<PAGE>

SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549


FORM 10-Q

(Mark one)
[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the quarter ended June 30, 1999

[_]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

Commission file number 0-19856

XIRCOM, INC.
2300 Corporate Center Drive
Thousand Oaks, California  91320
Telephone:  (805) 376-9300

California  (State of incorporation)

95-4221884  (IRS Employer Identification No.)

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


There were 24,171,091 shares of the Registrant's $.001 par value Common Stock
outstanding as of August 4, 1999.


                                                               1    XIRCOM, INC.
<PAGE>

Xircom, Inc.
TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                               Page in Form 10-Q
<C>       <S>                                                  <C>
Part I.   Financial Information

ITEM 1.   FINANCIAL STATEMENTS

          Condensed Consolidated Balance Sheets                               3

          Condensed Consolidated Income Statements                            4

          Condensed Consolidated Statements of Cash Flows                     5

          Notes to Condensed Consolidated Financial Statements              6-7

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    7-14

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES
          ABOUT MARKET RISK                                               14-15

PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS                                                  15

ITEM 2.   CHANGES IN SECURITIES                                              15

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES                                    15

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                15

ITEM 5.   OTHER ITEMS                                                        15

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                                   15

SIGNATURES                                                                   15
</TABLE>


                                                                2   XIRCOM, INC.
<PAGE>

XIRCOM, INC.
PART I. FINANCIAL STATEMENTS

ITEM I. FINANCIAL STATEMENTS
CONDENSED COSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                      (Unaudited)
                                                                                         June 30         September 30
(In thousands)                                                                              1999                 1998
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                <C>
Current assets:
     Cash and cash equivalents                                                          $129,835             $105,796
     Accounts receivable, net                                                             44,271               29,280
     Income tax receivable                                                                   285                  285
     Inventories                                                                          11,218               16,121
     Deferred income taxes                                                                11,659               11,659
     Other current assets                                                                  4,894                4,874
---------------------------------------------------------------------------------------------------------------------
Total current assets                                                                     202,162              168,015

Property and equipment, net                                                               30,310               26,730
Other assets                                                                               4,675                  479
---------------------------------------------------------------------------------------------------------------------
Total assets                                                                            $237,147             $195,224
---------------------------------------------------------------------------------------------------------------------


Current liabilities:
     Accounts payable                                                                   $ 15,403             $ 17,269
     Accrued liabilities                                                                  38,894               28,813
     Accrued income taxes                                                                  6,002                3,308
---------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                                 60,299               49,390

Deferred income taxes                                                                      9,116                9,116

Shareholders' equity:
     Common stock                                                                             24                   23
     Paid-in capital                                                                     144,189              145,862
     Retained earnings (accumulated deficit)                                              23,519               (9,167)
---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                               167,732              136,718
---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                              $237,147             $195,224
---------------------------------------------------------------------------------------------------------------------
</TABLE>






See Notes to Condensed Consolidated Financial Statements
                                                                3   XIRCOM, INC.
<PAGE>

Xircom, Inc.
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                  Three months ended            Nine months ended
(In thousands, except per share information)            June 30                      June 30
----------------------------------------------------------------------------------------------------
                                                   1999        1998             1999          1998
----------------------------------------------------------------------------------------------------
<S>                                              <C>          <C>             <C>           <C>
Net sales                                        $103,073     $71,312         $296,779      $187,991
Cost of sales                                      56,835      47,001          168,666       123,923
----------------------------------------------------------------------------------------------------

Gross profit                                       46,238      24,311          128,113        64,068

Operating expenses:
  Research and development                          6,246       3,904           16,638        11,319
  Sales and marketing                              20,709      11,907           58,597        33,702
  General and administrative                        3,214       2,434            9,167         6,853
----------------------------------------------------------------------------------------------------
    Total operating expenses                       30,169      18,245           84,402        51,874
----------------------------------------------------------------------------------------------------

Operating income                                   16,069       6,066           43,711        12,194
Other income, net                                     713         657            1,686         2,680
----------------------------------------------------------------------------------------------------

Income before income taxes                         16,782       6,723           45,397        14,874
Provision for income taxes                          4,699       2,018           12,711         4,462
----------------------------------------------------------------------------------------------------

Net income                                       $ 12,083     $ 4,705         $ 32,686      $ 10,412
----------------------------------------------------------------------------------------------------

Basic earnings per share                         $    .50     $   .21         $   1.37      $    .46
Diluted earnings per share                       $    .48     $   .20         $   1.29      $    .45
----------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Condensed Consolidated Financial Statements.
                                                                 4  XIRCOM, INC.
<PAGE>

Xircom, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
(in thousands)

Nine months Ended June 30                                                     1999         1998
-------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>
Operating activities:
  Net income                                                                $ 32,686     $ 10,412
  Adjustments to derive cash flows from operating activities:
    Depreciation and amortization                                             10,370        5,677
    Foreign currency exchange gains, net                                        (434)        (636)
    Changes in assets and liabilities:
      Accounts receivable                                                    (14,991)     (21,020)
      Income tax receivable                                                        -        5,006
      Inventories                                                              4,903       11,263
      Other current assets                                                       (20)        (452)
      Accounts payable and accrued liabilities                                 8,649        6,552
      Income taxes payable                                                     8,184        4,122
-------------------------------------------------------------------------------------------------
  Net cash provided by operating activities                                   49,347       20,924
-------------------------------------------------------------------------------------------------

Investing activities:
  Purchases of property and equipment                                        (14,141)     (14,028)
  Decrease (increase) in other assets                                         (4,005)         137
-------------------------------------------------------------------------------------------------
  Net cash used in investing activities                                      (18,146)     (13,891)
-------------------------------------------------------------------------------------------------

Financing activities:
  Proceeds from issuance of common stock                                      12,613        2,467
  Repurchase of common stock                                                 (19,775)           -
  Repayment of debt obligations                                                    -       (2,541)
-------------------------------------------------------------------------------------------------
  Net cash used in financing activities                                       (7,162)         (74)
-------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                     24,039        6,959
Cash and cash equivalents at beginning of period                             105,796       75,109
-------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                  $129,835     $ 82,068
-------------------------------------------------------------------------------------------------

Supplemental cash flow disclosures:
Cash paid for income taxes                                                  $  4,268     $    148
Non-cash transactions--tax benefit related to employee stock options        $  5,490     $    386
-------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Condensed Consolidated Financial Statements.
                                                                 5  XIRCOM, INC.
<PAGE>

Xircom, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of presentation
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit (except for the balance sheet information as of
September 30, 1998, which was derived from audited consolidated financial
statements) pursuant to Securities and Exchange Commission regulations. In the
opinion of management, the financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position at June 30, 1999, the consolidated
statements of income for the three- and nine-month periods ended June 30, 1999
and 1998, and cash flows for the nine-month periods ended June 30, 1999 and
1998, in accordance with generally accepted accounting principles. The
accompanying financial statements are condensed and do not include footnotes and
certain financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's 1998 annual report on
Form 10-K. The results of operations for the three- and nine-month periods ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the entire fiscal year.

Cash and cash equivalents
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents and are carried at cost
plus accrued interest. Beginning in fiscal 1999, the Company changed its
investment strategy and began investing its excess cash balances primarily in
tax preferred investment vehicles.

Other assets
Other assets in 1999 consisted primarily of licensing rights for certain
intellectual property. The use of these rights is contingent upon approval of
the transfer of these rights by the court having jurisdiction over the assets.

Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:

<TABLE>
<CAPTION>
                                        June 30         September 30
    (In thousands)                         1999                 1998
    -----------------------------------------------------------------
    <S>                                 <C>             <C>
    Finished goods                      $ 4,397              $ 4,165
    Subassemblies                           629                1,092
    Work-in-process                       2,373                5,383
    Component parts                       3,819                5,481
    -----------------------------------------------------------------
                                        $11,218              $16,121
    -----------------------------------------------------------------
</TABLE>

Common stock
On February 18, 1999, Intel Corporation exercised its warrant to purchase
additional shares of Xircom common stock. Under the terms of the warrant
agreement, Intel elected to receive 514,314 shares at no additional cost in lieu
of purchasing 1,509,903 shares at an exercise price of $27.01. Concurrent with
the warrant exercise, Xircom repurchased all 514,314 shares of common stock
issued to Intel for a total price of $19.8 million, or $38.45 per share. During
the nine-month period ended June 30, 1999, the Company received cash of $12.6
million from the issuance of common stock through its stock option and employee
stock purchase plans.

Earnings per share
Basic earnings per share is calculated using the weighted average common shares
outstanding for the period, and excludes dilutive securities. Diluted earnings
per share reflects the dilution to earnings that would occur if stock options or
other dilutive securities resulted in the issuance of common stock.

                                                                 6  XIRCOM, INC.
<PAGE>

Xircom, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The weighted average number of shares for basic an diluted earnings per share
were as follows:

<TABLE>
<CAPTION>
                                Three Months Ended        Nine Months Ended
                                      June 30                  June 30
(In thousands)                    1999        1998        1999          1998
-----------------------------------------------------------------------------
<S>                             <C>         <C>         <C>           <C>
Weighted average number of
 shares--basic                  24,022      22,865      23,798        22,782

Effect of dilutive
 securities:
 Employee stock options          1,103         626       1,348           283
 Warrant                             -           -         114             -
-----------------------------------------------------------------------------
Weighted average number of
 shares--diluted                25,125      23,491      25,260        23,065
-----------------------------------------------------------------------------
</TABLE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
This Quarterly Report contains trend analysis and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the trend
analysis and other forward-looking statements contained herein, as a result of
the risk factors set forth below and elsewhere in this report.

Results of Operations
--------------------
The following table sets forth the income statements as a percentage of net
sales:

<TABLE>
<CAPTION>
                                Three months ended    Nine months ended
                                      June 30               June 30
                                  1999        1998      1999        1998
-------------------------------------------------------------------------
<S>                             <C>         <C>       <C>         <C>
Net sales                       100.0%      100.0%    100.0%      100.0%
Cost of sales                    55.1%       65.9%     56.8%       65.9%
-------------------------------------------------------------------------
Gross profit                     44.9%       34.1%     43.2%       34.1%
Operating expenses:
  Research and development        6.1%        5.5%      5.6%        6.0%
  Sales and marketing            20.1%       16.7%     19.8%       17.9%
  General and administrative      3.1%        3.4%      3.1%        3.7%
-------------------------------------------------------------------------
                                 29.3%       25.6%     28.5%       27.6%
-------------------------------------------------------------------------
Operating income                 15.6%        8.5%     14.7%        6.5%
Other income, net                 0.7%        0.9%      0.6%        1.4%
-------------------------------------------------------------------------
Income before income taxes       16.3%        9.4%     15.3%        7.9%
Provision for income taxes        4.6%        2.8%      4.3%        2.4%
-------------------------------------------------------------------------
Net income                       11.7%        6.6%     11.0%        5.5%
-------------------------------------------------------------------------
</TABLE>

Net sales
Net sales of our LAN adapters, modems and multifunction LAN and modem cards
("Combo cards") for the three- and nine-month periods ended June 30, 1999
increased 45% and 58%, respectively, from the corresponding prior-year periods.
We attribute this increase primarily to growth in overall market demand for
local and wide area network connectivity products and an increase in unit sales
of our adapter products by our domestic and international distribution customers
and original equipment manufacturer ("OEM") customers.

                                                                 7  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Total unit shipments for the three- and nine-month periods ended June 30, 1999
increased 41% and 53%, respectively, from the corresponding prior year periods.
Average selling prices were slightly higher during the third quarter of fiscal
1999 than the corresponding prior year quarter primarily due to two opposing
factors. First, we sold more of our RealPort/TM/ Integrated PC Card family of
products, which were introduced during the third quarter of fiscal 1998, than
our other PC Card products. During the third quarter of fiscal 1999, net sales
of our RealPort Integrated PC Card products, which have higher average selling
prices than our other PC Card products, accounted for more than 50% of total net
sales. Second and partially offsetting the first factor, during the quarter
ended June 30, 1999 we sold more of our LAN adapters at lower selling prices
than in the corresponding prior year quarter.

International sales.  Total international sales (shipments to customers located
outside the U.S.) were 54% and 57% of total net sales for the three-and nine-
month periods ended June 30, 1999, as compared to 48% and 52% for the comparable
prior year periods.  During the third quarter of fiscal 1999 PC Card sales in
the Americas and Asia-Pacific regions grew at a faster rate than in Europe.

Gross profit
Gross profit consists of net sales less cost of sales, which includes product
costs and other costs of sales.  Product costs include materials, labor and
manufacturing overhead.  Other costs of sales include royalty payments to
licensors of software incorporated into the Company's products, warranty expense
and provisions for excess and obsolete inventory.  Gross profit margins for the
three- and nine-month periods ended June 30, 1999 were 44.9% and 43.2% compared
to 34.1% for both of the comparable prior-year periods.  The increase in gross
profit as a percentage of net sales was primarily attributable to higher gross
margins of the Company's RealPort Integrated PC Card family of products as
compared to PC Card products.  In addition, the mix of product shipments during
the 1999 periods was more heavily weighted toward higher margin LAN adapter and
Combo cards, versus lower margin modem cards, as compared to the prior year
periods.

Operating expenses
We increased our research and development expenses for the three- and nine-month
periods ended June 30, 1999 in absolute dollars by 60% and 47% and as a
percentage of net sales for the three-month period ended June 30, 1999, as
compared to the corresponding prior-year periods.  We incurred these increased
expenses for additional staffing costs and project materials required to
support:
 .  product development for our OEM customers, including Mini-PCI adapters;
 .  development of communications adapters in Compact Flash and other form
   factors;
 .  continued development of higher-speed and higher bandwidth Integrated PC
   Cards and PC Cards;
 .  feature enhancement of current products; and,
 .  cost reduction of current products.
Research and development expenses decreased as a percentage of net sales for the
nine-month period ended June 30, 1999 as compared to the corresponding prior-
year period primarily due to the increase in net sales.  We expect research and
development expenses to continue to increase in absolute dollars and
proportionately as a percentage of net sales due to planned expenditures on
product enhancements and new product introductions.

We increased our sales and marketing expenses for both the three- and nine-month
periods ended June 30, 1999 by 74% in absolute dollars compared to the
corresponding prior-year periods, and as a percentage of net sales.  We incurred
these expenses primarily for additional headcount and sales and marketing
activities to support increased brand awareness and expanding markets,
advertising, programs to increase end user demand, and increased OEM sales
levels.  Our sales and marketing expenses are expected to increase slightly
through the remainder of fiscal 1999 and may decline as a percentage of net
sales.

We increased our general and administrative expenses for the three- and nine-
month periods ended June 30, 1999 by 32% and 34% as compared to the
corresponding prior-year periods.  The

                                                                 8  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSON AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

increase was to support growth in the organization and, to a lesser extent,
continued noncapitalizable expenditures on information systems hardware and
software, including Year 2000 upgrades. See Risk Factors for a more detailed
discussion of Year 2000 issues. These expenses decreased as a percentage of net
sales as compared to the corresponding prior-year period primarily due to
increased levels of sales. Our general and administrative expenses are expected
to continue to increase for the remainder of fiscal 1999 and may vary as a
percentage of net sales.

Other income, net
Other income, net includes interest income we earned on the investment of our
available cash and net gains on our foreign currency transactions, offset by
discounts earned by our customers on early payments to us and losses on
disposals of our fixed assets.  The decrease in net other income for the nine-
month period ended June 30, 1999 as compared to the corresponding fiscal 1998
period was primarily due to an increase in discounts earned by our customers on
early payments to us and a decrease in gains on our foreign current
transactions, offset partially by an increase in interest income.  The increase
in interest income was due to our increased cash balances offset partially by
the lower interest rates we earned in fiscal 1999 when using tax preferred
investments vehicles.

Income taxes
Our effective income tax rate for the three- and nine-month periods ended June
30, 1999 was 28% as compared to 30% for the comparable prior-year periods.  The
difference between our effective tax rates and the 35% federal statutory tax
rate was due primarily to benefits we received from the tax holiday status of
our manufacturing operations in Malaysia, which expires in 2000.  In addition,
in fiscal 1999 we began using tax preferred investment vehicles for our cash
equivalents to further reduce our effective tax rate.

Risk Factors
------------
We Face the Risk of Being Unable to Remain Competitive in the Mobile Networking
Industry.  The market for notebook PC Card adapters has grown rapidly since the
Personal Computer Memory Card International Association (PCMCIA) introduced a
standard form factor for PC Card LAN adapters in 1993.  Companies in the PC,
desktop LAN adapter and modem industries with greater name recognition and
greater financial resources than us, have a significant presence in the PC Card
adapter market.  As a result, we have faced increased competition in our
industry.  Actions by our competitors which continue to influence this
competitive environment include price reductions, new product introductions,
promotional efforts, and changes in the level of channel inventory.  We expect
competition to remain intense and as a result, we may lose some of our business
to our competitors.  Further, we believe that the market for PC Card LAN
adapters, modems and Combo cards will continue to be price competitive and thus
we could continue to experience lower selling prices, lower gross profit margins
and reduced profitability levels than earned from such products in the past.

We Face the Risk of Being Unable to Compete if Our Manufacturing Facility
Becomes Unable to Produce Our Products at a Low Cost.  We believe that our in-
house manufacturing facility continues to operate at a greater efficiency level
than during prior years.  This manufacturing facility, located in Malaysia,
produces all of our products.  While we expect the manufacturing facility and
increased production volume to continue to have a positive impact on cost
reduction efforts, we may be unable to achieve significant additional
efficiencies from this facility.  If we are unable to achieve additional cost
reductions through increased production or manufacturing efficiency we may be
unable to keep pace with competitors' cost or price reductions to an extent
necessary to maintain or increase our market share without adversely affecting
gross profit margins.  Because all of our products are being manufactured at our
own facility, if we are unable to accurately forecast or react to changes in
product demand, interruptions in the supply of products could occur.  This in
turn could adversely affect future sales.  We also face risks associated with
operations overseas, including management of a distant and remote manufacturing
facility, currency fluctuations and potential instability in the local country.
This is particularly of concern to us in

                                                                 9  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

light of recent economic and political uncertainty in Malaysia and in Asia
generally.

We Face Certain International Risks by Operating Our International Sales and
Manufacturing Facilities.  The majority of our international sales are
denominated in U.S. dollars.  Our sales may be subject to government controls
and other risks such as:
 .  federal restrictions on export;
 .  export licenses;
 .  trade restrictions;
 .  changes in tariff and freight rates;
 .  currency fluctuations; and,
 .  political instability.
As a result of recent and potential factors such as currency fluctuations and
economic instability impacting international markets, we could encounter
difficulties in accessing new and existing international markets or experience
increased credit risks.  Such credit risks could include customer insolvencies
or other impairments of customers' ability to repay amounts owed to us.  These
credit risks could also include vendor insolvencies or other impairments of
vendors' ability to supply raw materials to us.

We use certain strategies to limit the impact of foreign currency fluctuations
on our Asian distributors.  In doing so, we may at times assume greater foreign
currency risk than at other times.  Continued instability or other adverse
changes in local economies could affect our future operations.  In September
1998, the Malaysian government fixed the exchange rate of the Malaysian currency
at 3.8 ringgits per U.S. dollar.  We believe that the fixing, or any potential
reversion to a floating exchange rate, will not have a significant impact on our
results of operations.

Several European countries have adopted a Single European Currency (the "Euro")
as of January 1, 1999 with a transition period continuing through January 1,
2002.  We have reviewed the impact the Euro may have on our internal systems and
on our competitive environment.  We believe our internal systems will be Euro
capable without material modification cost.  Further, we do not expect the
transition to the Euro currency to have a material adverse impact on our
financial condition or results of operations.

We Face the Risk of Declining Margins From Changes in the Mix of Products We
Sell and in the Types of Customers to Whom We Sell.  Revenues derived from our
Combo and modem-only PC Cards typically have lower gross profit margins than our
LAN PC Cards.  In addition, shipments to our OEM customers generally result in
lower average selling prices and gross profit margins than sales made through
our distribution partners.  Increases in the proportion of modem-only and Combo
PC Cards and in shipments to OEMs tend to negatively impact overall gross
margins and may offset any improvements from manufacturing and design
efficiencies.  In addition, the increased percentage of revenue from OEM
customers during fiscal 1999 as compared to fiscal 1998 has resulted in an
increased concentration in our customer base.  With this increased customer
concentration, we have increased our dependency on a more limited number of
customers at lower average selling prices and gross profit margins than sales
made through our distribution partners.  These trends may continue as we
anticipate a continuing increase in OEM revenues as a percentage of sales.

We Face the Risk of Incurring Unneccessary Expenses if We are Unable to
Accurately Predict Sales of Our Products.  We generally ship products within one
to four weeks after receipt of orders.  Therefore, our sales backlog is
typically minimal.  Accordingly, our expectations of future net sales are based
largely on our own estimates of future demand and not on firm customer orders.
If our net sales do not meet expectations profitability would be adversely
affected, as we may not be able to reduce expenses at the same pace in the near
term.

We Face the Risk of a Reduction in Our Sales if We are Unable to Respond Quickly
to Changes in Demand for Our Products.  Our net sales may be affected by our
distributor and OEM customers' decisions as to the quantity of our products to
be maintained in their inventories.  Due to steps we took beginning in the
fourth quarter of fiscal 1997, our distributors carry relatively low quantities
of

                                                                10  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

inventory compared to our competitors.  In addition, beginning in the second
quarter of fiscal 1999, we took steps to reduce the levels of inventory
maintained by our OEM customers.  These actions enable us to react more quickly
to market changes.  However, we may also be more directly affected by changes in
the market, including the impact of any slowdown or rapid increase in end user
demand.

Despite our efforts to reduce channel inventory exposure, distributors and OEM
customers may still choose to reduce their inventories below the already reduced
levels, which could cause a reduction in our net sales.

We Face the Risk of Being Unable to Compete if We are Unable to Develop New
Products in a Timely Manner.  Our continued success is dependent on our ability
to continue to introduce new products offering advanced features, functionality
and solutions demanded by customers.  We may not be able to continue to
introduce new products on time that are accepted by the market or that sell
through to end users in quantities sufficient to make the products viable for
the long-term.  Sales of such new products may negatively impact sales of our
existing products. In addition, we may have difficulty establishing our
products' presence in markets where we do not currently have significant brand
recognition.

We Face the Risk of Being Unable to Manufacture Our Products Because We Are
Dependent on a Limited Number of Qualified Suppliers for Our Components.
Because of frequent technology changes and rapid industry growth, the cost and
availability of components used to manufacture our products may fluctuate.
Because some components, including custom chipsets, are available from only one
supplier, they are subject to the risk of reduced availability due to a number
of factors, including:
 .  supplier manufacturing constraints;
 .  excess of demand versus supply;
 .  national political or economic changes; and,
 .  other risks not within our control.
Although we have not experienced any significant parts shortages over the past
year, many of these components require long-lead purchase orders thereby
limiting flexibility to change order quantities due to changes in demand.  Any
supply source interruptions, limitations on availability, or inability to
develop alternative sources as needed could adversely affect our ability to
deliver products and, in turn, our future earnings.

We Face the Risk of a Decline in Our Gross Margins Caused by Any of a Number of
Factors.  In summary, gross profit margins are impacted by a number of factors,
including:
 .  sales growth rates;
 .  competitive pricing pressures;
 .  product sales mix;
 .  channel sales mix;
 .  frequency of product transitions;
 .  component cost; and,
 .  manufacturing cost.
In addition, new products often have lower gross profit margins until market
acceptance when increased volumes may permit component cost reductions and
manufacturing efficiencies.

We Face the Risk that Rapid Changes, Short Product Life Cycles and Technological
Changes in Our Industry Could Harm Our Business.  Rapid technological change and
short product life cycles characterize the industry in which we operate.  The
industry includes competitors with greater financial and technical resources
than us.  While we have historically been successful in developing or
integrating leading technology into our products, ongoing investment in research
and development is required for us to maintain our technological position.  We
may need to increase the rate of such investment depending on competitive
factors.

If networking capability is included in extension modules to PCs or in the PC
itself, a reduction in the demand for add-on networking devices could result.
Our operating results and ability to retain our market share are also dependent
on continued growth in the underlying markets for notebook networking products,
notebook computers, and the notebook-to-network connection rate.

                                                                11  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

We Face the Risk That We Could Become Involved in Intellectual Property Disputes
and May be Unable to Enforce Our Intellectual Property Rights.  Patents,
copyrights, trademarks and other efforts we take may not succeed in protecting
our intellectual property, preventing duplication of our technology or providing
a competitive advantage.  Patents issued to us may not be upheld as valid if
litigation over the patent was initiated.  Because of the rapid pace of
technological change in the communications industry we believe our success is
likely to depend more upon continued innovation, technical expertise, marketing
skills and customer support and service rather than upon legal protection of our
proprietary rights.  However, we will aggressively assert our intellectual
property rights when necessary.

With the proliferation of new products and rapidly changing technology in the PC
Card market, there is a significant volume of patents or similar intellectual
property rights held by third parties.  Given the nature of our products and
development efforts, there are risks that claims associated with such patents or
intellectual property rights could be asserted by third parties.  These risks
include the cost of licensing a given technology.  If a claimant refuses to
offer such a license on terms acceptable to us, there is a risk of incurring a
substantial cost of litigation or settlement of such claims regardless of the
merits of the allegations.  In the event of litigation, if we do not prevail we
may be required to pay significant damages and/or to cease sales and production
of infringing products and only make future sales of a noninfringing design.

We currently use software licensed from third parties in certain of our Combo,
modem-only and Token Ring products.  Our operating results could be adversely
affected by a number of factors relating to this third-party software,
including:
 .  failure by a licensor to accurately develop, timely introduce, promote or
   support the software;
 .  delays in shipment of our products;
 .  excess customer support costs or product returns experienced by us due to
   errors in licensed software; or,
 .  termination of our relationship with such licensors.

We Face the Risk of Continued High Volatility in Our Stock Price.  The market
price of our common stock has been, and may continue to be, subject to a high
degree of volatility.  Numerous factors relating to us or our competitors may
have a significant impact on the market price of our common stock, including:
 .  general conditions in the networking and computer industries;
 .  product pricing;
 .  new products;
 .  market growth forecasts;
 .  technological innovations;
 .  acquisitions; and,
 .  announcements of quarterly operating results.
In addition, stock markets have experienced extreme price volatility and broad
market fluctuations in recent years.  This volatility has had a substantial
effect on the market price of securities issued by many high technology
companies, including ours, in many cases for reasons unrelated to the operating
performance of the specific companies.  Our common stock has experienced
volatility not necessarily related to announcements of our performance.

We Face the Risk that Year 2000 Compliance Issues Could Harm Our Business.  The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year.  Such computer programs
or hardware may have date-sensitive software or embedded chips that always
assume the century is "19".  This could cause miscalculations or failure in our
information systems and/or manufacturing equipment.  Such system miscalculations
or failure could cause disruptions of operations including, among other things,
a temporary inability to process transactions or engage in normal business
activities.  Disruptions of our operations may also occur if key suppliers or
customers experience disruptions in their ability to purchase, supply or
transact with us due to Year 2000 issues.

                                                                12  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSION ANA ANALYSIS OF FINANCIAL CONDITION AND RSULTS OF
OPERATIONS

Our global operations rely heavily on the infrastructures within the countries
in which they do business.  The Year 2000 readiness within infrastructure
suppliers (utilities, government agencies, and shipping organizations) will be
crucial to our ability to avoid disruption of operations.

We have reviewed and tested our own products and believe they do not present any
Year 2000 issues.  These products are used as accessories to systems which may
contain Year 2000 issues and we believe that any such Year 2000 issues in such
systems are not attributable to our products.

We have completed our initial analysis of our major information systems that
could be significantly affected by the Year 2000 issue and have committed
personnel and resources to resolve potential issues.  Based on our analysis, we
determined that we would be required to modify or replace certain portions of
our internal hardware and software so that those systems will properly use dates
beyond December 31, 1999.  We believe that the Year 2000 issue can be mitigated
with respect to our internal information systems and manufacturing equipment
with modifications or replacements of certain existing software and hardware.

Our plan to resolve the Year 2000 issue involves four phases: assessment,
remediation, testing, and contingency planning.  Our assessment plan for both
information technology ("IT") and non-IT systems is currently in process.  We
have initiated a communications plan to create awareness, both internally and
externally, of the need to identify Year 2000 issues and the risks the issues
create.  We collected and analyzed inventories of systems, equipment, and
processes from our global locations.  Thus far, the assessment has indicated
that most of our significant IT systems are Year 2000 compliant.  The assessment
indicated, however, that our customer interaction system could be affected.
This system was successfully replaced with a Year 2000 compliant system in May
1999.

We are approximately 66% complete with the remediation phase with respect to our
IT exposures and expect to complete all software reprogramming or replacement no
later than September 30, 1999.  Remediation of all systems classified as
"mission critical" was completed by March 31, 1999 and remediation of all
systems classified as "priority" was completed by June 30, 1999.  Remediation of
the remaining systems, classified as "low impact", is scheduled to be completed
by September 30, 1999.

We tested our manufacturing equipment and found no Year 2000 issues.  We have
queried our significant suppliers regarding their Year 2000 readiness.  To date,
we are not aware of any such supplier with a Year 2000 issue that would
materially affect our operating results. While we have no means of ensuring that
our significant suppliers will be Year 2000 ready we performed secondary
evaluations of our critical suppliers and found no Year 2000 issues that we
believe would lead to an interruption of our manufacturing schedules.  We could
be materially impacted if our significant suppliers are unable to complete their
Year 2000 resolution process in a timely fashion.  The ultimate effect on us of
non-compliance by these parties is not determinable.

We are using both internal and external resources to replace, test and implement
software and operating equipment needing Year 2000 modifications.  The total
cost of the Year 2000 project is estimated at $1.4 million and is being funded
by cash flows from operations. To date, we have incurred approximately $1.3
million ($568,000 expensed and $702,000 capitalized for new software), related
to all phases of the Year 2000 project.  We expect the remaining $92,000 to be
expensed as incurred.

We are developing a contingency plan for organizing responses in case of
shutdown of certain of our critical applications due to Year 2000 issues.  This
contingency plan involves, among other things, IT and non-IT systems and
external systems.  We believe that the most likely worst case of a Year 2000-
related failure given our state of readiness today would be a temporary loss of
10% of our internal IT capability with no material impact on our ability to
conduct normal revenue-generating operations.

                                                                13  XIRCOM, INC.
<PAGE>

Xircom, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

We are also subject to additional risk factors as identified in our Annual
Report to Shareholders and filing on Form 10-K for the year ended September 30,
1998.

Liquidity and Capital Resources
-------------------------------
As of June 30, 1999 we had $129.8 million in cash and cash equivalents.  Our
operating activities provided cash of approximately $49.3 million in the nine-
month period ended June 30, 1999, primarily as a result of net income and
increases in accounts payable and other accrued liabilities and income taxes
payable, partially offset by an increase in accounts receivable.  Income taxes
payable increased primarily due to the timing of payments for income taxes.
Accounts payable and other accrued liabilities increased primarily due to the
timing of payments for component inventory purchases.  Accounts receivable
increased due to quarterly revenue growth and strong sales in the month of June
1999, which resulted in a quarter in which revenue was slightly more back-end
loaded than the September 1998 quarter.

We used $18.1 million in cash in investing activities during the nine-month
period ended June 30, 1999, primarily for capital expenditures and for securing
contingent rights to use certain intangible assets.  The capital expenditures
were for the purchase of manufacturing equipment for use in our Penang, Malaysia
facility, equipment for increased headcount, and information systems hardware
and software.  The intangible assets for which we secured rights consist of a
license to use certain intellectual property.  Our use of these rights is
contingent upon approval of the transfer of these rights by the court having
jurisdiction over the assets.  We have no material fixed commitments and do not
expect an increase in the rate of capital expenditures in the normal course of
business during the remainder of fiscal 1999.

Our financing activities used $7.2 million in cash during the nine-month period
ended June 30, 1999, primarily for the repurchase of capital stock offset by the
issuance of capital stock through our stock option and employee stock purchase
plans.  On February 18, 1999, Intel Corporation exercised its warrant to
purchase additional shares of our common stock.  Under the terms of the warrant
agreement, Intel elected to receive 514,314 shares at no additional cost in lieu
of purchasing 1,509,903 shares at an exercise price of $27.01.  Concurrent with
the warrant exercise, we repurchased all 514,314 shares of common stock issued
to Intel for a total price of $19.8 million, or $38.45 per share.  We generated
cash of $12.6 million from the issuance of capital stock through our stock
option and employee stock purchase plans.

We have a bank credit facility allowing borrowings up to $25.0 million.  Loans
under the agreement are secured by all of our U.S.-based assets.  We also have a
credit facility totaling $10.8 million, denominated in Malaysian ringgits, with
a bank in Malaysia.  We had no borrowings outstanding and approximately $29.0
million in borrowings available under our credit facilities as of June 30, 1999.

We believe that cash on hand, borrowings available under our existing facilities
or from other financing sources and cash provided by operations will be
sufficient to support our working capital and capital expenditure requirements
for at least the next twelve months. However, we cannot assure that future cash
requirements to fund operations will not require us to seek additional capital
sooner than the twelve months, or that such additional capital will be available
when required on terms acceptable to us.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves forward-
looking statements.  Actual results could differ materially from those projected
in the forward-looking statements.

Given the short-term nature of our portfolio of highly liquid cash equivalents,
and that we have no borrowings outstanding, we are not subject to significant
interest rate risk.  We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates and do not use derivative
financial instruments.

We manufacture our products in Malaysia and sell our products worldwide.  Our
financial results, therefore, could be significantly impacted by factors

                                                                14  XIRCOM, INC.
<PAGE>

Xircom, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

such as changes in foreign currency exchange rates and weak economic conditions
in foreign markets. Our operating results are exposed to the impact of weakening
economic conditions in the countries in which we sell our products.

Since the majority of our sales are denominated in U.S. dollars, our foreign
operations are net payers of currencies other than the U.S. dollar, particularly
the Malaysian ringgit and the Belgian franc.  As such, our operating results may
be adversely affected by the impacts of a stronger Malaysian ringgit or Belgian
franc relative to the U.S. dollar.  To mitigate the short-term effect of changes
in currency exchange rates on our foreign currency based expenses, we purchase
and hold Malaysian ringgits and Belgian francs in advance of the due date of the
underlying obligations.

PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS
None.

ITEM 2.   CHANGES IN SECURITIES
None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

ITEM 5.   OTHER ITEMS
None.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                                    XIRCOM, INC.
                                                          ----------------------
                                                                    (Registrant)

                             Date: August 13, 1999             /s/ Dirk I. Gates
                                   ---------------        ----------------------
                                                                   Dirk I. Gates
                                            Chairman of the Board, President and
                                                         Chief Executive Officer


                             Date: August 13, 1999        /s/Steven F. DeGennaro
                                   ---------------        ----------------------
                                                             Steven F. DeGennaro
                                                         Vice President, Finance
                                                     and Chief Financial Officer

                                                                15  XIRCOM, INC.