<PAGE>
 
          UNITED STATES
          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, 1998

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

          Commission file number 0-19856


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


          CALIFORNIA  (State or other jurisdiction of incorporation or
          organization)

          95-4221884  (IRS Employer Identification No.)

          2300 Corporate Center Drive
          Thousand Oaks, California 91320
          (Address of principal executive offices & zip code)
 
          Registrant's telephone number:  (805) 376-9300


          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 23,015,768 shares of the registrant's $.001 par value
          Common Stock outstanding as of August 5, 1998.


<PAGE>
 
XIRCOM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                         Page in
                                                                       Form 10-Q
<S>                                                                    <C> 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
         Condensed Consolidated Balance Sheets                                 3
 
         Condensed Consolidated Statements of Operations                       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                      8-15
 
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
<PAGE>
 
PART I. FINANCIAL INFORMATION
XIRCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                   (UNAUDITED)
(In thousands)                                                                   JUNE 30, 1998        September 30, 1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                  <C>
Current assets:
     Cash and cash equivalents                                                       $  82,068                 $  75,109
     Accounts receivable, net                                                           31,917                    10,897
     Income tax receivable                                                                   -                     5,006
     Inventories                                                                        17,699                    28,962
     Deferred income taxes                                                               7,075                     7,075
     Other current assets                                                                2,928                     2,476
------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                   141,687                   129,525

Equipment and improvements, net                                                         26,091                    17,819
Other assets                                                                               528                       586
------------------------------------------------------------------------------------------------------------------------
Total assets                                                                         $ 168,306                 $ 147,930
------------------------------------------------------------------------------------------------------------------------
 
 
Current liabilities:
     Accounts payable                                                                $  14,020                 $  10,431
     Accrued liabilities                                                                22,434                    20,107
     Current portion of long-term obligations                                                -                     2,541
     Accrued income taxes                                                                4,681                       945
------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                               41,135                    34,024

Deferred income taxes                                                                      479                       479
 
Shareholders' equity:
     Common stock                                                                           23                        23
     Paid-in capital                                                                   143,745                   140,892
     Accumulated deficit                                                              ( 17,076)                 ( 27,488)
------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                             126,692                   113,427
------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                           $ 168,306                 $ 147,930
------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

3
<PAGE>
 
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share information)
<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                               JUNE 30                         JUNE 30
                                                                         1998           1997             1998            1997
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>              <C>             <C>
Net sales                                                             $71,312       $ 50,226         $187,991        $163,675
Cost of sales                                                          47,001         33,315          123,923         104,208
-----------------------------------------------------------------------------------------------------------------------------
Gross profit                                                           24,311         16,911           64,068          59,467
 
Operating expenses:
 Research and development                                               3,904          3,162           11,319           8,841
 Sales and marketing                                                   11,907         11,579           33,702          32,062
 General and administrative                                             2,434          2,018            6,853           5,607
-----------------------------------------------------------------------------------------------------------------------------
          Total operating expenses                                     18,245         16,759           51,874          46,510
-----------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations                             6,066            152           12,194          12,957
Other income, net                                                         657            479            2,680             565
-----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes                   6,723            631           14,874          13,522
Provision for income taxes                                              2,018            189            4,462           4,056
-----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations                                       4,705            442           10,412           9,466
Discontinued operations:
 Operating loss, net of income taxes                                        -              -                -         (   226)
 Loss on disposal, net of income taxes                                      -        ( 6,275)               -         ( 6,275)
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                     $ 4,705       $( 5,833)        $ 10,412        $  2,965
-----------------------------------------------------------------------------------------------------------------------------
 
 
Basic earnings (loss) per share:
 Continuing operations                                                $   .21       $    .02         $    .46        $    .45
 Discontinued operations                                                    -        (   .28)               -         (   .31)
-----------------------------------------------------------------------------------------------------------------------------
 Net income (loss)                                                    $   .21       $(   .26)        $    .46        $    .14
-----------------------------------------------------------------------------------------------------------------------------
 
Diluted earnings (loss) per share:
 Continuing operations                                                $   .20       $    .02         $    .45        $    .43
 Discontinued operations                                                    -        (   .27)               -         (   .29)
-----------------------------------------------------------------------------------------------------------------------------
 Net income (loss)                                                    $   .20       $(   .25)        $    .45        $    .14
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.

4
<PAGE>
 
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In thousands)
<TABLE>
<CAPTION>
  Nine Months Ended June 30                                                                    1998               1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                <C>
Operating activities:
 Income from continuing operations                                                         $ 10,412           $  9,466
 Adjustments to derive cash flows from continuing operating activities:
   Depreciation and amortization                                                              5,677              4,928
   Foreign currency exchange gain                                                           (   636)           (   180)
   Changes in assets and liabilities:
     Accounts receivable                                                                    (21,020)           (14,636)
     Income tax receivable                                                                    5,006              2,652
     Inventories                                                                             11,263            ( 8,711)
     Other current assets                                                                   (   452)               413
     Accounts payable and accrued liabilities                                                 6,552              8,230
     Income taxes payable                                                                     4,122              3,727
----------------------------------------------------------------------------------------------------------------------
 Net cash provided by continuing operating activities                                        20,924              5,889
 Net cash used in operating activities of discontinued operations                                 -            ( 5,985)
----------------------------------------------------------------------------------------------------------------------
 Net cash provided by (used in) operating activities                                         20,924            (    96)
----------------------------------------------------------------------------------------------------------------------
 
Investing activities:
 Proceeds from sale of Netaccess, Inc.                                                            -             11,000
 Purchases of equipment and improvements                                                    (14,028)           ( 4,659)
 Other                                                                                          137                 89
----------------------------------------------------------------------------------------------------------------------
 Net cash provided by (used in) continuing investing activities                             (13,891)             6,430
 Net cash used in investing activities of discontinued operations                                 -            (   501)
----------------------------------------------------------------------------------------------------------------------
 Net cash provided by (used in) investing activities                                        (13,891)             5,929
----------------------------------------------------------------------------------------------------------------------
 
Financing activities:
 Proceeds from issuance of capital stock                                                      2,467             56,123
 Proceeds from issuance of debt obligations                                                       -                960
 Repayment of debt obligations                                                              ( 2,541)           ( 6,061)
----------------------------------------------------------------------------------------------------------------------
 Net cash provided by (used in) financing activities                                        (    74)            51,022
----------------------------------------------------------------------------------------------------------------------
 
Net increase in cash and cash equivalents                                                     6,959             56,855
Cash and cash equivalents at beginning of period                                             75,109             21,377
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                 $ 82,068           $ 78,232
----------------------------------------------------------------------------------------------------------------------
 
Supplemental cash flow disclosures:
 Cash paid for interest                                                                    $     72           $    399
 Cash paid for income taxes                                                                $    148           $     82
 Tax benefit related to employee stock options                                             $    386           $  2,078
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.

5
<PAGE>
 
          XIRCOM, INC.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
          JUNE 30, 1998

          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, 1997, 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 condensed
          consolidated financial position at June 30, 1998, the condensed
          consolidated results of operations for the three- and nine-month
          periods ended June 30, 1998 and 1997, and condensed consolidated cash
          flows for the nine-month periods ended June 30, 1998 and 1997, 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 1997 annual report on Form 10-K.

          The results of operations for the three- and nine-month periods ended
          June 30, 1998 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.

          INVENTORIES
          Inventories are stated at the lower of cost (first-in, first-out) or
          market.  Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                              JUNE 30            September 30
                                                 1998                    1997
-----------------------------------------------------------------------------
<S>                                           <C>                <C>
Finished goods                                $ 4,792                 $17,984
Sub-assemblies                                  1,665                   2,441
Work-in-process                                 5,364                   1,253
Component parts                                 5,878                   7,284
-----------------------------------------------------------------------------
                                              $17,699                 $28,962
-----------------------------------------------------------------------------
</TABLE>

          REVENUE RECOGNITION
          The Company recognizes revenue from product sales when shipped.  The
          Company generally provides a lifetime limited warranty against defects
          in the hardware component and a two-year limited warranty on the
          software component of its network adapters and modem products.  In
          addition, the Company provides telephone support to purchasers of its
          products as needed to assist them in installation or use of the
          products.  The Company makes provisions for these costs in the period
          of sale.  The Company also has contractual agreements which permit
          distributors and dealers to return products or receive price
          protection credits under certain circumstances.  The Company makes a
          provision for the estimated amount of product returns or credits that
          may occur under these contracts in the period of sale.

          EARNINGS PER SHARE
          During the quarter ended December 31, 1997, the Company adopted
          Statement of Financial Accounting Standards No. 128, "Earnings Per
          Share," ("SFAS 128") which required a change in

6
<PAGE>
 
          XIRCOM, INC.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
          JUNE 30, 1998

          the method used to compute earnings per share. SFAS 128 simplifies the
          calculation of earnings per share data by replacing primary and fully
          diluted earnings per share with basic and diluted earnings per share,
          respectively. 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 securities, stock options and
          other dilutive securities resulted in the issuance of common stock. As
          required by SFAS 128, all prior period amounts have been restated to
          conform to the new presentation. The weighted average number of shares
          used for basic and diluted earnings per share were as follows:

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                            JUNE 30                       JUNE 30
                                                                      1998           1997           1998            1997
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>             <C>             <C> 
Weighted average number of shares:
 Basic                                                             22,865,000     22,682,000      22,782,000      21,190,000
  Effect of dilutive securities, employee stock options               626,000        234,000         266,000         618,000
----------------------------------------------------------------------------------------------------------------------------
 Diluted                                                           23,491,000     22,916,000      23,048,000      21,808,000
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

          DISCONTINUED OPERATIONS
          On June 30, 1997, the Company completed the sale of Netaccess, Inc.
          ("Netaccess"), its remote access subsidiary.  The accompanying
          condensed consolidated financial statements have been prepared to
          reflect the historical results of operations of Netaccess as
          discontinued operations.  Net sales and loss before income taxes from
          discontinued operations were $3,120,000 and $2,052,000, respectively,
          during the three-month period ended June 30, 1997 and $13,185,000 and
          $2,375,000, respectively, during the nine-month period ended June 30,
          1997.

7
<PAGE>
 
          XIRCOM, INC.
          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 statements of operations as a
          percentage of net sales:
<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED     NINE MONTHS ENDED
                                                       JUNE 30                JUNE 30
                                                   1998       1997        1998       1997
------------------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>        <C>
Net sales                                          100.0%     100.0%      100.0%     100.0%
Cost of sales                                       65.9%      66.3%       65.9%      63.7%
------------------------------------------------------------------------------------------
Gross profit                                        34.1%      33.7%       34.1%      36.3%
Operating expenses:                       
     Research and development                        5.5%       6.3%        6.0%       5.4%
     Sales and marketing                            16.7%      23.1%       17.9%      19.6%
     General and administrative                      3.4%       4.0%        3.7%       3.4%
------------------------------------------------------------------------------------------
      Total operating expenses                      25.6%      33.4%       27.6%      28.4%
------------------------------------------------------------------------------------------
Operating income from continuing          
     operations                                      8.5%       0.3%        6.5%       7.9%
Other income, net                                    0.9%       1.0%        1.4%       0.4%
------------------------------------------------------------------------------------------
Income from continuing operations before  
     income taxes                                    9.4%       1.3%        7.9%       8.3%
Provision for income taxes                           2.8%       0.4%        2.4%       2.5%
------------------------------------------------------------------------------------------
Income from continuing operations                    6.6%       0.9%        5.5%       5.8%
Discontinued operations:                  
     Operating loss, net of income taxes               -          -           -       (0.2%)
     Loss on disposal, net of income taxes             -      (12.5%)         -       (3.8%)
------------------------------------------------------------------------------------------
Net income (loss)                                    6.6%     (11.6%)       5.5%       1.8%
------------------------------------------------------------------------------------------
</TABLE>
          NET SALES
          The Company sells its products primarily through domestic and
          international distributors (the "branded business") as well as to
          original equipment manufacturers ("OEMs").  Net sales of LAN adapters,
          modems and multifunction LAN and modem cards ("Combo cards") for the
          three- and nine-month periods ended June 30, 1998 increased 42% and
          15%, respectively, from the corresponding prior-year periods.  The
          increase was primarily due to an increase in unit shipments by the
          Company to distributors and OEMs during the third quarter of fiscal
          1998, as compared to the third quarter of fiscal 1997, offset by lower
          average selling prices.  In addition, the Company began shipping the
          first product in its RealPort Integrated PC Card family during the
          third quarter of fiscal 1998, although, because shipments commenced
          late in the quarter, this product has had limited sales to date.
          During the fourth quarter of fiscal 1997, the Company implemented a
          plan to reduce the levels of inventories maintained by the Company's
          distributors and to enable it to react more quickly to market changes.
          Implementation of this plan resulted in slightly lower unit shipments
          by the Company to its distributors during the first nine months of

8
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          fiscal 1998 as compared to the first nine months of fiscal 1997. The
          resulting lower revenues in the branded business were more than offset
          by higher revenues in the OEM business for the comparable periods.
          Total unit shipments for the three- and nine-month periods ended June
          30, 1998 increased 53% and 26%, respectively, from the corresponding
          prior year periods. Average selling prices declined, however, due to a
          higher mix of modem product shipments, which have lower average
          selling prices than Combo cards, and an increase in shipments to OEM
          customers, which typically have lower average selling prices than
          branded sales for comparable products, as compared to the prior year
          periods.

          INTERNATIONAL SALES.  Total international sales (shipments to
          customers located outside the U.S.) were 48% and 52% of total net
          sales for the three- and nine-month periods ended June 30, 1998,
          compared to 44% and 47% for each of the comparable prior year periods.
          PC Card sales in Europe grew at a faster rate than in the Asia-Pacific
          region during the first nine months of fiscal 1998, which the Company
          believes is attributable to economic uncertainty in the Asian region.
          However, PC Card sales in the Asia-Pacific region grew at a comparable
          rate to that of Europe during the third quarter of fiscal 1998.

          GROSS PROFIT
          Gross profit margins for the three- and nine-month periods ended June
          30, 1998 were each 34.1%, compared to 33.7% and 36.3%, respectively,
          for the comparable prior-year periods.  The increase in gross profit
          as a percentage of net sales for the quarter ended June 30, 1998, as
          compared to the prior year period, was primarily attributable to a
          decrease in fixed manufacturing costs as a percentage of sales and an
          increased amount of revenues derived from Combo card and RealPort
          Integrated PC Card products which have higher gross profit margins
          than modem products, offset partially by an increase in modem product
          sales to the Company's OEM customers at lower gross profit margins
          than those of products sold in the branded business.  The decrease in
          gross profit as a percentage of net sales for the nine-month period
          ended June 30, 1998 was due to a higher percentage of sales to the
          Company's OEM customers at lower gross profit margins than those of
          products sold in the branded business.

          OPERATING EXPENSES
          Total operating expenses for the three- and nine-month periods ended
          June 30, 1998 increased by 9% and 12%, respectively, compared to the
          corresponding prior-year periods, primarily due to the continued
          expansion of product lines and an increase in certain sales and
          marketing programs.  Total operating expenses as a percentage of sales
          for the three- and nine-month periods ended June 30, 1998 decreased
          compared to the prior year periods primarily due to an increase during
          the 1998 periods in shipments to the Company's OEM customers, as OEM
          sales typically require lower sales and marketing expenses than
          branded sales.  Total operating expenses are expected to increase
          throughout the remainder of fiscal 1998, and may remain consistent as
          a percentage of net sales.

          Research and development expenses for the three- and nine-month
          periods ended June 30, 1998 increased by 23% and 28%, respectively, as
          compared to the corresponding prior-year periods.  These increased
          expenses were due to additional staffing to support expanded branded
          and OEM product offerings.  Research and development expenses are
          expected to continue to increase due to planned expenditures on
          product enhancements and new product introductions, and may increase
          as a percentage of net sales.

9
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          Sales and marketing expenses for the three- and nine-month periods
          ended June 30, 1998 increased by 3% and 5%, respectively, but
          decreased as a percentage of sales compared to the corresponding
          prior-year periods.  The increases were primarily due to additional
          staffing and sales and marketing activities required to support
          expanding branded markets and increased OEM sales levels.  Partially
          offsetting these increases were the lower sales and marketing
          expenditures that generally are associated with OEM sales versus
          branded business sales, as well as reduced expenses associated with
          lower levels of inventories maintained by distributors.  Sales and
          marketing expenses are expected to increase through the remainder of
          fiscal 1998 as further product and market expansion activities are
          pursued.

          General and administrative expenses for the three- and nine-month
          periods ended June 30, 1998 increased by 21% and 22%, respectively,
          compared to the corresponding prior-year periods.  The increase was to
          support growth in the organization and, to a lesser extent, continued
          expenditures on information systems hardware and software, including
          Year 2000 upgrades.  General and administrative expenses are expected
          to increase modestly for the remainder of fiscal 1998 but may decrease
          as a percentage of net sales.

          OTHER INCOME, NET
          Net other income includes interest income from the investment of
          available cash, foreign currency transaction gains and losses, and
          early payment discounts taken by the Company on trade payable
          payments, offset by early payment discounts taken by customers and
          interest expense on notes payable.  The increase in net other income
          for the fiscal 1998 periods compared to the prior year periods was due
          primarily to higher interest income and lower interest expense as a
          result of increased cash balances and reduced borrowings under credit
          facilities.

          INCOME TAXES
          The Company's effective tax rate for the three- and nine-month periods
          ended June 30, 1998 and 1997 was 30.0%.  The difference between the
          effective tax rates and the 35% federal statutory tax rate was due
          primarily to benefits from the tax holiday status of the Company's
          operations in Malaysia.

          DISCONTINUED OPERATIONS
          The financial results of Netaccess, the Company's remote access
          subsidiary which was sold on June 30, 1997, have been reported as
          discontinued operations in the Condensed Consolidated Statements of
          Operations.  The sale resulted in a loss of $6.3 million or $0.27 per
          diluted share.  Operating loss from discontinued operations, net of
          income taxes, was $226,000 for the nine-month period ended June 30,
          1997.

          LIQUIDITY AND CAPITAL RESOURCES
          At June 30, 1998 the Company had $82.1 million in cash and cash
          equivalents.  The Company's operating activities provided cash of
          $20.9 million during the nine-month period ended June 30, 1998,
          primarily as a result of income from operations, decreases in
          inventories and income tax receivable and increases in accounts
          payable and other accrued liabilities and income taxes payable, offset
          partially by an increase in accounts receivable.  Accounts receivable
          increased and inventories decreased due to higher quarterly revenue in
          the June 1998 quarter compared to the September 1997 quarter.
          Accounts payable and other accrued liabilities increased primarily due
          to an increase in the volume of business.

10
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS
          
          The Company used $13.9 million in cash in its investing activities
          during the nine-month period ended June 30, 1998, primarily for
          capital expenditures.  These capital expenditures were for the
          purchase of and improvements to the Company's manufacturing facility
          in Penang, Malaysia, manufacturing equipment for use in the Malaysian
          facility, equipment for increased headcount, and information systems
          hardware and software. The Company has no material fixed commitments
          and does not expect an increase in the rate of capital expenditures in
          the normal course of business during the remainder of fiscal 1998.

          The Company used $74,000 in cash in its financing activities during
          the nine-month period ended June 30, 1998, to repay all outstanding
          long-term debt, partially offset by proceeds from issuance of capital
          stock through its employee stock purchase and stock option plans.  The
          Company has a bank credit facility allowing borrowings up to $25.0
          million.  Loans under the agreement are advanced based on the
          Company's accounts receivable and inventories, subject to borrowing
          formulas, and are secured by all U.S.-based assets of the Company. The
          Company also has a credit facility totaling $10.8 million, denominated
          in Malaysian ringgit, with a bank in Malaysia.  All amounts under this
          facility were repaid by the Company in November 1997.  The Company had
          approximately $22.3 million in borrowings available under all credit
          facilities at June 30, 1998.  As of June 30, 1998, the Company had no
          borrowings outstanding under these agreements.

          The Company believes that cash on hand, borrowings available under its
          existing facilities or from other financing sources and cash provided
          by operations will be sufficient to support its working capital and
          capital expenditure requirements for at least the next twelve months.
          However, there can be no assurances that future cash requirements to
          fund operations will not require the Company to seek additional
          capital sooner than the twelve months, or that such additional capital
          will be available when required on terms acceptable to the Company.

          RISK FACTORS
          The market for portable PC LAN adapters has grown rapidly since the
          Personal Computer Memory Card International Association (PCMCIA)
          introduced a standard form factor for PC Card (originally "PCMCIA")
          LAN adapters in 1993.  Companies with greater name recognition in the
          PC, desktop LAN adapter and PC Card modem industries and with greater
          financial resources than the Company, now have a significant presence
          in the PC Card adapter market.  As a result, the Company's net sales
          and gross profit margins have been and are expected to continue to
          remain subject to adverse competitive pressure.  Continuing
          competitive factors include price competition, new product
          introductions by competitors, promotional efforts by competitors, and
          changes in the level of inventories in the Company's and its
          competitors' distribution channels.  Competition is expected to remain
          intense and the Company could experience fluctuations in its market
          share.  Moreover, the Company believes that the market for PC Card LAN
          adapters, modems and Combo cards will continue to be price competitive
          and thus could continue to result in lower selling prices, lower gross
          profit margins and reduced profitability levels than the Company has
          earned from such products in the past.

          The Company believes that its in-house manufacturing facility is
          operating at a greater efficiency level than during fiscal 1997.  This
          manufacturing facility, located in Malaysia, began volume production
          in early fiscal 1996 and is now producing all of the Company's
          products.  While the manufacturing facility and increased production
          volumes are expected to continue to have a positive impact on cost
          reduction efforts, the Company may not be able to achieve significant

11
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          additional efficiencies from this facility. There can be no assurances
          that the Company will be able to achieve additional cost reductions
          through increased manufacturing efficiencies in order to keep pace
          with competitors' cost reductions or in an amount sufficient in the
          event of competitive price reductions to allow price reductions
          required to maintain or increase market share without adversely
          affecting gross profit margins. Because all PC Card products are being
          manufactured at the Company's own facilities, interruptions in supply
          of products could occur if the Company is unable to accurately
          forecast or react to changes in product demand, which in turn could
          adversely affect future sales. In addition, the Company faces risks
          associated with operations overseas, including management of a distant
          manufacturing facility, currency fluctuations and potential
          instability in the local country, particularly in light of recent
          economic and political uncertainty in Malaysia and in Asia generally.

          All of the Company's international sales are denominated in U.S.
          dollars and may be subject to government controls and other risks,
          including in some cases, export licenses, federal restrictions on
          export, currency fluctuations, political instability, trade
          restrictions, and changes in tariff and freight rates.  The recent
          economic instability, currency fluctuations and other factors
          impacting Asian markets in particular could result in difficulties in
          accessing new markets in the region and increased credit risks,
          insolvencies or other impairments of customers' ability to repay
          existing obligations.  The Company has and may continue to implement
          certain strategies to limit the impact of foreign currency
          fluctuations on its Asian distributors, and in doing so may assume
          greater foreign currency risk in the future.  Continued instability or
          other adverse changes in local economies could impact future
          operations.

          Revenues derived from the Company's Combo and modem-only PC Cards
          typically have lower gross profit margins than LAN PC Cards.  In
          addition, shipments to OEMs generally result in lower average selling
          prices and gross profit margins than sales made through the Company's
          distribution partners.  Increases in the proportion of modem-only and
          Combo PC Cards and in shipments to OEMs have negatively impacted
          overall gross margins and may continue to offset any improvements from
          manufacturing and design efficiencies.  This trend may continue as the
          Company does not anticipate a significantly reduced mix of OEM
          revenues as a percentage of sales.  In addition, the increased
          percentage of revenue to OEM customers during the first nine months of
          fiscal 1998 as compared to the first nine months of fiscal 1997 has
          resulted in an increased concentration in the Company's customer base.
          With this increased customer concentration, the Company has increased
          its dependency on a limited number of customers at lower average
          selling prices and gross profit margins than sales made through the
          Company's branded business.

          The Company generally ships products within one to four weeks after
          receipt of orders and therefore its sales backlog is typically
          minimal.  Accordingly, the Company's expectations of future net sales
          are based largely on its own estimate of future demand and not on firm
          customer orders.  If net sales do not meet expectations, the Company
          may not be able to reduce expenses commensurately in the near-term,
          and profitability would be adversely affected.

          The Company's net sales may be affected by its distributors' decisions
          as to the quantity of the Company's products to be maintained in their
          inventories.  Since the fourth quarter of fiscal 1997, the Company 
          has taken steps to reduce the levels of inventories maintained by its
          distributors and to enable the Company to react more quickly to market
          changes. As a result, the Company may be more directly affected by
          changes in the market, including the impact on the

12
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OEPRATIONS

          Company of any slowdown in end user demand, as well as any potentially
          reduced ability of the Company to satisfy rapid increases in market
          demand. Notwithstanding the Company's efforts to reduce channel
          inventory exposure, there can be no assurance that distributors will
          not choose to reduce their inventories below the already reduced
          levels, which would adversely affect net sales.

          The Company's continued success is dependent on its ability to
          continue to introduce new products offering advanced features,
          functionality and solutions demanded by end users.  There can be no
          assurances that the Company will be able to continue to introduce
          advanced products in a timely manner, that new products the Company
          may introduce will achieve market acceptance or sell through to end
          users in sufficient quantities to make them viable for the long-term,
          or that sales of such new products will not negatively impact sales of
          the Company's existing products.  In addition, the Company may have
          difficulty in establishing its products' presence in markets in which
          it does not currently have significant brand recognition.

          Because of frequent technology changes and rapid industry growth, the
          cost and availability of components used to manufacture the Company's
          products may fluctuate.  Some components, including custom chipsets,
          are available from only one supplier, and accordingly are subject to
          the risk of reduced availability due to manufacturing constraints,
          allocations due to an excess of demand versus supply, and other risks
          not within the Company's control.  Interruptions in supply could also
          occur due to political or economic changes around the world.  Any
          interruptions in these supply sources or limitations on availability
          could impact the Company's ability to deliver its products and in turn
          adversely affect future earnings.

          In summary, gross profit margins are impacted by a number of factors
          including the rate of sales growth, competitive pricing pressures, the
          mix of product sales, the mix of sales made through various channels,
          component costs and manufacturing costs.  In addition, new products
          often have lower margins until market acceptance and increased volumes
          permit component cost reductions and manufacturing efficiencies.
          Frequent product transitions also increase the risk of inventory
          obsolescence and interruptions of sales.

          A number of additional factors could have an impact on the Company's
          future operating results.  The industry in which the Company operates
          is characterized by rapid technological change and short product life
          cycles, and includes competitors with greater financial and technical
          resources than the Company.  While the Company has historically been
          successful in developing leading technology for its products, ongoing
          investment in research and development will be required to maintain
          the Company's technological position, and the Company could be
          required to increase the rate of such investments depending on
          competitive factors.  It is possible that networking capability could
          be included in the PC itself or in extension modules to PCs, which
          could cause a reduction in the demand for add-on networking devices.
          The Company's results are also dependent on continued growth in the
          underlying market for portable networking products, the laptop
          computer market and the notebook-to-network connection rate, as well
          as the Company's ability to retain its market share.

          There can be no assurance that the Company's patents, copyrights,
          trademarks and other efforts to protect its intellectual property will
          prevent duplication of the Company's technology or that they will
          provide a competitive advantage. The Company is also aware that there
          can be no assurance that a patent issued to the Company would be
          upheld as valid if litigation over a patent were initiated. The
          Company believes that, due to the rapid pace of technological change
          in the

13
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          communications industry, the Company's success is likely to depend
          more upon continued innovation, technical expertise, marketing skills
          and customer support and service than upon legal protection of the
          Company's proprietary rights.

          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 the Company's 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 may
          include the following: the cost of licensing a given technology if the
          Company believes it may be prudent to secure such rights; the refusal
          by a claimant to offer such a license on terms acceptable to the
          Company; incurring a substantial cost of litigation or settlement of
          such claims regardless of the merits of the allegations; and failure
          by the Company to prevail in the event of litigation which could lead
          to the Company being required to pay significant damages, and/or to
          cease sales and production of infringing products, and only make
          future sales of a noninfringing design.

          The Company currently includes software licensed from third parties in
          certain of its Combo, modem-only and Token Ring products which, in the
          aggregate, accounted for 71% of revenues in the third quarter of
          fiscal 1998.  The Company's operating results could be adversely
          affected by a number of factors relating to this third-party software.
          Such factors include failure by a licensor to promote or support the
          software, delays in shipment of the Company's products as a result of
          delays in the introduction of licensed software or errors in the
          licensed software, excess customer support costs or product returns
          experienced by the Company due to errors in licensed software, or
          termination of the Company's relationship with such licensors.

          The Company has reviewed its own products and believes they do not
          present any Year 2000 issues.  However, some of the older third-party
          computer programs used by the Company for internal purposes were
          written using two digits rather than four to define the applicable
          year.  As a result, those computer programs have time-sensitive
          software that always assumes the century is "19".  This could cause a
          system failure or miscalculations causing disruptions of operations,
          including, among other things, a temporary inability to process
          transactions or engage in similar normal business activities.  The
          Company has performed an initial analysis of the impact of computer
          software issues associated with the Year 2000 and initiated
          modification efforts so that its computer systems will function
          properly with respect to dates in the year 2000 and thereafter.  The
          total Year 2000 project cost is estimated to be approximately
          $750,000, which includes approximately $300,000 for the purchase of
          new software that will be capitalized and the remainder expensed as
          incurred.  The repair or replacement is estimated to be completed not
          later than June 30, 1999, which is prior to any anticipated impact on
          its operating systems, however, there can be no assurance that the
          estimated cost and timing will be achieved.  In addition, there can be
          no assurance that the Company's sales and results of operations will
          not be adversely impacted indirectly as a result of Year 2000 issues
          that may affect the Company's suppliers and customers.

          The market price of the Company's common stock has been, and may
          continue to be, subject to a high degree of volatility. Factors such
          as general conditions in the networking and computer industries,
          announcements of quarterly operating results, acquisitions, pricing,
          new products or technological innovations by the Company or its
          competitors, and other events or factors may have a significant impact
          on the market price of the Company's common stock. In addition,

14
<PAGE>
 
          XIRCOM, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          stock markets have experienced extreme price volatility in recent
          years. This volatility has had a substantial effect on the market
          price of securities issued by many high technology companies, in many
          cases for reasons unrelated to the operating performance of the
          specific companies, and the Company's common stock has experienced
          volatility not necessarily related to announcements of Company
          performance. Broad market fluctuations may also adversely affect the
          market price of the Company's common stock.

          The Company is also subject to additional risk factors as identified
          in its Annual Report to Shareholders and filing on Form 10-K for the
          year ended September 30, 1997.

          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
          In May 1998, Carl Russo resigned as executive vice president and chief
          operating officer of the Company.

          ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
          (a)  Exhibits
          27  Financial Data Schedule

          (b)  Reports on Form 8-K
          None.

          SIGNATURES

          Pursuant to the requirements of the Securities and 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, 1998       /s/ Dirk I. Gates
                ----------------      ------------------------------------------
                                      Dirk I. Gates
                                      Chairman of the Board, President and Chief
                                      Executive Officer

          Date: August 13, 1998       /s/ Steven F. DeGennaro
                ---------------       ---------------------------------
                                      Steven F. DeGennaro
                                      Vice President, Finance and Chief
                                       Financial Officer


15