<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-Q

      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934


 For the quarter ended September 30, 1996      Commission File Number 0-21860

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


          DELAWARE                                      06-1232140
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


       222 Third Street                                    02142
         Suite 3300                                      (Zip Code)
        Cambridge, MA
(Address of principal executive offices)


                                 617-621-0820
             (Registrant's telephone number, including area code)


     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         
        -------      ---------

     Number of shares outstanding of the issuer's classes of common stock as of
     October 31, 1996:

                    Class                           Number of Shares Outstanding
     --------------------------------------         ----------------------------
     Common Stock, par value $.01 per share                    6,525,065



                            Total number of pages 17
<PAGE>
 
                          DATAWARE TECHNOLOGIES, INC.



                                     INDEX


                                                                     PAGE NUMBER
                                                                    ------------

PART I.  FINANCIAL INFORMATION

     Item 1.    Consolidated Condensed Financial Statements
 
                Consolidated Condensed Balance Sheets as of
                September 30, 1996 and December 31, 1995                   3
 
                Consolidated Condensed Statements of Operations for the
                Three and Nine Months Ended September 30, 1996 and 1995    4
 
                Consolidated Condensed Statements of Cash Flows for the
                Nine Months Ended September 30, 1996 and 1995              5
 
                Notes to Consolidated Condensed Financial Statements       6
 
     Item 2.    Management's Discussion and Analysis of Financial
                Condition and Results of Operations                        8
 
PART II.  OTHER INFORMATION

     Item 1.    Legal Proceedings                                         12

     Item 6.    Exhibits and Reports on Form 8-K                          12


SIGNATURE                                                                 14

EXHIBIT INDEX                                                             15



 
<PAGE>
 
                        Part I.  FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements

                          Dataware Technologies, Inc.
                     Consolidated Condensed Balance Sheets
                       (In thousands, except share data)

<TABLE>
<CAPTION>         
                                                September 30,   December 31,
                                                     1996            1995
                                                -------------   -------------
<S>                                             <C>             <C>
ASSETS       
Current assets: 
   Cash and cash equivalents                    $       3,204   $       7,734
   Accounts receivable, less allowance for  
      doubtful accounts of $860 and $610                8,986          10,063
   Prepaid expenses and other current assets            3,230           2,734
   Deferred taxes                                         336             336
                                                -------------   -------------
      Total current assets                             15,756          20,867
 
Property and equipment, net                             7,587           5,543
Computer software costs, net                            2,112           3,002
Marketable securities                                   2,034           8,908
Deferred taxes                                          4,151             284
Intangible assets                                       2,370           3,362
                                                -------------   -------------
      Total assets                              $      34,010   $      41,966
                                                =============   =============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of notes, software license
      payable and capital leases                $         107   $         189
   Demand note payable to related party                   ---              50
   Accounts payable                                     2,785           1,963
   Accrued expenses                                     1,982           1,396
   Accrued litigation and non-recurring
      charges                                           4,394             ---
   Accrued compensation                                 1,957           1,690
   Income taxes payable                                 1,875           1,928
   Deferred revenue                                     2,399           2,530
                                                -------------   -------------
      Total current liabilities                        15,499           9,746
 
Notes, software license payable and capital
    leases                                                ---               4
 
Stockholders' equity:
   Preferred stock, $.01 par value, 8,000,000
      shares authorized, none issued                      ---             ---
   Common stock, $.01 par value: 14,000,000
      shares authorized; 6,500,942 and
      6,239,123 shares issued and outstanding                              
      at September 30, 1996 and December 31,
      1995, respectively                                   65              62
   Additional paid-in capital                          38,118          36,782
   Accumulated deficit                                (19,400)         (4,445)
   Cumulative translation adjustment                     (269)           (209)
   Unrealized gain (loss) on marketable
      securities                                           (3)             26
                                                -------------   -------------
      Total stockholders' equity                       18,511          32,216
                                                -------------   -------------
      Total liabilities and stockholders'
         equity                                 $      34,010   $      41,966
                                                =============   =============
The accompanying notes are an integral part of the consolidated condensed
financial statements   
 
                               
</TABLE>
<PAGE>
 
                          Dataware Technologies, Inc.
                Consolidated Condensed Statements of Operations
                     (In thousands except per share data)

<TABLE>
<CAPTION>

                                   Three months ended   Nine months ended
                                      September 30,        September 30,
                                     1996       1995       1996       1995
                                   ---------  --------- ----------  ---------
<S>                                <C>        <C>       <C>         <C>
Revenues:                                                         
   Software license fees           $   4,905  $   5,415 $   11,408  $  14,620
   Services                            5,115      5,187     15,417     15,971
                                   ---------  --------- ----------  ---------
      Total revenues                  10,020     10,602     26,825     30,591
                                                                  
Cost of revenues:                                                 
   Software license fees                 896        872      2,576      2,209
   Write down of intangible
     assets                             ----       ----      1,926       ----
   Services                            3,400      2,938      9,776      8,821
                                   ---------  --------- ----------  ---------
                                                                  
      Total cost of revenues           4,296      3,810     14,278     11,030
                                   ---------  --------- ----------  ---------
                                                                  
Gross margin                           5,724      6,792     12,547     19,561
                                                                  
Operating expenses:                                               
   Sales and marketing                 4,752      3,342     12,752      9,859
   Product development                 2,181      1,155      5,953      3,620
   General and administrative          1,736      1,343      5,172      3,936
   Write down of goodwill                                         
        and other non-recurring                                   
        charges                         ----       ----      1,889       ----
   Acquired research and
     development                         668       ----      1,861       ----
                                   ---------  --------- ----------  ---------
      Total operating expenses         9,337      5,840     27,627     17,415
                                   ---------  --------- ----------  ---------
                                                                  
Income (loss) from operations         (3,613)       952    (15,080)     2,146
                                                                  
Interest income, net                      64        158        360        425
Settlement of litigation                ----       ----     (4,073)      ----
Other income (expenses), net               2         11        (29)        65
                                   ---------  --------- ----------  ---------
                                                                  
Income (loss) before income taxes     (3,547)     1,121    (18,822)     2,636
Provision (benefit) for income
   taxes                                (864)       336     (3,867)       791
                                   ---------  --------- ----------  ---------
      Net income (loss)            $  (2,683) $     785 $  (14,955) $   1,845
                                   =========  ========= ==========  =========
Net income (loss) per common share $   (0.41) $    0.12 $    (2.35) $    0.28
                                   =========  ========= ==========  =========
   Weighted average number of               
   common and common equivalent             
   shares                              6,466      6,635      6,358      6,605
                                   =========  ========= ==========  =========
</TABLE>
 
The accompanying notes are an integral part of the consolidated condensed
financial statements   

<PAGE>
 
                          Dataware Technologies, Inc.
                Consolidated Condensed Statements of Cash Flows
                                (In thousands)
 
<TABLE>
                                                                 Nine months ended
                                                                   September 30,
                                                                  1996        1995
                                                               ---------  ----------
<S>                                                            <C>        <C>
Cash flows provided by (used in) operating activities:         
Net income (loss)                                              $ (14,955) $    1,845
Adjustments to reconcile net income (loss) to net cash         
   provided by (used in) operating activities:                 
   Depreciation and amortization                                   2,785       2,480
   Loss (gain) on foreign currency transactions                       51         (62)
   Deferred taxes                                                 (3,867)        ---
   Non-cash portion of write-down of intangible assets             3,180         ---
   Charge for acquired research and development                    1,861         ---
   Other adjustments                                                 195         ---
   Changes in operating assets and liabilities, net            
      of effects from acquisitions of businesses:              
      Accounts receivable                                          1,691      (1,686)
      Prepaid expenses and other current assets                     (960)       (101)
      Accounts payable                                               677        (351)
      Accrued expenses and compensation                              528         129
      Accrued litigation and non-recurring charges                 4,394         ---
      Income taxes payable                                           (53)        795
      Deferred revenue                                              (435)        296
                                                               ---------  ----------
         Net cash provided by (used in) operating activities      (4,908)      3,345
                                                               ---------  ----------
                                                               
Cash flows provided by (used in) investing activities:         
   Purchase of marketable securities                              (9,874)        ---
   Proceeds from sales and maturities of marketable securities    16,719       1,213
   Additions to property and equipment                            (3,507)     (2,178)
   Acquisition of businesses, net of cash                      
      acquired                                                    (1,553)        ---
   Additions to capitalized software costs                        (1,496)     (1,084)
                                                               ---------  ----------
         Net cash provided by (used in) investing activities         289      (2,049)
                                                               ---------  ----------
                                                               
Cash flows provided by financing activities:                   
   Proceeds from issuance of common stock and exercise of      
      stock options                                                  382       1,200
   Principal payments on notes, software license               
      payable and capital leases                                    (236)       (290)
                                                               ---------  ----------
         Net cash provided by financing activities                   146         910
                                                               ---------  ----------
Effect of exchange rate changes on cash                              (57)        (13)
                                                               ---------  ----------
Net change in cash and cash equivalents                           (4,530)      2,193
Cash and cash equivalents at beginning of period                   7,734       4,642
                                                               ---------  ----------
Cash and cash equivalents at end of period                     $   3,204  $    6,835
                                                               ---------  ----------
Supplemental disclosure of non-cash financing                  
   transactions:                                                       
                                                               
Stock and stock warrants issued in connection with             
   acquisitions                                                $     761  $      --- 
                                                               =========  ==========
Note payable assumed in connection with acquisition            
   of business                                                 $     101  $      ---  
                                                               =========  ==========
</TABLE>

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

<PAGE>
 
                          DATAWARE TECHNOLOGIES, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

A. Basis of Presentation

These consolidated financial statements should be read in conjunction with
portions of the Company's Annual Report incorporated by reference in Form 10-K
for the fiscal year ended December 31, 1995 and the financial statements and
footnotes included therein.  In the opinion of management, the accompanying
unaudited financial statements include all adjustments, consisting of normal
recurring accruals and non-recurring charges, necessary to present fairly the
consolidated financial position, results of operations and cash flows of
Dataware Technologies, Inc.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission rules and regulations.

The Company's results for the three and nine month periods ended September 30,
1995 have been restated to include the operations of Ledge Multimedia, Inc.,
which was acquired on December 30, 1995 in a pooling transaction.  Additionally,
certain reclassifications have been made to the prior years' financial
statements to conform to the current presentation.

B. Computer Software Costs

During the nine month period ended September 30, 1996, the Company capitalized
approximately $1,492,000 of internally developed software costs and capitalized
$1,084,000 during the same period in 1995.  For the three month period ended
September 30, 1996, the Company capitalized approximately $551,000 of these
costs as compared to $353,000 during the same period in 1995.  These costs, net
of accumulated amortization, amounted to $1,887,000 at September 30, 1996.
Amortization expense related to internally developed software was $667,000 and
$608,000 for the nine month periods ended September 30, 1996 and 1995,
respectively.  For the three month periods ended September 30, 1996 and 1995,
amortization expense related to internally developed software was $212,000 and
$308,000, respectively.  The Company also recorded a $1,180,000 one-time charge
during the nine month period ended September 30, 1996 for the write-down of less
productive internally developed software assets to their net realizable value.

During the nine month period ended September 30, 1996, the Company capitalized
approximately $175,000 of purchased software costs related to the acquisition
of Status/IQ Ltd.  The cost of capitalized software purchased, net of
accumulated amortization, amounted to $225,000 at September 30, 1996.
Amortization expense for computer software purchased was $308,000 and $194,000
for the nine months ended September 30, 1996 and 1995, respectively.  For the
three month periods ended September 30, 1996 and 1995, amortization expense
related to computer software purchased was $207,000 and $72,000, respectively.
During the nine months ended September 30, 1996 the Company recorded a one-time
charge for the write-down of less productive purchased software assets to their
net realizable value in the amount of $405,000.

C. Accounting for Goodwill

The company periodically reviews and evaluates the recoverability of goodwill
whenever events or changes in circumstances indicate that the carrying amount of
goodwill may not be recoverable.  The Company's assessment of impairment
considers the expected future operating income of the acquired entity.  During
the nine month period ended September 30, 1996, the Company recorded a $905,000
one-time charge for the write-down of goodwill to fair value primarily related
to the acquisition of PCD-Consult AB in Skovde, Sweden.  There were no write-
downs of goodwill during the three month period ended September 30, 1996.


D.  Acquisitions

On March 29, 1996 the Company completed the acquisition of all of the
outstanding shares of Status/IQ Ltd. ("Status"), located in the United Kingdom,
in exchange for approximately $1,394,000 (including acquisition expenses),
consisting of cash, common stock of the Company, and warrants to purchase
additional common stock of the Company.  The acquisition has been accounted for
as a purchase and, accordingly, the assets, liabilities and results of
operations are included in the financial statements from the acquisition date.
Because Status was acquired on the last business day of the quarter, the results
of operations in the first quarter were not affected by the acquisition other
than a one-time charge of $1,193,000 for purchased research and development.  In
addition, $175,000 of the purchase price has been allocated to computer software
costs and is being amortized over a one year period.

On May 15, 1996 the Company completed the acquisition of substantially all of
the assets and assumed the liabilities of S Cube srl of Milan ("S Cube") for
approximately $425,000 including acquisition-related expenses.  The acquisition
has been accounted for as a purchase and, accordingly, the assets, liabilities
and results of operations have been included in the financial statements from
<PAGE>
 
the acquisition date.  The purchase price has been allocated to the assets and
liabilities of S Cube based on their estimated respective fair values.  The
excess purchase price over the fair value of net assets acquired, totaling
$191,000, is included in intangible assets and is being amortized over a five
year period.

On July 31, 1996 the Company acquired Ntergaid, Inc. of Milford, CT through the
merger of a wholly-owned subsidiary with Ntergaid for a cost of approximately
$685,000 (including acquisition-related expenses), consisting of cash and common
stock of the Company.  The acquisition is being accounted for as a purchase and,
accordingly, the assets, liabilities and results of operations have been
included in the financial statements from the acquisition date. The excess
purchase price over the fair value of net assets acquired, totaling $668,000, is
included in the third quarter results of operations as acquired research and
development.

E.    Income Taxes

The Company recorded a tax benefit of $864,000 for the third quarter of 1996 as
compared to a $336,000 tax provision for the same period a year ago.  For the
nine month period ended September 30, 1996, the Company recorded a tax benefit
of $3,867,000.  The effective tax rate for the three and nine month periods
ended September 30, 1996 was 24% and 20%, respectively.  The Company has not
recorded a benefit for the litigation settlement costs incurred in 1996.

Management continues to evaluate the realizability of its $4.5 million deferred
tax asset and believes that it is more likely than not, based on the weight of
available evidence, that these deferred tax assets will be realizable.  However,
there can be no assurances that a reduction of this deferred tax asset will not
be required in the near term pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".

<PAGE>
 
                          Dataware Technologies, Inc.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
of Operations
 
RESULTS OF OPERATIONS:
----------------------

The Company's results for the three month and nine month periods ended September
30, 1995 have been restated to include the operations of Ledge Multimedia, Inc.,
which was acquired on December 30, 1995 in a pooling transaction.  Additionally,
the former systems integration category has been combined with the services
category in the revenues and cost of revenues sections in the statements of
operations for all periods shown.
 
On July 31, 1996 the Company acquired Ntergaid, Inc. of Milford, CT through the
merger of a wholly-owned subsidiary with Ntergaid for a cost of approximately
$685,000 (including acquisition-related expenses), consisting of cash and common
stock of the Company.  The acquisition is being accounted for as a purchase and,
accordingly, the assets, liabilities and results of operations have been
included in the financial statements from the acquisition date.  The excess
purchase price over the fair value of net assets acquired, totaling $668,000, is
included in the third quarter results of operations as acquired research and
development.

Revenues

The Company's total revenues decreased 5% from $10.6 million in the third
quarter of 1995 to $10.0 million in the third quarter of 1996.  The Company's
total revenues decreased 12% from $30.6 million in the first nine months of 1995
to $26.8 million in the first nine months of 1996.

Software license fees decreased 9% from $5.4 million for the three months ended
September 30, 1995 to $4.9 million for the three months ended September 30,
1996. Services revenues decreased 1% from $5.2 million during the same period in
1995 to $5.1 million in 1996. For the first nine months of 1996, software
license fees decreased 22% from $14.6 million to $11.4 million, and services
revenues decreased 3% from $16.0 million to $15.4 million. These decreases in
software license revenues during the third quarter as well as the first nine
months of 1996 reflect customer delays, as our customers reviewed the impact of
the internet on their businesses, as well as increased competition in the
industry.

Software revenues decreased to 49% of total revenues in the third quarter of
1996, down from 51% in the third quarter of 1995, and services revenues
increased to 51% of total revenues in the third quarter of 1996, up from 49% in
the third quarter of 1995.  For the first nine months of 1996, software license
fees decreased to 43% of total revenues from 48% in the first nine months of
1995 and services revenues increased to 57% of total revenues from 52% in the
first nine months of 1995.  

Consistent with past experience, a higher percentage of the Company's revenues
are expected to be realized in the third month of each fiscal quarter and tend
to be concentrated in the latter half of that month.  The Company's orders early
in a quarter will not generally be large enough to assure that it will meet its
revenue targets for any particular quarter.  Accordingly, the Company's
quarterly results will be difficult to predict until the end of the quarter, and
a shortfall in shipments or contract orders at the end of any particular quarter
may have a material adverse impact on the results for that quarter. 

Cost of Revenues

Cost of revenues increased 13% from $3.8 million in the third quarter of 1995 to
$4.3 million during the same period in 1996. Cost of revenues increased 29% from
$11.0 million for the nine month period ended September 30, 1995 to $14.3
million during the nine month period ended September 30, 1996.  As a percent of
revenues, total cost of revenues increased from 36% of total revenues for the
<PAGE>
 
three months ended September 30, 1995 to 43% for the three months ended
September 30, 1996 and from 36% to 53% for the first nine months of 1995
compared to the same period in 1996. This increase is largely due to a $1.9
million one-time charge that was recorded in the second quarter of 1996 for the
write-down of less productive software assets to their net realizable value. A
continuing shift in product mix from software license fees to higher cost
services business, as well as increased fixed costs, also contributed to the
increase.

The cost of software licenses as a percentage of software license fees increased
from 16% during the third quarter of 1995 to 18% during the same period in 1996,
and from 15% for the first nine months of 1995 to 23% for the first nine months
of 1996.  This increase was due to the decrease in sales volume while fixed
costs, primarily amortization of capitalized software, increased quarter over
quarter and year over year.

The cost of services as a percentage of service revenues increased from 57% for
the third quarter of 1995 to 66% during the third quarter of 1996 and from 55%
for the first nine months of 1995 to 63% for the first nine months of 1996.
This increase primarily reflects higher direct and indirect expenses for
services projects.

Gross Margin

Total gross margin was $6.8 million or 64% of total revenues for the third
quarter of 1995 and $5.7 million or 57% of total revenues for the third quarter
of 1996.  For the nine month period ended September 30, 1995, total gross margin
amounted to $19.6 million as compared with $12.5 million for the same period in
1996, representing 64% and 47% of total revenues, respectively.  In addition to
the one-time charge mentioned previously, changes in total gross margin from
period to period have resulted from lower total revenue volume, higher costs
within each revenue category, and a shift in product mix from higher margin
software products to relatively lower margin services.

Although management anticipates that gross margin as a percentage of revenues
will improve in the long run as the Company's revenue base grows and if the
Company successfully shifts product mix toward higher margin software, there are
a number of important factors that could adversely affect the Company's future
gross margins resulting in higher than anticipated costs and/or lower than
anticipated revenues. These factors, which are discussed in detail in Exhibit 99
hereto, incorporated by reference, include: the existence of strong competition
for the Company's products and services, including the introduction of new
products from competitors, the timing of which cannot be foreseen by the
Company; the inherent risks of new product introductions, including uncertainty
of customer acceptance; and the Company's reliance on third parties for supply
of certain product components.

Sales and Marketing Expenses

Sales and marketing expenses increased 42% from $3.3 million during the third
quarter of 1995 to $4.8 million during the same period in 1996. During the nine
month period ended September 30, 1996, sales and marketing expenses increased
29% from $9.9 million during this period a year ago to $12.8 million. Sales and
marketing expenses increased as a percentage of revenues from 32% in the third
quarter of 1995 to 47% in that same period in 1996 and from 32% for the nine
months ended September 30, 1995 to 48% for the nine months ended September 30,
1996. The increase in sales and marketing expenses reflects the Company's
continuing investment in strengthening the Company's sales and marketing
capabilities as well as the incremental expense associated with recent
acquisitions.
<PAGE>
 
Product Development Expenses

Product development expenses, which excludes capitalized software costs,
increased 89% from $1.2 million in the third quarter of 1995 to $2.2 million in
the third quarter of 1996, and increased 64% from $3.6 million during the first
nine months of 1995 to $6.0 million during the same period in 1996.  The Company
capitalized software development costs in the amount of $353,000 in the third
quarter of 1995 as compared to $551,000 in the third quarter of 1996.  During
the first nine months of 1995, the Company capitalized $1,084,000 in software
development expenses as compared with $1,492,000 during the same period in 1996.
Product development expenses as a percentage of total revenues increased from
11% in the third quarter of 1995 to 22% in that same period in 1996 and from 12%
for the nine months ended September 30, 1995 to 22% for the nine months ended 
September 30, 1996. The increase in product development expenses in real dollars
as well as in relation to total revenues reflects the Company's continuing
investment in previously announced projects, compounded by the decline in
revenue during 1996.

General and Administrative Expenses

General and administrative expenses increased 29% from $1.3 million in the third
quarter of 1995 to $1.7 million in the third quarter of 1996, and increased 31%
from $3.9 million during the first nine months of 1995 to $5.2 million during
the first nine months of 1996. This increase was primarily due to the build-up
of the Company's financial and administrative infrastructure during the second
half of 1995. General and administrative expenses as a percent of total revenues
increased from 13% in the third quarter of 1995 to 17% in that same period in
1996 and from 13% for the nine months ended September 30, 1995 to 19% for the
nine months ended September 30, 1996, due to increased fixed costs while
revenues declined during 1996.

Write-Down of Goodwill and Other Non-Recurring Charges

The company periodically reviews and evaluates the recoverability of goodwill
whenever events or changes in circumstances indicate that the carrying amount of
goodwill may not be recoverable.  The Company's assessment of impairment
considers the expected future operating income of the acquired entity.  During
the nine month period ended September 30, 1996 the Company recorded a one-time
charge, which was included in cost of revenues in the consolidated statements of
operations, in the amount of $1,926,000 for the write-down, to their net
realizable value, of less productive software assets, prepaid royalties and
inventory.  In addition, the Company recorded write-downs of goodwill,
facilities consolidations, and smaller amounts for severance and miscellaneous
items amounting to $1,889,000 which was included in operating expenses in the
consolidated statements of operations.

Charge for Acquired Research and Development

In conjunction with the acquisitions of Status/IQ Ltd. in March 1996 and
Ntergaid, Inc. in July 1996, the Company acquired certain technologies under
development that the Company hopes will prove valuable to the future growth of
the Company.  Such technology, valued at approximately $1.2 million for
Status/IQ  and $668,000 for Ntergaid, was charged to operations during the first
and third quarters of 1996, respectively, as acquired research and development.

Settlement of Litigation

Pursuant to the settlement with the plaintiffs of a securities class-action
lawsuit pending against the Company and certain of its current and former
directors and officers since November 1994, the Company will distribute
approximately $1.7 million in cash and 250,000 shares of its common stock in
exchange for a full release of all claims against the Company and its current
and former directors and officers. The Company's insurance carrier will
contribute $1.0 million in cash towards the settlement and associated legal
fees. The Company reported an expense of $4,073,000 in the consolidated
statements of operations for the second quarter of 1996 related to the then
proposed settlement. The final cost of the settlement will be based on the
closing price of the Company's common stock on November 25, 1996.
<PAGE>
 
Provision for Income Taxes

The Company recorded a tax benefit of $864,000 for the third quarter of 1996 as
compared to a $336,000 tax provision for the same period a year ago.  For the
nine month period ended September 30, 1996, the Company recorded a tax benefit
of $3,867,000.  The effective tax rate was 24% for the third quarter of 1996,
and 20% for the nine month period ended September 30, 1996.  The Company did not
record a tax benefit for the litigation settlement costs incurred in 1996.

Management continues to evaluate the realizability of its $4.5 million deferred
tax asset and believes that it is more likely than not, based on the weight of
available evidence, that these deferred tax assets will be realizable.  However,
there can be no assurances that a reduction of this deferred tax asset will not
be required in the near term pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".


LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------

As of September 30, 1996, the Company had cash, cash equivalents, and marketable
securities of approximately $5.2 million.  Operating activities used $4.9
million of the Company's cash during the first nine months of 1996, primarily
due to operating losses.  Days sales outstanding decreased from 79 days at June
30, 1996 to 75 days at September 30, 1996.

The Company's investing activities provided cash of $289,000 during the first
nine months of 1996.  The cash inflow from the net sales and maturities of
marketable securities amounting to $6.8 million was partially offset by
additions to property and equipment of $3.5 million, $1.6 million to fund the
acquisitions of Status/IQ Ltd., S Cube and Ntergaid and capitalization of $1.5
million in software costs.

The Company's financing activities provided cash of $146,000 during the first
nine months of 1996.  Cash of $382,000 from proceeds received from the issuance
of stock and exercise of stock options partially offset the paydown of $236,000
in debt.

The Company currently has higher than usual cash requirements due to the
settlement of litigation and certain product development investments. While the
Company believes that its cash, cash equivalents, and marketable securities,
together with anticipated cash from operations and available credit lines, would
be sufficient to meet its liquidity needs for the foreseeable future, the
Company is considering various options for raising additional capital, including
the possibility of the sale of equity securities. Working capital and other
capital requirements may change because of unanticipated changes in business
conditions or delays in market acceptance of new products, in addition to such
other considerations as expansion of operations or research and development
activities, competitive and technological developments, costs associated with
litigation, and possible future acquisitions of businesses and/or product
rights.
<PAGE>
 
                          DATAWARE TECHNOLOGIES, INC.
                           PART II. OTHER INFORMATION


Item 1.  Legal Proceedings
--------------------------

On October 24, 1996 the United States District Court for Massachusetts approved
the settlement of the securities class-action lawsuit filed in November 1994,
the terms of which were described in the Company's Report on Form 10-Q for the
quarter ending June 30, 1996.  See "Settlement of Litigation" on page 10 above.


Item 6. Exhibits and Reports Filed on Form 8-K.
-----------------------------------------------

(a)    Exhibits.  See exhibit list on page 14.

(b)    Reports on Form 8-K.  On July 18, 1996 the Company filed a report on Form
       8-K reporting the adoption of a Shareholder Rights Plan and a
       distribution to all shareholders of one share purchase right for each
       share of Common Stock held.



                                      
<PAGE>
 
                          DATAWARE TECHNOLOGIES, INC.
                                   SIGNATURE



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.



                                  DATAWARE TECHNOLOGIES, INC.
                                           (Registrant)


Date: November 14, 1996            By: Daniel M. Clarke
                                       -----------------------------------------
                                   Daniel M. Clarke
                                   Chief Financial Officer
                                   (Principal Financial and Principal Accounting
                                   Officer)



<PAGE>
 
                                 Exhibit Index


27.1  Financial Data Schedule.
99    Important Factors Regarding Future Results