consideration of approximately
$3,037,000. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations" ("APB 16"), and accordingly, the purchase price was allocated to
goodwill as of the acquisition date. An amount equal to the purchase price was
recorded on the Company's statement of operations as nonrecurring charges due
to uncertainties regarding its recoverability.

F-15
<PAGE>

XCELLENET, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

In addition, the Company recorded nonrecurring charges of $459,000 primarily
representing severance plus hiring costs associated with certain key
employees.

7. SUBSEQUENT EVENTS

The following events have occurred subsequent to December 31, 1996:

Acquisition of E-Comm

During January 1997, the Company acquired all of the outstanding shares of
E-Comm for a total consideration comprising cash and stock of approximately
$2,675,000. The Company will account for the acquisition as a purchase in
accordance with APB 16. See Note 5 "Related Party Transactions."

Potential Public Stock Offering

During January 1997, the Company commenced an underwritten offer to the
public of up to 655,953 shares of the Company's common stock (the "Offering")
(excluding shares that may be sold upon exercise of the underwriters' over-
allotment option and any selling shareholders' shares and including 157,539
shares currently classified as treasury stock in the Company's accompanying
Consolidated Balance Sheets). It is currently anticipated that up to 844,047
shares would be offered by selling shareholders, of which no more than 113,000
shares would be offered by officers and directors of the Company. The Offering
will commence as soon as practicable after a registration statement to be
filed with the Securities and Exchange Commission by the end of February 1997
becomes effective.

Employment Agreements

During February 1997, the Company entered into employment agreements with
certain of its executive officers that provide for compensation and benefit
arrangements upon a change in control as defined in the agreements.

F-16
<PAGE>

[LOGO OF XCELLENET APPEARS HERE]
<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses in connection with the issuance and distribution of the Common
Stock, other than underwriting discounts, are set forth in the following
table. All amounts except the Securities and Exchange Commission registration
fee and the NASD filing fee are estimated.

<TABLE>
<CAPTION>
PORTION BORNE BY PORTION BORNE BY THE
THE COMPANY SELLING SHAREHOLDERS
---------------- --------------------
<S> <C> <C>
Securities and Exchange Commission
Registration Fee.................... $ 6,363 $ 2,491
NASD Filing Fee...................... 2,459 963
Nasdaq Listing Fee................... 12,577 4,923
Printing and Engraving Expenses...... 89,831 35,169
Accountants' Fees and Expenses....... 32,339 12,661
Legal Fees and Expenses.............. 89,831 35,169
Blue Sky Fees and Expenses........... 3,593 1,407
Transfer Agent and Registrar Fees.... 3,593 1,407
Miscellaneous........................ 46,874 18,350
-------- --------
Total.......................... $287,460 $112,540
======== ========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Pursuant to the Company's Amended and Restated Bylaws and indemnification
agreements between the Company and each of its officers and directors, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by law with respect to all liability and loss
suffered and reasonable expense incurred by such person in any action, suit or
proceeding in which such person was or is made or threatened to be made a
party or is otherwise involved by reason of the fact that such person is or
was a director or officer of the Company. The Company is also obligated to pay
the reasonable expenses of the directors and officers incurred in defending
such proceeding if the indemnified party agrees to repay all amounts advanced
if it is ultimately determined that such person is not entitled to
indemnification.

In addition, the Company's Amended and Restated Articles of Incorporation
provide that the Company's directors shall not be liable to the Company or its
shareholders for monetary damages for breach of a director's fiduciary duty as
a director to the Company and its shareholders, except to the extent such
exemption from liability or limitation thereof is not permitted under the
Georgia Business Corporation Code. This provision in the Company's Amended and
Restated Articles of Incorporation does not eliminate the duty of care, and in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Georgia law. In
addition, each director continues to be subject to liability for monetary
damages for misappropriation of any corporate opportunity in violation of the
director's duties, for acts or omissions involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director and for distributions (including payment of dividends, stock
repurchases or redemptions) that are unlawful under Georgia law. This
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.

The Company holds an insurance policy covering directors and officers under
which the insurer agrees to pay, subject to certain exclusions, for any claim
made against the directors and officers of the Company for a wrongful act that
they may become legally obligated to pay or for which the Company is required
to indemnify the directors or officers, including liabilities under the
Securities Act. The Company believes that these provisions of its Amended and
Restated Articles of Incorporation, Bylaws and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.

II-1
<PAGE>

Reference is hereby made to the Section entitled Indemnification and
Contribution of the Underwriting Agreement, the form of which is filed as
Exhibit 1 hereto, in which the Underwriters agree to indemnify the directors
and officers of the Company and certain other persons against certain civil
liabilities.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1* Form of Underwriting Agreement.
4.1 Specimen Stock Certificate for the Common Stock of the Registrant
(Incorporated herein by reference to Exhibit 4.01 to Registration
Statement No. 33-76012).
4.2 Amended and Restated Articles of Incorporation of the Registrant
(Incorporated herein by reference to Exhibit 3.01 to Registration
Statement No. 33-76012).
4.3 Amended and Restated Bylaws of the Registrant (Incorporated herein by
reference to Exhibit 3.02 to Registration Statement No. 33-76012).
4.4 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).
5* Opinion of Alston & Bird LLP.
23.1* Consent of Alston & Bird LLP (Included in Exhibit 5 above).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (Included on signature page).
</TABLE>
- --------
*To be filed by amendment

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise,

II-2
<PAGE>

the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II- 3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Atlanta, and state of Georgia, on February 24,
1997.

XcelleNet, Inc.

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

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Dennis M. Crumpler, Sidney V. Sack and Corey M.
Smith and each of them, with the power to act without the other, as his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on February 24, 1997.

SIGNATURE TITLE
--------- -----

/s/ Dennis M. Crumpler Chairman of the Board of Directors
- ------------------------------------- and Chief Executive Officer
DENNIS M. CRUMPLER (Principal Executive Officer)

/s/ Sidney V. Sack Executive Vice President and Chief
- ------------------------------------- Financial Officer (Principal
SIDNEY V. SACK Financial and Accounting Officer)

/s/ Stephen P. Bradley Director
- -------------------------------------
STEPHEN P. BRADLEY

II-4
<PAGE>

SIGNATURE TITLE
--------- -----

/s/ Donald L. House Director
- ------------------------------------
DONALD L. HOUSE

/s/ Richard C. Marcus Director
- ------------------------------------
RICHARD C. MARCUS

/s/ Geoffrey A. Moore Director
- ------------------------------------
GEOFFREY A. MOORE

/s/ Shereef W. Nawar Director
- ------------------------------------
SHEREEF W. NAWAR

/s/ Richard L. Nolan Director
- ------------------------------------
RICHARD L. NOLAN

/s/ Jeffrey P. Parker Director
- ------------------------------------
JEFFREY P. PARKER

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
<C> <S> <C>
1* Form of Underwriting Agreement.
4.1 Specimen Stock Certificate for the Common Stock of the
Registrant (Incorporated herein by reference to Exhibit 4.01 to
Registration Statement No. 33-76012).
4.2 Amended and Restated Articles of Incorporation of the
Registrant (Incorporated herein by reference to Exhibit 3.01 to
Registration Statement No. 33-76012).
4.3 Amended and Restated Bylaws of the Registrant (Incorporated
herein by reference to Exhibit 3.02 to Registration Statement
No. 33-76012).
4.4 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).
5* Opinion of Alston & Bird LLP.
23.1* Consent of Alston & Bird LLP (Included in Exhibit 5 above).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (Included on signature page).
</TABLE>
- --------
*To be filed by amendment

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the inclusion in
this registration statement of our report dated January 23, 1997 for the fiscal
year ended December 31, 1996 and to all references to our Firm included in or
made a part of this Registration Statement.

Arthur Andersen LLP

Atlanta, Georgia
February 21, 1997