<PAGE>   1
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    FORM 10-K



[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997

                                       OR

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



                         COMMISSION FILE NUMBER: 0-23132





                            PARCPLACE-DIGITALK, INC.
             (Exact name of registrant as specified in its charter)



         DELAWARE                                   77-0143293
(State or other jurisdiction of        (I.R.S. Employer Identification No.)
incorporation or organization)

              999 EAST ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086
                    (Address of principal executive offices)



       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 481-9090


        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE


           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                  COMMON STOCK
                                (Title of class)




               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. [ ]



               The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock on June 26, 1997, as reported by Nasdaq was $12,331,236. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not a conclusive determination for other purposes. As of June 26,
1997, the registrant had outstanding 11,929,351 shares of Common Stock.



                       DOCUMENTS INCORPORATED BY REFERENCE


               Parts of the Registrant's Annual Report to Stockholders for its
fiscal year ended March 31, 1997 (the "1997 Annual Report to Stockholders") are
incorporated by reference in Parts II and IV of this Form 10-K report and parts
of the Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders
(the "Proxy Statement"), which shall be filed with the Securities and Exchange
Commission within 120 days after the Registrant's fiscal year end, are
incorporated by reference in Part III of this Form 10-K Report.


================================================================================







<PAGE>   2




                                     PART I

ITEM 1. BUSINESS

1A.  GENERAL

               ParcPlace-Digitalk, Inc. ("ParcPlace-Digitalk" or the "Company")
develops, markets and supports fully object-oriented application development
tools for use in development of distributed client/server/web applications. The
Company also provides a comprehensive range of services, including customer
support, training and consulting as integral components of a complete solution.
The Company's primary products are VisualWorks, VisualWave and Distributed
Smalltalk, which are application development environments ("ADEs") based on the
Smalltalk programming language. VisualWorks, the Company's primary ADE, provides
a powerful visual programming environment that enables programmers to develop,
deploy and maintain applications ranging from workgroup and departmental
applications to complex enterprise-wide mission-critical client/server
applications. VisualWorks applications are portable across multiple platforms.
VisualWave is an extension of the VisualWorks environment that allows a
VisualWorks application to be enhanced for deployment on the Internet. The
Company's Distributed Smalltalk ("DST") tool set, when used in conjunction with
VisualWorks or VisualWave, provides a proven architecture for developing
mission-critical, enterprise-wide distributed applications. Through its
ObjectShare division, the Company develops, markets and supports Parts for Java,
a visual programming environment based on the Java programming language, and
related tools.

               ParcPlace Systems, Inc., which merged with Digitalk, Inc. in
August 1995, to form ParcPlace-Digitalk, was organized in 1988 in cooperation
with Xerox Corporation to commercialize object-oriented technology.
ParcPlace-Digitalk acquired ObjectShare Systems, Inc. in July 1996 and
Polymorphic Software, Inc. in October 1996.

               This Form 10-K includes a number of forward-looking statements
that are subject to certain risks and uncertainties that could cause the
Company's actual results and financial position to be affected negatively as
events unfold in the market for the Company's products. These events include,
but are not limited to, the risks inherent in the development and marketing of
relatively new technologies, and the Company's ability to deliver competitive
products, retain key employees and maintain sufficient sales revenue to fund
ongoing research and development. The Company will not update or revise any such
forward-looking statements to reflect events or circumstances that may arise
after this report is filed, and that may have an effect on the Company's overall
performance. A more thorough discussion of these factors is presented in Section
1.b "Risk Factors" and elsewhere in this report.

BACKGROUND

      OBJECT ORIENTED APPLICATION DEVELOPMENT

               Object-oriented application development represents a relatively
new approach to developing software applications. The basic concept of
object-oriented technology is to construct software in terms of objects, which
are independent modules that can be modified independently from each other,
reused in new applications, and reused and extended to create new objects. Thus,
object-oriented technology can offer substantial productivity gains by enabling
programmers to reuse more of their application code in developing new
applications or adding new functionality to existing applications. Because new
functions can be added incrementally without changing existing objects,
applications developed using object-oriented programming are also more easily
maintained without risking the integrity of the entire system. The reusability
of tried-and-tested objects results in higher-quality code and reduced
maintenance requirements. Since independent objects can be combined to form new
objects, a complex system can be created from simpler sub-structures. These
characteristics of object-oriented systems make them well suited for the
complexity of larger-scale systems, such as those needed to support
enterprise-wide mission-critical business applications.

               Smalltalk is a pure object-oriented programming language. As a
pure object language, Smalltalk provides all of the intended benefits of object
programming: direct business modeling, an easy-to-learn syntax, rapid
development of new objects, incremental changes to existing objects, and easy
and safe reuse of objects. Such benefits make Smalltalk generally more suitable
to corporate application development than object-based extensions of other
programming languages, such as C++, which is an object-oriented extension of C.
Both C and C++ are too complex and low level to provide a pragmatic solution for
the vast majority of corporate applications. In addition, although the C++
language provides for object orientation, it allows programmers to revert to
procedural programming techniques, thereby potentially limiting the benefits of
object-oriented programming

               Smalltalk also has certain advantages over Java, which is being
used primarily for development of Web-based client applications. Smalltalk,
particularly in the Company's implementation, has more extensive class
libraries, 



                                                                               1
<PAGE>   3

server capability, and the maturity achieved through testing and deployment in
corporate applications. Java, which has had only limited implementation in
development tools, has not been widely tested or deployed in corporate
applications.

      CLIENT/SERVER/WEB COMPUTING

               In recent years, many organizations have moved their information
systems from mainframe and mini-computer based architectures to distributed
client/server computing environments. Client/server systems typically consist of
multiple desktop PC and workstation clients linked in a network to one or more
high-performance servers. This computing architecture has several benefits: (i)
client/server computing enables end-users to access and share enterprise-wide
data and applications, (ii) additional clients, servers and other computing
resources can easily be added to the network in cost-effective increments and
(iii) because of the distributed nature of client/sever systems, organizations
can improve the overall effectiveness of their computing resources by
appropriately distributing application logic, processing and data among clients
and servers.

               The distribution of functionality among objects and the ability
of objects to communicate with each other makes object-oriented technology
ideally suited for the client/server environment. Client/server architectures
are based upon the distribution of functionality among different computers on a
network and the ability of clients and servers to communicate via
message-passing. Object-oriented technology is based on a similar
message-passing architecture in which objects on clients and servers throughout
a network can easily communicate to comprise an enterprise-wide client/server
application. Distributed computing standards like the Common Object Request
Broker Architecture ("CORBA") enhance communication among objects.

               The Internet is a global web of computer networks. This "network
of networks" allows any computer attached to the Internet to talk to any other,
using the Internet Protocol. Much of the recent growth in Internet use by
businesses and individuals has been driven by the emergence of the World Wide
Web (the "Web"), a format for delivering graphical information over the
Internet. The Web, based on a client/server model and a set of standards for
information access and navigation, can be accessed using client "browser"
software that allows non-technical users to exploit the capabilities of the
Internet. As an increasing number of organizations provide their employees with
Web access from their desktops, an opportunity is emerging for internal
information systems and enterprise applications hosted on internal Web servers.
These systems are referred to as the "intranet." An intranet enables
organizations to extend their internal information systems and enterprise
applications to geographically dispersed facilities, remote offices, and mobile
employees using Web browsers and server software.

               Client/server/web computing refers to application development and
delivery systems for business software that will operate in both a client/server
environment and on the Internet and/or Intranet without modification or
recompilation.

      DISTRIBUTED COMPUTING

               Distributed computing is based on the ability to distribute
applications across a network. Early application networks provided simple data
or procedural interfaces among software programs that needed to interact. The
complexity of such a system expands geometrically as the number of discrete
application components in such a system increases. Managing application networks
larger than a single enterprise can be an impossible task unless distributed
components can communicate with each other without the need to understand each
interface in the distributed network of components.

               Distributed objects resolve this crucial problem by using
standards that support sending messages to and receiving messages from other
objects regardless of location. Distributed objects can reside on different
machines and on an intranet or the Internet, and they can migrate from one host
to the other, surviving beyond the life of a current host. A majority of
distributed objects adhere to CORBA, a standard for object messaging maintained
by the Object Management Group ("OMG"). The main advantage of CORBA is the
ability to transparently interoperate with other languages that support CORBA.
Messages between objects are converted into language-neutral forms that are
processed by an object request broker ("ORB"), which carries the translated
message from one object to another.

THE PARCPLACE SOLUTION

               The Company provides a fully object-oriented software development
environment and related training and consulting services to support the
development of mission-critical, enterprise-wide client/server/web applications.
The Company's strategy has been to offer a complete solution to its customers to
enable them to capitalize on the advantages of object-oriented technology.



                                                                               2
<PAGE>   4

               Complete, Integrated Application Development Environment. The
Company believes that customers developing client/server/web or distributed
computing applications require a complete, powerful, robust and extensible
development environment as a foundation for their development efforts.
VisualWorks provides a fully integrated graphical user interface ("GUI")
builder, access to multiple databases, cross-platform portability, true
object-oriented visual programming in the Smalltalk language, and an extensive
library of pre-developed classes and methods that support its environment.
VisualWave, as an extension of VisualWorks, provides the capabilities to develop
applications that are ready to be deployed on the Internet in the familiar
VisualWorks development environment. 

               Comprehensive Service and Support. The Company believes that
service and support is a critical factor for customer success. The Company
offers comprehensive customer service, training, support, and on-site assistance
and consulting as integral components of its overall customer solution. The
Company's training and consulting personnel assist customers in becoming
productive quickly, setting up a development infrastructure appropriate to
customer requirements and the implementation of object-oriented technology, and
for providing ongoing support of deployed applications and enterprise-wide
distributed computing solutions.

PRODUCTS

               The Company offers a line of object-oriented application
development tools for the client/server/web and distributed computing markets.
The Company's primary products are VisualWorks, VisualWave, Distributed
Smalltalk ("DST"), and related products based on the Smalltalk programming
language. This family of object-oriented application development environments
provides the following significant customer benefits:

               Improved Information Systems Productivity. The Company's products
are designed to increase the productivity of IS organizations by reducing the
overall effort required to develop and maintain an application.

           o   Reduced Development Effort. True object-oriented development
               environments allow programmers to take advantage of code reuse,
               prototyping of partial systems and incremental development. By
               fully adhering to the concepts of true object-oriented
               programming, the Company's software tools can reduce the time and
               resources required to develop an application when compared to
               structured programming languages.

           o   Reduced Maintenance Effort. Because the Company's development
               tools allow objects to be developed and tested independently and
               applications to be modified by adding new objects incrementally,
               applications can be more easily maintained without risking the
               integrity of the entire system. In addition, changes made to an
               original object are immediately made available to every
               application or applications using that object, thereby speeding
               maintenance and enhancement.

               Enterprise-Wide Capability. The Company's products enable
customers to develop mission-critical applications that operate throughout the
enterprise.

           o   Portability. The Company's products provide a solution to the
               heterogeneous computing environments prevalent in most large
               organizations today. Applications written in VisualWorks are
               instantly portable across the most commonly used client and
               server platforms.

           o   Scalability. Scalability refers to the size and complexity of
               applications that can be developed. The Company's products
               provide for the development of fully scalable applications
               ranging from workgroup or departmental applications to
               enterprise-wide, mission-critical applications deployed on
               complex networks with thousands of users in multiple locations.

           o   Development for Client/Server/Web Computing. The architecture of
               the Company's products enables customers to develop applications
               for the server, the client, or the Web. The products accommodate
               flexibility in computing architectures, and allow the developer
               to adjust the distribution of data, presentation and applications
               among clients, servers and the Web, depending on the requirements
               of the business function being implemented.

           o   Development for Distributed Computing. By combining the
               application development capabilities of VisualWorks and the
               distributed component technology of DST, the Company provides a
               toolset and architecture for developing mission-critical,
               enterprise-wide distributed applications for the Internet. In a
               distributed computing architecture, the processing of various
               application tasks is distributed across network systems, rather
               than being centralized in a specific location. This model of
               distribution enables corporations to improve efficiency and
               performance of the overall enterprise network by leveraging the
               computing power



                                                                               3
<PAGE>   5

               of multiple systems for a given task, either with systems that
               would be otherwise underutilized or with systems that are
               geographically closer to the user.

               Following is a description of the Company's products:

      VISUALWORKS AND ADD-ON PRODUCTS FOR VISUALWORKS

               VisualWorks is a robust application development environment for
corporate developers building client and server applications. It includes these
key features:

           o   The ParcPlace Smalltalk language and its extensive class library,
               and a full set of integrated development tools, providing all the
               benefits of true object-oriented programming.

           o   Instant, zero-cost portability across PC (Windows, Windows NT and
               OS/2), UNIX, and Macintosh platforms. VisualWorks' compiler
               architecture enables deployment across platforms without any
               reprogramming or recompiling.

           o   A Database Application Creator that allows developers to create
               basic database applications without any Smalltalk or SQL
               programming. The Database Application Creator includes an
               "ObjectLens" that allows developers to combine relational
               database systems with object-oriented programming technology for
               client and server applications, a "Visual Data Modeler" that
               allows developers to manipulate database schemas and
               relationships between databases and applications, and other
               capabilities for rapid database application development.

           o   A GUI builder that enables developers to create user interface
               specifications using a visual "paint-and-build" approach. The GUI
               builder includes a "ChameleonView" feature that lets developers
               preview the look of their application on multiple platforms.

           o   A Reusable Application Framework used to generate a working
               prototype application from the user interface specification.

           o   The ability to develop applications that reside on servers and
               run without client user interfaces.

           o   The capability to perform multi-threading operations.

               VisualWorks Advanced Tools provides a variety of specialized
Smalltalk-based tools to optimize applications. These tools include browsers,
allocation and time profilers, a parser compiler, a class reporter, and a
benchmark facility.

               VisualWorks Business Graphics is a data presentation tool for
building and incorporating business graphics into applications developed using
VisualWorks.

               VisualWorks Database Connect products provide the additional code
necessary to connect VisualWorks to Oracle, Sybase and DB2 relational databases.
Because VisualWorks has an open API for drivers, additional connections can be
made to other databases.

               VisualWorks DLL and C Connect provides tools and interfaces that
enable an easier and tighter integration of VisualWorks applications with C
programs. By using these tools, a VisualWorks developer can link VisualWorks
applications to external C code libraries and applications available in today's
open systems environment.

      VISUALWAVE

               VisualWave Development Environment ("VisualWave") is an
object-oriented development tool for creating applications that operate across
the Web, either on an internal "intranet" or over the Internet. VisualWave
includes the same object-oriented application development features as
VisualWorks but also includes a set of advanced tools for creating a Web
application. End-users can interact with the application through the Web using a
Web "browser" such as Netscape Navigator or Microsoft Internet Explorer
connected to a VisualWave Internet Application Server. Unlike most Web tools,
which provide only for broadcasting of static information or simple interaction
via forms, VisualWave allows end-users to connect through the Web to a dynamic
application, fully integrated with client/server systems. VisualWave offers the
following features:

           o   Graphical tools that provide automatic generation of the Web
               interface and allow developers to incorporate dynamic graphics
               into their applications.



                                                                               4
<PAGE>   6

           o   Session management, enabling a true two-way dialog between the
               end-user and the application.

           o   A personal Web server for testing Web applications before
               deployment.

           o   Support for most Web servers and browsers.

           o   A full-featured object-oriented application development
               environment.

               VisualWave Internet Application Server ("VisualWave Server") is
an Internet application server for deploying Web applications developed using
VisualWave. The VisualWave Server provides the ability to relay application
requests from Web servers to VisualWave applications. It can be used with most
available Web servers, including those from Netscape and Microsoft, in a wide
variety of configurations, including both a single Web server interfacing with
multiple VisualWave Servers or multiple Web servers interfacing with one or more
VisualWave Servers. The "Server Console" feature provides complete control over
all aspects of server operation, including application management and network
operations. Applications can be updated using the VisualWave Development
Environment and can be "hot-loaded" into a running server, making them rapidly
available to users.

      DISTRIBUTED SMALLTALK ("DST")

               Distributed Smalltalk is a powerful development tool for building
multi-tiered distributed applications. Distributed Smalltalk (DST) is designed
to help developers build enterprise-wide solutions for client/server-based
environments. Fully integrated with VisualWorks, DST provides application
frameworks for the development of multi-tiered client/server applications. DST
combines the Common Object Request Broker Architecture (CORBA) implementation,
powerful testing and tuning tools, reusable frameworks, and an open and flexible
architecture in the development of distributed applications.

      OTHER PRODUCTS FOR USE WITH VISUALWORKS AND VISUALWAVE

               ENVY/Developer for VisualWorks and ENVY/Developer for VisualWave
are component management environments that are fully integrated with the
VisualWorks and VisualWave development environments. ParcPlace-Digitalk is a
reseller of ENVY/Developer, which is provided by a third party. ENVY/Developer
facilitates application development by a group of developers. It also assists
with incremental application development and provides a complete history of an
application's development. The product includes a version control feature that
helps manage the software development process and a configuration management
feature that allows a developer to configure an application by specifying
particular objects to be included.

      OBJECTSHARE DIVISION PRODUCTS

               Parts for Java was first made available in July 1996. The second
release of Parts for Java is scheduled to ship in June 1997. Parts for Java 2.0
is a visual development environment that furnishes end-to-end productivity in
the creation of distributed Java applets and applications. Parts for Java 2.0
provides an extremely powerful drag-and-drop visual programming environment for
the delivery and maintenance of Internet applications. Parts for Java 2.0 is
intended to be the first Internet Development Environment ("IDE") to ship that
includes full support for JavaBeans. Developers can easily create and consume
industry-standardized Java components with Parts for Java. Parts for Java
includes powerful tools for developing client/server/web solutions: a browser
for browsing and editing source code and class hierarchies; an open tool set for
selecting compilers and other tools; and an editor for creating and maintaining
selecting compilers and other tools, and for creating and maintaining Java
classes. The Company distributes the product through retail sales channels and
over the Web, and to site licenses for corporate customers.

               jKit/Grid and jKit/GO support Parts for Java. jKit/Grid is a set
of Java components that provide powerful grid, table and hierarchical to enable
UIs for Java applets and applications. jKit/GO provides a rich Java framework
for graphic objects. jKit/GO lets developers applets and applications go beyond
text, tables, lists, and buttons. With jKit/GO developers can build graphical
applications on a well-designed framework of reusable components, including
graphic objects, tools, and visual handles. jKit/Grid and jKit/GO allow
developers to make applications more visually appealing, more usable, and to
produce them more efficiently.

      VISUALSMALLTALK ENTERPRISE

               In February 1997, as part of its restructuring effort, the
Company announced that it would not continue to enhance VisualSmalltalk
Enterprise and related products. The Company will continue to provide support to
licensees of VisualSmalltalk Enterprise.



                                                                               5
<PAGE>   7

PROFESSIONAL SERVICES AND SUPPORT

               To help ensure successful development of mission-critical
business applications, ParcPlace-Digitalk provides its customers with a full
range of professional services and support. The Company's training programs,
consulting services and technical support complement the Company's
object-oriented application development tools, allowing the Company to provide a
complete solution for corporate application developers seeking the benefits of
object-oriented technology. Charges for training, consulting and support are not
bundled with license fees. As of March 31, 1997 the Company had 26 employees
providing training and consulting services and 12 providing customer support.

               In addition to the on-line and printed documentation provided
with its products, Parcplace-Digitalk offers extensive training to its
customers. The Company offers courses focusing on the concepts of
object-oriented programming, as well as courses in the use of the Company's
application development environments, add-on tools, and developer productivity
tools.

               For customers requiring experienced object-oriented developers,
the Company offers consulting services. The Company provides both short-term and
long-term project assistance at customer sites to help ensure a project's
success and an accelerated transfer of skills. In addition, the Company offers
ObjectSupport, a technical support service that includes a hotline to technical
support engineers, a newsletter, and an Internet service which allows customers
with support to search for answers to common questions and problems.

STRATEGIC RELATIONSHIPS

               ParcPlace-Digitalk has established a number of strategic
relationships with management consultants, system integrators, and computer
system and software providers. The Company believes that its relationships with
other product and service providers for client/server computing will encourage
and reinforce the decision by corporations to entrust their strategic
mission-critical applications to the Company's products. The Company has strived
to establish strategic alliances to make object-oriented technology a clear
choice for large organizations, and to make the ParcPlace-Digitalk Smalltalk
language a standard and safe choice.

               Management Consultants and System Integrators. ParcPlace-Digitalk
has marketing, training, reselling and development relationships with leading
management consultants and system integrators that help corporations reengineer
their business models and implement client/server computing solutions. As
facilitators for many customers migrating to client/server architectures and
object-oriented technology, management consultants and system integrators help
to encourage use of the Company's products. In addition, as these service
providers gain experience with object-oriented technology and expand their own
class libraries, they may be able to offer customized solutions to their clients
at prices competitive with prepackaged software solutions. The Company has
strategic relationships with organizations such as: American Management Systems,
Andersen Consulting, Cambridge Technology, Computer Sciences Corporation, Gemini
Consulting, IBM ISSC, SHL Systemhouse and SPL Worldgroup. These relationships
are non-exclusive, are not all subject to written agreements and may be
discontinued at any time.

               Computer System and Software Providers. ParcPlace-Digitalk has
established development, marketing and reseller relationships with many computer
system and software providers. These companies have large sales organizations
dedicated to providing companies with the computing hardware and database
technology necessary to migrate to client/server architectures. Because
corporations considering a change to client/server and object-oriented
technologies typically seek counsel from their computer system and software
providers, it is important that these providers are familiar with and understand
the Company's technology and its benefits. In addition, by forming strategic
relationships with these companies, ParcPlace-Digitalk benefits from their
established industry leadership positions, sales presence and technology. The
Company has such relationships with the following companies: Digital, Gemstone,
Hewlett-Packard, IBM, Informix, Mercury Interactive, Object Design, Oracle
Corporation, and Sun Microsystems. These relationships are non-exclusive, are
not all subject to written agreements and may be discontinued at any time.

SALES AND MARKETING

               The Company markets its products to large business and
governmental organizations, both domestic and international. To address the
range of sales opportunities, the Company relies on the coordinated efforts of
its direct sales force and system engineering personnel, as well as on
distribution agreements with a limited number of authorized domestic VARs and
resellers. The Company also has international distribution arrangements covering
Europe, Southeast Asia, South America, Australia, South Africa, Israel and the
Pacific Rim. As of March 31, 



                                                                               6
<PAGE>   8

1997, the Company's sales and marketing organization consisted of 67 marketing
employees sales employees in the United States and in Canada, the United
Kingdom, France, Germany and Japan.

               The Company uses a team sales approach. The direct sales force
focuses on selling to major accounts and provides face-to-face contact with
customers. Sales engineering personnel work with the direct sales force to
perform demonstrations at customer sites and provide pre-sales assistance
including analysis of the customer's technical requirements.

               In support of the sales organization, the marketing department
positions, promotes and markets the Company's products. Marketing personnel are
engaged in a variety of activities including public relations, direct marketing,
trade shows, advertising, seminars, newsletters and promotion of customer
success stories through brochures and press placements.

PRODUCT DEVELOPMENT

               The Company believes that the timely development of new products
and enhancements to existing products is essential to maintain its competitive
position. Since the founding of the Company and the transfer of certain
technology from Xerox PARC, the Company has developed its products internally
or, in certain instances, has acquired technology from third parties and
consultants. The Company intends to continue to enhance its product lines in
response to technological evolution and customer requirements. The Company
cannot provide any assurances that it will deliver any specific product
enhancements, or that the delivery of such enhancements will be timely or have a
significant affect on product sales.

               As of March 31, 1997, the Company's product development staff
consisted of 37 employees. The Company's total expenses for research and
development, including capitalized software development costs, for fiscal years
ending March 31, 1997, 1996 and 1995 were $8.9 million, $10.5 million and $8.6
million, respectively, representing 24%, 21% and 15% of net revenues for each
fiscal period.

EMPLOYEES

               As of March 31, 1997, the Company had 169 full-time employees,
consisting of 37 in product development, 67 in sales and marketing, 27 in
finance and administration, 12 in customer support, and 26 in training and
professional services. No employees are covered by any collective bargaining
agreements. The Company believes that its relationships with its employees are
good. The future success of the Company depends in a large part on its ability
to attract and retain qualified personnel. The loss of the services of one or
more of the Company's key employees could have a material adverse effect on the
Company's ability to deliver new products and generate license and associated
revenues, thereby affecting the Company's operating results and financial
condition. The Company maintains competitive compensation, benefits and equity
participation programs. Competition for qualified personnel is intense, and
there can be no assurance that the Company will be able to attract and retain
qualified personnel in the future.

               In October 1996, as part of a restructuring to bring its
operating expenses in line with current and projected revenues, the Company
reduced its total headcount by approximately 70 people, including employees and
contractors. In January 1997, the Company decided to further reduce its
worldwide total headcount by approximately 25%. Employees who were terminated in
each reduction in force were selected on the basis of the Company's need to
realign its expenses with revenue. Employees affected by the reductions in force
typically received severance payments based on length of service. In addition to
the reductions in force, the Company has experienced a significant number of
voluntary resignations, particularly among development and sales personnel, for
which the hiring market is extremely competitive.


1B.  RISK FACTORS

               In addition to the other information set forth in this report,
the following are certain risks that should be considered with regard to the
Company and its common stock.

LACK OF ACCEPTANCE OF SMALLTALK

               Sales of the Company's application development tools,
substantially all of which are based on the Smalltalk programming language,
declined in each quarter of fiscal 1997, resulting in a significant year-to-year
decrease in the Company's license revenues. The Company believes that this
trend, which has continued in the first quarter of fiscal 1998, is due in large
part to corporate users' reluctance to make new or additional investments in
Smalltalk-based applications. This reluctance correlates to the perception that
Java will emerge as the leading programming language 



                                                                               7
<PAGE>   9

for object-oriented application development, and is compounded by the Company's
operational difficulties throughout fiscal 1997 and its financial results in
recent quarters, which have caused customers to become concerned about the
Company's ability to continue to maintain, support and enhance its product line.
Because the Company is a leading vendor among a small number of vendors
providing Smalltalk-based tools, such concerns exacerbate customer reluctance to
make investments in the Smalltalk programming language generally, and the
Company's products in particular. In addition, use of the Company's
Smalltalk-based products requires organizations to make a substantial investment
in the retraining of programmers, which can be expensive and can reduce the
productivity of programmers during the training period, or to hire experienced
Smalltalk programmers, which are in scarce supply. The Company believes that
Smalltalk continues to provide certain significant advantages over competing
programming languages, but if these advantages are not recognized by corporate
users as having sufficient value to their organizations, the downward trend in
sales of Smalltalk-based application development tools may continue, which would
have a material adverse effect on the Company's results of operations.

FLUCTUATIONS IN QUARTERLY RESULTS

               The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. Fluctuations
may be caused by numerous factors including, but not limited to, those discussed
above. License revenues in any quarter depend on orders shipped in the quarter.
The Company generally ships orders as received and, as a result, has little or
no backlog. Quarterly revenues and operating results therefore depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. Historically, the Company has received a substantial portion of its
product orders in the last month of the quarter, with a concentration of such
orders in the last week. Delays in the receipt of orders can therefore cause
significant fluctuations in quarterly license revenues. In addition, license
revenues in quarters after a new product release may be affected by the amount
of upgrade revenue, which tends to increase soon after the release of a new
product and then decline rapidly. License revenues may also be affected by
seasonal trends, which may include: relatively lower sales in the summer months
when many businesses experience lower sales; relatively higher sales in December
as many customers complete annual budget cycles; and relatively higher sales in
the Company's last fiscal quarter as a result of efforts to meet sales quotas,
with correspondingly lower sales in the following quarter. Service revenues tend
to fluctuate as consulting projects, which may continue over several quarters,
are undertaken or completed. Operating results may also fluctuate due to factors
such as the demand for the Company's products, the mix of products and services,
the size and timing of customer orders, the introduction of new products and
product enhancements by the Company or its competitors, changes in the
proportion of revenues derived from licenses versus service fees, commencement
or conclusion of significant consulting projects, changes in the level of
operating expenses, and competitive conditions in the industry. Because the
Company's staffing and other operating expenses are based on anticipated
revenues, operating results will be adversely affected if the anticipated level
of revenues is not realized in the expected quarter or over the course of the
year. The Company's results in recent quarters are not necessarily indicative of
future results and the Company believes that period-to-period comparisons of its
financial results should not be relied upon as the sole indicator of future
performance, although such comparisons may be useful in establishing an overall
trend in financial results.

RESTRUCTURING

               In an effort to bring operating expenses in line with current and
projected revenues, the Company undertook a restructuring in each of the third
and fourth quarters of fiscal 1997. Each restructuring involved a reduction in
the number of employees, the closing of several sales and engineering
facilities, and other related changes. The Company initiated the restructurings
in response to a shortfall in revenues in the second and third quarters of
fiscal 1997 that resulted in a substantial operating loss for each of those
quarters. The Company may have to make further adjustments to the organization
to bring operating costs in line with revenues in the future. Such adjustments
could include additional reductions in headcount, changes in product delivery
schedules and plans, and closing or downsizing of facilities.

               As a result of the restructurings, the Company has incurred a
number of risks associated with its reduced operating size and capabilities.
These risks include an increased sensitivity to employee turnover, with a
greater likelihood that turnover would have a significant negative effect on the
Company's operations, such as by causing delays in product delivery schedules; a
reduced ability to pursue diversified research and development efforts,
particularly for projects that are not profitable in the near term; and the need
for the Company to effectively manage dramatically changing operations. The
confidence of the Company's customer base may also be affected by the
restructurings, to the extent that such customers may become concerned that the
Company may not be able to deliver on future product plans or to effectively
maintain its existing products.



                                                                               8
<PAGE>   10

VOLATILITY OF STOCK PRICE

               The market for the Company's common stock is highly volatile. The
trading price of the Company's common stock has been and will likely continue to
be subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations, and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the market in which the Company does business,
or relating to the Company specifically, have in the past resulted and could in
the future result in an immediate and adverse effect on the market price of the
Company's common stock.

NEED FOR CONTINUED ACCEPTANCE OF OBJECT-ORIENTED TECHNOLOGY

The Company currently derives substantially all of its revenue from its product
family of object-oriented application development environments and related
products and services and expects this concentration to continue for the
foreseeable future. As a result, any factor adversely affecting the demand for,
or pricing of, object-oriented application development environments and related
products and services, would have a material adverse effect on the Company's
business and results of operations. In addition, the future success of the
Company's current product family depends upon continued market acceptance of
object-oriented technology, particularly acceptance by corporate users for
mission-critical applications. Because object-oriented technology represents a
fundamental shift in programming methodology, it requires a substantial
investment in the retraining of programmers, which can discourage organizations
from choosing object-oriented tools. Even if organizations choose to make the
investment required to use object-oriented technology, there can be no assurance
that they will choose products based on the Smalltalk language, such as the
Company's products, or that the Company will be successful in the market for
object-oriented application development environments, which is already crowded
with larger and better-funded competitors such as Oracle, IBM, Sun Microsystems
and Symantec. There are a number of potential approaches to implementing object
technology, including the use of languages other than Smalltalk, such as C++,
object extensions of COBOL, Java, object-based third-generation programming
languages ("3GLs"), and other new languages and software tools that may
currently be under development or that may be developed in the future. In
particular, the Company believes that the decrease in sales of its
Smalltalk-based products in fiscal 1997 correlates to the perception among
corporate users that Java will emerge as the leading programming language for
object-oriented application development, which has led to a general decline in
sales of application development tools based on other programming languages.

TECHNOLOGICAL CHANGE AND NEW PRODUCTS

               The market for software for client/server/web computing
environments is characterized by rapidly changing technology, evolving industry
standards, and frequent new product introductions. The Company must continually
update its existing products to keep them current with changing customer needs,
technology, and competitive products. New technologies could render existing
products obsolete. If the Company is unable to enhance its existing products and
introduce new products in response to changing customer requirements, or if such
products are not introduced on a timely basis, fail to receive market
acceptance, or contain significant errors, the Company's business and results of
operations will be materially and adversely affected.

               In particular, the market for the Company's products has been
adversely affected by the emergence of Java as the dominant language for
developing web-based client applications. Many of the Company's customers have
chosen to evaluate the capabilities of Java-based products before making
additional investments in the Company's products, which has had a direct adverse
impact on license revenues. Also, the growth of the Internet as a means of
communicating information about competitive products has shortened the average
development cycle for the Company's products and the average life cycle for the
Company's products. This has caused an increase in competition in the market for
the Company's products and a requisite increase in development expenses as the
Company strives to release products on a shorter cycle with significant
additional function. The failure of others to develop or enhance technologies
that are critical to broad public acceptance and use of the Internet may also
affect the Company's ability to market its products for Internet application
development.



                                                                               9
<PAGE>   11

COMPETITION

               The market for application development tools for large-scale
client/server/web computing environments is intensely competitive and the
Company expects competition to continue to increase. The Company's competitors
include a broad range of companies that develop and market tools and languages
for software application development, including IBM (whose competing offerings
include a development environment based on Smalltalk and plans to deliver a
Java-based derivative), Borland, Forte, Informix, Microsoft, Oracle, Sun
Microsystems, Sybase and Symantec. Many of the Company's current and prospective
competitors have significantly greater financial, technical, manufacturing, and
marketing resources than the Company. Moreover, these companies may produce
additional products competitive with those of the Company and there can be no
assurance that the Company could compete effectively with such products. In
particular, several competitors have introduced entry-level Java-based
application development environments, which may, for the near term, satisfy the
requirements of a significant number of corporate users who are beginning to
develop applications in Java. 

               The principal competitive factors affecting the market for the
Company's products include product functionality, quality and reliability, the
timing of product introductions, customer support and price. Based on a
combination of these factors, the Company believes that it will have to
incorporate significant additional function in a relatively short period of time
for its products to remain competitive. There can be no assurance that the
Company will be able to do so or that the Company will be successful in the face
of increasing competition from new products and enhancements introduced by
existing competitors and by new companies entering the market. 

               The Company believes that competitive pressures in fiscal 1997,
particularly the introduction of new products by competitors, caused delays in
purchase decisions by and in some cases, loss of sales to potential customers,
and increased the pricing pressure faced by the Company. Continuing competitive
pressures from existing and new competitors who offer lower prices or introduce
new products could result in further delays in purchase decisions by or loss of
sales to potential customers or cause the Company to institute price reductions,
any of which would adversely affect the Company's results of operations. In the
first quarter of fiscal 1997, partially in response to competitive pressures,
the Company ceased charging a separate fee for application deployment, which had
typically been charged on a per-copy basis. Because deployment fees contributed
a significant portion of the Company's revenues for the past several years, the
cessation of charging a deployment fee had an adverse effect on the Company's
license revenues.


INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

               The Company's success depends upon its proprietary technology.
The Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures, and licensing arrangements to establish and
protect its proprietary rights. In addition, the Company currently holds one
patent. As part of its confidentiality procedures, the Company generally enters
into non-disclosure agreements with its employees, distributors and corporate
partners, and limits access to and distribution of its software, documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the 



                                                                              10
<PAGE>   12

Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain foreign countries.

               The Company provides its products to end-users primarily under
"shrink-wrap" license agreements, which could be held unenforceable in whole or
in part in various jurisdictions. The Company makes a portion of its source code
available to its customers which increases the likelihood of misappropriation or
other misuse of the Company's products.

               The Company is not aware that any of its products infringe upon
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim such infringement by the Company with respect
to current or future products. The Company expects that software product
developers will increasingly be subject to such claims as the number of products
and competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation or might require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all.

DEPENDENCE ON THIRD-PARTY RELATIONSHIPS

               In its product offerings, ParcPlace-Digitalk uses certain
products and technologies of various third-party software developers, including
both complete products offered as extensions of the Company's product line and
technology used in the enhancement of internally developed products. Such
products and technologies are obtained from the third-party providers under
contractual license agreements, which in some cases are for limited time periods
and in some cases provide that such licenses may be terminated under certain
circumstances. There can be no assurances that the company will be able to
maintain adequate relations with these third-party providers, that these
third-party providers will commit adequate development resources to maintain
these products and technologies, or that the license agreements that are for
limited time periods will be renewed upon termination. ParcPlace-Digitalk has
established a number of strategic relationships with management consultants,
system integrators, and computer system and software providers. These companies
provide software development, marketing, reselling, and training services that
the Company believes are important to its existing and future business. These
relationships are non-exclusive and may be discontinued at any time.

DEPENDENCE ON KEY PERSONNEL

               The Company's future success will depend upon its ability to
attract and retain highly qualified personnel. Loss of key personnel or
inability to hire and retain qualified personnel could have a material adverse
effect on the Company's business and results of operations. During fiscal 1997,
the Company has experienced an increase in the number of voluntary resignations
of employees. Competition for qualified personnel is intense and has recently
intensified in the Company's geographic and industry segments. The intensifying
competition for qualified personnel, as well as the implementation of the
Company's restructuring actions, have increased the already high difficulty of
retaining and motivating employees. Employee turnover, particularly in technical
and sales positions, is highly disruptive, and high turnover of sales personnel
has adversely affected the Company's revenues. Ongoing high rates of employee
turnover, the loss of key personnel, or an inability to hire qualified personnel
will adversely affect the Company's business and results of operations.

MANAGING A CHANGING BUSINESS; BUSINESS COMBINATIONS

               Since its inception, the Company has experienced changes in its
operations which have placed significant demands on the Company's
administrative, operational, and financial resources. The Company's future
performance will depend in part on its ability to effectively respond to and
manage changing business conditions.

               The Company completed the acquisition of Objectshare Systems,
Inc., a privately held corporation in the Smalltalk tools add-on products
business, in July 1996. Due to a decrease in demand for such products, which
reflects the decrease in demand for the Company's primary products, the Company
did not receive significant revenues from the acquired Objectshare product line
in fiscal 1997. The Company does not plan to invest additional amounts in
marketing or development of the acquired Objectshare product line. Parts for
Java, which is marketed by the Company's ObjectShare division, was developed by
ParcPlace.

               The Company completed the acquisition of Polymorphic Software,
Inc., a privately held corporation in the Smalltalk tools and consulting
business, in October 1996. The Company will not add the Polymorphic products to
its current product list.

               The Company may acquire other companies, products, or
technologies in the future. There can be no assurances that these acquisitions
can be effectively integrated, that such acquisitions will not result in costs
and 



                                                                              11
<PAGE>   13

liabilities adversely affecting the Company's results of operations and
financial condition, or that the Company will obtain the anticipated benefits of
such acquisitions.

INTERNATIONAL OPERATIONS

               Approximately 32%, 31%, and 15% of the Company's net revenues for
the years ended March 31, 1997, 1996, and 1995, respectively, were attributable
to international sales. The majority of international revenues to date have been
derived from license revenues. International sales are made primarily through
distributors, and are therefore largely dependent on the efforts of these third
parties. Other risks associated with international operations include tariff
regulations and requirements for export licenses, customer or governmental
requirements for local-language versions of products; unexpected changes in
regulatory requirements; longer accounts receivable payment cycles; difficulties
in managing international operations; potentially adverse tax consequences;
economic and political instability; restrictions on repatriation of earnings;
foreign exchange translation and transaction exposure; and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
countries do not protect the Company's products and intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that such factors will not have an adverse effect on the Company's
future international sales and, consequently, on the Company's business and
results of operations.


1C. EXECUTIVE OFFICERS

               Pursuant to General Instruction G(3) to Form 10-K, the
information regarding executive officers that is otherwise required to be
included in Item 10 is set forth in this Item 1 so that, in reliance on
Instruction 3 to Item 401(b) of Regulation S-K, it need not be included in the
Proxy Statement.

               In June 1997, the Company's Board of Directors appointed Eugene
Goda, Ronald Clear and James Smith President and Chief Executive Officer, Chief
Financial Officer, and Senior Vice President of Sales, respectively.

               Eugene L. Goda, 61, joined the Company as President and Chief
Executive Officer, and Chairman of the Board, on June 10, 1997. From November
1995 until joining the Company, Mr. Goda was a consultant and private investor.
From October 1991 to October 1995, Mr. Goda served as CEO of Simulation
Sciences, Inc., a software company that develops and markets simulation tools.
From July 1989 to September 1991, he served as CEO of Meridian Software Systems,
a systems software provider. He is also a director of Powerwave Technologies,
Inc.

               Ronald J. Clear, 44, joined the Company as Chief Financial
Officer on June 10, 1997. Since 1985, he has served as President of Clear,
Alexander & Associates, a management consulting firm specializing in
recapitalization and turnaround management. From 1983 to 1985, he was Vice
President and CFO of Waubash Computing Systems. From 1982 to 1983, he was CFO of
Russco Industrial.

               James H. Smith, 41, joined the Company as Senior Vice President
of Sales on June 10, 1997. From 1995 until joining the Company, he was Executive
Vice President, Chief Operating Officer and a Director of Select Software Tools,
a developer of object-oriented application development tools. From 1994 to 1995,
he was Vice President of Sales at Softlab, a developer of process automation
tools. From 1992 to 1994, he was Vice President of Sales for the western region
at Knowledgeware, a developer of CASE tools. From 1988 to 1992, he was Vice
President of Sales and Marketing at Meridian, a developer of Ada development
tools.

               Richard H. Dym, 50, is Vice President of Marketing. He joined the
Company in March 1993 as Vice President of Marketing and served as Vice
President of International Operations from April 1995 through September 1996.
From September 1996 through January 1997, he was Vice President and General
Manager of the ObjectShare Division. From 1992 until 1993, he was General
Manager of the Multimedia Division at Autodesk. From 1987 until 1992, he held a
variety of positions with Ashton-Tate Corporation, serving most recently as
Director of Graphics and Decision Support Products.

               Steven G. Harris, 40, joined the Company in October 1996 as Vice
President of Technology Partnerships, and has been Vice President of Development
since January 1997. Mr. Harris was President of Polymorphic Software, Inc.
("Polymorphic"), from its inception in April 1993 until its acquisition by the
Company in October 1997. Polymorphic was a privately held corporation in the
Smalltalk tools and consulting business. From 1983 until March 1993, Mr. held
various positions with Anamet Laboratories, Inc., a systems integration firm,
serving most recently as Manager of Systems Integration and Development.



                                                                              12
<PAGE>   14

ITEM 2. PROPERTIES

               The Company's corporate headquarters are located in Sunnyvale,
California in a 30,000 square foot facility, including office space and a
customer training facility, occupied under a lease expiring in July 1997. The
Company also leases facilities and offices in southern California, Illinois, New
Jersey, Oregon, Virginia, France, Germany, Japan, and the United Kingdom. As
part of its restructuring in fiscal 1997, the Company terminated the leases on
several sales and engineering offices and consolidated its headquarters and
manufacturing warehouse facility into a single building in Sunnyvale,
California. The Company believes that its existing facilities will be adequate
to meet its needs through fiscal 1998.


ITEM 3. LEGAL PROCEEDINGS

               During the third quarter of fiscal 1997, the Company and its
insurers agreed to settle a securities class action lawsuit filed against the
Company and certain of its officers and directors on October 11, 1995, in the
U.S. District Court for the Northern District of California. Under the terms of
the settlement, a settlement fund of $3.1 million was established, of which
$2,850,000 was paid by the Company's insurers and $250,000 was paid by the
Company. The amount paid by the Company is included in interest and other income
(expense) for the quarter. The settlement was approved by the court in March
1997. Although the Company believes that it would have prevailed on the merits
if the suit had proceeded to trial, the Company determined to settle the lawsuit
in order to avoid the expense and distraction of litigation.


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

               There were no matters submitted to a vote of the shareholders of
the Company during the fourth quarter of the fiscal year covered by this report.



                                                                              13
<PAGE>   15

                                     PART II


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

               The information required by this item is incorporated by
reference to inside back cover of the Company's 1997 Annual Report to
Stockholders.


ITEM 6. SELECTED FINANCIAL DATA

               The information required by this item is incorporated by
reference to the same-captioned portion of the Company's 1997 Annual Report to
Stockholders.


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

               The information required by this item is incorporated by
reference to the same-captioned portion of the Company's 1997 Annual Report to
Stockholders.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               The Report of Ernst & Young LLP, Independent Auditors, the
Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements, and the Quarterly Financial Information of
ParcPlace-Digitalk, Inc. are incorporated by reference to the same-captioned
portions of the Company's 1997 Annual Report to Stockholders.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

               Not applicable.



                                                                              14
<PAGE>   16

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               The information concerning the Company's directors required by
this Item is incorporated by reference to the Company's Proxy Statement.

               The information concerning the Company's executive officers is in
Item 1 of this Form 10-K.


ITEM 11. EXECUTIVE COMPENSATION

               The information required by this item is incorporated by
reference to the Company's Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

               The information required by this item is incorporated by
reference to the Company's Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               The information required by this item is incorporated by
reference to the Company's Proxy Statement.



                                                                              15
<PAGE>   17

                                     PART IV


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

(a) The following documents are filed as a part of this Report:

        1.     Financial Statements.

               The following consolidated financial statements and supplementary
               financial information of ParcPlace-Digitalk, Inc. are
               incorporated by reference to the same-captioned portions of the
               Company's 1997 Annual Report to Stockholders:
                      Consolidated Balance Sheets - March 31, 1997 and 1996
                      Consolidated Statements of Operations - Years Ended March
                      31, 1997, 1996, and 1995
                      Consolidated Statements of Stockholders' Equity - Years
                      Ended March 31, 1997, 1996, and 1995
                      Consolidated Statements of Cash Flows - Years Ended March
                      31, 1997, 1996, and 1995
                      Notes to Consolidated Financial Statements
                      Quarterly Financial Information (not covered by the report
                      of Independent auditors)

               The Report of Ernst & Young LLP, Independent Auditors is
               incorporated by reference to the same-captioned portion of the
               Company's 1997 Annual Report to Stockholders.

               The Report of Price Waterhouse LLP, Independent Accountants.

        2.     Financial Statement Schedules.

               The following financial statement schedule should be read in
               conjunction with the Consolidated Financial Statements of
               ParcPlace-Digitalk, Inc. and is included herein.

                      Schedule II    -- Valuation and Qualifying Accounts.

               All other schedules are omitted because they are not applicable
               or the required information is shown in the consolidated
               financial statements or notes thereto.

        3.     Exhibits.

               2.1 (3)    --    Conformed Agreement and Plan of Reorganization
                                by and among the Registrant, Boardwalk Merger 
                                Subsidiary Co., a subsidiary of the Registrant
                                ("Merger Sub"), and Digitalk, Inc.
               2.2 (3)    --    Agreement of Merger by and between Merger Sub 
                                and Digitalk, Inc. (included as Exhibit A to the
                                Agreement and Plan of Reorganization filed as
                                Exhibit 2.1)
               3.1 (1)    --    Certificate of Incorporation
               3.2 (1)    --    Bylaws
               4.3 (1)    --    Specimen of Common Stock Certificate
               10.2B* (2) --    Executive Bonus Plan for Fiscal 1996
               10.2C* (4) --    Executive Bonus Plan for Fiscal 1997
               10.2D*     --    Executive Bonus Plan for Fiscal 1998
               10.3B* (1) --    1989 Stock Option Plan
               10.3Da*(4) --    1993 Stock Plan
               10.3E* (3) --    1995 Director Stock Option Plan
               10.3F* (4) --    Incentive and Nonstatutory Stock Option Plan 
                                adopted by Digitalk, Inc., in 1992
               10.4C* (4) --    1993 Employee Stock Purchase Plan
               10.5 (1)   --    Lease Agreement (Sunnyvale, CA) effective March 
                                9, 1992 between the Registrant and New England 
                                Mutual Life Insurance Company, with Amendments 
                                1, 2 and 3
               10.10 (1)  --    Business Loan Agreement dated October 18, 1991 
                                between the Registrant and Silicon Valley Bank,
                                together with:  Loan Modification Agreement 
                                dated July 15, 1993; 



                                                                              16
<PAGE>   18

                                Promissory Note dated August 11, 1993; Change in
                                Terms Agreement dated July 5, 1992; promissory 
                                Note dated October 18, 1991; and Security 
                                Agreement dated May 9, 1990

               10.10B (3) --    Loan Modification Agreement dated July 15, 1994,
                                amending the agreement filed as Exhibit 10.10
               10.11* (1) --    Form of Indemnification Agreement between the 
                                Registrant and each of its directors and 
                                executive officers
               10.12* (3) --    Form of agreement between the Registrant and 
                                each of its executive officers regarding a 
                                change of control
               10.13A     --    Agreement for Services between the Registrant 
                                and Eugene L. Goda dated June 10, 1997
               10.13B     --    Agreement for Services between the Registrant 
                                and Ronald J. Clear dated June 10, 1997
               10.13C     --    Agreement for Services between the Registrant 
                                and James H. Smith dated June 10, 1997
               11.1       --    Statement Regarding Computation of Per Share 
                                Earnings
               13.1       --    Portions of Registrant's 1997 Annual Report to 
                                Stockholders incorporated by reference in this 
                                report (to be deemed filed only to the extent
                                required by the instruction to exhibits for 
                                reports on Form 10-K)
               21.1       --    List of Subsidiaries
               23.1       --    Consent of Ernst & Young LLP, Independent 
                                Auditors
               24.1       --    Power of Attorney
               27.1       --    Financial Data Schedule

(1)            Incorporated by reference to the same-numbered exhibit to the
               Company's Registration Statement on Form S-1 (No. 33-73008)

(2)            Incorporated by reference to the same-numbered exhibit to the
               Company's Annual Report on Form 10-K for the year ended March 31,
               1994

(3)            Incorporated by reference to the same-numbered exhibit to the
               Company's Annual Report on Form 10-K for the year ended March 31,
               1995

(4)            Incorporated by reference to the same-numbered exhibit to the
               Company's Annual Report on Form 10-K for the year ended March 31,
               1996

*              Management contract or compensatory plan

(b)  Reports on Form 8-K.

               No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1997.



                                                                              17
<PAGE>   19


                                   SIGNATURES



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

DATE:  June 30, 1997               PARCPLACE-DIGITALK, INC.


                                   By:    /s/ EUGENE L. GODA
                                   -------------------------------------------
                                          Eugene L. Goda
                                          President and Chief Executive Officer



                                POWER OF ATTORNEY

               Each individual whose signature appears below hereby appoints
Eugene L. Goda and Ronald J. Clear, and each of them acting individually, his or
her attorneys-in-fact with full power of substitution, for him or her in any and
all capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming
signatures as they may be signed by said attorneys to any and all such
amendments.

               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>


             NAME                                   TITLE                           DATE
             ----                                   -----                           ----
PRINCIPAL EXECUTIVE OFFICER:

<S>                                      <C>                                     <C> 
/s/ EUGENE L. GODA                       President and Chief Executive Officer   June 30, 1997
-------------------------------------    and Chairman of the Board 
Eugene L. Goda                                                     
                                         
PRINCIPAL FINANCIAL OFFICER AND 
PRINCIPAL ACCOUNTING OFFICER:


/s/ RONALD J. CLEAR                      Chief Financial Officer                 June 30, 1997
-------------------------------------
Ronald J. Clear

ADDITIONAL DIRECTORS:

/s/ JAMES C. ANDERSON                    Director                                June 30, 1997
-------------------------------------
James C. Anderson


/s/ JOHN B. CARRINGTON                   Director                                June 30, 1997
-------------------------------------
John B. Carrington


/s/ JOS C. HENKENS                       Director                                June 30, 1997
-------------------------------------
Jos C. Henkens


/s/ PHILIP C. KANTZ                      Director                                June 30, 1997
-------------------------------------
Philip C. Kantz

</TABLE>


                                                                              18
<PAGE>   20


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Digitalk, Inc.


In our opinion the statements of income, of stockholders' equity (deficit) and
of cash flows of Digitalk, Inc. (not presented separately herein) present
fairly, in all material respects, the results of its operations and its cash
flows for the year ended March 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of Digitalk, Inc. for any period subsequent to March 31,
1995.




/s/ PRICE WATERHOUSE LLP

July 26, 1995, except for as to Note 8, 
which is as of August 29, 1995 
Costa Mesa, California



                                                                              19
<PAGE>   21

                            PARCPLACE-DIGITALK, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                        Additions
                                                 ------------------------
                                     Balance at   Charged to   Charged to              Balance at
                                     beginning    costs and       net                      end
                                     of period     expenses     revenues   Deductions*  of period
                                     ---------     --------     --------   ----------- ----------
<S>                                     <C>          <C>        <C>            <C>        <C> 
Description
Allowance for Doubtful Accounts:
    Year Ended March 31, 1997           $498         $939       $       0      $479       $958
    Year Ended March 31, 1996            533          285               0       320        498
    Year Ended March 31, 1995            134          491               0        92        533

Allowance for Sales Returns:
    Year Ended March 31, 1997            969            0            1964      1582       1351
    Year Ended March 31, 1996            271            0            1600       902        969
    Year Ended March 31, 1995            499            0             609       837        271

</TABLE>


* Uncollectible accounts written off, net of recoveries



                                                                              20
<PAGE>   22

                            PARCPLACE-DIGITALK, INC.



                           ANNUAL REPORT ON FORM 10-K

                            YEAR ENDED MARCH 31, 1997



                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>


Exh. No.                                Description                                                                               
--------                                -----------   
<S>                <C>        

 10.2D      --     Executive Bonus Plan for Fiscal 1998

 10.13A     --     Agreement for Services between the Registrant and Eugene L. Goda 
                   dated June 10, 1997 

 10.13B     --     Agreement for Services between the Registrant and Ronald J. Clear
                   dated June 10, 1997 

 10.13C     --     Agreement for Services between the Registrant and James H. Smith 
                   dated June 10, 1997 

 11.1       --     Statement Regarding Computation of Per Share Earnings

 13.1       --     Portions of Registrant's 1997 Annual Report to Stockholders 
                   incorporated by reference in this report (to be deemed filed only to 
                   the extent required by the instruction to exhibits for reports on Form 10-K)

 21.1       --     List of Subsidiaries

 23.1       --     Consent of Ernst & Young LLP, Independent Auditors

 24.1       --     Power of Attorney (see signature page of this Form 10-K)

 27.1       --     Financial Data Schedule 

</TABLE>