<PAGE>   1
                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)

[xx]     Annual report pursuant to section 13 or 15(d) of the Securities
         Exchange Act of 1934

                  For the fiscal year ended DECEMBER 31, 1998.

[  ]     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 the 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 Offices)

Registrant's telephone number, including area code:  (408) 395-7000

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:   COMMON STOCK, 
                                                              $0.001 PAR VALUE
                                                              PREFERRED SHARE
                                                              PURCHASE RIGHTS

        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
                                 ---         ---

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [x]

        The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
1, 1999, as reported by NASDAQ, was approximately $185,717,000.

        The number of shares of the Registrant's Common Stock outstanding as of
March 1, 1999, was 12,178,138.
 .

DOCUMENTS INCORPORATED BY REFERENCE

        (1)     Definitive proxy statement filed with the Securities and
                Exchange Commission relating to the Company's 1999 Annual
                Meeting of Stockholders to be held May 11, 1999 (Part III of
                Form 10-K).

        (2)     Portions of the Annual Report to Stockholders for the fiscal
                year ended December 31, 1998 (Parts II and IV of Form 10-K).


<PAGE>   2

                                TABLE OF CONTENTS


                                     PART I


<TABLE>
<S>               <C>                                                                                 <C>
Item 1.            Business...................................................................         Page 2
                      Recent Business Model...................................................         Page 2
                      Products................................................................         Page 3
                      Distribution and Support................................................         Page 9
                      Competition.............................................................         Page 10
                      Product Development.....................................................         Page 11
                      Backlog.................................................................         Page 12
                      Manufacturing and Suppliers.............................................         Page 12
                      Product Protection......................................................         Page 12
                      Employees...............................................................         Page 13
                      Risk Factors............................................................         Page 14
Item 2.            Properties.................................................................         Page 17
Item 3.            Legal Proceedings..........................................................         Page 17
Item 4.            Submission of Matters to a Vote of Security Holders .......................         Page 17
</TABLE>
                                     PART II
<TABLE>
<S>               <C>                                                                                 <C>
Item 5.            Market for Registrant's Common Equity and Related
                   Stockholder Matters .......................................................         Page 17
Item 6.            Selected Financial Data....................................................         Page 17
Item 7.            Management's Discussion and Analysis of Financial Condition and Results
                   of Operations..............................................................         Page 17
Item 7a.           Quantitative and Qualitative Disclosures about Market Risks ...............         Page 17
Item 8.            Financial Statements and Supplementary Data................................         Page 19
</TABLE>
                                    PART III
<TABLE>
<S>               <C>                                                                                 <C>
Item 10.           Directors and Executive Officers of the Registrant ........................         Page 19
Item 11.           Executive Compensation.....................................................         Page 19
Item 12.           Security Ownership of Certain Beneficial Owners and Management ............         Page 19
Item 13.           Certain Relationships and Related Transactions.............................         Page 19
</TABLE>
                                     PART IV
<TABLE>
<S>               <C>                                                                                 <C>
Item 14.           Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..........         Page 20

Signatures ...................................................................................         Page 22
Report on Financial Statement Schedule and Consent of Independent Auditors ...................         Page 23
Financial Statement Schedule..................................................................         Page 24
</TABLE>





                                        1

<PAGE>   3

FORWARD LOOKING STATEMENTS

        IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED HEREIN.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "RISK FACTORS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE
COMPANY IN 1999. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISIONS TO THE FORWARD LOOKING STATEMENTS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.


                                     PART I


ITEM 1. BUSINESS.

        Caere(R) Corporation ("Caere" or the "Company") is a leading scanner
software company. It designs, develops, manufactures, and markets optical
character recognition (OCR) software and hardware for converting scanned and
faxed images into computer usable text, as well as desktop electronic forms and
information management products. For many applications, the Company's products
provide a low cost, accurate alternative to manual data entry, which is slow,
tedious, and error prone.

        The Company maintains its executive offices and principal facilities at
100 Cooper Court, Los Gatos, California 95032. Its telephone number is
408-395-7000. The Company maintains a World Wide Web site at
HTTP://WWW.CAERE.COM.

                              RECENT BUSINESS MODEL

        Fiscal 1998 was the fourth year under the Company's "bundle and upgrade"
strategy. The Company previously shifted to the bundle and upgrade model late in
1994 to take advantage of the changing dynamics in the OCR marketplace. Prior to
that, OCR was primarily a "niche" market characterized by relatively high prices
and low unit volumes. Today, driven by the increased power of personal
computers, new scanner products with significantly lower prices, continuing
improvements in OCR accuracy, and the education of the marketplace, scanning and
OCR solutions continue to reach the mainstream.

        Beginning in the fourth quarter of 1994, Caere began to "bundle"
versions of its OmniPage(R), OmniPage Limited Edition(TM), and WordScan(R) OCR
software products with scanner products from various manufacturers. The
Company's objective in bundling its software products with scanners was to
expand the overall market for OCR software by providing a larger number of
scanner purchasers with experience in the advantages of optical character
recognition. "Light" versions -- with limited capabilities -- are now bundled
with most scanners being sold. This aggressive seeding of the rapidly growing
base of scanner owners has greatly expanded the number of Caere product users.
The success of this business model, compared to Caere's former model of selling
its software primarily at higher prices with lower unit volumes, will depend
upon a decision by a significant proportion of customers who first receive OCR
software in a bundled form to upgrade to a newer or more fully featured version
of the Company's software. Such an upgrade is typically sold at a substantially
lower price than the price of a fully featured, non-upgrade product.


                                       2
<PAGE>   4

        In 1998, the "bundle and upgrade" model helped to generate the results
that have been expected since the strategy's inception in 1994 and laid the
foundation for future growth in revenues. The Company shipped nearly 7,500,000
bundled units in 1998, compared to approximately 2,800,000 bundled units in
1997, and 1,800,000 bundled units in 1996. Fueled by the growing customer base
of bundled product users, the business model helped produce a seven percent
increase in revenues from Windows-based OCR software in 1998, despite
approximately a 23 percent price reduction in the retail price of upgrade
products near the beginning of the year. Another indicator of the bundle and
upgrade model's success was the 11 percent increase in unit shipments of OCR
upgrade products in 1998 compared to 1997. Customers took advantage of key
improvements in Caere's OCR technology by upgrading to the Company's
fully-featured, flagship product -- OmniPage Pro(R) for Windows 95/98/NT version
9.0 -- which began shipping in October 1998. The Company believes that bundles
and upgrades will continue to become a larger portion of its total revenues and
unit sales in the future.

        There can be no assurance that Caere's continued transition to the
bundle and upgrade business model will be successful and provide sufficient
increases in unit volume in the future to offset reduced per-unit revenue and
gross margin. In addition, customers using the bundled products may defer or
forego the purchase of Caere's more fully featured versions of OmniPage if they
find that the bundled product satisfies their OCR needs.

                                    PRODUCTS

        The Company offers a product line designed to accommodate the diversity
of information and data entry requirements. Caere's products fall into two
general categories:

        (1)    SOFTWARE: Software products, which accounted for 87 percent of
               total revenues in 1998, for the information management market
               that offer a range of OCR, electronic forms, and document
               management products that provide personal computer users tools to
               manage, intelligently and efficiently, the documents, images,
               forms, and faxes that cross their desktops.

        (2)    HARDWARE: Hardware products, which accounted for 13 percent of
               total revenues in 1998, for the data capture market, which
               include bar code scanners and OCR readers for transaction
               processing applications such as high-volume data entry and check
               verification. Customers of these products include retail
               establishments, government agencies, banks, utility companies,
               and other organizations.

        Caere's products can be used with a range of computer systems, such as
IBM, IBM-compatible, and Apple Macintosh personal computers, as well as most
desktop operating systems, such as Windows, Windows 95/98, Windows NT, and
System 7. Each product is designed to accomplish the same overall goal: to
improve the speed, accuracy, and simplicity of desktop information management.

SIGNIFICANT SOFTWARE PRODUCTS

OmniPage Pro

        Caere's flagship product, OmniPage Professional for Windows 95/98, and
Windows NT, is a fully featured page recognition solution for power users.
OmniPage Pro(R) is designed for the text handling professional who needs more
than basic OCR capabilities. OmniPage Pro is an OCR product that allows the user
to recognize, edit, and save complex documents containing text and images in
their original, full-page formats. New capabilities introduced in OmniPage Pro
version 9.0 provide users the ability to recognize tables and spreadsheets.
Using Caere's True Page(R) technology, the user can maintain the layout of their
original documents. Users can also edit graphics (including color graphics)
contained on a recognized page simply by double-clicking on the image. OmniPage
Pro uses a combination of technologies, including neural networks, linguistic
analysis, character experts, and grayscale data to improve accuracy on degraded
documents.

        OmniPage Pro for Macintosh includes most of the same features found in
OmniPage Pro for Windows. The program also supports Apple Events, which allows
other software programs to access OmniPage Pro.




                                       3
<PAGE>   5


OmniPage Web(TM)

        The Company believes that OmniPage Web is the only product of its kind.
It is a fast, easy way to convert paper documents into intelligent, structured
Web sites. Using the award-winning OmniPage Pro OCR engine and new Logical
Structure Recognition(TM) (LSR(TM)) technology, OmniPage Web outlines a scanned
document and creates a complete, dynamic Web site with separate Web pages for
each page, chapter or section; hot-links between referenced sections (for
example, "See Chapter 3"); built-in navigation; and more.

OmniPage Wizard(TM)

        OmniPage Wizard is the industry's first wizard-based OCR application.
With its highly graphical interface, OmniPage Wizard walks users easily through
the OCR process. It asks users five simple questions about the documents they
want to scan and what they want to do with those scanned documents. The user
answers each question before OmniPage Wizard takes over to automatically convert
the scanned pages. OmniPage Wizard is perfect for scanner owners who want higher
levels of OCR accuracy and page format preservation capabilities than the
"limited edition" OCR bundled with their scanner. The product is designed to
appeal to less sophisticated computer users who desire extreme ease of use and
are willing to compromise the superior OCR accuracy and advanced OCR features
found in Caere's OmniPage Pro.

OmniPage Limited Edition

        OmniPage Limited Edition is a limited feature version of OmniPage that
allows a user to perform OCR on a scanned document and save the document to a
file. OmniPage Limited Edition is bundled with most scanners offered by the
Company's scanner partners. The product is designed to allow the scanner
purchaser to experience the advantages of optical character recognition in order
to encourage the purchaser to upgrade to a fully featured product.

Recognita Plus(R)

        Recognita Plus is a leading, full-featured, multilingual, and
font-independent OCR software product that integrates with most popular word
processing, desktop publishing, and spreadsheet applications available for
Windows. Recognita Plus includes Self Assertion Technology(TM), which provides
improved character recognition using a two-step reading process. Recognita Plus
can recognize text in more than 100 languages with the addition of its Language
Enhancement(TM) Package.

Developers Kit 2000(TM)

        Caere's Developers Kit 2000 is a new way to develop applications that
integrate multiple recognition technologies. Whether users require OCR, ICR,
OMR, or bar code, the Developers Kit 2000 offers the flexibility customers
demand, in a single set of developer tools. Developers Kit 2000 includes support
for Windows 95/98 and NT application development through the use of ActiveX
controls and full C libraries, which gives developers the ability to easily
create applications with a wide variety of recognition technologies using a
single kit.

PageKeeper(R) Pro(TM)

        PageKeeper Pro is document management software designed to help users
get their arms around the mounds of information stored on their computers.
PageKeeper Pro enables users to organize, use, and retrieve virtually all
computer documents, including scanned paper, electronic files, and Web pages.
PageKeeper Pro automates the time-consuming work of setting up and maintaining a
collection of documents, eliminating the up-front hassles typically associated
with document management software. In addition, PageKeeper Pro provides other
advantages over current products in the category, including more sophisticated
search capabilities and superior handling of electronic documents such as word
processing files, spreadsheets, and Web pages.





                                       4
<PAGE>   6


OmniForm(R)

        OmniForm converts paper forms to electronic forms with the click of a
button. Simply scan or fax documents into a computer and OmniForm creates an
electronic version using Caere's OCR technologies and color Logical Forms
Recognition(TM). OmniForm users also can design their own forms, complete with
fonts, graphics, and logos, using the custom toolset and Form Assistant(TM).
OmniForm Filler(TM) allows users to efficiently fill out forms by accepting
input, performing calculations, validating entries and creating databases which
can be searched, sorted, imported, and exported to popular database
applications.

OmniForm Internet Publisher(TM)

        The Company believes that OmniForm Internet Publisher is the first
paper-to-electronic forms solution for Intranets and the Internet. The product
converts existing paper forms to electronic versions, retaining and recognizing
the various form elements on the form, bridging the gap between the paper world
and the electronic world. The product allows users to save the forms to a
variety of Web-ready formats incorporating such form intelligence as field
validation and calculations, so that companies can collect and distribute
data-associated business transactions such as invoices, purchase orders, expense
reports, or questionnaires.

License of Technology

        In addition to the application products and developers kit described
above, Caere continues to license its OCR technology to a broad range of
computer equipment manufacturers, systems integrators, and developers for
inclusion as components in more complex end user products, including document
management and retrieval systems, forms processing systems, resume screening
systems, and standalone systems.








                                       5
<PAGE>   7




        The chart below shows system requirements and suggested retail price for
the Company's significant software products.


                           SELECTED SOFTWARE PRODUCTS


<TABLE>
<CAPTION>
      PRODUCT                            SYSTEM REQUIREMENTS                    ESTIMATED STREET
                                                                                      PRICE*
<S>                            <C>                                              <C> 
OmniPage Pro - Windows          80486 or above based personal computer, 16             $  499
                                MB RAM, 45 MB disk space, Microsoft
                                Windows 95/98, or NT 4.0 or later

OmniPage Pro - Windows          80486 or above based personal computer, 16             $   99
   Retail Upgrade               MB RAM, 45 MB disk space, Microsoft Windows
                                95/98, or NT 4.0 or later

OmniPage Pro - Mac              Power Macintosh or compatible, 10 MB RAM,              $  499
                                20 MB disk space, System 7.5 or above

OmniPage Pro - Mac              Power Macintosh or compatible, 10 MB RAM,              $   99
   Retail Upgrade               20 MB disk space, System 7.5 or above

OmniPage Web                    Pentium-based personal computer or better,             $  499
                                16 MB RAM, 45 MB disk space, Microsoft
                                Windows 95/98, or NT 4.0 or later

OmniPage Wizard                 80486 or above based personal computer, 16             $   49
                                MB RAM, 40 MB disk space, Microsoft Windows
                                95/98

Recognita Plus - Windows        80386 or above based personal computer, 4              $  695
                                MB RAM, 10 MB disk space, Microsoft Windows
                                3.1 or later

Recognita Plus - Windows        80386 or above based personal computer, 4              $  199
   Retail Upgrade               MB RAM, 10 MB disk space, Microsoft Windows
                                3.1 or later

Developers Kit 2000             Pentium-based personal computer or better,      $2,495-$5,495
                                32 MB RAM, 60 MB disk space, Microsoft
                                Windows 95/98, or NT 4.0 or later

PageKeeper Pro - Windows        Pentium-based personal computer or better,             $   49
                                16 MB RAM, 150 MB disk space, Microsoft
                                Windows 95/98, or NT 4.0 or later

OmniForm - Windows              80486 or above based personal computer, 8              $  149
                                MB RAM, 15 MB disk space, Microsoft Windows
                                95/98 or NT 4.0 or later

OmniForm - Mac                  Power Macintosh or Macintosh computer with             $  149
                                68020 processor or above, 12 MB RAM, 10 MB disk
                                space, System 7.1 or above

OmniForm Internet Publisher     80486 or above based personal computer, 12             $  895
                                MB RAM, 10 MB disk space, Microsoft Windows
                                95/98 or NT 4.0 or later
</TABLE>


* Estimated Street Prices as of March 1, 1999.

Note: All Caere products support a wide range of output file formats and
scanners. Output file formats include, but are not limited to: WordPerfect,
Microsoft Word, Lotus 1-2-3, and Microsoft Excel. Supported scanners include,
but are not limited to: Agfa, Apple, Canon, Epson, Fujitsu, Hewlett Packard,
Microtek, Mustek, Plustek, Sony, and UMAX.




                                       6
<PAGE>   8


PAGE RECOGNITION PROCESS

        The process by which Caere's recognition products recognize text
involves converting the electronic output of a scanner into computer usable
files through a series of complex software algorithms. The electronic image
produced by the scanner is comprised of white or black picture elements
(pixels), usually 90,000 pixels per square inch, each rendered to the computer
as a 0 or a 1, representing either a white or a black pixel. Before the
application of recognition products such as OmniPage, a scanner's electronic
output could be displayed and manipulated only as an image on a computer's
monitor; the computer did not recognize that image as a data file usable in an
application program such as a word processor or spreadsheet.

        The graphic below illustrates the process by which scanned text or
numeric data is converted into computer usable form by the Company's OmniPage,
WordScan, and Recognita OCR products.



                           [THE OCR PROCESS PICTURE]


        Caere's products recognize an image in two steps. First, they analyze
the image of the page to determine which parts are text and numeric data and
determine the structure of the page layout. Tables, columns, and paragraphs are
identified and located. They then examine and identify the characters and
produce a file of the character data contained in words, including page
formatting information such as tables, columns, paragraphs, spacing, bold,
italics, and underlines that are necessary to allow manipulation of the data as
a text file.

        OmniPage Pro employs a combination of technologies, referred to as
Caere's 3D OCR(TM) and AnyFont technologies, to achieve a very high degree of
accuracy on many different types of documents. The Company believes that
OmniPage Pro is the first OCR product to utilize grayscale information to
analyze characters the way a human eye does. Character experts view certain
character attributes like a closed loop or crossed downward stroke to identify
the unique set of features inherent in each character. Neural networks have been
developed on powerful mainframe computers to "learn" what makes up one character
versus another, a methodology known as "feature recognition." Caere's page
recognition products analyze each character image according to proprietary
algorithms. Feature recognition enables the OmniPage products to provide the
AnyFont capability that recognizes text in almost any type style and size.





                                       7
<PAGE>   9


HARDWARE PRODUCTS

OCR Systems

        Caere has produced high-quality handheld and slot-reader OCR systems
since 1977. This line of data capture OCR systems reads single lines of
characters. These desktop systems -- consisting of an input device, such as a
wand, slot-reader or motorized slot-reader, a controller, and an interface cable
-- are designed for transaction processing applications that do not require
variable font recognition technology, but demand extremely high accuracy. Common
applications involve remittance processing, which is entering customer account
numbers or data from billing documents into a computer. Caere's systems
accelerate transaction processing, while reducing operator fatigue and key entry
errors.

        Caere's 5000 Series OCR Line Reader, which works with a wide variety of
computers, integrates OCR, bar code, and magnetic stripe reading capabilities in
a single unit. This provides cost-effective and versatile functionality for a
wide range of applications in remittance processing, banking, and point-of-sale
environments. The 5000 Series is also widely used by government organizations,
post offices, and the public utility industry.

        In 1998, Caere developed a new OCR technology for use in handheld
digital cameras. Imager OCR(TM) combines Caere's neural network OCR technology
and our highly developED programmable data entry automation validation routines
with handheld digital cameras from strategic partners in the bar code industry,
including Welch Allyn. With Caere Imager OCR, a new class of two-dimensional
data entry automation scanners read linear bar codes, 2D barcodes, and OCR. The
Company believes that this is the first commercial application of non-contact
handheld embedded OCR and also creates the first cost-effective alternative to
bar code. Development of this new technology is continuing with other strategic
partners and application form factors.

        A significant portion of Caere's OCR data capture business is the result
of original equipment manufacturer ("OEM") sales; that is, sales to firms that
purchase Caere's OCR data capture technology and then integrate it into their
own products. In 1998, we completed and began shipments of the Model 5911 OEM
OCR board and read head. This new product has more font choices than its
predecessor and utilizes visible light sensing to scan ink jet imprinted
remittance documents.


Bar Code Systems

        Bar code readers recognize documents printed with series of vertical
bars and spaces that represent data. They are used in high-volume transaction
processing applications, such as point-of-sale operations, where human
readability of data is not necessary. Bar code systems tolerate lower-quality
media than limited-font OCR systems, and are typically less expensive than OCR
systems. Caere's bar code product line, introduced in 1983, includes both
stand-alone decoders that can be attached externally to personal computers, and
internal board-level decoders used in personal computers for cost and space
savings.

        Caere bar code products cater to the higher-end of the market with
feature-rich decoders and one of the industry's first five-year warranties.
Caere's decoders are used in manufacturing, retail point-of-sale, inventory,
asset tracking, and myriad applications where value added resellers need more
functionality from bar code readers than just decoding.

        Caere's Easy-Scanner(TM) Series bar code systems are decoders, or
keyboard wedges, thAT can accommodate several input devices. With three input
ports, these decoder/wedges can accept input from a bar code wand, CCD, laser,
badge reader, or magnetic stripe reader and/or serial data from portable data
terminals and scales. Any data received can be filtered for acceptance, then
transmitted, and re-formatted to fit the host application with over 90 built-in
data editing commands. The Easy-Scanner also features multiple output ports to
accommodate a variety of interfaces, such as RS-232 keyboard wedge protocols
(for simple interfacing to over 450 different types of computers and terminals).

        The Company partnered with PSC, Inc., one of the industry's leading bar
code laser manufacturers to build Caere's bar code decoding and interfacing
technologies into the housing of PSC's small platform laser scanner for Caere's
distribution. This partnership gave Caere a low cost laser scanning solution
that keeps pace with the price, performance, and size requirements of the
industry. Shipments of the Caere Model 1760 Integrated Laser Scanner began in
1998.






                                       8
<PAGE>   10


        The chart below shows typical applications, features, available
interfaces, and input devices for selected Caere OCR and bar code transaction
processing products.


<TABLE>
<CAPTION>
PRODUCTS            TYPICAL APPLICATIONS        FEATURES                        AVAILABLE INTERFACES       INPUT DEVICES
--------            --------------------        --------                        --------------------       -------------
<S>                 <C>                         <C>                             <C>                        <C>
OCR                                                                                                    
5000 Series         Point-of-sale               Reads the following             Apple Macintosh            Handheld wand
                                                fonts:                                                    
  OCR/Bar           Remittance processing         OCR-A Full                    AT&T                       Fixed slot
  Code Combo,       Document control                Alphanumeric                Burroughs                  Fixed mount
1500 Series         Manufacturing                 OCR-A Eurobanking             DEC                        CCD scanner
                    applications                                                                          
  Document          Hospitals                     OCR-B ECMA11                  IBM                        Magnetic stripe
  Processor,        Banking                       OCR-B Eurobanking             IBM PC and                 Bar code pen
Imager OCRsl        Government                    E13B (MICR)                     compatibles              Badge reader
                    Office file tracking          PostNET                       ITT                        Non-contact
                                                   Office Font Numerics                                       via industrial
                                                                                                                 handheld
                                                                                                           digital cameras       
                    Postal                      Most one-dimensional bar        Etc. (over 450)
                                                  code symbologies
                                                Dual-track magnetic stripe
                                                Fully user programmable

BAR CODE

1000 Series,        Manufacturing               Reads and                       Apple Macintosh            Wand
                    applications                autodiscriminates                                         
1700 Series,        Inventory control             the following                 AT&T                       Slot
                                                   symbologies:                                           
2000 Series         Work-in-process               Code 39, Code 128,            DEC                        Laser scanner
                    tracking                                                                              
                    Shop floor control            Codabar, Interleaved 2        IBM                        CCD scanner
                                                of 5,                                                     
                    Warehousing                   UPC, EAN and MSI              IBM PC and                 Magnetic stripe
                    Point-of-sale                 Plessey                         compatibles              Badge reader
                    Hospital health             Fully user programmable         ITT                       
                    industry                                                                              
                    Video cassette rental       Dual-track                      Memorex                   
                    Government                  Magnetic stripe                 NCR                       
                    Document tracking                                           UNISYS                    
                                                                                Wyse                      
                                                                                Etc. (over 450)
</TABLE>


                            DISTRIBUTION AND SUPPORT

        Domestically, the Company markets its software products through
distributors, including: Ingram Micro, Merisel, and Tech Data; computer
superstores such as Best Buy, CompUSA, and Fry's Electronics; mail order houses
including PC Connection, MicroWarehouse, and Computer Discount Warehouse; and
office superstores, such as Staples and Office Depot. Software products are also
sold to end-users directly and through the Internet and marketed through scanner
manufacturers who "bundle" versions of the Company's products with their scanner
products. High-speed and integrator products are primarily sold through Law
Cypress Distributing Company, which works with the Company to serve value-added
resellers and systems integrators of imaging products.

        Sales of software products to Ingram Micro, Inc. represented
approximately 25 percent, 23 percent, and 28 percent of the Company's net
revenues during 1998, 1997, and 1996, respectively. Sales of software products
to Hewlett-Packard Company represented approximately 12 percent of the Company's
net revenues during 1998. There is considerable competition for bundling
arrangements with hardware suppliers such as Hewlett-Packard. There can be no
assurance that the nature of such relationships will continue in the future. In
addition, should these customers have a significant change in their quarterly
buying pattern or their financial condition, the Company could experience a
material adverse impact on its business and financial results. In addition,
there are increasing numbers of companies competing for access to distribution
channels. Distributors and retailers often carry




                                       9
<PAGE>   11


competing products. Retailers of Caere's products typically have a limited
amount of shelf space and promotional resources for which there is intense
competition. There can be no assurance that distributors and retailers will
continue to provide the Company's products with adequate levels of shelf space
and promotional support. Failure to do so would have a material adverse effect
on the Company's results of operations.

        The Company markets its transaction processing OCR and bar code products
primarily through independent distributors, VARs, and hardware OEMs. The
Company's agreements with OEMs typically grant an OEM the right to distribute
the Company's products with the OEMs' microcomputers and other data collection
equipment. VARs purchase the Company's products and incorporate them into
systems integrated with the products of other manufacturers.

        Internationally, the Company's products are sold primarily through
distributors and to end users directly. At December 31, 1998, the Company had
distributors servicing Western and Eastern Europe, Canada, South America,
Australia, New Zealand, Mexico, Africa, the Pacific Rim, and Japan. The
Company's international revenues are subject to certain risks, such as export
controls, import restrictions, and other governmental regulations. The Company
is not currently affected adversely by such controls or regulations and is not
aware of pending changes in export regulations that would adversely affect its
international business or its ability to collect foreign receivables.
International revenues in 1998, 1997, and 1996 were approximately $22,369,000,
$18,659,000, and $16,367,000, respectively. In most cases, the Company bills its
international customers in U.S. dollars; therefore, such revenues are not
subject to foreign currency fluctuations.

        The Company's agreements with its distributors generally provide for a
limited right of return, with the distributor receiving full credit of the
product's purchase price, less any discounts, against a purchase order of equal
or greater value. The Company monitors its returns and records provisions for
estimated returns as shipments are made. During 1998, 1997, and 1996, returns
represented 2.4 percent, 2.6 percent, and 3.2 percent of revenues, respectively.
Although Caere believes that it provides adequate allowances for returns, there
can be no assurance that actual returns will not exceed the Company's
allowances. Any product returns in excess of recorded allowances could result in
a material adverse effect on operating results of the Company.

        The Company has a domestic sales and support staff of approximately 40
employees located throughout the United States. During 1992, the Company
established a European sales office - Caere GmbH - in Munich, Germany. In
December 1996, the Company acquired Recognita Rt., a Hungarian provider of OCR
and forms software solutions. In 1998, the Company established additional
European sales offices - Caere BV and Caere SARL - in Amsterdam, The
Netherlands, and Paris, France, respectively. Domestically, software product
customers who register with the Company currently receive limited hotline
technical support and product information at no cost. Additional technical
support services are available on a "fee for support" basis thereafter. Outside
of the U.S., information management customers currently receive technical
support from a variety of Caere partners on a non-fee basis. The Company
warrants to end users that software disks are free from media defects, and that
the software will function substantially in accordance with the documentation,
for three months. The Company outsources a portion of its technical support and
customer service volume to third party providers of such support. This allows
the Company to maintain a consistent level of support from internal personnel
while increasing or decreasing the level of outsourced support during periods of
fluctuating customer demand.

        OCR and bar code hardware customers receive free telephone support,
including assistance with installation, programming, and trouble shooting. OCR
hardware products are warranted for one year, while bar code hardware products
are warranted for between one and five years. In addition, the Company provides
hardware customers with spare parts and repair services. OCR and bar code
hardware customers also may purchase annual service contracts under which the
Company performs service work as needed for the duration of the service
contract.

                                   COMPETITION

        The information management market is highly competitive and subject to
rapid change along with constant pressure to reduce prices. The Company believes
that the principal competitive factors in the software products market include
accuracy, ease of understanding and use, product reliability, tolerance for poor
media, product



                                       10
<PAGE>   12


features and functions, price/performance characteristics, brand recognition,
and quality of product support. Caere's competition within the microcomputer
software industry ranges from large corporations to small independent software
vendors. Caere also expects to encounter continued competition both from
established companies and from new companies that are now developing, or may
develop, competing products. Competition in the software products market can be
grouped into the following categories:

        OCR -- The OmniPage, WordScan, and Recognita families of OCR products
contend with competition in two markets. First, several companies offer packaged
OCR application programs through the retail distribution channel. These include
ScanSoft, Inc. ("ScanSoft") and several small independent software vendors. The
Company faces significant price competition in the retail channel. The second
competitive market for the OmniPage family of OCR products is the OEM and
reseller market in which companies license OCR technology to incorporate into
different application software products or "bundle" the technology with related
hardware products such as scanners or other hardware. Competitors include
ScanSoft and several small independent software vendors. The Company experiences
significant price competition in the OEM market and expects this to continue. In
addition, the "bundled" OCR products themselves present competition to the
Company's fully featured shrink-wrap product.

        Document Management -- PageKeeper has several direct competitors
offering competing products in the growing desktop document management market.
The competing products include, but are not limited to, PaperPort Deluxe and
Pagis by ScanSoft, and Paper Master by eFax.com Inc. (formerly JetFax, Inc.).
With decreasing prices driving affordable scanning solutions into the
mainstream, Caere expects to face increasing competition in the product category
from a variety of software developers in the future.

        Electronic Forms -- OmniForm competes against various products in the
electronic forms marketplace. In the forms creation segment, where OmniForm's
technology takes an existing paper form and converts it into an electronic
version, OmniForm competes with products like FormTool Scan & OCR by IMSI. In
the forms design and print segment of the electronic forms market, OmniForm
competes with products such as Form Tool Gold by IMSI and FormFlow by JetForm
Corporation ("JetForm"). In the form filling and submit segment of the
electronic forms market, OmniForm competes with products including FormFlow by
JetForm. In the Internet/intranet publish and submit segment of the electronic
forms market, OmniForm competes with FormFlow by JetForm and Acrobat by Adobe
Systems, Inc.

        The Company believes that the principal competitive factors in the
hardware products market include accuracy, tolerance for poor media, product
features and functions, and reliability. Price is also an important factor in
the bar code market. The major competition in the OCR segment of the Company's
hardware business is Siemens CGK. In the bar code segment of the hardware
business there are numerous competitors, including Symbol Technologies.

        Many of the Company's competitors have substantially greater financial,
marketing, recruiting and training resources than the Company. There can be no
assurance that the Company will be successful in competing in the information
management market.

                               PRODUCT DEVELOPMENT

        The development and enhancement of the Company's OCR, electronic forms,
and desktop document management products have recently absorbed and are expected
to continue to consume the greatest part of the Company's development effort.
The Company believes that it must continue to upgrade and enhance its existing
products to ensure that its products remain competitive. Furthermore, given the
Company's reliance on it's "bundle and upgrade" strategy, more frequent product
updates must be brought to market to continue to provide customers with
compelling reasons to upgrade to improved products. The Company has established
a goal of releasing upgrades of its OCR, electronic forms, and document
management products on a twelve-month cycle.

        To accomplish this objective, the Company has recently increased its
investment in various software development projects significantly. During 1998,
1997, and 1996, research and product development expenses were approximately
$12,442,000, $9,370,000, and $7,069,000, respectively. In addition to internal
product



                                       11
<PAGE>   13


development, the Company incorporates software produced by other companies into
its products. All such incorporation or use is pursuant to licensing agreements.
See also "Product Protection." There can be no assurance that the research and
development expenses incurred will not exceed development budgets or that new
products will achieve market acceptance and generate sales sufficient to offset
development costs.

        From time to time, the Company has experienced delays in product
development and "debugging" efforts, and could experience such delays in the
future. Significant delays in developing, completing, or shipping new or
enhanced products could adversely affect the Company's financial results.
Furthermore, as the Company's products become more complex, development cycles
become longer and more expensive. There can be no assurance that the Company
will be able to respond effectively to technological changes or new product
announcements by others, or that the Company's product development efforts will
be successful.

                                     BACKLOG

        The majority of the Company's net revenues in a particular quarter has
typically resulted from orders booked in that quarter. The Company considers
backlog to be orders received and due to be filled within six months. Orders
included in backlog typically may be canceled or rescheduled by customers
without significant penalty. The Company's backlog at December 31, 1998, was
approximately $813,000, as compared to backlog at December 31, 1997, of
approximately $930,000. Backlog primarily represents orders for the Company's
hardware products, which represented approximately 13 percent of net revenues
during 1998. There is typically little or no backlog for the Company's software
products, as these products ship as soon as orders are received. Backlog as of
any particular date should not be relied upon as indicative of the Company's net
revenues for any future period.

                           MANUFACTURING AND SUPPLIERS

        The Company outsources a majority of the duplication and production of
its software products to third parties. These vendors procure all required
components, including compact disks, floppy disks, product manuals, boxes, and
other product literature, and manufacture completed software products for
delivery to the Company. Such manufacturing services are available from multiple
vendors. However, an interruption or failure by an existing manufacturing
supplier could result in a delay in shipment of Caere products.

        The Company's manufacturing operations for its OCR and bar code hardware
products consist of final assembly, test, burn in, and quality control for its
systems, subassemblies, and components. Components for products are procured by
the Company and then supplied to third party contractors. Many of these
components are tested and burned in prior to delivery to contractors to reduce
failure rates. Major subassemblies such as printed circuit boards are contracted
to third parties for assembly and initial testing.

        Most of the components used in the manufacture of the Company's products
are available from multiple sources of supply. Certain components used in the
manufacture of the Company's OCR products are currently available only from a
single source. Although the Company generally maintains a several-month
inventory level of these components, failure of a single-source supplier to
deliver required quantities of such materials could materially and adversely
affect the Company's operating results. The Company believes that, if necessary,
it could develop alternative sources of supply for these components and parts,
or re-engineer the products. However, any delays in developing such alternative
sources of supply or in the re-engineering of the products could have a material
adverse effect on the Company's results of operations.

                               PRODUCT PROTECTION

        The Company relies upon proprietary technology, trade secrets, know-how,
continuing technological innovations and licensing opportunities to maintain its
competitive position. The Company attempts to protect its technology and trade
secrets with patents, copyrights, trade secret laws, technical measures and
non-disclosure agreements. The Company's policy is to file patent applications
to protect technology, inventions and improvements that are important to the
development of its business. The Company has been issued a series of patents
which directly relate to its products. These patents expire on various dates
between 2005 and 2016. Assurance cannot be



                                       12
<PAGE>   14

given that any patents issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted by the patents will provide
competitive advantages to the Company.

        In order to protect its ownership rights in its software products, the
Company licenses such products to OEMs and resellers on a non-exclusive basis
with contractual restrictions on reproduction, distribution and transferability.
In addition, the Company generally licenses it software in object code form
only. The Company licenses its software products to end users by use of a
"shrink-wrap" customer license that restricts the end user to personal use of
the product. Despite these contractual restrictions, it may be possible for
competitors or users to illegally copy the software or obtain information which
the Company regards as proprietary.

        The Company also relies on trade secrets and proprietary know-how. The
Company has been, and will continue to be, required to disclose its trade
secrets and proprietary know-how to employees and consultants. Although the
Company seeks to protect its trade secrets and proprietary know-how by entering
into confidentiality agreements with such persons, there can be no assurance
that these agreements will not be breached, that the Company would have an
adequate remedy for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.

        Because of technological developments in the industry in which the
Company markets its products, it is possible that certain of the Company's
products may infringe third party proprietary rights. From time to time the
Company has received, and in the future may receive, notices of claims of
infringement. In response to these claims, the Company may have to obtain
licenses for an allegedly infringing product or stop selling such product and be
liable for damages. However, there can be no assurances that any required
licenses or rights could be obtained on commercially reasonable terms.

        In addition, Caere has developed products in the past that incorporate
technology based on licenses received from third parties. The Company's ability
to continue to develop and commercialize its products will be affected by its
ability to renew existing technology licenses and to obtain technology licenses
from third parties in the future. There can be no assurance that the Company
will be able to renew its current licenses or obtain any necessary licenses in
the future. The failure to renew existing licenses or to obtain any licenses
that may be required in the future could have a material adverse effect on the
Company.

        Policing unauthorized use of technology is difficult, especially in the
software industry. Software piracy can be expected to be a persistent problem
for the software industry for the foreseeable future. Such piracy can be
particularly egregious in international markets in which the Company distributes
its products. The Company believes that, due to the rapid pace of technological
change in the industry, factors such as knowledge, ability, frequent product
enhancements, timeliness and quality of product support and the experience of
the Company's employees are more significant as a means to protect the Company's
competitiveness than patent, copyright and trade secret protection.

                                    EMPLOYEES

        As of December 31, 1998, Caere employed 295 people. None of the
Company's employees is represented by a labor union. The Company has experienced
no work stoppages and believes that its employee relations are good. The Company
has utilized the services of consultants, third-party developers, and other
vendors extensively in its sales, development, and manufacturing activities.

        Competition in the recruiting of personnel in the computer and data
recognition industry is intense. The Company believes that its future success
will depend in part on its continued ability to hire and retain qualified
management, marketing, technical employees, and independent contractors. There
can be no assurance that the Company will be able to attract and retain enough
qualified employees. Caere does not carry any key person life insurance with
respect to any of its personnel.





                                       13
<PAGE>   15

                                  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 the 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 PC 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 players 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, or
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 may
adversely impact the Company's future software revenue opportunity.

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
the 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.





                                       14
<PAGE>   16

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

PRICES

        Future product prices may decrease from historical levels, depending on
competitive market and cost factors. 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 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 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 future operating results and financial condition.
Caere currently offers its software products over the Internet.

        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 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 future revenues and operating
results.

        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 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. While such channel
fill, order delays or cancellations can cause fluctuations in net revenues from
one quarter to the next, 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. A material adverse impact
on revenue and operating results, however, can occur.

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.




                                       15
<PAGE>   17


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 the Company's business, revenues, operating results,
or 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.

FUTURE GROWTH RATE

        The revenue growth rate in 1999 and future periods may not approach the
level attained in prior years. As discussed previously, operating expenses are
expected to increase in 1999. Because of the fixed nature of a significant
portion of such expenses, coupled with the possibility of slower revenue growth,
operating margins in 1999 may decrease from those in 1998.

LACK OF PRODUCT REVENUE DIVERSIFICATION

        Caere derived approximately 69 percent of sales in 1998, and 72 percent
of sales in each of 1997 and 1996, from the OmniPage and WordScan line 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 results of
operations.

MATURE MARKETS FOR CERTAIN HARDWARE PRODUCTS

        In 1998, 1997, and 1996, Caere derived approximately 13 percent, 13
percent, and 14 percent, respectively, of its net revenues from sales of its
transaction processing OCR and bar code products. The market for both of these
sets of products is relatively mature and may not be subject to growth or
expansion by the Company in the future. There can be no assurance that Caere's
hardware-based transaction processing products will continue to be a significant
source of net revenues for the Company.

POSSIBLE VOLATILITY OF CAERE STOCK PRICE

        The prices for Caere Common Stock have fluctuated widely in the past.
The management of 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 



                                       16
<PAGE>   18


could be to 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.

ITEM 2. PROPERTIES.

        The Company's principal administrative, marketing, manufacturing, and
product development facilities consist of approximately 56,000 square feet in
two buildings in Los Gatos, California. The Company occupies this space under a
lease agreement that expires in 2004. In addition, the Company leases office and
storage space in five locations in the United States for use by its regional
development and field sales and support staff. Caere GmbH also leases office
space in Munich, Germany, for its operations, while Recognita leases office
space in Budapest, Hungary. As of December 31, 1998, neither Caere BV nor Caere
SARL leased office space in The Netherlands and France, respectively. It is
expected that office leases will be executed in 1999 for these European offices.
The Company believes that its existing facilities are adequate for its needs for
at least the next twelve months.

ITEM 3. LEGAL PROCEEDINGS.

        The Company is involved in certain claims arising in the normal course
of business. The extent to which these matters will be pursued by the claimants
or the eventual outcome is not presently determinable. However, Company
management, after review and consultation with the Company's counsel, believes
that the ultimate resolution of these matters will not have a material adverse
effect on its consolidated financial position or results of operations.

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

None.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        Incorporated by reference to the section of the Company's 1998 Annual
Report to Stockholders entitled "Quarterly Results of Operations," page 30.

ITEM 6. SELECTED FINANCIAL DATA.

        Incorporated by reference to the section of the Company's 1998 Annual
Report to Stockholders entitled "1998 Financial Highlights," page 3.

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

        Incorporated by reference to the section of the Company's 1998 Annual
Report to Stockholders entitled "Management's Discussion and Analysis," pages 14
through 18.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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



                                       17
<PAGE>   19


Eastern Europe. In addition, the Company hedges firmly committed transactions
using primarily forward contracts with maturities of less than three months. As
of December 31, 1998, 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 December 31, 1998, the Company had an investment portfolio of
fixed income securities, including those classified as cash equivalents of $42.2
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 December 31, 1998, the weighted-average, pre-tax
interest rate on the Company's fixed income securities was approximately 5.73
percent.

        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 strictly
monitoring clear policies and guidelines for its fixed income portfolios. The
guidelines limit the maximum duration of portfolios, establish credit quality
standards, limits on exposure to one issue, 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.





                                       18
<PAGE>   20


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        Incorporated by reference to the sections of the Company's 1998 Annual
Report to Stockholders, pages 19 through 30.

        Supplementary data for the year ended December 31, 1997, is as follows:

QUARTERLY RESULTS OF OPERATIONS
(Unaudited)


(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                    
                                                                      1997, Quarter Ended                      Year
                                                            ----------------------------------------          Ended
                                             Mar 31           Jun 30          Sep 30          Dec 31          Dec 31
                                           --------         --------        --------        --------        --------
<S>                                        <C>              <C>             <C>             <C>             <C>     
Net revenues                               $ 12,572         $ 12,751        $ 14,069        $ 15,626        $ 55,018
Gross margin                                  8,856            9,398          10,621          11,823          40,698
In-process research and development           2,935               --              --              --           2,935
Earnings (loss) before income taxes          (1,831)           1,124           2,116           2,608           4,017
Net earnings (loss)                          (1,941)           1,012           1,852           2,217           3,140
Basic earnings (loss) per share            $   (.15)        $    .08        $    .14        $    .17        $    .24
Diluted earnings (loss) per share          $   (.15)        $    .08        $    .14        $    .17        $    .24

Weighted average shares used in
per share calculations:
   Basic                                     12,682           13,280          13,310          13,212          13,123
   Diluted                                   12,682           13,320          13,402          13,387          13,265

Common stock price per share:
   High                                    $  12.88         $   8.75        $   9.38        $   9.19        $  12.88
   Low                                         7.13             6.00            7.02            8.00            6.00
</TABLE>



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Incorporated by reference to the sections of the Company's definitive
proxy statement for the 1999 Annual Meeting of Stockholders entitled "Election
of Directors" and "Management."

ITEM 11. EXECUTIVE COMPENSATION.

        Incorporated by reference to the sections of the Company's definitive
proxy statement for the 1999 Annual Meeting of Stockholders entitled "Executive
Compensation" and "Compensation of Directors."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        Incorporated by reference to the section of the Company's definitive
proxy statement for the 1999 Annual Meeting of Stockholders entitled "Security
Ownership of Management and Principal Stockholders."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        Incorporated by reference to the section of the Company's definitive
proxy statement for the 1999 Annual Meeting of Stockholders entitled "Executive
Compensation," "Compensation of Directors," and "Stock Option Grants and
Exercises."





                                       19
<PAGE>   21

                                     PART IV



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)      1.    INDEX TO FINANCIAL STATEMENTS

               The following documents are incorporated in Part II of this
        Annual Report by reference to the 1998 Annual Report to Stockholders:


<TABLE>
<CAPTION>
                                                                                       ANNUAL REPORT TO
                                                                                         STOCKHOLDERS
                                                                                       ----------------
<S>                                                                                   <C>
         Consolidated Balance Sheets as of December 31, 1998 and 1997                       Page 19
         Consolidated Statements of Earnings for each of the years in the
            three-year period ended December 31, 1998                                       Page 20
         Consolidated Statements of Stockholders' Equity for each of the years in the
            three-year period ended December 31, 1998                                       Page 21
         Consolidated Statements of Cash Flows for each of the years in the
            three-year period ended December 31, 1998                                       Page 22
         Notes to Consolidated Financial Statements                                       Pages 23-30
         Independent Auditors' Report                                                       Page 30
</TABLE>

        With the exception of the information expressly incorporated by
        reference into Items 5, 6, 7, and 8 of this Annual Report on Form 10-K,
        the 1998 Annual Report to Stockholders, attached as Exhibit 13.1, is not
        deemed filed as part of this report.


        2. FINANCIAL STATEMENT SCHEDULES

               The following financial statement schedule is filed as a part of
        this Annual Report on Form 10-K and should be read in conjunction with
        the Financial Statements:

        Schedule II - Valuation and Qualifying Accounts

               All other schedules are omitted because they are not required, or
        not applicable, or because the required information is included in the
        1998 Annual Report to Stockholders, filed as Exhibit 13.1.





                                       20
<PAGE>   22

3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
 NUMBER             DESCRIPTION
-------             -----------
<S>           <C> 
    2.1       Agreement and Plan of Reorganization dated as of October 14, 1994,
              between the Company and Calera Recognition Systems, Inc.(5)

    3.1       Certificate of Incorporation of the Company (exhibit 3.4)(1)

    3.1(i)    Certificate of Amendment filed with the Delaware Secretary
              of State October 13, 1994(6)

    3.1(ii)   Agreement of Merger between the Caere Acquisition Corporation and
              Calera Recognition Systems, Inc. as filed with the California
              Secretary of State December 20, 1994 (Exhibit 3.5)(6)

    3.2       By-laws of the Company (exhibit 3.4)(8)

    3.3       Amended Bylaws

    4.1       Reference is made to Exhibits 3.1 and 3.2

  *10.1       1981 Incentive Stock Option Plan, as amended, and related form of
              incentive stock option agreement(8)

  *10.2       1981 Supplemental Stock Option Plan, as amended, and related form
              of supplemental stock option agreement(8)

   10.3       Lease Agreement for 100 Cooper Court, dated November 27, 1991
              between the Company and Vasona Business Park(7)
 
   10.4       Lease Agreement for 104 Cooper Court, dated November 27, 1991
              between the Company and Vasona Business Park(7)

   10.5       Form of Indemnity Agreement between the Company and its officers
              and directors (exhibit 10.12)(1)

  *10.7       Employee Stock Purchase Plan (exhibit 10.6)(8)

  *10.8       1992 Officer Bonus Plan (exhibit 10.9)(4)

  *10.9       1992 Non-Employee Directors' Stock Option Plan (exhibit 10.8)(8)

  10.10       Preferred Share Purchase Rights Plan (exhibit 1)(3)

 *10.11       Executive Compensation and Benefits Continuation Agreement, Robert
              G. Teresi, dated December 28, 1994.(6)

  10.12       2000 Stock Option Plan

  10.13       2000 Employee Stock Purchase Plan

  11.1        Statement regarding computation of net earnings (loss) per share

  13.1        1998 Annual Report to Stockholders

  21.1        Subsidiaries of the Registrant

  23.1        Consent of KPMG LLP

  24.1        Power of Attorney. Reference is made to the signature page

  27.1        Financial Data Schedule
</TABLE>


        *Management contract or compensatory plan or arrangement.

(1)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Registration Statement on Form S-1, as amended (File No.
        33-30842).

(2)     Incorporated by reference to the corresponding exhibit in the Company's
        Form 10-K Annual Report for the fiscal year ended December 31, 1990.

(3)     Incorporated by reference to the indicated exhibit in the Company's Form
        8-K Current Report filed on April 18, 1991.

(4)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1991.

(5)     Incorporated by reference to Caere's Registration Statement on Form S-4
        (File No. 33-85840).

(6)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1994.

(7)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1995.

(8)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1996.




                                       21
<PAGE>   23

(b) REPORTS ON FORM 8-K.

    None.



                                   SIGNATURES


        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                            CAERE CORPORATION



Dated: March 25, 1999                       By: /S/Blanche M. Sutter     
                                                -------------------------------
                                                Blanche M. Sutter
                                                Executive Vice President,
                                                Chief Financial Officer 
                                                and Secretary


                                POWER OF ATTORNEY


        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert G. Teresi and Blanche M. Sutter, or either
of them, his attorney-in-fact, each with the power of substitution, for him or
her, in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
Signature                                       Title                                             Date
---------                                       -----                                             ----
<S>                                   <C>                                                    <C> 
/S/Robert G. Teresi                    Chairman of the Board,                                 March 25, 1999
--------------------------             Chief Executive Officer                            
Robert G. Teresi                       (Principal Executive Officer)                      
                                                                                          
/S/James K. Dutton                     Director                                               March 25, 1999
--------------------------                                                                
James K. Dutton                                                                           
                                                                                          
/S/Robert J. Frankenberg               Director                                               March 25, 1999
--------------------------                                                                
Robert J. Frankenberg                                                                     
                                                                                          
/S/Betsy S. Atkins                     Director                                               March 25, 1999
--------------------------                                                                
Betsy S. Atkins                                                                           
                                                                                          
/S/Joseph J. Francesconi               Director                                               March 25, 1999
--------------------------                                                                
Joseph J. Francesconi                                                                     
                                                                                          
/S/Blanche M. Sutter                                                                          March 25, 1999
--------------------------             Executive Vice President,                              
Blanche M. Sutter                      Chief Financial Officer and Secretary
                                       (Principal Financial and Accounting Officer)
</TABLE>






                                       22
<PAGE>   24



   Report on Financial Statement Schedule and Consent of Independent Auditors











                                       23
<PAGE>   25

                                                                    SCHEDULE II



                                CAERE CORPORATION

                        VALUATION AND QUALIFYING ACCOUNTS
                             AS OF DECEMBER 31, 1998

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                      ADDITIONS
                                               BALANCE AT     CHARGED TO      CHARGED                    BALANCE
                                               BEGINNING      COSTS AND      TO OTHER                   AT END OF
                DESCRIPTION                    OF PERIOD      EXPENSES       ACCOUNTS    DEDUCTIONS      PERIOD
                -----------                    ----------     ----------     --------    ----------     ---------
<S>                                           <C>            <C>            <C>         <C>            <C>   
YEAR ENDED DECEMBER 31, 1996
  Allowance for returns, coop advertising
      and other customer credits                 $1,702        $1,578        $    --        $1,765        $1,515
                                                 ===============================================================
  Reserve for excess and obsolete
    inventories                                  $  310        $1,033        $    --        $  734        $  609  
                                                 ===============================================================
  Accumulated amortization of
    software development costs                   $3,413        $  734        $    --        $   --        $4,147
                                                 ===============================================================

YEAR ENDED DECEMBER 31, 1997
  Allowance for returns, coop advertising
      and other customer credits                 $1,515        $2,189        $    --        $1,617        $2,087
                                                 ===============================================================
  Reserve for excess and obsolete
    inventories                                  $  609        $  975        $    --        $  781        $  803
                                                 ===============================================================
  Accumulated amortization of
    software development costs                   $4,147        $  508        $    --        $   --        $4,655
                                                 ===============================================================

YEAR ENDED DECEMBER 31, 1998
  Allowance for returns, coop advertising
      and other customer credits                 $2,087        $2,341        $    --        $2,471        $1,957
                                                 ===============================================================
  Reserve for excess and obsolete
    inventories                                  $  803        $1,100        $    --        $1,139        $  764
                                                 ===============================================================
  Accumulated amortization of
    software development costs                   $4,655        $  678        $    --        $   --        $5,333
                                                 ===============================================================
</TABLE>






                                       24
<PAGE>   26


                                CAERE CORPORATION

                                INDEX OF EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
 NUMBER             DESCRIPTION
-------             -----------
<S>           <C>
    2.1       Agreement and Plan of Reorganization dated as of October 14, 1994,
              between the Company and Calera Recognition Systems, Inc. (5)

    3.1       Certificate of Incorporation of the Company (exhibit 3.4)(1)

    3.1(i)    Certificate of Amendment filed with the Delaware Secretary
              of State October 13, 1994(6)
  
    3.1(ii)   Agreement of Merger between the Caere Acquisition Corporation and
              Calera Recognition Systems, Inc. as filed with the California
              Secretary of State December 20, 1994 (Exhibit 3.5)(6)

    3.2       By-laws of the Company (exhibit 3.4)(8)

    3.3       Amended Bylaws

    4.1       Reference is made to Exhibits 3.1 and 3.2

  *10.1       1981 Incentive Stock Option Plan, as amended, and related form of
              incentive stock option agreement(8)

  *10.2       1981 Supplemental Stock Option Plan, as amended, and related form
              of supplemental stock option agreement(8)

   10.3       Lease Agreement for 100 Cooper Court, dated November 27, 1991
              between the Company and Vasona Business Park(7)

   10.4       Lease Agreement for 104 Cooper Court, dated November 27, 1991
              between the Company and Vasona Business Park(7)

   10.5       Form of Indemnity Agreement between the Company and its officers
              and directors (exhibit 10.12)(1)

  *10.7       Employee Stock Purchase Plan (exhibit 10.6)(8)

  *10.8       1992 Officer Bonus Plan (exhibit 10.9)(4)

  *10.9       1992 Non-Employee Directors' Stock Option Plan (exhibit 10.8)(8)

  10.10       Preferred Share Purchase Rights Plan (exhibit 1)(3)

 *10.11       Executive Compensation and Benefits Continuation Agreement, Robert
              G. Teresi, dated December 28, 1994.(6)

  10.12       2000 Stock Option Plan

  10.13       2000 Employee Stock Purchase Plan

  11.1        Statement regarding computation of net earnings (loss) per share

  13.1        1998 Annual Report to Stockholders

  21.1        Subsidiaries of the Registrant

  23.1        Consent of KPMG LLP

  24.1        Power of Attorney. Reference is made to the signature page

  27.1        Financial Data Schedule
</TABLE>


        *Management contract or compensatory plan or arrangement.

(1)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Registration Statement on Form S-1, as amended (File No.
        33-30842).

(2)     Incorporated by reference to the corresponding exhibit in the Company's
        Form 10-K Annual Report for the fiscal year ended December 31, 1990.

(3)     Incorporated by reference to the indicated exhibit in the Company's Form
        8-K Current Report filed on April 18, 1991.

(4)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1991.

(5)     Incorporated by reference to Caere's Registration Statement on Form S-4
        (File No. 33-85840).

(6)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1994.

(7)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1995.

(8)     Incorporated by reference to the corresponding or indicated exhibit to
        the Company's Form 10-K Annual Report for the fiscal year ended December
        31, 1996.