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 quarterly period ended March 31, 1998 or

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

For the transition period from ______________ to ______________

Commission file number     0-18090

                                CAERE CORPORATION
             (Exact name of registrant as specified in its charter)

Delaware                                                   94-2250509
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)

                 100 Cooper Court, Los Gatos, California, 95030
                    (Address of principal executive offices)

                                 (408) 395-7000
              (Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last 
report)

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_____

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock.

                                                        Outstanding
           Class                                       March 31, 1998

           Common Stock
          $.001 par value                                12,964,843

                           This is page 1 of 15 pages


<PAGE>


<TABLE>

                                CAERE CORPORATION
                                      INDEX

                          PART I. Financial Information
<CAPTION>

<S>              <C>                                                                                     <C>    

                                                                                                         Page
ITEM 1.          Financial Statements

                 Condensed Consolidated Balance Sheets - March 31, 1998
                      and December 31, 1997                                                                 3

                 Condensed Consolidated Statements of Operations -- Three Months
                      Ended March 31, 1998 and 1997                                                         4

                 Condensed Consolidated Statements of Cash Flows - Three Months
                      Ended March 31, 1998 and 1997                                                         5

                 Notes to Condensed Consolidated Financial Statements                                    6-9

ITEM 2.          Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                                               10-15



                           PART II. Other Information

ITEM 6.          Exhibits and Reports on Form 8-K                                                         16

SIGNATURES                                                                                                16

</TABLE>



<PAGE>

<TABLE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                                CAERE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
                                   (Unaudited)
<CAPTION>
                                                                              March 31,          December 31,
                                                                                1998                 1997

                                     ASSETS
<S>                                                                        <C>  <C>            <C>   <C>   
       
Cash and cash equivalents                                                  $     5,675         $     16,417
Short-term investments                                                          45,065               33,156
Receivables                                                                      4,297                5,263
Inventories (Note B)                                                             1,952                1,917
Deferred income taxes                                                            3,241                3,241
Other current assets                                                             939                  990
                                                                           -----------         ----------
         Total current assets                                                   61,169               60,984

Property and equipment, net                                                      4,384                4,781
Other assets                                                                     1,648                1,535
                                                                           -----------         ------------

         Total assets                                                      $    67,201         $     67,300
                                                                           ===========         ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses and other payables                                        $     5,695         $     6,091

Preferred stock, $.001 par value:  authorized 2,000,000
  shares; none issued or outstanding                                                 -                    -
Common stock, $.001 par value:  authorized 30,000,000
  shares; issued and outstanding 12,964,843 and 13,107,235
  shares                                                                            13                   13
Additional paid-in capital                                                      55,681               57,629
Accumulated other comprehensive income                                              91                   91
Retained earnings                                                                5,721                3,476
                                                                           -----------         ------------

         Total stockholders' equity                                             61,506               61,209
                                                                           -----------         ------------

         Total liabilities and stockholders' equity                        $    67,201         $     67,300
                                                                           ===========         ============

</TABLE>

The  accompanying  notes  are an  integral  part of the  condensed  consolidated
financial statements.


<PAGE>
<TABLE>


                                CAERE CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<CAPTION>

                                                                                     Three Months Ended
                                                                                          March 31,
                                                                                 1998                1997

<S>                                                                               <C>                <C>   

Net revenues                                                                      $15,659            $12,572

Cost of revenues                                                                    3,427              3,716
                                                                                    -----              -----

                                                                                   12,232              8,856
                                                                                   ------              -----
Operating expenses:
  Research and development                                                          2,947              2,002
  Selling, general and administrative                                               7,058              6,312
   In-process research and development                                                 --              2,935
                                                                                 --------            -------

                                                                                   10,005             11,249
                                                                                   ------             ------

  Operating earnings (loss)                                                         2,227             (2,393)

Interest income, net                                                                  587                562
                                                                                   ------             ------

  Earnings (loss) before income taxes                                               2,814             (1,831)

Income tax expense                                                                    569                110
                                                                                   ------             ------

  Net earnings (loss)                                                              $2,245            $(1,941)
                                                                                   ======            ========

Basic earnings (loss) per share                                                     $0.17           $(0.15)
                                                                                    =====           =======
Diluted earnings (loss) per share                                                   $0.17           $(0.15)
                                                                                    =====           =======

Weighted average shares used in basic earnings (loss) per share
calculation                                                                        13,064             12,682
                                                                                   ======             ======
Weighted average shares used in diluted earnings (loss) per share
calculation                                                                        13,561             12,682
                                                                                   ======             ======

The  accompanying  notes  are an  integral  part of the  condensed  consolidated
financial statements.

</TABLE>


<PAGE>

<TABLE>

                                CAERE CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<CAPTION>
                                                                                         Three Months Ended
                                                                                               March 31,
                                                                                         1998            1997
<S>                                                                                 <C>  <C>       <C>  <C>
Cash flows from operating activities:
  Net earnings (loss)                                                               $    2,245     $    (1,941)
  Adjustments to reconcile net earnings to net cash provided
  by operating activities:
    Depreciation and amortization                                                          718              787
    In-process research and development                                                     --            2,935
    Amortization of capitalized software development costs                                 138              117
    Tax benefit associated with exercise of stock options                                   30              --
    Changes in operating assets and liabilities:
         Receivables, net                                                                  966             (756)
         Inventories                                                                       (35)             343
         Other current assets                                                               51             (533)
         Accrued expenses and other payables                                              (396)            (779)
                                                                                    -----------    -------------
         Net cash provided by operating activities                                       3,717              173
                                                                                    ----------     ------------
Cash flows from investing activities:
    Short-term investments, net                                                        (11,909)         (8,231)
    Capital expenditures                                                                  (258)           (738)
    Capitalized software development costs                                                 (75)           (408)
    Other assets                                                                          (239)             183
                                                                                    -----------    ------------
         Net cash used for investing activities                                        (12,481)         (9,194)
                                                                                    -----------    ------------
Cash flows from financing activities:
  Proceeds from issuance of common stock                                                   353             504
  Repurchase of stock                                                                   (2,331)             --
                                                                                    -----------    -----------
         Net cash provided by (used for) financing activities                           (1,978)            504
                                                                                    -----------    -----------
Net change in cash and cash equivalents                                                (10,742)         (8,517)

Cash and cash equivalents at beginning of period                                        16,417           11,663
                                                                                    ----------     ------------
Cash and cash equivalents at end of period                                          $    5,675     $      3,146
                                                                                    ==========     ============
Supplemental disclosures:
  Cash paid for income taxes                                                        $    1,717     $        709
                                                                                    ==========     ============
  Common stock issued for business acquisition                                      $       --     $      3,105
                                                                                    ==========     ============

The  accompanying  notes  are an  integral  part of the  condensed  consolidated
financial statements.
</TABLE>


<PAGE>



                                CAERE CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

A)       Basis of Presentation

         The  accompanying  unaudited  condensed  consolidated  balance  sheets,
statements of earnings,  and  statements  of cash flows reflect all  adjustments
(consisting of only normal recurring  adjustments)  which are, in the opinion of
management,  necessary  to present the  financial  position of the Company as of
March 31,  1998,  and its results of  operations  and cash flows for the periods
indicated.

         The accompanying  unaudited  condensed  financial  statements have been
prepared in accordance  with the  instructions  for Form 10-Q,  and,  therefore,
certain  information and footnote  disclosures  normally  contained in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  The Company filed audited financial  statements
with the Securities and Exchange  Commission  which included all information and
footnotes  necessary  for a complete  presentation  of the  Company's  financial
position,  results of operations and cash flows for the years ended December 31,
1997, 1996 and 1995, in its report on Form 10-K, as amended,  for the year ended
December 31, 1997 (the "Form 10-K"). These condensed financial statements should
be read in conjunction with the financial  statements contained in the Company's
Form 10-K.  The results of  operations  for the interim  period  ended March 31,
1998, are not necessarily  indicative of the results to be expected for the full
year.
<TABLE>

B)       Inventories                                                 March 31, 1998             December 31, 1997
         -----------                                                 --------------             -----------------
          <S>                                                           <C>                        <C>    
                                                                                   (In thousands)
          A summary of inventories follows:

               Raw materials                                            $    572                   $    738
               Work in process                                               247                        226
               Finished goods                                              1,133                        953
                                                                        --------                   --------
                                                                        $1,952                     $1,917
                                                                        ======                     ======
</TABLE>






<PAGE>



C)       Earnings (Loss) Per Share

         In  1997,  the  Company  adopted  Statement  of  Financial   Accounting
Standards  ("SFAS")  No. 128,  "Earnings  Per  Share."  SFAS No. 128 changes the
standards for computing earnings per share ("EPS") by replacing the presentation
of primary  EPS with basic EPS for all  periods  presented.  Basic EPS  excludes
dilution  and  is  computed  by  dividing  net  earnings   available  to  common
stockholders by the weighted-average number of common shares outstanding for the
period.  Diluted  EPS is computed  similarly  to fully  diluted EPS  pursuant to
Accounting  Principles  Board ("APB") Opinion No. 15. All prior period share and
per share amounts have been restated to comply with SFAS No. 128.

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                 March 31,
                                                                                      1998                    1997
<S>                                                                            <C>  <C>               <C><C>            
   
Net earnings (loss)                                                            $    2,245,000         $  (1,941,000)
                                                                                =============          =============

Shares used to compute basic earnings (loss) per share
   (weighted average common shares outstanding)                                     13,064,909             12,681,795

Dilutive common equivalent shares - stock options                                   496,370                     --
                                                                                --------------         -----------

Shares used to compute diluted earnings (loss) per share                            13,561,279             12,681,795
                                                                               ===============        ===============

Basic earnings (loss) per share                                                $           .17        $         (.15)
                                                                                ==============         ==============

Diluted earnings (loss) per share                                              $           .17        $         (.15)
                                                                                ==============         ==============
</TABLE>


           There were no reconciling  items in the numerators  between the basic
and  diluted  earnings  per  share  computations.   Options  excluded  from  the
computation of earnings per share because their effect on earnings per share was
antidilutive, but which could dilute basic earnings per share in future periods,
were as follows:  8,491 options with a weighted average exercise price of $12.53
in 1998, and 246,717 options with a weighted  average exercise price of $8.50 in
1997.

D)         Business Acquisition

           On March 31, 1997, the Company acquired Formonix,  Inc. ("Formonix"),
a software developer located in Colorado. The total value of the acquisition was
approximately  $3,188,000.  The Company issued 550,000 shares of Common Stock in
exchange for all of the capital  stock of Formonix.  Using the closing  price of
the Company's Common Stock on the closing date of the acquisition, the valuation
of the shares issued was approximately $3,105,000.  Acquisition costs associated
with the  transaction  totaled  approximately  $83,000 and  consisted  mainly of
professional fees. The business combination was accounted for under the purchase
method of accounting.  Accordingly, the consolidated financial statements of the
Company do not include Formonix until after the date of the acquisition.

           Acquired technology was valued using a risk-adjusted cash flow model,
under which future expected cash flows were discounted taking into account risks
related to existing  markets,  the technology's  life expectancy,  future target
markets and  potential  changes  thereto,  and the  competitive  outlook for the
technology.  The analysis resulted in an allocation of approximately $253,000 to
purchased  software and the balance of  approximately  $2,935,000  to in-process
technology,  which  had not yet  reached  technological  feasibility  and had no
alternative future use, and accordingly, was charged to expense.

           The following summarized,  pro forma results of operations assume the
acquisition  took  place  at  the  beginning  of the  period  and  excludes  the
$2,935,000 charge for acquired in-process technology.

                                                           Three months ended
                                                              March 31, 1997
          (In thousands, except per share amounts)

          Net revenues                                            $12,572
          Net earnings                                                851
          Diluted earnings per share                                 $.06

E)       Revenue Recognition

         The  Company's  recognizes  revenue in  accordance  with  Statement  of
Position ("SOP") No. 97-2, "Software Revenue  Recognition," which supersedes SOP
No.  91-1.  SOP  No.  97-2  generally   requires   revenue  earned  on  software
arrangements  involving multiple elements such as software  products,  upgrades,
enhancements,  post-contract customer support,  installation, and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an  element  must be based on  evidence  that is  specific  to the
vendor. If a vendor does not have evidence of the fair value for all elements in
a  multiple-element  arrangement,  all revenue from the  arrangement is deferred
until such evidence exists or until all elements are delivered.

F)       Comprehensive Income

         In June 1997, SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"),  was  issued and  established  standards  for  reporting  and  displaying
comprehensive  income and its  components in the financial  statements.  It does
not,  however,  require a specific  format for the  disclosure  but requires the
Company to display an amount  representing  total  comprehensive  income for the
period in its financial statements. The Company has not determined the manner in
which it will  present  the  information  required by SFAS No. 130 in its annual
financial  statements for the year ending December 31, 1998. The Company's total
comprehensive  income  (loss) for all periods  presented  herein  would not have
differed  from those  amounts  reported as net earnings  (loss) in the condensed
consolidated statements of operations.


<PAGE>



G)       Segment Reporting

         In June 1997, SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information" ("SFAS No. 131"), was issued and established  standards
for the manner in which public  companies  report  information  about  operating
segments in annual and interim financial statements issued to shareholders.  The
Company  has not yet  determined  the  manner  in  which  it  will  present  the
information required by SFAS No. 131.



<PAGE>




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

         The Company notes that, except for the historical information contained
herein, the matters discussed below contain  forward-looking  statements subject
to risks and uncertainties that may cause the Company's actual results to differ
materially.  These forward-looking  statements are based on current expectations
and the Company assumes no obligation to update this information. Such risks and
uncertainties include, but are not limited to, various important competitive and
technological  factors,  such as pricing  pressures;  success of the "bundle and
upgrade"   business   model,   including  the   maintenance   of  the  Company's
relationships with scanner manufacturers, as well as customers opting to upgrade
to newer or more fully featured  products;  the timely  completion of additional
product  capabilities and software updates;  changes in customer order patterns,
the  maintenance  of  relationships   with  retail   distributors  and  dealers;
manufacturing  considerations,   including  the  maintenance  of  margins  in  a
declining-price  environment,  as well as risk of inventory  obsolescence due to
shifts in market  demand and new product  introductions;  and other risk factors
listed from time to time in the Company's  reports filed with the Securities and
Exchange Commission,  including, but not limited to, the report on Form 10-K, as
amended, for the year ended December 31, 1997.

Results of Operations

         The following  chart  summarizes  net revenues,  cost of revenues,  and
gross  margins for the  Company's  products  categorized  between  hardware  and
software.  Software  products  consist  of  the  OmniPage,  WordScan,  OmniForm,
PageKeeper,  and  Recognita  lines of  products.  Hardware  products  consist of
transaction  processing  optical  character  recognition  ("OCR")  and bar  code
products, and the M/Series line of production OCR products.
<TABLE>

Business Line Analysis
<CAPTION>

                        -------------- --------------- --------------- ------------- --------------- ----------------
Three Months Ending:                   March 31, 1998                                March 31, 1997
                          Software        Hardware                       Software       Hardware
                          Products        Products        Combined       Products       Products        Combined
<S>                           <C>              <C>            <C>           <C>              <C>             <C>    
Net revenues                  $13,743          $1,916         $15,659       $10,865          $1,707          $12,572
Cost of revenues                2,430             997           3,427         2,777             939            3,716
                                -----             ---           -----         -----             ---            -----
                               11,313             919          12,232        $8,088            $768           $8,856
Gross margin %                  82.3%           48.0%           78.1%         74.4%           45.0%            70.4%
                        -------------- --------------- --------------- ------------- --------------- ----------------
</TABLE>

         Net  revenues  for  software  products  increased  26% during the first
quarter of 1998 to  $13,743,000  from  $10,865,000  in 1997,  due  primarily  to
continued  strength in upgrade  revenues of  OmniPage  Pro 8.0 and to  increased
royalties related to the bundled OCR and document management products.  Revenues
from Windows  versions of OmniPage Pro  increased  25% over the first quarter of
1997.  During the first quarter of 1998, the Company began shipping OmniPage Pro
8.0 for the Macintosh  platform and OmniForm 3.0 for Windows95.  On a sequential
basis,  software  product revenues were up 2% in the first quarter of 1998, from
$13,445,000  during  the  fourth  quarter  of 1997.  OmniForm  product  revenues
increased  33% in the first  quarter of 1998  compared  to the first  quarter of
1997, primarily due to the introduction of OmniForm 3.0.

         The marketplace for OCR software has been changing  rapidly as a result
of  significant  declines in scanner  prices.  To gain greater  leverage in this
expanding  market the  Company  reduced  the price of its  OmniPage  Pro upgrade
products to $99 from $129 in April 1998.  It is expected  that the reduced price
will generate sufficient  increases in consumer demand to provide for continuing
increases in quarterly  software  revenues.  However,  there can be no assurance
that volume  increases  will result or will be adequate to increase  revenues or
that more consumers will purchase the software at the lower price point.

         Net revenues for hardware  products  increased 12% to $1,916,000 in the
first quarter of 1998,  compared to  $1,707,000  during the same period in 1997.
The primary reason for this  improvement was increased  shipments of transaction
processing  OCR products.  It is common in this line of business for the Company
to receive  large,  one-time  orders for products  periodically.  This  ordering
pattern has  historically  resulted in  significant  fluctuations  in  quarterly
hardware revenues. This trend is expected to continue.

         International  sales increased 6% in the first quarter of 1998 compared
to the first quarter of 1997, and accounted for approximately 33% of total sales
in 1998,  compared  to 39% in 1997.  The  increase  in  international  sales was
primarily  attributable  to increased  sales of upgrades of OmniPage Pro 8.0 for
Windows,  which started to ship during the fourth  quarter of 1997. On a year to
year  comparison,  the  decrease  in  foreign  sales in the first  quarter  as a
percentage of total sales is primarily  attributable to increased total revenues
between the two periods.

Gross Margins

         Gross  margins for software  products  improved from 74.4% in the first
quarter of 1997 to 82.3% in the first  quarter of 1998.  The primary  reason for
the  increase  is  increased  royalty  revenues  between the two  periods.  Also
contributing to the improvement in margins was the increase in overall  software
and hardware volume during the quarter, allowing fixed manufacturing costs to be
spread over a higher level of production.

     There will be downward  pressure on gross margins for software  products in
the  future as a result of the  Company's  decision  to reduce  the price of its
OmniPage  Pro  upgrade  products.  This  decrease  will be  somewhat  offset  by
anticipated  volume increases that are expected to lead to improved economies of
scale.  However,  there can be no assurance  that  production  volumes will rise
sufficiently  or that the Company will be successful in securing more  favorable
pricing from key suppliers.

         Gross  margins for  hardware  products  increased to 48.0% in the first
quarter of 1998 from 45.0% in the same period of 1997,  due  primarily to higher
unit sales and revenues of transaction processing OCR products,  which typically
carry higher gross margins than other hardware  products.  Also  contributing to
the improved  margin on hardware  products was the fixed nature of a majority of
the Company's  hardware  manufacturing  overhead.  As hardware  product  volumes
increase,  the level of  manufacturing  overhead  does not  increase in the same
proportion.

         The primary factor  affecting  gross margins in the future is likely to
be shifts in product mix between fully priced retail software, bundled software,
and upgrade products,  as well as overall shifts in product mix between software
and hardware  products.  The  microcomputer  software market has been subject to
rapid changes, including significant price competition, which can be expected to
continue.  Future  technology or market  changes may cause  certain  products to
become  obsolete  rapidly,   necessitating  increased  inventory  write-offs  or
reserves and a corresponding decrease in gross margins.

Operating Expenses

         Research and development  (R&D) expense  increased 47% to $2,947,000 in
the first quarter of 1998, from  $2,002,000  during the same period of 1997. The
increase in spending relates  primarily to additional  staffing  associated with
ongoing  software  development  projects  and  the  recognition  of  development
expenses related to Formonix that were formerly treated as royalty expense. As a
percentage  of  revenue,  R&D expense  increased  to 19% of revenue in the first
quarter of 1998,  compared to 16% in the first quarter of 1997. This increase is
attributable to the Company's commitment to developing new and improved products
on a more timely and frequent basis.

         The  Company is  committed  to  providing  continuing  enhancements  to
current  products,  as well as developing new technologies for the future.  This
commitment  will result in the  Company's  continuing  to invest  heavily in R&D
during 1998. In accordance with Statement of Financial  Accounting Standards No.
86, the Company  capitalized  $75,000 of software  development  costs during the
first  quarter of 1998,  compared to  $155,000  in the same  period of 1997.  In
addition to this capitalization of internal R&D expenses, in connection with the
Company's  acquisition of Formonix in March 1997,  the Company also  capitalized
approximately $253,000 of the acquisition cost during the first quarter of 1997.
The  costs  capitalized  related  to the  portion  of the  Formonix  acquisition
valuation  which was allocated to existing  products  acquired.  Amortization of
capitalized  software  development  costs was  $138,000 in the first  quarter of
1998, versus $117,000 for the comparable period in 1997.

         Selling,  general and administrative  (S,G&A) expenses increased 12% in
the first quarter of 1998 to $7,058,000,  from $6,312,000 during the same period
of 1997.  The primary  factor for the  increase  was sales and support  expenses
associated  with  the  Company's   growing  customer  base  resulting  from  the
high-volume  business  generated  by  the  "bundle  and  upgrade"  model.  As  a
percentage of revenue,  S,G&A  expense  decreased to 45% of revenue in the first
quarter of 1998,  from 50%  during the same  period in 1997.  This  decrease  is
primarily  attributable to higher net revenues  between the comparable  periods.
The Company is  attempting to control the level of S,G&A  expenditures  while it
invests heavily in vital R&D projects.  Nonetheless,  the Company  believes that
S,G&A  expense may  increase  in dollar  terms in 1998 as  necessary  efforts to
expand sales and marketing  activities  continue in the OCR, forms,  and desktop
document management areas.

         During the first  quarter of 1997,  a  $2,935,000  one-time  charge for
in-process   research  and  development  was  taken  related  to  the  Company's
acquisition  of Formonix in March  1997.  This charge  related to the portion of
Formonix  acquisition  valuation  represented  by the present value of estimated
cash flows expected to be generated by Formonix-related technology which, at the
acquisition date, had not yet reached the point of technological feasibility and
did not have an alternative future use.

Interest Income

         Interest  income was $587,000 in the first  quarter of 1998 compared to
$562,000  in the same  period of 1997.  The  increase  in  interest  income  was
attributable  to an increase in total cash and  short-term  investment  balances
between the comparable periods.

Income Taxes

         The  Company's  effective  income  tax rate in 1998 is  expected  to be
between 20% and 25%,  which is less than statutory  rates,  primarily due to the
use of the Company's foreign sales corporation and increased  utilization of net
operating  loss  carryforwards   assumed  in  its  1994  acquisition  of  Calera
Recognition  Systems,  Inc.  ("Calera").  In the  first  quarter  of  1998,  the
effective  income tax rate was 20%, due  primarily  to the use of the  Company's
foreign  sales  corporation  and to the expected  utilization  of the Calera net
operating loss carryforwards in the 1998 fiscal year.

Net Earnings and Earnings Per Share

         Net earnings for the first quarter of 1998 were $2,245,000, compared to
net loss of  $1,941,000  during the same period in 1997.  Diluted  earnings  per
share were $.17 in the first quarter of 1998, versus a loss per share of $.15 in
the  comparable  period of 1997.  The first  quarter 1997 loss resulted from the
$2,935,000  one-time  in-process  research and development charge related to the
Formonix acquisition.  Excluding this one-time charge,  diluted earnings for the
first  quarter  of 1997  would  have been  $994,000,  or $.08 per  share,  using
12,931,000 weighted average shares outstanding.

Certain Trends

         The  Company's  future  operating  results  may be  affected by various
uncertain  trends and  factors  which are beyond the  Company's  control.  These
include, but are not limited to, adverse changes in general economic conditions,
rising  costs,  or the  occasional  unavailability  of  needed  components.  The
industry is characterized by rapid changes in the technologies affecting optical
character recognition, forms technology, and document management technology. The
industry  has  also  become  increasingly  competitive,  and,  accordingly,  the
Company's  results may also be adversely  affected by the actions of existing or
future  competitors,   including  the  development  of  new  technologies,   the
introduction of new products, and the reduction of prices by such competitors to
gain or retain market share.

         Bundled products  incorporating OmniPage and WordScan began shipping in
significant  quantities  in the  fourth  quarter  of 1994.  Because of the lower
per-unit revenue to the Company that results from the combined sale of a bundled
product plus an upgrade, compared to the retail sale of a fully featured version
of the  software,  the success of the "bundle and  upgrade"  program  depends on
increasing  unit sales of upgrades  for its  success.  There can be no assurance
that  Caere's  transition  to the "bundle and  upgrade"  business  model will be
successful  and  provide  sufficient  increase  in unit  volume in the future to
offset  reduced  per-unit  revenue.  In  addition,  customers  using the bundled
product  may defer or forego  purchase  of the  Company's  more  fully  featured
versions  of  OmniPage  and  WordScan  products  if they find  that the  bundled
products satisfy their recognition needs.

         A significant  portion of the Company's net revenues is attributable to
sales through the distribution  channel.  The Company's future operating results
are  dependent  to a certain  extent on its  ability to  maintain  its  existing
relationships with such distributors. There can be no assurance that the Company
will be able to maintain such relationships.

         The  Company's  future  earnings  and stock  price  could be subject to
significant  volatility,  particularly  on  a  quarterly  basis.  The  Company's
revenues and earnings are unpredictable until the end of each quarter due to the
Company's  shipment  patterns.  As is  common  in  the  software  industry,  the
Company's  experience  has been that a  disproportionately  large  percentage of
shipments has occurred in the third month of each fiscal quarter,  and shipments
tend to be concentrated in the latter half of that month.  Because the Company's
backlog early in a quarter is not generally  large enough to assure that it will
meet its  revenue  targets for any  particular  quarter,  quarterly  results are
difficult to predict  until the end of the quarter.  A shortfall in shipments at
the end of any particular quarter may cause the results for that quarter to fall
significantly  short of anticipated  levels.  Due to analysts'  expectations  of
continued  growth,  any such shortfall in earnings could have a very significant
adverse  effect on the trading price of the Company's  common stock in any given
period.

         As a result of the foregoing  factors and other factors which may arise
in the future,  the market price of the Company's common stock may be subject to
significant  fluctuations over a short period of time. These fluctuations may be
due to  factors  specific  to the  Company,  to changes  in  analysts'  earnings
estimates,  or to factors  affecting  the  computer  industry or the  securities
markets in general.

Liquidity and Capital Resources

         Caere's  financial  position remains strong at March 31, 1998.  Working
capital  increased one percent to $55,474,000,  from $54,893,000 at December 31,
1997.  The Company has no long-term  debt.  The  Company's  cash and  short-term
investments  totaled  $50,740,000 at March 31, 1998.  The Company  believes that
current cash balances and internally  generated funds will be sufficient to meet
its cash requirements through 1998.

         Caere generated cash from operating activities of $3,687,000 during the
three months ended March 31, 1998. Uses of cash included $11,909,000 to purchase
additional short-term investments and $2,331,000 to repurchase 200,000 shares of
the Company's  common stock,  in addition to $258,000 for investments in capital
equipment.  During the first quarter of 1997,  the Company  generated  cash from
operating  activities  of  $173,000.  Uses of cash during  that period  included
$8,231,000 to purchase short-term investments and $738,000 for capital equipment
acquisitions.

         The Company offers credit terms to qualifying  customers and also sells
on a prepaid,  credit card and  cash-on-delivery  basis.  With respect to credit
sales, the Company attempts to control its bad debt exposure through  monitoring
of customers' creditworthiness and, where practicable,  through participation in
credit  associations that provide credit rating information about its customers.
The Company has also  purchased  credit  insurance  for certain key  accounts to
reduce the potential for catastrophic losses.

"Year 2000" Compliance

         Many currently  installed  computer  systems and software  products are
coded to accept only two digit  entries in the date code field.  These date code
fields will need to accept four digit entries to distinguish  21st century dates
from 20th century dates. As a result,  in less than two years,  computer systems
and/or  software  used by many  companies may need to be upgraded to comply with
such "Year 2000"  requirements.  Significant  uncertainty exists in the software
industry  concerning the potential effects  associated with such compliance.  In
the Company's  standard  license  agreements,  the Company warrants to licensees
that its software  routines and programs are Year 2000 compliant (i.e. that they
accurately process  date-related data within any century and between two or more
centuries).  Although the Company  believes its software  products are Year 2000
compliant,  there  can be no  assurance  that the  Company's  software  products
contain all necessary  software routines and programs necessary for the accurate
calculation,  display,  storage and manipulation of data involving dates. If any
of the Company's  licensees  experience Year 2000 problems,  such licensee could
assert claims for damages against the Company.  Any such litigation could result
in substantial costs and diversion of the Company's resources even if ultimately
decided in favor of the  Company.  In addition,  many  companies  are  expending
significant  resources to correct or patch their  current  software  systems for
Year 2000 compliance.  These  expenditures may result in reduced funds available
to  purchase  software  products  such as  those  offered  by the  Company.  The
occurrence of any of the foregoing  could have a material  adverse effect on the
Company's business, financial condition, and results of operations.

         In addition, certain of the Company's internal computer systems are not
"Year 2000"  compliant.  These  systems will be upgraded  within the next twelve
months to become  compliant.  Management has not yet determined the cost related
to achieving "Year 2000" compliance for its internal computer systems.

         There also can be no assurance that the Company's suppliers, vendors or
other  enterprises  with which the Company  interacts are or will be "Year 2000"
compliant.  Failure of third-party  enterprises with which the Company interacts
to achieve "Year 2000"  compliance  could have a material  adverse effect on the
Company's business, financial condition and results of operations.


<PAGE>



                           PART II. OTHER INFORMATION


                                     ITEM 6.

Exhibits and Reports on Form 8-K

(a)      Exhibits
                  * Exhibit  10.12 - Software  License  Agreement,  between  the
         Company and Hewlett-Packard Company, dated January 15, 1998.
                  Exhibit 27 - Financial Data Schedule

(b)      Reports on Form 8-K
                  No reports on Form 8-K were  filed by the  Company  during the
period covered by this report.

* Confidential treatment is being sought for portions of this exhibit.



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.

                                   CAERE CORPORATION

Date:  May 8, 1998

                                   /S/  Blanche M. Sutter                    
                                   Blanche M. Sutter, Executive Vice President
                                   and Chief Financial Officer
                                   (Principal Financial and Accounting Officer
                                   and Duly Authorized Officer)


<PAGE>