<PAGE>   1

                                  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 quarterly period ended September 30, 1999 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, 95032
     ----------------------------------------------------------------------
                    (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.

<TABLE>
<CAPTION>
                                                       Outstanding as of
           Class                                       September 30, 1999
           -----                                       ------------------
           <S>                                         <C>
           Common Stock
           $.001 par value                                 12,085,928
</TABLE>



                           This is page 1 of 24 pages


<PAGE>   2


                                CAERE CORPORATION
                                      INDEX

                          PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                                                Page
                                                                                ----
<S>         <C>                                                                 <C>
ITEM 1.     Financial Statements

            Condensed Consolidated Balance Sheets - September 30, 1999
                and December 31, 1998                                             3

            Condensed Consolidated Statements of Operations - Three Months
                and Nine Months Ended September 30, 1999 and 1998                 4

            Condensed Consolidated Statements of Cash Flows - Nine Months
                Ended September 30, 1999 and 1998                                 5

            Notes to Condensed Consolidated Financial Statements                  6

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

ITEM 3.     Quantitative and Qualitative Disclosures about Market Risk           23


                           PART II. OTHER INFORMATION

ITEM 6.     Exhibits and Reports on Form 8-K                                     24

SIGNATURES                                                                       24
</TABLE>



                                       2
<PAGE>   3


                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                                CAERE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                              September 30,   December 31,
                                                                  1999           1998
                                                              -------------   ------------
<S>                                                           <C>             <C>
                                     ASSETS

Cash and cash equivalents                                         $23,763        $15,753
Short-term investments                                             25,838         28,584
Receivables, net                                                    5,151          7,336
Inventories                                                         1,669          1,953
Deferred income taxes                                               2,953          2,953
Other current assets                                                1,062            422
                                                                  -------        -------
         Total current assets                                      60,436         57,001

Property and equipment, net                                         3,847          3,640
Other assets                                                        2,835          3,243
                                                                  -------        -------
         Total assets                                             $67,118        $63,884
                                                                  =======        =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses and other payables                               $ 6,476        $ 7,711

Stockholders' equity:
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 12,085,928 and 12,072,028
  shares                                                               12             12
Additional paid-in capital                                         41,251         42,409
Retained earnings                                                  19,379         13,752
                                                                  -------        -------
         Total stockholders' equity                                60,642         56,173
                                                                  -------        -------
         Total liabilities and stockholders' equity               $67,118        $63,884
                                                                  =======        =======
</TABLE>


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


                                       3
<PAGE>   4

                                CAERE CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Three Months Ended       Nine Months Ended
                                                           September 30,           September 30,
                                                         -------------------     -------------------
                                                           1999        1998       1999        1998
                                                         -------     -------     -------     -------
<S>                                                      <C>         <C>         <C>         <C>
Net revenues                                             $12,264     $15,707     $47,022     $47,534
Cost of revenues                                           2,662       3,556       9,419      10,866
                                                         -------     -------     -------     -------
                                                           9,602      12,151      37,603      36,668
                                                         -------     -------     -------     -------
Operating expenses:
  Research and development                                 3,238       3,059       9,931       8,992
  Selling, general and administrative                      6,354       6,817      21,472      20,730
                                                         -------     -------     -------     -------
                                                           9,592       9,876      31,403      29,722
                                                         -------     -------     -------     -------
  Operating earnings                                          10       2,275       6,200       6,946
Interest and other income                                    662         635       1,838       1,965
                                                         -------     -------     -------     -------
  Earnings before income taxes                               672       2,910       8,038       8,911
Income tax expense                                           202         731       2,411       2,094
                                                         -------     -------     -------     -------
  Net earnings                                           $   470     $ 2,179     $ 5,627     $ 6,817
                                                         =======     =======     =======     =======

Basic earnings per share                                 $  0.04     $  0.17     $  0.47     $  0.53
                                                         =======     =======     =======     =======
Diluted earnings per share                               $  0.04     $  0.17     $  0.45     $  0.51
                                                         =======     =======     =======     =======

Weighted average shares used in basic earnings per
share calculation                                         12,072      12,591      12,083      12,869
                                                         =======     =======     =======     =======
Weighted average shares used in diluted earnings per
share calculation                                         12,220      13,159      12,442      13,482
                                                         =======     =======     =======     =======
</TABLE>


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


                                       4
<PAGE>   5

                                CAERE CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                              ----------------------
                                                                                1999          1998
                                                                              --------      --------
<S>                                                                           <C>           <C>
Cash flows from operating activities:
  Net earnings                                                                $  5,627      $  6,817
  Adjustments to reconcile net earnings to net cash provided by operating
  activities:
    Depreciation and amortization                                                2,044         2,230
    Amortization of capitalized software development costs                         601           489
    Other                                                                          (98)           30
    Changes in operating assets and liabilities:
         Receivables, net                                                        2,185          (572)
         Inventories                                                               284           483
         Other current assets                                                     (640)          298
         Accrued expenses and other payables                                    (1,235)          901
                                                                              --------      --------
         Net cash provided by operating activities                               8,768        10,676
                                                                              --------      --------
Cash flows from investing activities:
    Short-term investments, net                                                  2,746       (10,159)
    Capital expenditures                                                        (2,143)       (1,157)
    Capitalized software development costs                                        (195)         (215)
    Other assets                                                                  (106)       (1,128)
                                                                              --------      --------
         Net cash provided by (used for) investing activities                      302       (12,659)
                                                                              --------      --------
Cash flows from financing activities:
  Proceeds from issuance of common stock                                         2,531         3,233
  Repurchase of stock                                                           (3,591)      (13,196)
                                                                              --------      --------
         Net cash used for financing activities                                 (1,060)       (9,963)
                                                                              --------      --------
Net increase (decrease)  in cash and cash equivalents                            8,010       (11,946)

Cash and cash equivalents at beginning of period                                15,753        16,417
                                                                              --------      --------
Cash and cash equivalents at end of period                                    $ 23,763      $  4,471
                                                                              ========      ========
Supplemental disclosures:
  Cash paid for income taxes                                                  $  4,005      $  2,412
                                                                              ========      ========
</TABLE>


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


                                       5
<PAGE>   6

                                CAERE CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

A)       Basis of Presentation

         The accompanying unaudited condensed consolidated balance sheets,
         statements of operations, 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 September 30, 1999, and its results of
         operations and cash flows for the periods indicated.

         The accompanying unaudited condensed consolidated 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, 1998, 1997 and 1996, in its report on Form 10-K, for the
         year ended December 31, 1998 (the "Form 10-K"). These condensed
         consolidated 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 September 30, 1999
         are not necessarily indicative of the results to be expected for the
         full year.


B)       Inventories

         A summary of inventories follows:

<TABLE>
<CAPTION>
                                September 30,   December 31,
                                     1999            1998
                                -------------    ------------
                                        (In thousands)
           <S>                  <C>              <C>
           Raw materials            $  892          $  690
           Work in process             201             406
           Finished goods              576             857
                                    ------          ------
                                    $1,669          $1,953
                                    ======          ======
</TABLE>


                                        6

<PAGE>   7

C)       Earnings Per Share

         Basic earnings per share is computed using the weighted-average number
         of common shares outstanding for the period. Diluted earnings per share
         is based on the weighted-average number of common shares outstanding
         for the period plus dilutive common equivalent shares, including stock
         options using the treasury stock method. Amounts shown below are in
         thousands, except per share amounts.

<TABLE>
<CAPTION>
                                          Three Months Ended       Nine Months Ended
                                             September 30,           September 30,
                                          -------------------     -------------------
                                           1999        1998        1999        1998
                                          -------     -------     -------     -------
<S>                                       <C>         <C>         <C>         <C>
Net earnings                              $   470     $ 2,179     $ 5,627     $ 6,817
                                          =======     =======     =======     =======

Shares used to compute basic earnings
   per share (weighted average common
   shares outstanding)                     12,072      12,591      12,083      12,869

Dilutive common equivalent shares -
   stock options                              148         568         359         613
                                          -------     -------     -------     -------
Shares used to compute diluted
   earnings per share                      12,220      13,159      12,442      13,482
                                          =======     =======     =======     =======

Basic earnings per share                  $  0.04     $  0.17     $  0.47     $  0.53
                                          =======     =======     =======     =======

Diluted earnings per share                $  0.04     $  0.17     $  0.45     $  0.51
                                          =======     =======     =======     =======
</TABLE>


D)       Comprehensive Income

         The Company has no significant components of other comprehensive income
         and, as a result, comprehensive income is substantially the same as net
         earnings for all periods presented.

E)       Segment Reporting

         The Company has adopted the provisions of SFAS No. 131, "Disclosure
         About Segments of an Enterprise and Related Information." SFAS No. 131
         establishes standards for the reporting by public business enterprises
         of information about operating segments, products and services,
         geographic areas, and major customers. The method for determining what
         information to report is based on the way management organizes the
         operating segments within the Company for making operating decisions
         and assessing financial performance.


                                       7
<PAGE>   8

         The Company's chief operating decision maker is considered to be the
         Company's Chief Executive Officer ("CEO"). The CEO reviews financial
         information presented on a consolidated basis accompanied by
         disaggregated information about revenues by product type and certain
         information about geographic regions for purposes of making operating
         decisions and assessing financial performance. The consolidated
         financial information is identical to the information presented in the
         accompanying condensed consolidated statements of operations.
         Therefore, the Company operates in a single operating segment:
         information recognition software and products.

         Net revenue information regarding product type is as follows (in
thousands):

<TABLE>
<CAPTION>
                                Three Months Ended          Nine Months Ended
                                   September 30,               September 30,
                               ---------------------       ---------------------
                                 1999          1998         1999          1998
                               -------       -------       -------       -------
<S>                            <C>           <C>           <C>           <C>
Software products              $10,840       $13,508       $42,190       $40,869
Hardware products                1,424         2,199         4,832         6,665
                               -------       -------       -------       -------
   Consolidated                $12,264       $15,707       $47,022       $47,534
                               =======       =======       =======       =======
</TABLE>


         Revenue and asset information regarding operations in the different
         geographic regions is as follows (in thousands):

<TABLE>
<CAPTION>
                                   Americas     Europe      Other     Consolidated
                                   --------     ------      -----     ------------
<S>                                <C>          <C>         <C>       <C>
Revenues for the three months
  ended September 30:
    1999                            $ 8,226     $ 3,628     $   410     $12,264
    1998                             11,300       4,004         403      15,707

Revenues for the nine months
  ended September 30:
    1999                            $32,126     $13,507     $ 1,389     $47,022
    1998                             32,647      13,468       1,419      47,534

Identifiable assets at
  September 30:
    1999                            $65,221     $ 1,897     $    --     $67,118
    1998                             63,191       1,894          --      65,085
</TABLE>


         One distributor accounted for approximately 26% of net revenues for the
         third quarter of both 1999 and 1998, respectively, and approximately
         26% and 25% of net revenues for the first nine months of 1999 and 1998,
         respectively. A second customer accounted for approximately 15% and 13%
         of net revenues for the third quarter of 1999 and 1998, respectively,
         and approximately 12% of net revenues for the first nine months of both
         1999 and 1998.

F)       Subsequent Events

         In October 1999, the Company announced that it would liquidate the
         operations of its hardware products division. The Company expects that
         substantially all activities of this



                                       8
<PAGE>   9

         division will cease by December 31, 1999. As a result of this decision,
         the hardware division will be accounted for as a discontinued operation
         beginning in the fourth quarter of 1999. In addition, the Company
         anticipates that the loss resulting from the closure of this division
         will be between $1.5 million and $2.5 million. The expected loss will
         include employee reductions, facility consolidations, satisfaction of
         hardware customer obligations, and the write-down of assets.



                                        9
<PAGE>   10

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

OVERVIEW

The statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this Form 10-Q, include
"forward looking" statements that are subject to risks and uncertainties. These
statements discuss, among other things, expected growth, future revenues, and
future performance. The actual future results of Caere Corporation ("Caere" or
the "Company") could differ materially from anticipated results described in
these forward looking statements. Some factors that could cause future actual
results to differ materially from the Company's recent results or those
described in the forward looking statements include those listed below in the
sections entitled "Net Revenues," "Gross Margin," "Financial Condition,"
"Certain Trends, Issues, and Uncertainties," "Risk Factors," and other
statements set forth below, as well as in the section entitled "Risk Factors" in
the Company's report on Form 10-K for its fiscal year ended December 31, 1998.
Readers should carefully review the risks described in this and other documents
that the Company files with the Securities and Exchange Commission, including
the Company's annual report on Form 10-K and quarterly reports on Form 10-Q. The
Company assumes no obligation to publicly release any updates or revisions to
the forward looking statements or reflect events or circumstances after the date
of this document.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the percentage
relationship certain items in the Condensed Consolidated Statements of
Operations bear to net revenues:

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED   NINE MONTHS ENDED
                                              SEPTEMBER 30,       SEPTEMBER 30,
                                           ------------------   ----------------
                                             1999      1998      1999       1998
                                             ----      ----      ----       ----
<S>                                          <C>       <C>       <C>        <C>
Net revenues                                  100%      100%      100%      100%
Cost of revenues                               22        23        20        23
                                              ---       ---       ---       ---
   Gross margin                                78        77        80        77
                                              ---       ---       ---       ---
Research and development                       26        19        21        19
Selling, general and administrative            52        43        46        44
                                              ---       ---       ---       ---
   Operating expenses                          78        62        67        63
                                              ---       ---       ---       ---
Operating earnings                              0        15        13        14
Interest income, net                            5         4         4         4
                                              ---       ---       ---       ---
Earnings before income taxes                    5        19        17        18
Income tax expense                              1         5         5         4
                                              ---       ---       ---       ---
Net earnings                                    4%       14%       12%       14%
                                              ===       ===       ===       ===
</TABLE>



                                       10
<PAGE>   11


NET REVENUES

The following chart summarizes net revenues, cost of revenues, and gross margins
for the Company's products categorized between software and hardware. Software
product revenues are primarily derived from sales of OmniPage, OmniForm,
PageKeeper, and Recognita Plus products. Hardware products consist of
transaction processing, optical character recognition ("OCR") products and bar
code products. Dollar amounts shown are in thousands.

BUSINESS LINE ANALYSIS


<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                      ------------------------------------------------------------------------------
                                     1999                                      1998
                      -----------------------------------     --------------------------------------
                      SOFTWARE     HARDWARE                    SOFTWARE       HARDWARE
                      PRODUCTS     PRODUCTS      COMBINED      PRODUCTS       PRODUCTS      COMBINED
                      --------     --------      --------      --------       --------      --------
<S>                   <C>           <C>           <C>           <C>           <C>           <C>
NET REVENUES          $10,840       $ 1,424       $12,264       $13,508       $ 2,199       $15,707
COST OF REVENUES        1,897           765         2,662         2,522         1,034         3,556
                      -------       -------       -------       -------       -------       -------
GROSS MARGIN          $ 8,943       $   659       $ 9,602       $10,986       $ 1,165       $12,151
                      =======       =======       =======       =======       =======       =======

GROSS MARGIN %           82.5%         46.3%         78.3%         81.3%         53.0%         77.4%
</TABLE>


<TABLE>
<CAPTION>
                                              NINE MONTHS ENDED SEPTEMBER 30,
                      ------------------------------------------------------------------------------
                                     1999                                      1998
                      -----------------------------------      -------------------------------------
                      SOFTWARE     HARDWARE                    SOFTWARE       HARDWARE
                      PRODUCTS     PRODUCTS      COMBINED      PRODUCTS       PRODUCTS      COMBINED
                      --------     --------      --------      --------       --------      --------
<S>                   <C>           <C>           <C>           <C>           <C>           <C>
NET REVENUES          $42,190        $4,832       $47,022       $40,869        $6,665       $47,534
COST OF REVENUES        6,892         2,527         9,419         7,568         3,298        10,866
                      -------       -------       -------       -------       -------       -------
GROSS MARGIN          $35,298        $2,305       $37,603       $33,301        $3,367       $36,668
                      =======       =======       =======       =======       =======       =======

GROSS MARGIN %           83.7%         47.7%         80.0%         81.5%         50.5%         77.1%
</TABLE>


In October 1999, Caere announced that it would discontinue the operations of the
hardware products division. The Company also indicated that it expected
substantially all activities of this division to cease by December 31, 1999. As
a result of this decision, the hardware products division will be accounted for
as a discontinued operation beginning in the fourth quarter of 1999. Therefore,
beginning with the fourth quarter of 1999, revenues and expenses related to the
hardware products division will no longer be a component of earnings from
continuing operations.

Under Caere's "bundle and upgrade" strategy, very low-priced, limited-featured
OCR and document management software products are bundled with products sold by
certain scanner manufacturer partners. When customers purchase scanners from
these manufacturers, they will be exposed to the utility and benefit of the
Company's OCR and document management technology. The objective of this strategy
is to capitalize on such exposure by getting a number



                                       11
<PAGE>   12

of customers to "upgrade" from the bundled limited edition version software to
the Company's more fully-featured products.

Net revenues from software products represented approximately 88% and 86% of
total net revenues for the third quarter of 1999 and 1998, respectively. Net
revenues from software products represented approximately 90% and 86% of total
net revenues for the first nine months of 1999 and 1998, respectively. Over 90%
of all software revenues are derived from Windows-based products, and the
Company anticipates that this will continue.

Net revenues for software products were $10.8 million for the third quarter of
1999, compared to $13.5 million for the third quarter of 1998, representing a
decrease of approximately 20%. This decrease was primarily attributable to
increased price competition and reductions in unit sales made in the third
quarter of 1999 compared to the same period of 1998. Net revenues for software
products were $42.2 million for the first nine months of 1999, compared to $40.9
million for the first nine months of 1998, representing an increase of
approximately 3%. This increase was primarily attributable to increased unit
sales of the OmniPage family of products and the OmniForm products during the
first six months of 1999, which was offset by increased price competition and
reduced demand for software products in the third quarter of 1999. Beginning in
the first quarter of 2000, quarterly software revenues from an existing OEM
customer will decrease up to $1.5 million because the agreement with that
customer was not extended under its current terms.

Net revenues for hardware products were $1.4 million for the third quarter of
1999, compared to $2.2 million for the third quarter of 1998, representing a
decrease of approximately 35%. Net revenues for hardware products were $4.8
million for the first nine months of 1999, compared to $6.7 million for the
first nine months of 1998, representing a decrease of approximately 28%. These
decreases were primarily the result of a decrease in the unit sales of
transaction processing OCR hardware products in both the third quarter of 1999
and the first nine months of 1999 compared to the same periods of 1998. As
previously noted, the Company has announced plans to discontinue the hardware
products division. As a result, revenues related to hardware products will no
longer be a component of earnings from continuing operations.

International sales were $4.2 million and $4.6 million for the third quarter of
1999 and 1998, respectively. International sales represented approximately 34%
and 29% of total net revenues in the third quarter of 1999 and 1998,
respectively. The decrease in international sales in the third quarter of 1999
compared to the same period of 1998 was primarily attributable to weakness in
software sales in Europe. International sales were $15.4 million and $15.5
million for the first nine months of 1999 and 1998, respectively. International
sales represented approximately 33% of total net revenues in the first nine
months of both 1999 and 1998. The Company believes that growth in international
sales will be important for the Company's future success, and as a result, the
Company intends to continue to invest in expanding its operations
internationally, particularly in Europe. Sales growth in these markets, however,
has been and will continue to be impacted by certain factors beyond the control
of the Company, such as variable economic conditions, foreign currency exchange
rates, slower adoption of OCR and document management technologies, and
government regulation.


                                       12
<PAGE>   13

GROSS MARGIN

Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of manufacturing and production expenses, packaging costs,
royalties paid to third parties, and amortization and write-off of capitalized
software development costs.

Cost of revenue as a percentage of total net revenue was 22% and 23% for the
third quarter of 1999 and 1998, respectively. Cost of revenue as a percentage of
total net revenue was 20% and 23% for the first nine months of 1999 and 1998,
respectively. Although cost of revenue as a percentage of total net revenue
decreased between the two three-month periods and the two nine-month periods,
cost of revenue varies between periods based on both the channel mix and the
product mix within channels. As a result, quarterly fluctuations in cost of
revenue, in absolute dollars and as a percentage of total net revenues, are
expected to continue in the future.

Overall gross margins were 78% and 77% for the third quarter of 1999 and 1998,
respectively, and 80% and 77% for the first nine months of 1999 and 1998,
respectively. The improvement, in both the third quarter of 1999 and the first
nine months of 1999 compared to the same periods of 1998, was due primarily to
product mix being more heavily weighted toward software products, which
generally have higher gross margins than do hardware products.

Gross margins for software products were 83% for the third quarter of 1999,
compared to 81% for the third quarter of 1998. Gross margins for the software
products were 84% for the first nine months of 1999 and 82% for the same period
of 1998. This improvement in gross margin percentages during both the third
quarter of 1999 and the first nine months of 1999 compared to the same periods
of 1998 was largely attributable to increasing production volumes and increased
royalty revenue.

Gross margins for hardware products were 46% for the third quarter of 1999
compared to 53% for the same period of 1998. Gross margins for hardware products
were 48% for the first nine months of 1999 compared to 51% for the same period
of 1998. The reduced gross margin in the third quarter of 1999 compared to the
same period of 1998 was primarily attributable to a product mix with higher
product margins in the third quarter of 1998 compared to the same period of
1999. The decline in gross margins during the first nine months of 1999 compared
to the same period of 1998 reflects the weakness of hardware product net
revenues in the first nine months of 1999 compared to the first nine months of
1998. Since a significant portion of hardware cost of revenues relates to fixed
manufacturing overhead costs, the gross margins for hardware will often decline
during periods of flat or negative revenue and unit shipment growth. As
previously noted, the hardware products division will be discontinued and its
revenues and expenses will not be a component of earnings from continuing
operations after the third quarter of 1999.

The primary factor affecting overall gross margins in the future is likely to be
shifts in product mix between fully-priced, non-upgrade software, bundled
software, and upgrade products. In addition, the 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 rapidly become obsolete, necessitating increased inventory
write-offs or reserves and a corresponding decrease in gross margins.



                                       13
<PAGE>   14


OPERATING EXPENSES

RESEARCH AND DEVELOPMENT

Caere continues to invest heavily in the future by funding research and
development ("R&D"). R&D expenses were $3.2 million for the third quarter of
1999 compared to $3.1 million for the third quarter of 1998, representing an
increase of approximately 6%. R&D expenses were $9.9 million for the first nine
months of 1999 compared to $9.0 million for the same period of 1998,
representing an increase of approximately 10%. This increase in absolute dollars
was primarily from development staff headcount growth, other employee related
costs and higher levels of third-party development costs in many areas,
particularly in software technologies.

The Company's sustained commitment to R&D over the last two years allowed the
Company to successfully launch multiple products in 1998, including OmniPage Pro
9.0, OmniPage Wizard, PageKeeper Standard, and an all-in-one Professional
Developers Kit. During the first nine months of 1999 new products launched have
included OmniForm 4.0, OmniPage Web, OmniPage Pro Scanner Suite and PageKeeper
Pro. In some cases, R&D efforts for these products began well over a year before
their launch. The Company believes that significant R&D investments in 1999 and
beyond will be necessary for the Company to effectively compete in the software
market.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative ("SG&A") expense was $6.4 million for the
third quarter of 1999 compared to $6.8 million for the third quarter of 1998,
representing a decrease of approximately 7%. SG&A expense was $21.5 million for
the first nine months of 1999 compared to $20.7 million for the same period of
1998, representing an increase of approximately 4%. As a percentage of net
revenue, SG&A expense was 52% and 43% for the third quarter of 1999 and 1998,
respectively, and 46% and 44% for the first nine months of 1999 and 1998,
respectively. The increase in the absolute dollar amounts of SG&A expense
between the two nine-month periods was due primarily to expansion of
product-specific marketing programs, distribution channels, and information
systems and business infrastructure to support overall increases in the scope of
the Company's operations.

INTEREST AND INCOME TAXES

Net interest income was $0.7 million and $0.6 million for the third quarter of
1999 and 1998, respectively. Net interest income was $2.4 million and $2.1
million for the first nine months of 1999 and 1998, respectively.

The effective income tax rate for both the third quarter of 1999 and the first
nine months of 1999 was approximately 30%. The effective income tax rate for the
third quarter of 1998 was approximately 25% and the effective income tax rate
for the first nine months of 1998 was approximately 23%. The effective income
tax rate continues to be lower than the U.S. federal statutory tax rate
primarily due to benefits derived from federal net operating loss carryforwards
and the Company's utilization of a foreign sales corporation. As of December 31,
1998, the Company has federal net operating loss carryforwards of approximately
$11.1 million, which are subject to an annual limitation of approximately $2.7
million.




                                       14
<PAGE>   15

CERTAIN TRENDS, ISSUES AND UNCERTAINTIES

The Company's future operating results may be affected by various uncertain
trends and factors that 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 OCR, forms, and
desktop document management. The industry has also become increasingly
competitive, and, accordingly, the Company's results may additionally 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.

The Company's future earnings and stock price is subject to significant
volatility, particularly on a quarterly basis. The Company's revenues and
earnings are unpredictable 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 that 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.

YEAR 2000 ISSUES

Like many other companies, the Year 2000 computer issues create certain risks
for the Company. If the Company's internal management information systems or
products sold to customers do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on the
Company's operations. Based on currently available information, the Company does
not believe that the Year 2000 issues related to internal systems or products
sold to customers will have a material adverse impact on its financial condition
or overall trends in results of operations; however, it is still uncertain to
what extent the Company may be affected by such matters. In addition, customers
may delay purchase decisions because of uncertainty about Year 2000 issues.
There also can be no assurance that the failure to ensure Year 2000 compliance
by a supplier or another third party would not have a material adverse effect on
the Company.

In mid-1997, Caere initiated a company-wide Year 2000 Project to address this
issue. A Year 2000 Committee was established and mandated with defining,
assessing and converting or replacing various programs, hardware and
instrumentation systems to make them Year 2000 compatible.



                                       15
<PAGE>   16

           INTERNAL BUSINESS PROCESSES. To address the Year 2000 issues with its
internal information technology ("IT") systems, the Company initiated a program
to evaluate its internal systems, including manufacturing, sales and financial
systems. The Company has completed the assessment phase and the renovation and
testing phases are proceeding in parallel. The Company's assessment indicated
that certain internal systems should be upgraded or replaced as part of a
solution to the Year 2000 problem. As part of its Year 2000 project, the Company
constructed a new computer facility to house the Company's IT systems. This
computer facility was completed in mid-September. Delays in the completion of
the new computer facility have resulted in delays in completion of the testing
of the Company's IT systems. The replacement process is now 90% complete. The
Company expects to complete the testing and renovation phases for its IT systems
by December 1999.

           Although the Company's non-IT systems do not in many cases directly
impact the Company's core business, they remain an important part of Caere's
Year 2000 efforts. Testing of all mission-critical non-IT systems and products
has been completed. Approximately 50% of the non-IT systems required
replacement, and the replacement process is now 85% complete. The Company
expects to complete the renovation phase by December 1999.

           The chart below shows the overall status of Caere's five-phase Year
2000 project in the following areas:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                 AWARENESS     ASSESSMENT      RENOVATION                  TESTING                     IMPLEMENTATION
--------------------------------------------------------------------------------------------------------------------------
<S>              <C>           <C>             <C>                         <C>                         <C>
IT SYSTEMS       Completed     Completed       Underway with               Underway with               Scheduled to be
                                               approximately 90%           approximately 95%           completed by
                                               completed.  Scheduled to    completed. Scheduled to     December 31, 1999.
                                               be completed by December    be completed by December
                                               1999.                       15, 1999.

--------------------------------------------------------------------------------------------------------------------------
NON-IT SYSTEMS   Completed     Completed       Underway with               Completed                   Scheduled to be
                                               approximately 85%                                       completed by
                                               completed. Scheduled to                                 December 1999.
                                               be completed by December
                                               1999.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>



           THIRD PARTY VENDORS, MANUFACTURERS AND SUPPLIERS. The Company has
identified and prioritized critical third parties and customers, and has
contacted them concerning their plans and progress in addressing the Year 2000
problem. The Company is also working with key suppliers of products and services
to determine that their operations and products are Year 2000 Compliant or to
monitor their progress toward Year 2000 compliance, as appropriate. Where
practicable, the Company will attempt to mitigate its risks with respect to the
failure of third parties to be Year 2000 ready, including developing contingency
plans. However, such failures, including failures of any contingency plan,
remain a possibility and could have a materially adverse impact on the Company's
results of operations or financial condition.

           PRODUCTS. The Company believes that all products currently
shipping and supported by Caere are "Year 2000 Compliant." It is likely
that some older products may not be Year 2000 Compliant. Current information
about the Company's products is available on the Company's Web site
(http://www.caere.com/company/y2k.asp). Information on the Company's Web site is
provided to customers for the sole purpose of assisting in planning for the
transition to the Year



                                       16
<PAGE>   17

2000. Such information is the most currently available concerning the Company's
products and is provided "as is" without warranty of any kind. As used by Caere,
"Year 2000 Compliant" means that when used properly and in conformity with the
product information provided by the Company, and when used with "Year 2000
Compliant" computer systems, the product will accurately store, display,
process, provide, and/or receive data from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Caere product properly exchanges
date data with the Caere product. There can be no assurance that (i) third party
technologies used in combination with Caere products will be Year 2000 Compliant
and (ii) Caere products will not be adversely affected when used with such third
party technologies. Nor can the Company represent that any modifications to its
products made by a party other than Caere will be Year 2000 Compliant.

           In the Company's standard license agreements, the Company warrants to
licensees that its software routines and programs are Year 2000 Compliant. 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.

           COSTS. Costs associated with certain system upgrades are included in
existing operating budgets. In some instances (such as the Company's financial
administrative system), the installation schedule of new software and hardware
in the normal course of business is being accelerated to also afford a solution
to Year 2000 compliance issues. Certain of the costs related to upgrades of
hardware and software systems are covered by ongoing maintenance agreements.
Additional costs of purchasing, installing, modifying and testing the internal
systems are not expected to exceed $800,000. The total cost associated with
required modifications to become Year 2000 Compliant is estimated at $1,000,000.
The total cost estimate is based on the current assessment of the projects and
is subject to change as the projects progress.

           CONTINGENCY PLANS. The Company continues to discuss contingency
planning to address potential problem areas with internal systems and with
suppliers and other third parties. It is expected that remediation and
contingency planning activities will be on-going throughout calendar year 1999
with the goal of appropriately resolving all material internal systems and third
party issues. There can be no assurance that the Company will be able to develop
contingency plans that will adequately address all Year 2000 issues that may
arise.

FINANCIAL CONDITION

Caere's cash and short-term investment portfolio totaled $49.6 million at
September 30, 1999. The portfolio is diversified among security types,
industries, and individual issuers. The portfolio is invested primarily in
short-term, U.S. dollar denominated securities to both minimize interest rate
risk and maintain liquidity in the event of immediate cash needs.

Caere offers credit terms to qualifying customers and also sells products on a
prepaid, credit card and cash-on-delivery basis. For 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.



                                       17
<PAGE>   18

Caere has no long-term debt. The Company has not paid cash dividends on its
common stock. Stockholders' equity at September 30, 1999 was $60.6 million.

Caere will continue to invest in its sales, marketing, and product support
infrastructures. In addition, research and development investments will continue
to be made in existing and advanced areas of technology, including the use of
cash to acquire technology and to fund other strategic opportunities. Additions
to property and equipment will continue, including new facilities and computer
systems for research and development, sales and marketing, support, and
administrative staff.

Cash will also continue to be used to repurchase common stock. Among other
purposes, the shares will be used for employee stock option and purchase plans.
The Company repurchased approximately 1.5 million shares of common stock in
1998, with an aggregate cost of approximately $19.8 million. During the nine
months ended September 30, 1999, the Company repurchased an additional 300,000
shares of common stock, with an aggregate cost of approximately $3.6 million.

Management believes that existing cash and short-term investments, together with
funds generated from operations, will be sufficient to meet operating and
capital expenditure requirements for at least the next 12 months.


                                  RISK FACTORS

Caere's future operating results may be affected by various factors that are
beyond the Company's control. Accordingly, in addition to the factors described
elsewhere in this Form 10-Q and in the Company's 1998 annual report on Form
10-K, the following trends, issues, and uncertainties, among others, should be
considered in evaluating the Company's growth and performance outlook.

RAPID TECHNOLOGICAL CHANGE AND INDUSTRY CONSOLIDATION

Rapid change and uncertainty due to new and emerging technologies characterize
the software industry. The introduction of competing products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. In addition, consolidation in the software
industry continues to occur, with competing companies merging or acquiring other
companies in order to capture market share or expand product lines. As this
consolidation occurs, the nature of the market may change as a result of fewer
companies dominating particular markets, potentially providing consumers with
fewer choices. Any of these changes or factors may have a material adverse
impact on the Company's future revenues, operating results, and financial
condition.

SCANNER GROWTH RATES

The underlying scanner unit growth rate directly impacts the Company's software
revenue growth. A reduction in the scanner shipment growth rate would adversely
impact the Company's future software revenue opportunity. In addition, a large
proportion of overall scanner unit growth over the last two years has been
attributable to the consumer market. There can be no




                                       18
<PAGE>   19

assurance, however, that a sufficient number of consumers will upgrade from the
limited version software included free with their scanner to the Company's more
fully featured upgrade products. Accordingly, weakness in the number of upgrades
would have a material adverse impact on the Company's future revenues, operating
results, and financial condition.

PRODUCT SHIPMENT SCHEDULES

Delays in new product releases adversely affect revenue growth rates and cause
operational inefficiencies that impact manufacturing and distribution logistics,
distributor and OEM relationships, and customer support expenses. In addition,
as is common in the software industry, the Company operates with relatively
little backlog. As a result, delays in product shipments or weakness in the
near-term demand for the Company's products could have an immediate, material
adverse affect on revenues and operating results, which would likely result in a
significant and precipitous drop in the Company's stock price.

FLUCTUATING REVENUES AND OPERATING RESULTS

Caere's revenues and operating results have fluctuated in the past and the
Company's future revenues and operating results are likely to do so in the
future, particularly on a quarterly basis.

Caere's experience has been that a disproportionately large percentage of
shipments have occurred in the third month of each fiscal quarter and that
shipments tend to be concentrated in the latter half of that month. Backlog
early in a quarter is not large enough to assure that Caere will meet its
revenue target for any particular 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.

The Company's quarterly operating results may continue to fluctuate due to
numerous other factors. Some of these factors include the demand for the
Company's products, seasonality, customer order deferrals in anticipation of new
versions of the Company's products, the introduction of new products and product
enhancements by the Company or its competitors, including the effects of filling
distribution channels following such introductions and of potential delays in
availability of announced or anticipated products, price changes by the Company
or its competitors, product sales mix, timing of acquisitions and associated
costs, and timing of significant marketing and sales promotions.

CUSTOMER ACCEPTANCE

Caere believes that it will be necessary to continue to introduce new products
to remain competitive. While Caere performs extensive usability and beta testing
of new products, user acceptance and consumer penetration rates ultimately
dictate the success of development and marketing efforts.

TECHNICAL SUPPORT

Consistent with many companies in the software industry, technical support costs
comprise a significant portion of the Company's operating costs and expenses.
The Company's technical support levels are based largely on projections of
future sales levels. While the Company performs extensive quality control review
over both technical support services provided by its corporate personnel and, to
a lesser extent, support services outsourced to third-party vendors,



                                       19
<PAGE>   20

customer satisfaction with the services rendered may not be favorable. In the
event of customer dissatisfaction, future product and upgrade sales may be
negatively impacted.

PRICES

Future product prices may decrease from historical levels, depending on
competitive market and cost factors. During 1999, certain competing products
have been reduced in price by the Company's primary competitors. In response,
the Company has reduced the prices for certain of its products, including the
OmniPage Pro and PageKeeper Pro products. Such price reductions could have a
material adverse impact on the Company's future revenues, operating results, and
financial condition. International software prices vary by country and are
generally higher than in the United States to cover higher costs of distribution
and localization expenses. Increased global competition, European monetary
unification, or other factors could erode such price uplifts in the future. In
the event of product price reductions either domestically or internationally,
the Company's future revenues, operating results, and financial condition may be
adversely impacted.

Product upgrades, which enable users to upgrade from both limited edition and
earlier versions of the Company's products, have lower prices and margins than
fully priced, non-upgrade products. As the desktop applications market continues
to saturate, the sales mix has shifted from fully priced, non-upgrade products
to upgrade products. This trend is likely to continue, and it could have a
material adverse impact on the Company's future revenues, operating results, and
financial condition.

DISTRIBUTION CHANNELS

Caere may not be able to develop an effective method of distributing its
software products utilizing newly emerging software distribution channels,
including the Internet. Even if successful, the presence of new channels could
adversely affect existing channels and product pricing, which could have a
material adverse impact on the Company's future operating results and financial
condition.

A significant portion of Caere's revenue is attributable to its upgrade
strategy. Upgrades are derived from three primary sources: first, from previous
customers who are seeking the improvements of the latest versions of Caere's
OCR, electronic forms, and document management software products; second, from
customers who are upgrading from competitive products; and third, from customers
who choose to upgrade from a limited edition version of the Company's product
that was bundled with various scanner manufacturer products. If previous Caere
customers or the customers of competitive products decline to upgrade or if
customers using a bundled product defer or forego the purchase of the Company's
newer or more fully featured products because they determine that the bundled
product satisfies their needs, it could have a material adverse impact on the
Company's future revenues, operating results, and financial condition.

Caere's future revenues and operating results may be negatively affected by
channel fill. Distributors may fill their distribution channels in anticipation
of price increases, sales promotions, or incentives. Channels may also become
filled simply because distributors do not sell their inventories to retail
distribution or retailers to end users as anticipated. If sell-through does not
occur at a sufficient rate, distributors will delay purchases, cancel orders, or
return prior




                                       20
<PAGE>   21

purchases in an effort to reduce their inventories. Further, distributors may
also delay purchases, cancel orders, or return products in anticipation of a new
product or version release. Such channel fill, order delays or cancellations can
cause fluctuations in net revenues from one quarter to the next, although the
impact is mitigated by the Company's deferral of revenue associated with
inventories estimated to be in excess of appropriate levels in the distribution
and retail channels. Furthermore, the Company estimates and maintains reserves
for product returns. There can be no assurance, however, that such channel fill,
order delays or cancellations will not have a material adverse impact on the
Company's future revenues and operating results.

LONG-TERM RESEARCH AND DEVELOPMENT CYCLE

Developing and localizing software is expensive and often involves a long
payback cycle. The Company plans to continue to make significant investments in
R&D and related product opportunities. Significant revenues from these efforts
in some cases are not expected for several years. Management expects total
spending for R&D in 1999 to increase over spending in 1998.

INTERNATIONAL OPERATIONS

Caere's international operations are subject to certain risks common to
international operations, such as government regulations, import restrictions,
currency fluctuations, economic volatility, repatriation restrictions, and
seasonal reductions in business activity during summer months in Europe and
certain other parts of the world. One or more of these factors could have a
material adverse impact on future revenues, operating results, and financial
condition.

EMPLOYEE RECRUITING AND RETENTION

Caere believes that its future success depends on its continuing ability to
attract and retain highly qualified technical, sales, financial, and managerial
personnel. Competition for such people, however, is intense. The Company
believes, therefore, that it must provide employees with a competitive
compensation package, which necessitates the continued availability of stock
options which, in turn, requires ongoing stockholder approval. Failure to obtain
such stockholder approval could have a material adverse effect on the Company's
ability to attract and retain employees.

FUTURE GROWTH RATE

The revenue growth rate in 1999 and future periods, if any, may not approach the
level attained in prior years. As discussed previously, operating expenses are
expected to increase in 1999 compared to 1998. The increase in expenses through
the first nine months of 1999 has not been offset by revenue growth, and has
resulted in a decline in the operating margin for the first nine months of 1999
compared to the same period of 1998. Because of the fixed nature of a
significant portion of the Company's expenses, coupled with the possibility of
slower revenue growth, operating margins in the future may decrease from
historical levels.

LACK OF PRODUCT REVENUE DIVERSIFICATION

Caere derives a significant portion of its net revenues from sales of its
OmniPage family of products. Caere expects that these software products will
continue to account for a majority of the Company's sales in the near future. A
decline in demand for these products as a result of competition, technological
change, or other factors would have a material adverse effect on the Company's
future revenues, operating results, and financial condition.



                                       21
<PAGE>   22

POSSIBLE VOLATILITY OF CAERE STOCK PRICE

The prices for Caere Common Stock have fluctuated widely in the past. The
Company believes that such fluctuations may have been caused by announcements of
new products, quarterly fluctuations in the results of operations, and other
factors including, but not limited to, changes in conditions of the personal
computer industry in general. Stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities issued by Caere and other high technology companies,
often for reasons unrelated to the operating performance of the specific
companies. Caere anticipates that prices for Caere Common Stock may continue to
be volatile. Such future stock price volatility for Caere Common Stock may
provoke the initiation of securities litigation, which may divert substantial
management resources and have an adverse effect on the Company's results of
operations.

EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW AND CAERE'S CHARTER DOCUMENTS

Caere is a corporation organized under the laws of the state of Delaware.
Certain provisions of the Delaware Law and the charter documents of Caere may
have the effect of delaying, deferring or preventing changes in control or
management of Caere. Caere is subject to the provisions of Section 203 of the
Delaware Law, which has the effect of restricting changes in control of a
company. In addition, Caere's Board of Directors is divided into three separate
classes. Caere's Board has authority to issue up to 2,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of such shares without any further vote or action by
its stockholders. Caere also has a Preferred Share Rights Plan (the "Shareholder
Rights Plan"). The effect of the antitakeover protections of the Delaware Law,
the Caere charter documents and the Shareholder Rights Plan could make it more
difficult for a third party to acquire, or could discourage a third party from
acquiring, a significant portion of the outstanding stock of Caere.



                                       22
<PAGE>   23

                                     ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY HEDGING INSTRUMENTS

The Company transacts business in various foreign currencies, primarily in
certain European countries and Japan. Accordingly, the Company is subject to
exposure from movements in foreign currency exchange rates. This exposure is
primarily related to forint denominated licenses in Hungary and Eastern Europe,
yen denominated licenses in Japan, and local currency denominated operating
expenses in Europe.

A portion of the Company's operating expenses in Japan are in yen, which
mitigates a portion of the exposure related to yen denominated licenses in
Japan. Likewise, a majority of the Company's operating expenses in Hungary are
denominated in forints, mitigating a portion of the exposure related to forint
denominated licenses in Eastern Europe. In addition, the Company hedges firmly
committed transactions using primarily forward contracts with maturities of less
than three months. As of September 30, 1999, there were no outstanding foreign
currency forward exchange contracts. The Company's hedging policy is designed to
reduce the impact of foreign currency exchange rate movements, and any gain or
loss in the hedging instruments is expected to be offset by a corresponding gain
or loss in the underlying exposure being hedged.

The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.

The Company currently does not use financial instruments to hedge local currency
denominated operating expenses in Europe. Instead, the Company believes that a
natural hedge exists, in that local currency revenue from product upgrades
substantially offsets the local currency denominated operating expenses. The
Company assesses the need to utilize financial instruments to hedge European
currency exposure on an ongoing basis.

The Company regularly reviews its hedging program and may as part of this review
determine at any time to change its hedging program.

FIXED INCOME INVESTMENTS

As of September 30, 1999, the Company had an investment portfolio of fixed
income securities, including those classified as cash equivalents of about $43.0
million. These securities are subject to interest rate fluctuations. An increase
in interest rates could adversely affect the market value of the Company's fixed
income securities. As of September 30, 1999, the weighted-average, pre-tax
interest rate on the Company's fixed income securities was approximately 5.6%.

The Company does not use derivative financial instruments in its investment
portfolio to manage interest rate risk. The Company does, however, limit its
exposure to interest rate and credit risk by establishing and monitoring
policies and guidelines for its fixed income portfolios. The guidelines limit
the maximum duration of portfolios, establish credit quality standards, and
limit exposure for any one issue or issuer, as well as the type of instrument.
Due to the limited duration and credit risk criteria established in the
Company's guidelines, the exposure to market and credit risk is not expected to
be material.




                                       23
<PAGE>   24

                           PART II. OTHER INFORMATION

                                     ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

                  Exhibit 27 - Financial Data Schedule (included only in the
         copy of this report filed electronically with the Commission)

(b)      Reports on Form 8-K

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




SIGNATURES

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

                                CAERE CORPORATION

Date:  November 12, 1999

                                /s/  BLANCHE M. SUTTER
                                --------------------------------------------
                                Blanche M. Sutter, Executive Vice President
                                and Chief Financial Officer
                                (Principal Financial and Accounting Officer
                                and Duly Authorized Officer)



                                       24
<PAGE>   25

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
 Number                            Description
------                             -----------
<S>          <C>
  27         Financial Data Schedule (included only in the copy of this
             report filed electronically with the Commission)
</TABLE>