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

                                   FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934


<TABLE>
<S>                                                  <C>
For the Fiscal Year Ended:   SEPTEMBER 30, 1996      Commission File Number:  0-18059
                             ------------------                               -------
</TABLE>


                       PARAMETRIC TECHNOLOGY CORPORATION
                       ---------------------------------
             (Exact name of registrant as specified in its charter)
             ------------------------------------------------------

     MASSACHUSETTS                                       04-2866152
 ----------------------               ---------------------------------------
(State or other jurisdiction of       (I.R.S. Employer Identification Number)
incorporation or organization)

                    128 TECHNOLOGY DRIVE, WALTHAM, MA  02154
                    ----------------------------------------
          (Address of principal executive offices, including zip code)

                               (617) 398-5000
                       -------------------------------    
              (Registrant's telephone number, including area code)

Securities registered pursuant to      Securities registered pursuant
Section 12(b) of the Act:              Section 12(g) of the Act:

             None                      COMMON STOCK, $.01 PAR VALUE PER SHARE
                                       --------------------------------------
                                                 (Title of Class)
                                                 ----------------

          Indicate by check mark whether the registrant has (i) 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 (ii) 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 the 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 nonaffiliates
of the registrant as of October 31, 1996 was $5,404,022,974.

          Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

     Common Stock, $.01 par value per share             127,462,608
     --------------------------------------          ------------------
                    Class                      Outstanding at October 31, 1996

                      DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Annual Report to Stockholders for the fiscal year
ended September 30, 1996 are incorporated by reference into Parts I and II.

           Portions of the definitive Proxy Statement in connection with the
Annual Meeting of Stockholders to be held February 13, 1997 are incorporated
by reference into Part III.

                                       1

<PAGE>
 
                   Important Factors Regarding Future Results

Information provided by the Company, including information contained in this
Annual Report on Form 10-K, or by its spokespersons from time to time may
contain forward-looking statements concerning projected financial performance,
market and industry segment growth, product development and commercialization,
or other aspects of future operations.  Such statements, made pursuant to the
safe harbor established by recent securities legislation, are based on the
assumptions of  management at the time such statements are made.  The Company
cautions investors that its performance (and, therefore, any forward-looking
statement) is subject to risks and uncertainties.  Various important factors,
including but not limited to those discussed herein, may cause the Company's
future results to differ materially from those projected in any forward-looking
statement.  Important information about the basis for those assumptions is
contained in "Important Factors Regarding Future Results" included in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section in the 1996 Annual Report to Stockholders, which section is
incorporated herein by reference.



                                     PART I


ITEM 1:    Business

                                    General

Parametric Technology Corporation (the "Company") develops, markets and supports
the Pro/ENGINEER(R) family of software products - a suite of more than 70
application modules that automate the design-through-manufacturing process
within the mechanical computer-aided design, manufacturing and engineering
("CAD/CAM/CAE") industry.  The Company's Pro/ENGINEER product line includes
capabilities in industrial design; mechanical design, including large assembly
management; functional simulation; manufacturing; information management; and
data exchange.

Mechanical CAD/CAM/CAE is a complex, iterative process encompassing a broad
spectrum of distinct engineering disciplines which is essential to the
development of virtually all manufactured products, ranging from consumer
products to jet aircraft.  Manufacturers compete on the basis of cost, time to
market and product performance criteria, which are significantly affected by the
quality and length of the design process.  The Company's mechanical CAD/CAM/CAE
products offer a high-performance, fully integrated solution which enables end-
users to reduce the time to market and manufacturing costs for their products
and to improve product quality by easily evaluating multiple design
alternatives. The Company believes that its Pro/ENGINEER product line offers
better price/performance, greater ease of use, and more complete integration of
multiple engineering disciplines than other available mechanical CAD/CAM/CAE
products.

The Company's Pro/ENGINEER product line is based on an innovative software
architecture that incorporates a unique parametric, feature-based solid modeling
technology. The Company's Pro/ENGINEER software uses a single data structure to
capture changes made in any stage of the design-through-manufacturing process
and to automatically update designs and all engineering deliverables. The single
data structure allows all changes to be propagated automatically throughout the
design and manufacturing process, thus enabling users to integrate multiple
engineering activities in the mechanical design process and conduct them on a
concurrent basis.  In addition, as a result of the data structure of the
Company's products, engineers can create, process, modify and store designs
quickly and easily, in a highly efficient manner.

The Pro/ENGINEER product line runs on all major UNIX(R) and Microsoft(R) Windows
NT(TM) and Windows(R) 95 Workstation Operating System platforms, and is 
hardware-independent. The product is written in "C" programming language, which
allows for portability from one standard workstation to another. The 
Pro/ENGINEER product line primarily competes in the high-end of the mechanical 
CAD/CAM/CAE
market.

                                  Acquisitions

On July 10, 1996, the Company acquired project modeling and management software
("Reflex") technology from Greenshire License Co. NV for $32,119,000 which
included the issuance of 113,000 shares of the Company's common stock with a
fair value of $5,000,000 at the time of acquisition and $5,000,000 payable in
the fourth quarter of fiscal

                                       2

<PAGE>
 
1997. Payments of $22,119,000 in fiscal 1996 were from the Company's existing
cash balances. The acquisition has been accounted for as a purchase.

On August 1, 1995, the Company acquired Rasna Corporation  ("Rasna"), a
developer and marketer of software products for mechanical computer-aided
engineering, by merging it into the Company pursuant to an Agreement and Plan of
Merger dated as of May 30, 1995. Based on the number of shares of Rasna common
stock, the Company issued 7,541,000 shares of common stock and reserved
1,045,000 shares of its common stock for outstanding Rasna stock options
assumed. The merger was accounted for as a pooling of interests.

On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of the Conceptual Design and Rendering System ("CDRS")
software business operated by the Design Software Division of Evans & Sutherland
Computer Corporation for approximately $33,507,000 in cash, which was paid by
the Company from its existing cash balances. The acquisition has been accounted
for as a purchase.



                              Product Development

The mechanical CAD/CAM/CAE industry is characterized by rapid technological
advances.  Accordingly, the Company's future success will depend upon its
ability to enhance its current products and develop and introduce new products
and modules which keep pace with technological developments and address
increasingly sophisticated needs of its customers.  The Company expects to
continue to expand the scope of applications of its Pro/ENGINEER product family,
to expand the functionality set of each of the acquired technologies, and to
fully integrate all of the product families.  The Company's ability to develop
new products rapidly is facilitated by the modular structure of its software
code, which enables functional subroutines used in existing products to be
accessed and utilized by new software modules, thereby reducing the amount of
new code required to develop additional products.  The major benefit of this
approach is rapid development of new functionality.  The Company intends to
focus its ongoing product development efforts on additional products within the
Pro/ENGINEER product family, including tools for fully simulating the design,
manufacturing, and function of our customers' products, and tools to manage all
of the resulting engineering data. The Company intends to further accelerate
these efforts to provide a completely integrated suite of tools for our
customers. There can be no assurance, however, that the Company will be
successful in developing and marketing product enhancements or new products and
modules that respond to technological changes by others, or that its new
products will adequately address the needs of the marketplace.

The Company's practice has been to issue two major releases of its product line
per year, each of which has generally included several new modules.  In
connection with each release, the Company works closely with its customers to
define improvements and enhancements, which are then integrated into the
products.  Using this approach, customers become involved in the product design
process to validate feasibility and to influence functionality early in the
product's life-cycle.  In addition, the Company's Cooperative Software Program
("CSP") provides the mechanisms and environment to facilitate the integration of
complementary products with the Pro/ENGINEER product line.  Through the
Company's open software toolkit, the CSP members can build tightly integrated
solutions that satisfy various requirements of the Company's customers.

As of September 30, 1996, the Company's product development was performed by 453
employees at its Waltham, Massachusetts, headquarters; its San Jose, California
and Salt Lake City, Utah offices; and abroad.  The development group includes
experts in mechanical engineering, advanced mathematical techniques, database
structures and operating systems technology.

During the years ended September 30, 1996, 1995 and 1994, the Company incurred
expenses of $39,476,000, $25,591,000 and $19,882,000, respectively, on research
and development.


                                     Sales

The Company focuses its marketing and sales efforts primarily on the
electronics, aerospace, automotive, consumer products, medical equipment,
industrial equipment and telecommunications industries.  The Company derives
more than

                                       3

<PAGE>
 
90% of its revenue from products distributed directly to its customers and the
remainder through third-party distributors. The Company's sales force manages
the activities of all distribution channels within a geographic area.

As of September 30, 1996, the Company's sales and marketing organization
consisted of 668 people in the United States and 977 people abroad.  The Company
has sales and/or support offices located in 84 cities across the United States
and in 91 cities in 26 foreign countries.

Since inception, the Company has licensed software products for more than 71,500
seats to nearly 11,500 companies.  A seat of software generally consists of the
Company's core product, Pro/ENGINEER, together with several other software
modules, configured to serve the needs of a single end user.  End users of the
Company's products range from small companies to some of the world's largest
manufacturing organizations.  No single customer accounted for more than 10% of
the Company's revenue in fiscal 1996.

Information with respect to foreign and domestic operations and export sales may
be found in Note L to the Consolidated Financial Statements of the Annual Report
to Stockholders for the fiscal year ended September 30, 1996 ("1996 Annual
Report to Stockholders"), which financial statements are included in Exhibit
13.1 to this Annual Report on Form 10-K and incorporated herein by reference.

                                  Competition

The mechanical CAD/CAM/CAE industry is highly competitive, and is characterized
by rapidly advancing technology.  In order to maintain or improve its position
in this industry, the Company must continue to enhance its current products and
develop, in a timely fashion, new products which address the rapidly changing
needs of the marketplace.

The Company competes most directly with the CADAM(R) and CATIA(R) products
developed by Dassault and marketed by IBM(R), the CADDS(R) product marketed by
Computervision Corporation, the UNIGRAPHICS(R) product marketed by EDS, the
I/EMS(TM) product marketed by Intergraph Corporation and the I-DEAS Master
Series(TM) product marketed by Structural Dynamics Research Corporation. The
Company believes that the principal bases for competition in its markets are
product functionality, price/performance characteristics, product portability,
ease of product use, sales and marketing strength, support services and
corporate reputation. The Company is aware of ongoing efforts by competitors,
some of whom have greater resources than the Company, to develop equivalent or
superior technology and market these products at lower prices. Should a
competitor successfully bring such a product to market and be able to sell it at
a lower price in the future, the Company's operating results could be adversely
affected. The Company's future success will depend in a large part on its
ability to license additional products and services to its existing customer
base as well as the installed customer bases of traditional mechanical
CAD/CAM/CAE suppliers.

                               Proprietary Rights

The Company regards its software products as proprietary and attempts to protect
its intellectual property rights by relying on copyrights, trademarks, patents
and common law safeguards, including trade secret protection, as well as
restrictions on disclosures and transferability in its agreements with other
parties.  The Company distributes its products under software license
agreements, which grant customers perpetual licenses to, rather than ownership
of, the Company's products and which contain various provisions protecting the
Company's ownership of and the confidentiality of the underlying technology.
The Company also limits access to and distribution of its software,
documentation and other proprietary information.  The source code of the
Company's products is protected as a trade secret and as an unpublished
copyright work.  Despite these precautions, it may be possible to copy or
otherwise obtain and use the Company's products or technology without
authorization.  In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries.

The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal protections surrounding
its technology.  The Company believes that its products and technology do not
infringe any existing proprietary rights of others, although there can be no
assurance that third parties will not assert infringement claims in the future.

Pro/ENGINEER and Parametric Technology Corporation are registered trademarks and
all product names in the PTC product family and the PTC logo are trademarks of
Parametric Technology Corporation in the United States and other countries.

                                       4

<PAGE>
 
                                    Backlog

The Company generally ships its products within 30 days after acceptance of a
customer purchase order and execution of a software license agreement.
Accordingly, the Company does not believe that its backlog at any particular
point in time is indicative of future sales levels.

                                   Employees

The Company's success depends upon its ability to attract and retain highly
skilled technical, managerial and sales personnel.  Competition for such
personnel in the computer industry in general, and the mechanical CAD/CAM/CAE
industry in particular, is intense.  Although the Company has not experienced
any significant difficulty to date in attracting and retaining skilled
personnel, there can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to continue to grow and
operate profitably, both domestically and internationally.

As of September 30, 1996, the Company had 2,774 employees, including 1,645 in
sales, marketing and support activities; 418 in customer support, training and
consulting; 258 in management, finance and administration; and 453 in product
development.  Of these employees, 1,477 were located in the United States and
1,297 were located in foreign countries.


I
TEM 2:    Properties

The Company's executive offices are located in approximately 262,000 square feet
of office space in Waltham, Massachusetts which is leased for an annual rent of
approximately $5,384,000.  The Company also leases 176 additional sales and/or
support offices and development offices in the United States and, through its
wholly-owned subsidiaries, abroad.  The Company believes that its facilities are
adequate for its present needs, but will continue to evaluate the need for
additional space as the growth of the business requires.


ITEM 3:     Legal Proceedings

Not applicable.


ITEM 4:    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the last quarter
of fiscal 1996.

EXECUTIVE OFFICERS OF THE REGISTRANT

       The executive officers of the Company as of November 14, 1996
       were as follows:

<TABLE>
<CAPTION>
 
       Name                       Age                        Position
       ----                       ---                        --------
   <S>                           <C>                <C>
      Steven C.  Walske           44                 Chairman of the Board of Directors and Chief Executive Officer
      C. Richard Harrison         41                 President and Chief Operating Officer
      Edwin J. Gillis             47                 Executive Vice President of Finance and Administration, Chief
                                                          Financial Officer and Treasurer
      Michael E. McGuinness       36                 Executive Vice President of Sales
      Kirk D. Bowman              31                 Senior Vice President of Business Development
      Robert C. Gremley           31                 Senior Vice President, Professional Services
      Donald R. Henrich           38                 Senior Vice President of Marketing
      Thomas W. Jensen, Ph.D.     43                 Senior Vice President of Research and Development
      Martha L. Durcan            37                 Vice President, Corporate Counsel and Clerk
      James F. Kelliher           37                 Vice President of Finance and Assistant Treasurer
      John G. Mokas               37                 Controller
</TABLE>


Mr. Walske has been Chairman of the Board of Directors since August 1994 and
Chief Executive Officer and a director of the Company since he joined the
Company in December 1986.  Mr. Walske was President of the Company from December
1986 to August 1994 and Clerk of the Company from December 1986 to February
1993.

                                       5

<PAGE>
 
Mr. Harrison has been President and Chief Operating Officer since August 1994.
Prior to that, Mr. Harrison served as Senior Vice President of Sales and
Distribution from September 1991 until August 1994 and as Vice President of
Sales and Distribution from May 1987 to September 1991.

Mr. Gillis has been Executive Vice President of Finance and Administration since
October 1996 and Chief Financial Officer and Treasurer since October 1995. Mr.
Gillis served as Senior Vice President of Finance and Administration from
October 1995 to September 1996.   Prior to joining the Company, Mr. Gillis was
Senior Vice President of Finance and Operations and Chief Financial Officer at
Lotus Development Corporation from August 1991 until September 1995.

Mr. McGuinness has been Executive Vice President of Sales since October 1996.
Prior to that, Mr. McGuinness had served as Senior Vice President of Sales and
Distribution from September 1994 to September 1996, and Vice President of North
American Sales Operations from October 1991 to September 1994.

Mr. Bowman has been Senior Vice President of Business Development since October
1996.  Prior to that, Mr. Bowman served as Vice President, European Operations
from October 1994 to September 1996, Vice President, Far East Operations from
October 1993 to September 1994, Regional Director from October 1992 to September
1993, and District Sales Manager from October 1991 to September 1992.

Mr. Gremley has been Senior Vice President of Professional Services since
November 1996.  Prior to that, Mr. Gremley served as Vice President for
Implementation Services from September 1995 to October 1996, Vice President of
Consulting Services from December 1994 to August 1995, Director of Consulting
Services from October 1992 to November 1994, Manager of Application Services
from December 1991 to September 1992, and Manager of Corporate Accounts from
March 1990 to November 1991.

Mr. Henrich has been Senior Vice President of Marketing since October 1996.
Prior to that, Mr. Henrich was Vice President of Asia Pacific Operations from
October 1994 to September 1996, Managing Director of Southern Europe from
October 1993 to September 1994, Regional Director from July 1993 to October
1993, and District Sales Manager from April 1992 to June 1993.  Prior to joining
the Company, Mr. Henrich was Regional Sales Manager at Adra Systems, Inc. from
April 1990 to March 1992.

Dr. Jensen has been Senior Vice President of Research and Development since he
joined the Company in April 1995. Prior to joining the Company, Dr. Jensen was
Vice President and General Manager from May 1993 until April 1995, and from July
1986 until May 1993 was Director of Research and Development of the Design
Software Division at Evans & Sutherland Computer Corporation.

Ms. Durcan has served as Vice President since October 1993, Corporate Counsel
since joining the Company in March 1992 and as Clerk since February 1993.  Prior
to joining the Company, Ms. Durcan was an associate with the law firm of
Goodwin, Procter & Hoar from September 1989 to March 1992.

Mr. Kelliher has been Vice President of Finance since December 1994.  Prior to
that, Mr. Kelliher had served as Director of Corporate Finance from November
1994 to December 1994, Chief Financial Officer of Europe from May 1993 to
November 1994, Manager of Finance and Assistant International Controller from
February 1992 to May 1993, and Manager of Budget and Analysis from October 1991
to February 1992.

Mr. Mokas has been Controller since he joined the Company in August 1993.  Prior
to joining the Company, Mr. Mokas was a manager at Coopers & Lybrand L.L.P. from
May 1988 to July 1993.


                                    PART II


ITEM 5:    Market for Registrant's Common Equity and Related Stockholder Matters

On July 10, 1996, the Company issued 113,000 shares of its common stock to
Greenshire License Co. NV ("Greenshire") as partial consideration for the
acquisition of certain software described in more detail in Part I, Item 1 of
this Annual Report on Form 10-K.  The shares were issued without registration
under the Securities Act of 1933 in reliance on the exemption provided by
Section 4(2) thereof based, among other matters, on Greenshire's representations
as to its investment intent and sophistication in financial matters.  Further
information with respect to this item may be found in the sections captioned
"Quarterly Financial Information" and "Supplemental Financial Information"
appearing in the 1996 Annual Report to Stockholders.  Such information is
incorporated herein by reference.

                                       6

<PAGE>
 

ITEM 6:     Selected Financial Data

Information with respect to this item may be found in the section captioned
"Five Year Summary of Selected Financial Data" appearing in the 1996 Annual
Report to Stockholders.  Such information is incorporated herein by reference.


ITEM 7:     Management's Discussion and Analysis of Financial Condition and
Results of Operations

Information with respect to this item may be found in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the 1996 Annual Report to Stockholders.   Such
information is incorporated herein by reference.


ITEM 8:     Financial Statements and Supplementary Data

Information with respect to this item may be found on pages 28 through 39 and in
the section entitled "Quarterly Financial Information" appearing in the 1996
Annual Report to Stockholders.   Such information is incorporated herein by
reference.


ITEM 9:     Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

On November 17, 1995, the Board of Directors of the Company, upon recommendation
of its Audit Committee, approved a change in the Company's independent
accountants from Price Waterhouse LLP to Coopers & Lybrand L.L.P. effective for
the fiscal year ended September 30, 1996.  Price Waterhouse LLP served as the
Company's independent accountants for fiscal years 1992 through 1995.  During
these periods, the Company did not have any disagreements with Price Waterhouse
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, nor did any reports issued by Price
Waterhouse LLP contain an adverse opinion or a disclaimer of opinion, nor were
such reports qualified or modified as to uncertainty, audit scope or accounting
principles.



                                    PART III


ITEM 10:     Directors and Executive Officers of the Registrant

Information with respect to directors of the Company may be found in the
sections captioned "Election of Directors" appearing in the 1997 Proxy
Statement.  Such information is incorporated herein by reference.  Information
with respect to Executive Officers of the Company may be found under the section
captioned "Executive Officers of the Registrant" in Part I of this Annual Report
on Form 10-K.


ITEM 11:     Executive Compensation

Information with respect to this item may be found in the sections captioned
"Director Compensation" and "Compensation of Executive Officers" appearing in
the 1997 Proxy Statement.  Such information is incorporated herein by reference.


ITEM 12:     Security Ownership of Certain Beneficial Owners and Management

Information with respect to this item may be found in the section captioned
"Principal Stockholders" appearing in the 1997 Proxy Statement.  Such
information is incorporated herein by reference.


ITEM 13:     Certain Relationships and Related Transactions

Not applicable.

                                       7

<PAGE>
 

                                    PART IV


ITEM 14:     Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Documents Filed as Part of Form 10-K
     1. Financial Statements
        -Consolidated Balance Sheet as of September 30, 1996 and 1995*
        -Consolidated Statement of Income for the years ended September
         30, 1996, 1995 and 1994*
        -Consolidated Statement of Stockholders' Equity for the years
         ended September 30, 1996, 1995 and 1994*
        -Consolidated Statement of Cash Flows for the years ended
         September 30, 1996, 1995 and 1994*
        -Notes to Consolidated Financial Statements*
        -Reports of Independent Accountants for the years ended September
         30, 1996*, 1995 and 1994
        -Independent Auditors' Report for Rasna Corporation as of
         December 31, 1994 and for the year then ended
     2. Financial Statement Schedules
        -Reports of Independent Accountants for the years ended September
         30, 1996, 1995 and 1994
        -Schedule II - Valuation and Qualifying Accounts
        -Schedules other than the one listed above have been omitted
         since they are either not required, not applicable, or the
         information is otherwise included.
     3. Listing of Exhibits
         The Exhibits filed as part of this Annual Report on Form 10-K are
         listed in the Exhibit Index immediately preceding such Exhibits, and
         are incorporated herein by reference.

(b)   Reports on Form 8-K
      None.

(c)   Exhibits
      The Company hereby files as part of this Annual Report on Form 10-K the
      Exhibits listed in the attached Exhibit Index.

(d)   Financial Statement Schedules
      The Company hereby files as part of this Annual Report on Form 10-K the
      financial statement schedule listed in Item 14(a)2 as set forth above.
 
- --------
*Referenced information is contained in the 1996 Annual Report to Stockholders,
filed as Exhibit 13.1 hereto.

                                       8

<PAGE>
 

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on the 23rd day of
December, 1996.

                                  PARAMETRIC TECHNOLOGY CORPORATION


                                  By  /S/  Steven C. Walske
                                      -----------------------------
                                      Steven C. Walske, Chairman
                                      and Chief Executive Officer


                                POWER OF ATTORNEY
                                -----------------


We, the undersigned officers and directors of Parametric Technology Corporation,
hereby severally constitute Edwin J. Gillis and Martha L. Durcan, Esq., and each
of them singly, our true and lawful attorneys with full power to them, and each
of them singly, to sign for us and in our names in the capacities indicated
below any and all subsequent 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 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 indicated below on the 23rd day of December, 1996.


<TABLE>
<CAPTION>
                        
Signature                         Title
- ---------                         -----

<S>                             <C>
/S/ Steven C. Walske              Chief Executive Officer and Chairman of the Board
- -----------------------           (Principal Executive Officer)
Steven C. Walske                         

/S/ C. Richard Harrison           President, Chief Operating Officer
- -----------------------           and Director
C. Richard Harrison

/S/ Edwin J. Gillis               Executive Vice President of Finance
- -----------------------           and Administration, Chief Financial Officer and Treasurer
Edwin J. Gillis                   (Principal Financial Officer and Principal Accounting Officer)


/S/ Robert N. Goldman             Director
- -----------------------                              
Robert N. Goldman


/S/ Donald K. Grierson            Director
- -----------------------                             
Donald K. Grierson


                                  Director
- -----------------------                             
Oscar B. Marx, III


/S/ Michael E. Porter             Director
- -----------------------                              
Michael E. Porter


/S/ Noel G. Posternak             Director
- -----------------------                              
Noel G. Posternak
</TABLE>


                                       9

<PAGE>
 

                                 EXHIBIT INDEX
                                 -------------
                                        
                                        
EXHIBIT
NUMBER
- ------

2.1    - Asset Purchase Agreement dated as of March 1, 1995 among Parametric
         Technology Corporation, a Massachusetts corporation, PTC Acquisition
         Corporation, a Massachusetts corporation and wholly owned subsidiary of
         Parametric Technology Corporation, and Evans & Sutherland Computer
         Corporation, a Utah corporation with Amendment No. 1 thereto (filed as
         Exhibit 2.1 to the Current Report on Form 8-K dated April 12, 1995 and
         incorporated herein by reference).

2.2    - Agreement and Plan of Merger dated as of May 30, 1995 among Parametric
         Technology Corporation, Rasna Corporation and certain shareholders of
         Rasna Corporation (filed as Exhibit 2.1 to the Quarterly Report on Form
         10-Q for the fiscal quarter ended July 1, 1995 and incorporated herein
         by reference).

3.1    - Restated Articles of Organization of the Company (filed as Exhibit 3.1
         to the Quarterly Report on Form 10-Q for the fiscal quarter ended March
         30, 1996 and incorporated herein by reference).

3.2    - By-Laws, as amended and restated, of the Company; filed
         herewith.

10.1   - Registration Rights Agreement dated March 26, 1987, as amended, among
         the Company and certain investors of the Company (filed as Exhibit 10.1
         to the Company's Registration Statement on Form S-1 (File No. 33-31620)
         and incorporated herein by reference).

10.2*  - 1987 Incentive Stock Option Plan of the Company, as amended;
         filed herewith.

10.3   - Lease dated May 22, 1987 by and between the Company and the Trustees of
         128 Technology Trust (filed as Exhibit 10.4 to the Company's
         Registration Statement on Form S-1 (File No. 33-31620) and incorporated
         herein by reference).

10.4   - Form of the Company's Distributorship Agreement (filed as Exhibit 10.8
         to the Company's Registration Statement on Form S-1 (File No. 33-31620)
         and incorporated herein by reference).

10.5   - Form of the Company's Agreement for Licensed Products (filed as Exhibit
         10.11 to the Company's Registration Statement on Form S-1 (File No. 33-
         31620) and incorporated herein by reference).

10.6*  - Employment Letter with Steven C. Walske dated October 17, 1986 (filed
         as Exhibit 10.12 to the Company's Registration Statement on Form S-1
         (File No. 33-31620) and incorporated herein by reference).

10.7*  - Severance Agreement with Steven C. Walske dated June 20, 1990; 
         filed herewith.

10.8   - Lease Amendment dated November 8, 1989 by and between the
         Company and the Trustees of 128 Technology Trust; filed herewith.

10.9   - Lease Amendment dated January 21, 1991 by and between the Company and
         the Trustees of 128 Technology Trust (filed as Exhibit 10.20 to the
         Annual Report on Form 10-K for the fiscal year ended September 30, 1991
         and incorporated herein by reference).

10.10* - Parametric Technology Corporation 1992 Director Stock Option Plan, as 
         amended; filed herewith.

__________
*Identifies a management contract or compensatory plan or arrangement in which
an executive officer or director of the Company participates.

                                       10

<PAGE>
 
10.11  - Lease Amendment dated March 6, 1992 by and between the Company and the
         Trustees of 128 Technology Trust (filed as Exhibit 10.18 to the Annual
         Report on Form 10-K for the fiscal year ended September 30, 1992 and
         incorporated herein by reference).

10.12  - Lease Amendment dated November 18, 1992 by and between the Company and
         the Trustees of 128 Technology Trust (filed as Exhibit 10.19 to the
         Annual Report on Form 10-K for the fiscal year ended September 30, 1992
         and incorporated herein by reference).

10.13  - Form of the Company's Sales Representative Agreement (filed as Exhibit
         10.10 to the Company's Registration Statement on Form S-1 (File No. 33-
         31620) and incorporated herein by reference).

10.14  - Lease Amendment dated June 8, 1993 by and between the Company and the
         Trustees of 128 Technology Trust (filed as Exhibit 10.21 to the Annual
         Report on Form 10-K for the fiscal year ended September 30, 1993 and
         incorporated herein by reference).

10.15* - First Amendment to Severance Agreement with Steven C. Walske dated June
         15, 1993 (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
         for the fiscal quarter ended July 3, 1993 and incorporated herein by
         reference).

10.16* - Severance Agreement with C. Richard Harrison dated August 19, 1994
         (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the
         fiscal year ended September 30, 1994 and incorporated herein by
         reference).

10.17  - Lease Amendment dated April 14, 1994 by and between the Company and the
         Trustees of 128 Technology Trust (filed as Exhibit 10.22 to the Annual
         Report on form 10-K for the fiscal year ended September 30, 1994 and
         incorporated herein by reference).

10.18  - Lease Amendment dated January 19, 1995 by and between the Company and
         the Trustees of 128 Technology Trust (filed as Exhibit 10.23 to
         the Annual Report on Form 10-K for the fiscal year ended September 30,
         1995 and incorporated herein by reference).

10.19* - Severance Agreement with Edwin J. Gillis dated October 2, 1995 (filed
         as Exhibit 10.24 to the Annual Report on Form 10-K for the fiscal year
         ended September 30, 1995 and incorporated herein by reference).

10.20* - Parametric Technology Corporation 1996 Directors Stock Option Plan, as
         amended; filed herewith.

13.1   - Annual Report to Stockholders for the fiscal year ended September 30,
         1996 (which is not deemed to be "filed" except to the extent that
         portions thereof are expressly incorporated by reference in this Annual
         Report on Form 10-K); filed herewith.
         
16.1   - Letter from Price Waterhouse LLP (filed as Exhibit 16.1 to the Current
         Report on Form 8-K dated November 17, 1995 and incorporated herein by
         reference).

21.1   - Subsidiaries of the Company; filed herewith.
 
23.1   - Report of Coopers & Lybrand L.L.P.; filed herewith.
 
23.2   - Consent of Coopers & Lybrand L.L.P.; filed herewith.
 
23.3   - Report of Price Waterhouse LLP; filed herewith.
 
23.4   - Report of Price Waterhouse LLP on Financial Statement Schedules; filed
         herewith.
__________
*Identifies a management contract or compensatory plan or arrangement in which
an executive officer or director of the Company participates.

                                       11

<PAGE>
 
23.5   - Consent of Price Waterhouse LLP; filed herewith.
 
23.6   - Report of Deloitte & Touche LLP; filed herewith.
 
23.7   - Consent of Deloitte & Touche LLP; filed herewith.

27.1   - Financial Data Schedule; filed herewith.
__________
*Identifies a management contract or compensatory plan or arrangement in which
an executive officer or director of the Company participates.

                                      12

<PAGE>
 
                                                                     SCHEDULE II

                       PARAMETRIC TECHNOLOGY CORPORATION
                       Valuation and Qualifying Accounts


<TABLE>
<CAPTION>

(in thousands)
==================================================================================================================================
              Column A                       Column B                 Column C                  Column D              Column E
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                    Additions
                                                            --------------------------  

                                            Balance          Charged to                                                Balance
                                         at Beginning        costs and       Charged to                                at end
Description                                of period         expenses       other accounts     Deductions(1)          of period
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>            <C>                <C>                   <C>

YEAR ENDED SEPTEMBER 30, 1996
Allowance for Doubtful Accounts......       $2,733             1,404              -               (1,227)              $2,910

YEAR ENDED SEPTEMBER 30, 1995
Allowance for Doubtful Accounts......       $2,694             1,110              -               (1,071)              $2,733 

YEAR ENDED SEPTEMBER 30, 1994
Allowance for Doubtful Accounts......       $1,546             1,388              -                 (240)              $2,694 

</TABLE>

- ------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.

                                       13





<PAGE>
 

                                                                     EXHIBIT 3.2

 
                                    BY-LAWS

                                       OF

                       PARAMETRIC TECHNOLOGY CORPORATION

                     (As Amended through November 21, 1990)

<PAGE>
 
                                    By-Laws
                                    -------

                               Table of Contents
                               -----------------

<TABLE>
<S>                            <C>                                                     <C>
Article 1 - Stockholders       ....................................................... 1
 
               Section 1.1     Place of Meetings .....................................   1
               Section 1.2     Annual Meeting ........................................   1
               Section 1.3     Special Meetings ......................................   1
               Section 1.4     Notice of Meetings ....................................   1
               Section 1.5     Quorum ................................................   2
               Section 1.6     Adjournments ..........................................   2
               Section 1.7     Voting and Proxies ....................................   2
               Section 1.8     Action at Meeting .....................................   2
               Section 1.9     Action without Meeting ................................   3
 
Article 2 - Directors          ....................................................... 3
 
               Section 2.1     Powers ................................................   3
               Section 2.2     Number, Election and Qualification ....................   3
               Section 2.3     Enlargement of the Board ..............................   4
               Section 2.4     Tenure ................................................   4
               Section 2.5     Vacancies .............................................   4
               Section 2.6     Resignation ...........................................   5
               Section 2.7     Removal ...............................................   5
               Section 2.8     Regular Meetings ......................................   5
               Section 2.9     Special Meetings ......................................   5
               Section 2.10    Meetings by Telephone Conference Calls ................   5
               Section 2.11    Notice of Special Meetings ............................   5
               Section 2.12    Quorum  ...............................................   6
               Section 2.13    Action at Meeting .....................................   6
               Section 2.14    Action by Consent .....................................   6
               Section 2.15    Committees ............................................   6
               Section 2.16    Compensation of Directors .............................   7
 
Article 3 - Officers           ....................................................... 7
 
               Section 3.1     Enumeration ...........................................   7
               Section 3.2     Election ..............................................   7
               Section 3.3     Qualification .........................................   7
               Section 3.4     Tenure ................................................   7
               Section 3.5     Resignation and Removal ...............................   7
               Section 3.6     Vacancies .............................................   8
               Section 3.7     Chairman of the Board and Vice-Chairman of the Board ..   8
               Section 3.8     President
 .............................................   8
</TABLE>


<PAGE>
 

<TABLE>
<S>                           <C>                                                      <C> 
               Section 3.9     Vice Presidents .......................................   8
               Section 3.10    Treasurer and Assistant Treasurers ....................   9
               Section 3.11    Clerk and Assistant Clerks ............................   9
               Section 3.12    Secretary and Assistant Secretaries ...................   10
               Section 3.13    Salaries ..............................................   10
 
Article 4 - Capital Stock      ....................................................... 10
 
               Section 4.1     Issue of Capital Stock ................................   10
               Section 4.2     Certificate of StocK ..................................   10
               Section 4.3     Transfers .............................................   11
               Section 4.4     Record Date ...........................................   11
               Section 4.5     Replacement of Certificates ...........................   12
 
Article 5 - Miscellaneous Provisions ................................................. 12
 
               Section 5.1     Fiscal Year ...........................................   12
               Section 5.2     Seal ..................................................   12
               Section 5.3     Voting of Securities ..................................   12
               Section 5.4     Corporate Records .....................................   12
               Section 5.5     Evidence of Authority .................................   12
               Section 5.6     Articles of Organization ..............................   13
               Section 5.7     Severability ..........................................   13
               Section 5.8     Pronouns ..............................................   13
 
Article 6 - Amendments         ....................................................... 13
</TABLE>


<PAGE>
 
                                 
                                 B Y - L A W S

                                       OF

                       PARAMETRIC TECHNOLOGY CORPORATION


                            ARTICLE 1 - Stockholders
                            ------------------------


          1.1  Place of Meetings.  All meetings of stockholders shall be held
               -----------------                                             
within the Commonwealth of Massachusetts unless the Articles of Organization
permit the holding of stockholders' meetings outside Massachusetts, in which
event such meetings may be held either within or without Massachusetts.
Meetings of stockholders shall be held at the principal office of the
corporation unless a different place is fixed by the Board of Directors or the
President and stated in the notice of the meeting.

          1.2  Annual Meeting.  The annual meeting of stockholders shall be held
               --------------                                                   
within six months after the end of each fiscal year of the corporation on a date
to be fixed by the Board of Directors or the President (which date shall not be
a legal holiday in the place where the meeting is to be held) at the time and
place to be fixed by the Board of Directors or the President and stated in the
notice of the meeting.  The purposes for which the annual meeting is to be held,
in addition to those prescribed by law, by the Articles of Organization or by
these By-Laws, may be specified by the Board of Directors or the President.  If
no annual meeting is held in accordance with the foregoing provisions, a special
meeting may be held in lieu of the annual meeting, and any action taken at that
special meeting shall have the same effect as if it had been taken at the annual
meeting, and in such case all references in these By-Laws to the annual meeting
of stockholders shall be deemed to refer to such special meeting.

          1.3  Special Meetings.    Special meetings of stockholders may be
               ----------------                                            
called by the President or by the Board of Directors.  Upon written application
of one or more stockholders who are entitled to vote and who hold at least 10%
(or 40% in the event the corporation has a class of voting stock registered
under the Securities Exchange Act of 1934, as amended) of the capital stock
entitled to vote at the meeting, special meetings shall be called by the Clerk,
or in the case of the death, absence, incapacity or refusal of the Clerk, by any
other officer.

          1.4  Notice of Meetings.  A written notice of each meeting of
               ------------------                                      
stockholders, stating the place, date and hour thereof, and the purposes for
which the meeting is to be held, shall be given by the Clerk, Assistant Clerk or
other person calling the meeting at least seven days before the meeting to each
stockholder entitled to vote at the meeting and to each stockholder who by law,
by the Articles of Organization or by these By-Laws is entitled to such notice,
by leaving such notice with him or at his residence or usual place of business,
or by mailing it postage prepaid and addressed to him at his address as it
appears in the records of the corporation.  Whenever any notice is required to
be given to a stockholder by law, by the Articles of Organization or by these
By-Laws, no such notice need be given if a written

                                      -1-

<PAGE>
 
waiver of notice, executed before or after the meeting by the stockholder or his
authorized attorney, is filed with the records of the meeting.

          1.5  Quorum.  Unless the Articles of Organization otherwise provide,
               ------                                                         
the holders of a majority of the number of shares of the stock issued,
outstanding and entitled to vote on any matter shall constitute a quorum with
respect to that matter, except that if two or more classes of stock are
outstanding and entitled to vote as separate classes, then in the case of each
such class a quorum shall consist of the holders of a majority of the number of
shares of the stock of that class issued, outstanding and entitled to vote.
Shares owned directly or indirectly by the corporation shall not be counted in
determining the total number of shares outstanding for this purpose.

          1.6  Adjournments.  Any meeting of stockholders may be adjourned to
               ------------                                                  
any other time and to any other place at which a meeting of stockholders may be
held under these By-Laws by the stockholders present or represented at the
meeting, although less than a quorum, or by any officer entitled to preside or
to act as clerk of such meeting, if no stockholder is present.  It shall not be
necessary to notify any stockholder of any adjournment.  Any business which
could have been transacted at any meeting of the stockholders as originally
called may be transacted at any adjournment of the meeting.

          1.7  Voting and Proxies.  Each stockholder shall have one vote for
               ------------------                                           
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by the Articles of Organization. Stockholders may vote either in person or by
written proxy dated not more than six months before the meeting named in the
proxy.  Proxies shall be filed with the clerk of the meeting, or of any
adjourned meeting, before being voted.  Except as otherwise limited by their
terms, a proxy shall entitle the persons named in the proxy to vote at any
adjournment of such meeting, but shall not be valid after final adjournment of
such meeting.  A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by any one of them, unless at or prior to
exercise of the proxy the corporation receives a specific written notice to the
contrary from any one of them.  A proxy purported to be executed by or on behalf
of a stockholder shall be deemed valid unless challenged at or prior to its
exercise.

          1.8  Action at Meeting.  When a quorum is present at any meeting, the
               -----------------                                               
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter), shall decide
any matter to be voted on by the stockholders, except when a larger vote is
required by law, the Articles of Organization or these By-Laws.  Any election by
stockholders shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election.  No ballot shall be required for
such election unless requested by a stockholder present or represented at the
meeting and entitled to vote in the election.  The corporation shall not
directly or indirectly vote any share of its own stock.

          1.9  Action without Meeting.  Any action required or permitted to be
               ----------------------                                         
taken at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to

                                      -2-

<PAGE>
 
vote on the matter consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. Each such consent shall
be treated for all purposes as a vote at a meeting.


                             ARTICLE 2 - Directors
                             ---------------------

          2.1  Powers.  The business of the corporation shall be managed by a
               ------                                                        
Board of Directors, who may exercise all the powers of the corporation except as
otherwise provided by law, by the Articles of Organization or by these By-Laws.
In the event of a vacancy in the Board of Directors, the remaining Directors,
except as otherwise provided by law, may exercise the powers of the full Board
until the vacancy is filled.

          2.2  Number, Election and Qualification.  The number of Directors
               ----------------------------------                          
which shall constitute the whole Board of Directors shall be determined by vote
of the stockholders or the Board of Directors, but shall consist of not less
than three Directors (except that whenever there shall be only two stockholders
the number of Directors shall be not less than two and whenever there shall be
only one stockholder or prior to the issuance of any stock, there shall be at
least one Director).  The number of Directors may be decreased at any time and
from time to time either by the stockholders or by a majority of the Directors
then in office, but only to eliminate vacancies existing by reason of the death,
resignation, removal or expiration of the term of one or more Directors.
Directors need not be stockholders of the corporation.
 
          Notwithstanding the foregoing provisions, if the corporation is a
"registered corporation" within the meaning of Section 50A of the Massachusetts
Business Corporation Law and has not elected, pursuant to paragraph (b) of such
Section 50A, to be exempt from the provisions of paragraph (a) of such Section
50A, then:

          (i) In accordance with paragraph (d), clause (iv) of such Section 50A,
the number of directors shall be fixed only by vote of the Board of Directors.

          (ii) In accordance with paragraph (a) of such Section 50A, the
Directors of the corporation shall be classified with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible; the term of office of those of the first class ("Class I
Directors") to continue until the first annual meeting following the date the
corporation becomes subject to such paragraph (a) and until their successors are
duly elected and qualified; the term of office of those of the second class
("Class II Directors") to continue until the second annual meeting following the
date the corporation becomes subject to such paragraph (a) and until their
successors are duly elected and qualified; and the term of office of those of
the third class ("Class III Directors") to continue until the third annual
meeting following the date the corporation becomes subject to such paragraph (a)
and until their successors are duly elected and qualified.  At each annual
meeting of the corporation, the successors to the class of directors whose term
expires at that meeting shall be elected to hold officer for a term continuing
until the annual meeting held in the third year following the year of their
election and until their successors are duly elected and qualified.

                                      -3-

<PAGE>
 
          2.3  Enlargement of the Board.  Subject to the second paragraph of
               ------------------------                                     
Section 2.2 above, the number of Directors may be increased at any time and from
time to time by the stockholders or by a majority of the Directors then in
office.

          2.4  Tenure.  Subject to the second paragraph of Section 2.2 above,
               ------                                                        
each Director shall hold office until the next annual meeting of stockholders
and until his successor is elected and qualified or until his earlier death,
resignation or removal.

          2.5  Vacancies.  Unless and until filled by the stockholders, any
               ---------                                                   
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled by vote of a majority
of the Directors present at any meeting of Directors at which a quorum is
present.  Each such successor shall hold office for the unexpired term of his
predecessor and until his successor is chosen and qualified or until his earlier
death, resignation or removal.
 
          Notwithstanding the foregoing provisions, if the corporation is a
"registered corporation" within the meaning of Section 50A of the Massachusetts
Business Corporation Law and has not elected, pursuant to paragraph (b) of such
Section 50A, to be exempt from the provisions of paragraph (a) of such Section
50A, then (i) vacancies and newly created directorships, whether resulting from
an increase in the size of the Board of Directors, from the death, resignation,
disqualification or removal of a director or otherwise, shall be filled solely
by the affirmative vote of a majority of the remaining Directors then in office,
even though less than a quorum of the Board of Directors, and (ii) any Director
elected in accordance with clause (i) shall hold office for the remainder of the
full term of the class of Directors in which the vacancy occurred or the new
directorship was created and until such Director's successor shall have been
elected and qualified or until his earlier death, resignation or removal.

          2.6  Resignation.  Any Director may resign by delivering his written
               -----------                                                    
resignation to the corporation at its principal office or to the President or
Clerk.  Such resignation shall be effective upon receipt unless it is specified
to be effective at some other time or upon the happening of some other event.

          2.7  Removal.  A Director may be removed from office with or without
               -------                                                        
cause by vote of the holders of a majority of the shares entitled to vote in the
election of Directors. However, the Directors elected by the holders of a
particular class or series of stock may be removed from office with or without
cause only by vote of the holders of a majority of the outstanding shares of
such class or series.  In addition, a Director may be removed from office for
cause by vote of a majority of the Directors then in office.  A Director may be
removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.

          Notwithstanding the foregoing provisions, if the corporation is a
"registered corporation" within the meaning of Section 50A of the Massachusetts
Business Corporation Law and has not elected, pursuant to paragraph (b) of such
Section 50A, to be exempt from the provisions of paragraph (a) of such Section
50A, then stockholders may effect, by the affirmative vote of a majority of the
shares outstanding and entitled to vote in the election of

                                      -4-

<PAGE>
 
Directors, the removal of any Director or Directors or the entire Board of
Directors only for cause, as defined in paragraph (e) of such Section 50A.

          2.8  Regular Meetings.  Regular meetings of the Directors may be held
               ----------------                                                
without call or notice at such places, within or without Massachusetts, and at
such times as the Directors may from time to time determine, provided that any
Director who is absent when such determination is made shall be given notice of
the determination.  A regular meeting of the Directors may be held without a
call or notice immediately after and at the same place as the annual meeting of
stockholders.

          2.9  Special Meetings.  Special meetings of the Directors may be held
               ----------------                                                
at any time and place, within or without Massachusetts, designated in a call by
the Chairman of the Board, President, Treasurer, two or more Directors or by one
Director in the event that there is only a single Director in office.

          2.10 Meetings by Telephone Conference Calls.  Directors or members of
               --------------------------------------                          
any committee designated by the Directors may participate in a meeting of the
Directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.

          2.11 Notice of Special Meetings.  Notice of any special meeting of the
               --------------------------                                       
Directors shall be given to each Director by the Secretary or Clerk or by the
officer or one of the Directors calling the meeting.  Notice shall be duly given
to each Director (i) by notice given to such Director in person or by telephone
at least 48 hours in advance of the meeting, (ii) by sending a telegram or
telex, or by delivering written notice by hand, to his last known business or
home address at least 48 hours in advance of the meeting, or (iii) by mailing
written notice to his last known business or home address at least 72 hours in
advance of the meeting.  Notice need not be given to any Director if a written
waiver of notice, executed by him before or after the meeting, is filed with the
records of the meeting, or to any Director who attends the meeting without
protesting prior to the meeting or at its commencement the lack of notice to
him.  A notice or waiver of notice of a Directors' meeting need not specify the
purposes of the meeting.  If notice is given in person or by telephone, an
affidavit of the Secretary, Clerk, officer or Director who gives such notice
that the notice has been duly given shall, in the absence of fraud, be
conclusive evidence that such notice was duly given.

          2.12 Quorum.  At any meeting of the Board of Directors, a majority of
               ------                                                          
the Directors then in office shall constitute a quorum.  Less than a quorum may
adjourn any meeting from time to time without further notice.

          2.13 Action at Meeting.  At any meeting of the Board of Directors at
               -----------------                                              
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, by
the Articles of Organization or by these By-Laws.

          2.14 Action by Consent.  Any action required or permitted to be taken
               -----------------                                               
at any meeting of the Board of Directors

                                      -5-

<PAGE>
 
may be taken without a meeting if all the Directors consent to the action in
writing and the written consents are filed with the records of the Directors'
meetings. Each such consent shall be treated for all purposes as a vote at a
meeting.

          2.15 Committees.  The Board of Directors may, by vote of a majority of
               ----------                                                       
the Directors then in office, elect from their number an executive committee or
other committees and may by like vote delegate to committees so elected some or
all of their powers to the extent permitted by law.  Except as the Board of
Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but unless otherwise provided by the Directors or in
such rules, its business shall be conducted as nearly as possible in the same
manner as is provided by these By-Laws for the Directors.  The Board of
Directors shall have the power at any time to fill vacancies in any such
committee, to change its membership or to discharge the committee.

          2.16 Compensation of Directors.  Directors may be paid such
               -------------------------                             
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine.  No such payment shall preclude any Director from serving the
corporation in any other capacity and receiving compensation therefor.


                              ARTICLE 3 - Officers
                              --------------------

          3.1  Enumeration.  The officers of the corporation shall consist of a
               -----------                                                     
President, a Treasurer, a Clerk and such other officers with such other titles
as the Board of Directors may determine, including, but not limited to, a
Chairman of the Board, a Vice Chairman of the Board, a Secretary and one or more
Vice Presidents, Assistant Treasurers, Assistant Clerks and Assistant
Secretaries.

          3.2  Election.  The President, Treasurer and Clerk shall be elected
               --------                                                      
annually by the Board of Directors at their first meeting following the annual
meeting of stockholders.  Other officers may be chosen or appointed by the Board
of Directors at such meeting or at any other meeting.

          3.3  Qualification.  No officer need be a director or stockholder.
               -------------                                                 
Any two or more offices may be held by the same person.  The Clerk shall be a
resident of Massachusetts unless the corporation has a resident agent appointed
for the purpose of service of process. Any officer may be required by the
Directors to give bond for the faithful performance of his duties to the
corporation in such amount and with such sureties as the Directors may
determine.  The premiums for such bonds may be paid by the corporation.

          3.4  Tenure.  Except as otherwise provided by law, by the Articles of
               ------                                                          
Organization or by these By-Laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their respective successors are chosen and
qualified; and all other officers shall hold office until the first meeting of
the Directors following the annual meeting of stockholders, unless a different
term is specified in the vote choosing or appointing them, or until his earlier
death, resignation or removal.

                                      -6-

<PAGE>
 
          3.5  Resignation and Removal.  Any officer may resign by delivering
               -----------------------                                       
his written resignation to the corporation at its principal office or to the
President, Clerk or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event.

          Any officer may be removed at any time, with or without cause, by vote
of a majority of the entire number of Directors then in office.  An officer may
be removed for cause only after reasonable notice and opportunity to be heard by
the Board of Directors prior to action thereon.

          Except as the Board of Directors may otherwise determine, no officer
who resigns or is removed shall have any right to any compensation as an officer
for any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or the year or
otherwise, unless such compensation is expressly provided in a duly authorized
written agreement with the corporation.

          3.6  Vacancies.  The Board of Directors may fill any vacancy occurring
               ---------                                                        
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Clerk.  Each such successor shall hold office for the unexpired term of his
predecessor and until his successor is chosen and qualified or until he sooner
dies, resigns or is removed.

          3.7  Chairman of the Board and Vice-Chairman of the Board. The Board
               ----------------------------------------------------           
of Directors may appoint a Chairman of the Board and may designate him as Chief
Executive Officer.  If the Board of Directors appoints a Chairman of the Board,
he shall perform such duties and possess such powers as are assigned to him by
the Board of Directors.  If the Board of Directors appoints a Vice-Chairman of
the Board, he shall, in the absence or disability of the Chairman of the Board,
perform the duties and exercise the powers of the Chairman of the Board and
shall perform such other duties and possess such other powers as may from time
to time be vested in him by the Board of Directors.

          3.8  President.  The President shall, subject to the direction of the
               ---------                                                       
Board of Directors, have general charge and supervision of the business of the
corporation.  Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a Director, at all
meetings of the Board of Directors.  Unless the Board of Directors has
designated the Chairman of the Board or another officer as Chief Executive
Officer, the President shall be the Chief Executive Officer of the corporation.
The President shall perform such other duties and shall possess such other
powers as the Board of Directors may from time to time prescribe.

          3.9  Vice Presidents.  Any Vice President shall perform such duties
               ---------------                                               
and possess such powers as the Board of Directors or the President may from time
to time prescribe.  In the event of the absence, inability or refusal to act of
the President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President.  The Board of Directors

                                      -7-

<PAGE>
 
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.

          3.10 Treasurer and Assistant Treasurers.  The Treasurer shall perform
               ----------------------------------                              
such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President.  In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office of
Treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.

          The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe.  In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.

          3.11 Clerk and Assistant Clerks.  The Clerk shall perform such duties
               --------------------------                                      
and shall possess such powers as the Board of Directors or the President may
from time to time prescribe.  In addition, the Clerk shall perform such duties
and have such powers as are incident to the office of the Clerk, including
without limitation the duty and power to give notices of all meetings of
stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.

          Any Assistant Clerk shall perform such duties and possess such powers
as the Board of Directors, the President or the Clerk may from time to time
prescribe.  In the event of the absence, inability or refusal to act of the
Clerk, the Assistant Clerk (or if there shall be more than one, the Assistant
Clerks in the order determined by the Board of Directors) shall perform the
duties and exercise the powers of the Clerk.

          In the absence of the Clerk or any Assistant Clerk at any meeting of
stockholders or Directors, the person presiding at meeting shall designate a
temporary Clerk to keep a record of the meeting.

          3.12 Secretary and Assistant Secretaries.  If a Secretary is
               -----------------------------------                    
appointed, he shall attend all meetings of the Board of Directors and shall keep
a record of the meetings of the Directors.  He shall, when required, notify the
Directors of their meetings, and shall possess such other powers and shall
perform such other duties as the Board of Directors or the President may from
time to time prescribe.

          Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe.  In the

                                      -8-

<PAGE>
 
event of the absence, inability or refusal to act of the Secretary, the
Assistant Secretary (or if there shall be more than one, the Assistant
Secretaries in the order determined by the Board of Directors) shall perform the
duties and exercise the powers of the Secretary.

          3.13 Salaries.  Officers of the corporation shall be entitled to such
               --------                                                        
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.


                           ARTICLE 4 - Capital Stock
                           -------------------------

          4.1  Issue of Capital Stock.  Unless otherwise voted by the
               ----------------------                                
stockholders, the whole or any part of any unissued balance of the authorized
capital stock of the corporation or the whole or any part of the capital stock
of the corporation held in its treasury may be issued or disposed of by vote of
the Board of Directors, in such manner, for such consideration and on such terms
as the Directors may determine.

          4.2  Certificate of Stock.  Each stockholder shall be entitled to a
               --------------------                                          
certificate of the capital stock of the corporation in such form as may be
prescribed from time to time by the Directors.  The certificate shall be signed
by the President or a Vice President, and by the Treasurer or an Assistant
Treasurer, but when a certificate is countersigned by a transfer agent or a
registrar, other than a Director, officer or employee of the corporation, such
signature may be a facsimile.  In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer at the time of its
issue.

          Every certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Articles of Organization, the By-Laws,
applicable securities laws or any agreement to which the corporation is a party,
shall have conspicuously noted on the face or back of the certificate either the
full text of the restriction or a statement of the existence of such
restrictions and a statement that the corporation will furnish a copy of the
restrictions to the holder of such certificate upon written request and without
charge.  Every certificate issued when the corporation is authorized to issue
more than one class or series of stock shall set forth on its face or back
either the full text of the preferences, voting powers, qualifications and
special and relative rights of the shares of each class and series authorized to
be issued or a statement of the existence of such preferences, powers,
qualifications and rights and a statement that the corporation will furnish a
copy thereof to the holder of such certificate upon written request and without
charge.

          4.3  Transfers.  Subject to the restrictions, if any, stated or noted
               ---------                                                       
on the stock certificates, shares of stock may be transferred on the books of
the corporation by the surrender to the corporation or its transfer agent of the
certificate representing such shares properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or the authenticity of signature as the corporation or its transfer
agent may reasonably require.  Except as may be otherwise required by law, by
the Articles of Organization or by these By-Laws, the corporation shall be
entitled to treat

                                      -9-

<PAGE>
 
the record holder of stock as shown on its books as the owner of such stock for
all purposes, including the payment of dividends and the right to vote with
respect thereto, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-Laws.

          It shall be the duty of each stockholder to notify the corporation of
his post office address and of his taxpayer identification number.

          4.4  Record Date.  The Board of Directors may fix in advance a time
               -----------                                                   
not more than 60 days preceding the date of any meeting of stockholders or the
date for the payment of any dividend or the making of any distribution to
stockholders or the last day on which the consent or dissent of stockholders may
be effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such meeting, and any
adjournment, or the right to receive such dividend or distribution or the right
to give such consent or dissent.  In such case only stockholders of record on
such record date shall have such right, notwithstanding any transfer of stock on
the books of the corporation after the record date.  Without fixing such record
date the Directors may for any of such purposes close the transfer books for all
or any part of such period.

          If no record date is fixed and the transfer books are not closed, the
record date for determining the stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
before the day on which notice is given, and the record date for determining the
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors acts with respect to such purpose.

          4.5  Replacement of Certificates.  In case of the alleged loss or
               ---------------------------                                 
destruction or the mutilation of a certificate of stock, a duplicate certificate
may be issued in place of the lost, destroyed or mutilated certificate, upon
such terms as the Directors may prescribe, including the presentation of
reasonable evidence of such loss, destruction or mutilation and the giving of
such indemnity as the Directors may require for the protection of the
corporation or any transfer agent or registrar.


                      ARTICLE 5 - Miscellaneous Provisions
                      ------------------------------------

          5.1  Fiscal Year.  Except as otherwise set forth in the Articles of
               -----------                                                   
Organization or as otherwise determined from time to time by the Board of
Directors, the fiscal year of the corporation shall in each year end on
September 30.

          5.2  Seal.  The seal of the corporation shall, subject to alteration
               ----                                                           
by the Directors, bear its name, the word "Massachusetts" and the year of its
incorporation.

          5.3  Voting of Securities.  Except as the Board of Directors may
               --------------------                                       
otherwise designate, the president or Treasurer may waive notice of, and act as,
or appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.

                                      -10-

<PAGE>
 
          5.4  Corporate Records.  The original, or attested copies, of the
               -----------------                                           
Articles of Organization, By-Laws and records of all meetings of the
incorporators and stockholders, and the stock records, which shall contain the
names of all stockholders and the record address and the amount of stock held by
each, shall be kept in Massachusetts at the principal office of the corporation,
or at an office of its transfer agent or of the Clerk.  These copies and records
need not all be kept in the same office.  They shall be available at all
reasonable times for the inspection of any stockholder for any proper purpose,
but not to secure a list of stockholders for the purpose of selling the list or
copies of the list or of using the list for a purpose other than in the interest
of the applicant, as a stockholder, relative to the affairs of the corporation.

          5.5  Evidence of Authority.  A certificate by the Clerk or Secretary,
               ---------------------                                           
or an Assistant Clerk or Assistant Secretary, or a temporary Clerk or temporary
Secretary, as to any action taken by the stockholders, Directors, any committee
or any officer or representative of the corporation shall as to all persons who
rely on the certificate in good faith be conclusive evidence of such action.

          5.6  Articles of Organization.  All references in these By-Laws to the
               ------------------------                                         
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.

          5.7  Severability.  Any determination that any provision of these By-
               ------------                                                   
Laws is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.

          5.8  Pronouns.  All pronouns used in these By-Laws shall be deemed to
               --------                                                        
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.


                             ARTICLE 6 - Amendments
                             ----------------------

          These By-Laws may be amended by vote of the holders of a majority of
the shares of each class of the capital stock at the time outstanding and
entitled to vote at any annual or special meeting of stockholders, if notice of
the substance of the proposed amendment is stated in the notice of such meeting.
If authorized by the Articles of Organization, the Directors, by a majority of
their number then in office, may also make, amend or repeal these By-Laws, in
whole or in part, except with respect to (a) the provisions of these By- Laws
governing (i) the removal of directors and (ii) the amendment of these By-Laws
and (b) any provision of these By-Laws which by law, the Articles of
Organization or these By-Laws requires action by the stockholders.

          No change in the date fixed in these By-Laws for the annual meeting of
stockholders may be made within 60 days before the date fixed in these By-Laws.
Subject to the preceding sentence, notice of any change in the date fixed in
these By-Laws for the annual meeting of stockholders shall be given to each
stockholder in person or by letter mailed to 

                                      -11-

<PAGE>
 
his last known post office address at least 20 days before the new date fixed
for such meeting.

          Not later than the time of giving notice of the meeting of
stockholders next following the making, amending or repealing by the Directors
of any By-Law, notice stating the substance of such change shall be given to all
stockholders entitled to vote on amending the By-Laws.

          Any By-Law adopted by the Directors may be amended or repealed by the
stockholders entitled to vote on amending the By-Laws.

                                      -12-



<PAGE>
 
                                                                    EXHIBIT 10.2
 
                       PARAMETRIC TECHNOLOGY CORPORATION

                        1987 Incentive Stock Option Plan
                        --------------------------------

    As amended through the October 2, 1996 meeting of the Board of Directors


          1.   Definitions.  As used in this Incentive Stock Option Plan
               -----------                                              
of PARAMETRIC TECHNOLOGY CORPORATION, the following terms shall have the
following meanings:

               1.    Board shall mean the company's Board of Directors.
                     -----                                             

               2.    Code shall mean the United States Internal Revenue Code of
                     ----                                                      
          1986, as amended from time to time.

               3.    Company shall mean PARAMETRIC TECHNOLOGY CORPORATION.
                     -------                                              

               4.    Fair Market Value shall mean the value of a share of Stock
                     -----------------                                         
          of the Company on any date as determined by the Board.

               5.    Grant Date shall mean the date on which an Option is
                     ----------                                          
          granted, as specified in Section 7.

               6.    Incentive Stock Option shall mean an Option intended to
                     ----------------------                                 
          qualify as an incentive stock option within the meaning of Section
          422A of the Code.

               7.    Option shall mean an option, granted under the Plan, to
                     ------                                                 
          purchase shares of the Stock.

               8.    Option Agreement shall mean an agreement between the
                     ----------------                                    
          Company and an Optionee, setting forth the terms and conditions of an
          Option.

               9.    Option Price shall mean the price per share of the Stock to
                     ------------                                               
          be paid by an Optionee upon exercising an Option under this Plan.

               10.   Option Share shall
 mean any share of the Stock transferred
                     ------------                                              
          to an Optionee upon exercise of an Option pursuant to this Plan.

               11.   Optionee shall mean a person eligible to receive an Option,
                     --------                                                   
          as provided in Section 8, to whom an Option shall have been granted
          under this Plan.

               12.   Plan shall mean this Incentive Stock Option Plan of the
                     ----                                                   
          Company as it may be amended from time to time.


<PAGE>
 
               13.   Stock shall mean the common stock, $.01 par value, of the
                     -----                                                    
          Company.

               14.   Eligible Participants shall mean key employees and
                     ---------------------                             
          consultants of the Company.

               15.   Engagement shall mean the employment relationship, in the
                     ----------                                               
          case of employees, or the services arrangement, in the case of
          consultants, between the Company and the Eligible Participants, as the
          case may be.

          2.   Purpose.  This Incentive Stock Option Plan is intended to
               -------                                                  
encourage ownership of the Stock by Eligible Participants of the Company and of
its subsidiaries and to provide additional incentive for them to promote the
growth, development and financial success of the Company's business.  This Plan
is intended to be an incentive stock option plan, and the Company may grant
pursuant to this Plan either Incentive Stock Options or Options which do not
qualify as Incentive Stock Options.

          3.   Term of the Plan.  Options under this Plan may be granted
               ----------------                                         
on or after the date this Plan is approved by the stockholders of the Company;
but no Option under this Plan may be granted more than ten years from the
earlier of (a) the date this Plan is adopted by the Board, and (b) the date this
Plan is approved by the stockholders of the Company.

          4.   Stock Subject to the Plan.  Subject to adjustment as
               -------------------------                           
provided in Section 14 of this Plan, at no time shall the sum of (i) the number
of shares of the Stock then outstanding which are attributable to the exercise
of Options granted under this Plan, and (ii) the number of shares of the Stock
then issuable upon exercise of outstanding Options granted under this Plan
exceed 48,792,000 shares.  Shares to be issued upon the exercise of Options
granted under this Plan may be either authorized but unissued or shares held by
the Company in its treasury.  If any Option expires or terminates for any reason
without having been exercised in full, the shares not purchased thereunder shall
again be available for Options thereafter to be granted under this Plan.

          5.   Administration.  This Plan shall be administered by the
               --------------                                         
Board or by a duly appointed committee of the Board having such powers as shall
be specified by the Board; provided, however, that any grants of Options under
                           --------  -------                                  
this Plan to an officer (as defined in Section 16, and the rules promulgated
thereunder ("Section 16"), of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) or director of the Company shall be made by the Officers'
Stock Option Committee which shall, in accordance with Section 16 of the
Exchange Act, consist of "Non-Employee Director" members of the Board.
Subsequent references herein to the Board shall also refer to such committees,
as appropriate, if they have been appointed.  No member of the Board shall act
upon any matter exclusively affecting any Option granted or to be granted to
himself or herself under this Plan.  Subject to the provisions of this Plan, the
Board shall have complete authority, in its discretion, to make the following
determinations with respect to each Option to be granted by the Company: (a) the
Eligible Participant to receive the Option; (b) the time of granting the Option;
(c) the number of shares subject thereto; (d) the Option Price; (e) the Option
period; and (f) the period of exercisability

                                       2

<PAGE>
 
following the termination of Optionee's Engagement. In making such
determinations, the Board may take into account the nature of the services
rendered by the respective Eligible Participants, their present and potential
contributions to the success of the Company and its subsidiaries, and such other
factors as the Board, in its discretion, shall deem relevant. Subject to the
provisions of this Plan, the Board shall also have complete authority to
interpret this Plan, to prescribe, amend and rescind rules and regulations for
the administration of this Plan, to determine the terms and provisions of the
respective Option Agreements (which need not be identical), to decide all
questions and settle all controversies and disputes which may arise in
connection with this Plan, and to make all other determinations necessary or
advisable for the administration of this Plan. The Board's determinations on the
matters referred to in this Section 5 shall be conclusive and binding on all
persons concerned.

          6.   Eligibility.  An Option may be granted only to an Eligible
               -----------                                               
Participant of any one or more of the Company and its subsidiaries. A director
of any one or more of the Company and its subsidiaries who is not also an
Eligible Participant of any one or more of the Company and its subsidiaries
shall not be eligible to receive an Option.  An Optionee may hold more than one
Option, but only on the terms and subject to the conditions and restrictions
herein set forth.  No Optionee may receive an Option grant which would result in
such Optionee having received, during the fiscal year of the Company in which
the grant is proposed to be made, Options for more than an aggregate of
2,000,000 shares of Stock.

          7.   Time of Granting Options.  The granting of an Option shall
               ------------------------                                  
take place at the time specified by the Board.  Only if expressly so provided by
the Board shall the Grant Date be the date on which an Option Agreement shall
have been duly executed and delivered by the Company and the Optionee.

          8.   Option Price.  The Option Price under each Option shall not
               ------------                                               
be less than 100 percent of the Fair Market Value of the Stock on the Grant
Date; provided, however, that in the case of an Incentive Stock Option granted
      --------  -------                                                       
to an individual who, on the Grant Date, owns stock possessing more than ten
(10%) percent of the total combined voting power of all classes of stock of the
Company or of a parent or subsidiary corporation of the Company (a "10%
Stockholder"), the Option Price shall not be less than 110 percent of the Fair
Market Value of the Stock on such Grant Date.  The Fair Market Value of the
Stock at the time any Option is granted shall be determined by the Board after
considering all relevant information.  In making any such determination, the
Board shall act in good faith so as to ensure that the Option Price is not less
than 100 percent (or 110 percent, if required) of such Fair Market Value.

          9.   Option Period.  Each Option shall be exercisable at such
               -------------                                           
time or times, whether or not in installments (which may be cumulative or non-
cumulative), as the Board may determine; and, in the case of an Option made
exercisable in installments, the Board may later determine to accelerate the
time by which any one or more of such installments may be exercised.
Notwithstanding the foregoing, no Option may be exercised after the expiration
of (i) ten years from 

                                       3

<PAGE>
 
the date such Option is granted, or (ii) five years from the date such Option is
granted, in the case of an Incentive Stock Option granted to an individual who,
on the Grant Date, is a 10% Stockholder.
 
          10.  Special Limitation on Exercise.  Notwithstanding anything
               ------------------------------                           
to the contrary contained in this Plan the aggregate fair market value of the
shares of Stock with respect to which Incentive Stock Options granted under this
Plan or under any other incentive stock option plan of the Company or of a
parent or subsidiary corporation of the Company are exercisable for the first
time by any Eligible Participant during any calendar year shall not exceed
$100,000.  For purposes of this Section 10, the fair market value of the shares
of Stock for which any such Incentive Stock Option is granted shall be
determined as of the time of the granting of such Incentive Stock Option.

          11.  Exercise of Option; Investment Purpose.  Each exercise of
               --------------------------------------                   
an Option hereunder may be effected only giving written notice, in the manner
provided in Section 19 hereof, of intent to exercise the Option, specifying the
number of shares as to which the Option is being exercised, and accompanied by
full payment of the Option Price for the number of shares then being acquired.
Such payment shall be made in cash, by certified or bank check payable to the
order of the Company, credit to the Company's account at a financial or
brokerage institution on the date of exercise, or, if the Option so provides,
(i) in shares of the Stock having an aggregate Fair Market Value, at the time of
such payment, equal to the total Option Price for the number of shares of the
Stock for which payment is then being made, or (ii) partly in cash or by
certified or bank check payable to the order of the Company and the balance in
shares of the Stock having an aggregate Fair Market Value, at the time of such
payment, equal to the difference between the total Option Price for the number
of shares of the Stock for which payment is then being made and the amount of
the payment in cash or by certified or bank check; provided, however, that no
                                                   --------  -------         
part of the purchase price for any shares of the Stock being purchased pursuant
to an exercise of an Option shall be paid in shares of the Stock which were
previously acquired by the Optionee (x) pursuant to an earlier exercise of such
Option, or (y) pursuant to the exercise of another incentive stock option
granted by the Company if the previously acquired shares have been held by the
Optionee for less than two years since the date of the granting of such other
option to him or for less than one year since the transfer to him of such
previously acquired shares.  The determination of such aggregate Fair Market
Value shall be made by the Board, whose determination in this regard shall be
final and binding on all concerned.

          Receipt by the Company of such notice and payment shall, for purposes
of this Plan, constitute exercise of the Option or a part thereof.  Within
twenty (20) days thereafter, the Company shall deliver or cause to be delivered
to the Optionee a certificate or certificates for the number of shares of the
Stock then being purchased by him.  Such shares shall be fully paid and
nonassessable.  If any law or applicable regulation of the Securities and
Exchange Commission or other public regulatory authority (including, but not
limited to, a stock exchange) shall require the Company or the Optionee (a) to
register or qualify, under the Securities Act of 1933, as amended, any similar
federal statute then in force or any state law regulating the sale of
securities, any Option Shares with respect to which notice of intent to exercise
shall have been delivered to the Company or (b) to take any other action in

                                       4

<PAGE>
 
connection with such shares before issuance thereof may be effected, then the
delivery of the certificate or certificates for such shares shall be postponed
until completion of the necessary action, which the Company shall take in good
faith and without delay.  All such action shall be taken by the Company at its
own expense.

          The Company may require an individual exercising an Option to
represent that his purchase of shares of the Stock pursuant to such exercise is
for his own account, for investment and without a view to resale or
distribution, and that he will not sell or otherwise dispose of any of such
shares except pursuant to (i) an effective registration statement covering such
transaction filed with the Securities and Exchange Commission and in compliance
with all of the applicable provisions of the Securities Act of 1933, as amended,
and the rules and regulations thereunder, or (ii) an opinion of Company counsel
that such registration is not required.

          12.  Transferability of Options.  Each Option granted hereunder
               --------------------------                                
shall not be transferable by the Optionee other than by will or the laws of
descent and distribution and may be exercised, during the Optionee's lifetime,
only by the Optionee or by his or her legal representative; provided that the
Board may in its discretion waive such restriction in any case..  From and after
the death of an Optionee, each Option held by such Optionee at his death, to the
extent then exercisable, may be exercised prior to its termination by the
person(s) to whom the Optionee's option rights pass by will or by the applicable
laws of descent and distribution.

          13.  Termination of Engagement.  In the event that an Optionee's
                     -------------------------                                  
Engagement is terminated for any reason (voluntary or involuntary) and the
period of exercisability for a particular Option following such termination has
not been specified by the Board, each such Option then held by that Optionee
shall expire to the extent not previously exercised ten (10) days after such
Optionee's Engagement is terminated, except that -
                                     ------ ----  

               (a) If the Optionee is on military, sick leave or other bona fide
                                                                  ---- ----
leave of absence (such as temporary employment by the federal government), his
Engagement with the Company will be treated as continuing intact if the period
of such leave does not exceed ninety (90) days, or, if longer, so long as the
Optionee's right to reemployment or the survival of his or her service
arrangement with the Company is guaranteed either by statute or by contract;
otherwise, the Optionee's Engagement will be deemed to have terminated on the
91st day of such leave.

               (b) If the Optionee's Engagement is terminated by reason of his
retirement from the Company, each Option then held by the Optionee, to the
extent exercisable at retirement, may be exercised by the Optionee at any time
within three (3) months after retirement unless terminated earlier by its terms.

               (c) If the Optionee's Engagement is terminated by reason of his
death, each Option then held by the Optionee, to the extent exercisable at the
date of death, may be exercised at any time within one year after that date
(unless terminated earlier by its terms) by

                                       5

<PAGE>
 
the person(s) to whom the Optionee's option rights pass by will or by the
applicable laws of descent and distribution.

               (d) If the Optionee's Engagement is terminated by reason of his
becoming permanently and totally disabled, each Option then held by the
Optionee, to the extent exercisable upon the occurrence of permanent and total
disability, may be exercised by the Optionee at any time within one (1) year
after such occurrence unless terminated earlier by its terms. For purposes
hereof, an individual shall be deemed to be "permanently and totally disabled"
if he is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a continuous
period of not less than twelve (12) months.  Any determination of permanent and
total disability shall be made in good faith by the Company on the basis of a
report signed by a qualified physician.

          14.  Adjustment of Number of Option Shares.  Each Option
               -------------------------------------              
Agreement shall provide that, in the event of any stock dividend payable in the
Stock or any split-up or contraction in the number of shares of the Stock
occurring after the date of such Agreement and prior to the exercise in full of
the Option covered thereby, the number of shares subject to such Agreement and
the price to be paid for each share subject to such Option shall each be
proportionately adjusted.  Each such Agreement shall also provide that, in case
of any reclassification or change of outstanding shares of the Stock occurring
after the date of such Agreement and prior to the exercise in full of the Option
covered thereby, the number and kind of shares of Stock subject to such
Agreement and the price to be paid for each share subject to such Option shall
each be appropriately adjusted.

          Each Option Agreement shall further provide that, in the event of any
reorganization, consolidation or merger to which the Company is a party and in
which the Company does not survive, or upon the dissolution or liquidation of
the Company, the Option covered thereby shall terminate; provided, however, that
                                                         --------  -------      
(i) in the event of the liquidation or dissolution of the Company, or in the
event of any such reorganization, consolidation or merger in which the Company
does not survive and with respect to which the resulting or surviving
corporation does not assume such Option or issue a substitute Option therefor,
such Option shall be exercisable in full, without regard to any installment
restrictions on exercise imposed pursuant to this Plan or such Option Agreement
(but subject to Section 10 hereof), during such period preceding the effective
date of such liquidation, dissolution, reorganization, consolidation or merger
(unless such Option is terminated earlier by its terms) as may be specified by
the Board; and (ii) in the event of any such reorganization, consolidation or
merger, the Board may, in its good faith discretion, arrange to have the
resulting or surviving corporation assume such Option or issue a substitute
option therefor.

          No fraction of a share shall be purchasable or deliverable upon
exercise of an Option, but, in the event any adjustment hereunder of the number
of shares covered by the Option shall cause such number to include a fraction of
a share, such fraction shall be adjusted to the nearest smaller whole number of
shares.

                                       6

<PAGE>
 
          In the event of changes in the outstanding Stock by reason of any
stock dividend, split-up, contraction, reclassification, or change of
outstanding shares of the Stock of the nature contemplated by this Section 14,
the number of shares of the Stock available for the purpose of the plan, as
stated in Section 4, shall be correspondingly adjusted.

          15.  Reservation of Stock.  The Company shall at all times
               --------------------                                 
during the term of this Plan and of the Options granted hereunder reserve and
keep available such number of shares of the Stock as will be sufficient to
satisfy the requirements of this Plan and shall pay all fees and expenses
necessarily incurred by the Company in connection therewith.

          16.  Limitation of Rights in the Option Shares.  An Optionee
               -----------------------------------------              
shall not be deemed for any purpose to be a stockholder of the Company with
respect to any of his Option Shares except to the extent that the Option
covering such Shares shall have been exercised with respect thereto and, in
addition, a certificate shall have been issued therefor and delivered to the
Optionee.  No adjustment shall be made for dividends (ordinary or extraordinary,
and whether in cash, securities or other property) or distributions or other
rights for which the record date is prior to the date such certificate is
issued, except as provided in Section 14.

          17.  Engagement Rights.  Neither the adoption, maintenance nor
               -----------------                                        
operation of this Plan shall confer upon any Eligible Participant of the Company
or of a parent or subsidiary corporation of the Company any right with respect
to the continuance of his Engagement by any of such corporations, nor shall they
interfere in any way with the right of any of such corporations to terminate the
Engagement of any Eligible Participant.

          18.  Termination and Amendment of the Plan.  The Board may at
               -------------------------------------                   
any time terminate this Plan or make such modifications to the Plan as it shall
deem advisable, except that no amendment of this Plan shall (a) increase the
                ------ ----                                                 
aggregate number of shares of Stock which may be issued under this Plan (except
pursuant to Section 14), materially increase the benefits accruing to
participants in the Plan or make any change in the designation of the Eligible
Participants or class of Eligible Participants eligible to receive Options under
this Plan without the approval of the stockholders of the Company; (b) impair
the rights or increase the obligations of any Optionee under any Option
theretofore granted under this Plan without the written consent of such
Optionee; or (c) cause any Option at any time granted under this Plan to fail to
qualify as an incentive stock option under Section 422A of the Code.

          19.  Notices.  Any communication or notice required or permitted
               -------                                                    
to be given under this Plan shall be in writing and mailed by registered or
certified mail or delivered in hand, if to the Company, to its Treasurer at
Parametric Technology Corporation, 128 Technology Drive, Waltham, Massachusetts
02154 and, if to an Optionee, to such address as the Optionee shall last have
furnished to the communicating party.

                                       7



<PAGE>
 
                                                                    EXHIBIT 10.7
 
                                   AGREEMENT
                                   ---------


          This Agreement is entered into as of this 20th day of June, 1990
between Parametric Technology Corporation, a Massachusetts corporation (the
"Company"), and Steven C. Walske (the "Executive").

          WHEREAS, the Executive is the President and Chief Executive Officer of
the Company; and

          WHEREAS, to provide incentive for the Executive to remain with the
Company, the Company desires to make the following arrangements with the
Executive concerning his termination of employment;

          NOW, THEREFORE, the Company and the Executive hereby agree as follows:


      1.       Termination Notice.  The Company agrees that it may not terminate
               ------------------                                               
the employment of the Executive unless (i) it does so for Cause (as defined
below) or (ii) the Company has delivered to the Executive a written notice of
such termination of employment (the "Termination Notice") at least six months in
advance of the effective date thereof.  The duties of the Executive during the
period from the date of delivery of a Termination Notice until the termination
of his employment shall be as determined by the Board of Directors.

      2.       Salary.
               ------ 

               (a) During the period from the date of delivery of a Termination
Notice (the "Notice Date") until the earlier of (i) the date six months
 after
the Notice Date, or (ii) the date the Executive commences employment with
another company or organization, the Company shall pay to the Executive a salary
(the "Severance Period Salary") that is equal, on an annualized basis, to two
times the highest annual salary (excluding any bonuses) in effect with respect
to the Executive during the six-month period immediately preceding the
Termination Notice.

               (b) In the event that a Change in Status of the Executive 
occurs prior to a Notice Date, the Company shall pay the Severance Period Salary
to the Executive during the period from the effective date of the Change in
Status until the earlier of (i) the date six months after such date or (ii) the
date the Executive commences employment with another company or organization;
and the Company shall have no obligation to make any payments to the Executive
under Section 2(a) above.

               (c) In the event that the Executive remains employed with the
Company for a period of six months following the earlier of (i) a Notice Date or
(ii) the effective date of a Change in Status, the Company shall pay to the
Executive on such six-month anniversary date an amount equal to the most recent
fiscal year end bonus paid to the Executive. For purposes of this Agreement,
"fiscal year end bonus" shall include all amounts paid to the Executive under
any bonus plans or programs of the Company with respect to his services to the
Company in the preceding fiscal year.


<PAGE>
 
      3.       Stock Options.
               ------------- 

               (a) Effective upon (i) a Change in Control (as defined below) of
the Company or (ii) the death or Disability (as defined below) of the Executive,
all outstanding stock options under the Company's 1987 Incentive Stock Option
Plan that are held by the Executive shall become exercisable in full,
notwithstanding any vesting schedule or other provisions to the contrary in the
agreements evidencing such options; and the Company and the Executive hereby
agree that such option agreements are hereby amended to give effect to this
provision.

               (b) Effective upon (i) a termination by the Company of the
Executive's employment without Cause or (ii) a Change in Status of the
Executive, all outstanding stock options under the Company's 1987 Incentive
Stock Option Plan that are held by the Executive shall become exercisable for
such number of shares of common stock for which such options would have been
exercisable had the Executive's employment with the Company continued for one
year following the date of the employment termination or the Change in Status,
as the case may be, notwithstanding any vesting schedule or other provisions to
the contrary in the agreements evidencing such options; and the Company and the
Executive hereby agree that such option agreements are hereby amended to give
effect to this provision.

      4.       Definitions.
               ----------- 

               (a) The Company shall be deemed to have terminated the
Executive's employment for "Cause" if it does so (i) for the Executive's willful
and continued failure to substantially perform his duties to the Company (other
than any such failure resulting from the Employee's incapacity due to physical
or mental illness or any such actual or anticipated failure after a Change in
Status of the Executive), provided that the Company has delivered a written
demand for substantial performance to the Executive specifically identifying the
manner in which the Company believes that the Executive has not substantially
performed his duties and that the Executive has not cured such failure within 30
days after such demand, (ii) for willful conduct by the Executive which is
demonstrably and materially injurious to the Company, or (iii) for the
Executive's willful violation of any material provision of any confidentiality,
nondisclosure, assignment of invention, noncompetition or similar agreement
entered into by the Executive in connection with his employment by the Company.
For purposes of this paragraph, no act or failure to act on the Executive's part
shall be deemed "willful" unless done or omitted to be done by the Executive not
in good faith and without reasonable belief that his action or omission was in
the best interests of the Company.

               (b) A "Change in Control" of the Company shall mean the
occurrence of any of the following events: (i) any "person", as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, or
any corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportion as their ownership of stock of the Company)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
50% or more of the combined voting power of the Company's then outstanding
securities (other than as a result of acquisitions of such securities from the
Company); (ii) individuals who, as of the date hereof, constitute the Board

                                       2

<PAGE>
 
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company) shall be, for purposes of this
Agreement, considered to be a member of the Incumbent Board; (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than (A) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation or (B) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no "person" (as defined above) acquires more
than 20% of the combined voting power of the Company's then outstanding
securities; or (iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.

               (c) A "Change in Status" of the Executive shall mean the
occurrence, without the Executive's written consent, of any of the following
circumstances (unless such circumstances constitute an isolated, insubstantial
and inadvertent action not taken in bad faith and are fully remedied by the
Company within 30 days after receipt of notice thereof given by the Executive):
(i) any diminution or change in a manner adverse to the Executive of (A) his
title, office or position with the Company, (B) his salary or other benefits, or
(C) his duties, responsibilities or employment condition, or (ii) the failure by
the Company to pay to the Executive any portion of his compensation within
ninety (90) days after such compensation is due.

               (d) "Disability" shall mean the inability of the Executive, for a
period of at least 60 consecutive days, to perform his employment duties as a
result of a physical or mental illness or incapacity.

      5. Term.  This Agreement shall continue in effect for a period of three
         ----          
years from the date hereof, unless extended by the mutual written consent of the
Company and the Executive.

      6. Successors.
         ---------- 
   
               (a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution.

               (b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.

               (c) The Company will require any successor (whether direct or
indirect, by

                                       3

<PAGE>
 
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as defined above and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement.

      7.       Miscellaneous.
               ------------- 

               (a) This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts, without reference
to principles of conflict of laws.

               (b) This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or their respective
successors and legal representatives.

               (c) All notices and other communications hereunder shall be in
writing and shall be delivered by hand delivery, by a reputable overnight
courier service, or by registered or certified mail, return receipt requested,
postage prepaid, in each case addressed as follows:

               If to the Company:
               ----------------- 

               Parametric Technology Corporation
               128 Technology Drive
               Waltham, MA  02154
               Attention: Secretary

               If to the Executive:
               ------------------- 

               Steven C. Walske
               147 Thorndike Street
               Brookline, MA  02146

or to such other address as either party shall have furnished to the other in
writing in accordance herewith.  Any Notice or communication shall be deemed to
be delivered upon the date of hand delivery, one day following delivery to such
overnight courier service, or three days following mailing by registered or
certified mail.

                                       4

<PAGE>
 
          EXECUTED as of the date first written above.

                                    PARAMETRIC TECHNOLOGY CORPORATION

                                    By:      /s/ Samuel P. Geisberg
                                           -------------------------------

                                                 Samuel P. Geisberg
                                           -------------------------------


                                             /s/ Steven C. Walske
                                           -------------------------------
                                           STEVEN C. WALSKE

                                       5



<PAGE>
 
                                                           EXHIBIT 10.8

                                                           November 8, 1989


                             128 TECHNOLOGY CENTER
                             ---------------------
                                        
                                  OFFICE LEASE
                                  ------------
                                        
                       PARAMETRIC TECHNOLOGY CORPORATION
                       ---------------------------------
                                        
                                AMENDMENT NO. 3
                                ---------------
                                        

Reference is made to the Lease (the "Lease") by and between DOMINIC J. SARACENO,
KURT W. SARACENO, and EDWARD R. WERNER, trustees of the 128 Technology Trust
under a Declaration of Trust dated October 12, 1983, recorded in Middlesex
County Registry of Deeds Southern District Book 15268 Page 65 (hereinafter
"Lessor", which expression shall include its heirs, executors, successors and
assigns where the context so admits), and Parametric Technology Corporation, a
Massachusetts corporation having principal place of business at 128 Technology
Drive, Waltham, Massachusetts 02154 (hereinafter "Lessee", which expression
shall include its successors and assigns or executors and administrators where
the context so admits).  Terms defined in or by reference in the Lease not
otherwise defined herein shall have the same meaning herein as therein.

For a good and valuable consideration, the receipt and legal sufficiency of
which is hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease
as follows:


1. ARTICLE 1, REFERENCE DATA, is hereby amended as follows:
              --------------                               

  *    NEW AREA III:  12,409 Additional Square
 Feet, as shown on Exhibit A
       attached.

  *    Operating Expense Base: $4.80 Lessor's contribution to Lessee's operating
       expenses. Lessee agrees to pay its annual prorata share of operating
       expenses in excess of $4.80 per square foot.

  *    BASE RENT:  $18.00 per square foot for 12,409 rentable square feet).

  *    RENT SCHEDULE:
                  Initial 4,500 square feet.
                  Rent Commencement:  December 1, 1989.
                  Annual Rent:  $81,000.00
                  Monthly Rent:  $6,750.00

                  Additional 1,704 square feet.
                  Rent Commencement:  Upon substantial completion.
                  Annual Rent:  $30,672.00
                  Monthly Rent:  $2,556.00

                  Additional 2,898 square feet.
                  Rent Commencement:  March 1,1990
                  Annual Rent:  $52,164.00
                  Monthly Rent:  $4,347.00

<PAGE>
 
                  Additional 3,307 square feet.
                  Rent Commencement:  June 1,1990
                  Annual Rent:  $59,526.00
                  Monthly Rent:  $4,960.50

  *    TERMINATION:  June 30, 1993

  *    PREPAID RENT: Lessee agrees to prepay $44,000.00 of rent upon signing
       this agreement to be applied to Lessee's total monthly rental charges
       until fully utilized.

  *    TENANT IMPROVEMENTS: Landlord shall provide Tenant with a turnkey
       buildout according to plan dated November 10, 1989 which is to be
       mutually agreed upon.

  *    ADDITIONAL SPACE: Lessor grants Lessee the option to lease the Aussimont
       space prior to May 1, 1990 with thirty (30) days prior written notice to
       Lessor. The term of said lease will be for a minimum of four (4) years.

In all other respects, by amending Article I with the corresponding changes to
Articles III and IV, the terms and provisions of the Lease are hereby ratified
and confirmed and remain in full force and effect and unamended.

Lessee acknowledges and agrees that this Amendment shall not be binding upon
Lessor until an original of this Amendment, executed by Lessor, is delivered to
Lessee.  Lessee shall not be entitled to rely on any rights set forth herein
until such a fully executed Amendment is delivered to Lessee.

Executed as a sealed instrument this 8th day of November, 1989.


                            LESSOR      128 TECHNOLOGY TRUST


                                        /s/ Dominic J. Saraceno
                                      -----------------------------------------
                                      Dominic J. Saraceno, as Trustee aforesaid


                                        /s/ Kurt W. Saraceno
                                      -----------------------------------------
                                      Kurt W. Saraceno, as Trustee aforesaid


                                        /s/ Edward R. Werner
                                      -----------------------------------------
                                      Edward R. Werner, as Trustee aforesaid



 
                            LESSEE    PARAMETRIC TECHNOLOGY CORPORATION
 
 
 
 
                                      BY   /s/  Steven C. Walske
                                            ---------------------
 
 
 
                                     
 



<PAGE>
 
                                                                   EXHIBIT 10.10
 
                       PARAMETRIC TECHNOLOGY CORPORATION
                        1992 DIRECTOR STOCK OPTION PLAN

1.        PURPOSE.

          This 1992 Director Stock Option Plan (the "Plan") governs options to
purchase Common Stock, $.01 par value per share (the "Common Stock"), of
Parametric Technology Corporation (the "Company") granted by the Company to
members of the Board of Directors of the Company who are not also officers or
employees of the Company.  The purpose of the Plan is to attract and retain
qualified persons to serve as Directors of the Company and to encourage
ownership of the Common Stock of the Company by such Directors.

2.        ADMINISTRATION.

          Grants of stock options under the Plan shall be automatic as provided
in Section 8.  All questions of interpretation of the Plan or of any options
granted hereunder shall be determined by  the Board of Directors of the Company
(the "Board"), provided that the Board shall have no discretion with respect to
the eligibility or selection of Directors to receive options, the timing of
grants or the number of shares of Common Stock subject to the Plan or any option
granted thereunder.  Any and all powers of the Board under the Plan may be
exercised by a committee consisting of three or more Directors or other persons

appointed by the Board.

3.        ELIGIBILITY.

          Members of the Board who are not also officers or employees of
the Company shall be eligible to participate in the Plan.

4.        SHARES SUBJECT TO THE PLAN.

          Options may be granted under the Plan in respect of a maximum of
640,000 shares of Common Stock, subject to adjustment as provided in Section 5
below.  Shares to be issued upon the exercise of options granted under the Plan
may be either authorized but unissued shares or shares held by the Company in
its treasury.  Whenever options under the Plan lapse or terminate or otherwise
become unexercisable, the shares of Common Stock which were available for such
options shall again be available for the grant of options under the Plan.  The
Company shall at all times while the Plan is in force reserve such number of
shares of Common Stock as will be sufficient to satisfy the requirements of the
Plan.

5.        ADJUSTMENT OF NUMBER OF OPTION SHARES.

          In the event of any stock dividend payable in Common Stock or any
split-up, combination or reclassification of shares, recapitalization or other
similar capital change relating to the Common Stock occurring after the date of
grant of an option hereunder and prior to the exercise in full of an option
granted hereunder, the number and kind of shares subject to such option and


<PAGE>
 
the price to be paid for each share subject to such option shall each be
proportionately adjusted by the Board.

          In the event of any reorganization, consolidation or merger to which
the Company is a party and in which the Company does not survive, or upon the
dissolution or liquidation of the Company, all outstanding options shall
terminate; provided, however, that (i) in the event of the liquidation or
           --------  -------                                             
dissolution of the Company, or in the event of any such reorganization,
consolidation or merger in which the Company does not survive and with respect
to which the resulting or surviving corporation does not assume such outstanding
option or issue a substitute option therefor, such option shall be exercisable
in full, without regard to any installment restrictions on exercise imposed
pursuant to this Plan or any Option Agreement, during such period preceding the
effective date of such liquidation, dissolution, reorganization, consolidation
or merger (unless such option is terminated earlier by its terms) as may be
specified by the Board; and (ii) in the event of any such reorganization,
consolidation or merger, the Board may, in its good faith discretion, arrange to
have the resulting or surviving corporation assume such outstanding option or
issue a substitute option therefor.

          No fraction of a share shall be purchasable or deliverable upon
exercise of an option, but, in the event any adjustment hereunder of the number
of shares covered by the option shall cause such number to include a fraction of
a share, such fraction shall be adjusted to the nearest smaller whole number of
shares.

          In the event of changes in the outstanding Common Stock by reason of
any stock dividend, split-up, dividend, combination, reclassification,
recapitalization or change of outstanding shares of Common Stock of the nature
contemplated by this Section 5, the number of shares of Common Stock available
for the purpose of the Plan, as stated in Section 4, shall be correspondingly
adjusted.

6.        NON-STATUTORY STOCK OPTIONS.

          All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").

7.        FORM OF OPTION AGREEMENTS.

          Options shall be granted hereunder pursuant to the terms of Option
Agreements which shall be substantially in the form of the attached Exhibit A or
                                                                    ---------   
in such other form as the Board may from time to time determine.



8.        GRANT OF OPTIONS AND OPTION TERMS.

                                      -2-

<PAGE>
 
          Initial Grant of Options.  Options to purchase Common Stock shall
automatically be granted to the following individuals, in the amounts set forth
opposite their respective names, immediately following approval of the Plan at
the 1992 Annual Meeting of Stockholders:


<TABLE>
<CAPTION>
 
                                       Number
Name of Director                      of Shares
- ------------------------------------  ---------
<S>                                   <C>
 
 Donald W. Feddersen................     80,000
 Donald K. Grierson.................     80,000
 Robert N. Goldman..................     80,000
 Noel G. Posternak..................     80,000
</TABLE>


          Automatic Grant of Subsequent Options.  Thereafter, through the date
of the 1996 Annual Meeting of Stockholders, any new Director elected to the
Board who is eligible to receive options to purchase Common Stock under the Plan
shall automatically be granted, on the effective date of such election, options
to purchase an aggregate of 80,000 shares of Common Stock.  The "Date of Grant"
for options granted under the Plan shall be the date the Plan is approved by the
stockholders for the initial options and the effective date of a new Director's
election to the Board for all subsequent options.  No options shall be granted
hereunder after ten years from the date on which the Plan was initially approved
by the stockholders of the Company.

          Option Price.  The option price for each option granted under the Plan
shall be the last sale price of the Common Stock as reported by the NASDAQ
National Market System on the Date of Grant.

          Term of Option.  The term of each option granted under the Plan shall
be ten years from the Date of Grant.

          Period of Exercise.  Options granted under the Plan shall become
exercisable in equal quarterly installments over four years on each of the
first, second, third and fourth anniversaries of the Date of Grant if and only
if the option holder is a member of the Board at the opening of business on that
anniversary date.  Directors holding exercisable options under the Plan who
cease to serve as members of the Board of the Company for any reason other than
death may, for a period of 10 days following the date of cessation of service,
exercise the rights they had under such options at the time they ceased being a
Director for the full unexpired term of such option.  Upon the death of a
Director, those entitled to do so under the Director's will or the laws of
descent and distribution shall have the right, at any time within twelve months
after the date of death, to exercise in whole or in part any rights which were
available to the Director at the time of his death.  Options granted under the
Plan shall terminate, and no rights thereunder may be exercised, after the
expiration of the applicable exercise period.

                                      -3-

<PAGE>
 
          Method of Exercise and Payment.  Each exercise of an option hereunder
may be effected only by giving written notice, in the manner provided in Section
12 hereof, of intent to exercise the option, specifying the number of shares as
to which the option is being exercised, and accompanied by full payment of the
option price for the number of shares then being acquired.  Such payment shall
be made in cash, by certified or bank check payable to the order of the Company,
credit to the Company's account at a financial or brokerage institution on the
date of exercise, or if the option so provides, (i) in shares of Common Stock
having an aggregate Fair Market Value, at the time of such payment, equal to the
total option price for the number of shares of Common Stock for which payment is
then being made, or (ii) partly in cash or by certified or bank check payable to
the order of the Company and the balance in shares of Common Stock having an
aggregate Fair Market Value, at the time of such payment, equal to the
difference between the total option price for the number of shares of Common
Stock for which payment is then being made and the amount of the payment in cash
or by certified or bank check.  For purposes hereof, the "Fair Market Value" of
the Common Stock shall be the last sale of price the Common Stock as reported by
the NASDAQ National Market System for the business day immediately preceding the
option exercise date.

          Receipt by the Company of such notice and payment shall, for purposes
of this Plan, constitute exercise of the option or a part thereof.  Within
twenty (20) days thereafter, the Company shall deliver or cause to be delivered
to the optionee a certificate or certificates for the number of shares of Common
Stock then being purchased by him.  Such shares shall be fully paid and non-
assessable.  If any law or applicable regulation of the Securities and Exchange
Commission or other public regulatory authority (including, but not limited to,
a stock exchange) shall require the Company or the optionee (a) to register or
qualify, under the Securities Act of 1933, as amended (the "Securities Act"),
any similar federal statute then in force or any state law regulating the sale
of securities, any shares of Common Stock covered by an option with respect to
which notice of intent to exercise shall have been delivered to the Company or
(b) to take any other action in connection with such shares before issuance
thereof may be effected, then the delivery of the certificate or certificates
for such shares shall be postponed until completion of the necessary action,
which the Company shall take in good faith and without delay.  All such action
shall be taken by the Company at its own expense.

          The Company may require an individual exercising an option to
represent that his purchase of shares of Common Stock pursuant to such exercise
is for his own account, for investment and without a view to resale or
distribution, and that he will not sell or otherwise dispose of any such shares
except pursuant to (i) an effective registration statement covering such
transaction filed with the Securities and Exchange Commission and in compliance
with all of the applicable provisions of the Securities Act, and the rules and
regulations thereunder, or (ii) an opinion of Company counsel that such
registration is not required.

          Non-transferability.  Options granted under the Plan shall not be
transferable by the holder thereof otherwise than by will or the laws of descent
and distribution and shall be

                                      -4-

<PAGE>
 
exercisable, during the holder's lifetime, only by the option holder or his or
her legal representative; provided that the Board may in its discretion waive
such restriction in any case.

9.        LIMITATION OF RIGHTS.

          No Right to Continue as a Director.  Neither the Plan, nor the
granting of an option or any other action taken pursuant to the Plan, shall
constitute an agreement or understanding, express or implied, that the Company
will retain an optionee as a Director for any period of time or at any
particular rate of compensation.

          No Stockholders' Rights for Options.  Directors shall have no rights
as stockholders with respect to the shares covered by their options until the
date they exercise such options and pay the option price to the Company, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such option is exercised and paid for.

10.       EFFECTIVE DATE.

          The Plan shall become effective immediately upon approval by the
affirmative vote of a majority of the shares of Common Stock present or
represented and entitled to vote at a meeting of the Company's stockholders.

11.       AMENDMENT OR TERMINATION.

          The Board may amend or terminate this Plan at any time, provided that,
to the extent required to qualify the Plan for the exemption under Rule 16b-3
under the Exchange Act, no amendment may be made to change the eligibility or
selection of Directors to receive options, the timing of grants, or the number
of shares of Common Stock subject to the Plan or any option granted thereunder,
other than as permitted by such Rule, and this Plan shall not be amended more
than once every six months, other than to comport with changes in the Code or
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the
rules and regulations promulgated thereunder.

12.       NOTICES.

          Any communication or notice required or permitted to be given under
this Plan shall be in writing and mailed by registered or certified mail or
delivered in hand, if to the Company, to its Treasurer at Parametric Technology
Corporation, 128 Technology Drive, Waltham, Massachusetts 02154 and, if to an
optionee, to such address as the optionee shall last have furnished to the
Company.

13.       GOVERNING LAW.

                                      -5-

<PAGE>
 
          The Plan shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts.



                         Adopted by the Board of Directors on November 21, 1991
                         Adopted by the Stockholders on February 4, 1992
                         As amended through the October 2, 1996 meeting of the
                         Board of Directors.

                                      -6-

<PAGE>
 
                                   EXHIBIT A
                                   ---------

1992 DSO -                                                             Shares
          -----------                                         ---------

                       PARAMETRIC TECHNOLOGY CORPORATION
                        1992 Director Stock Option Plan
                     Non-statutory Stock Option Agreement
                             ______________, 199__


     Parametric Technology Corporation (the "Company"), a Massachusetts 
corporation, hereby grants to the person named below an option to purchase 
shares of Common Stock, $.01 par value per share of the Company (the "Option") 
under and subject to the Company's 1992 Director Stock Option Plan (the "Plan") 
exercisable only on the following terms and conditions and those set forth on 
the reverse side of this Agreement:

Name of Optionee:
Address:

Social Security No.
Option Price:
Date of Grant:

Exercisability Schedule:

at any time on or after the first anniversary of the date hereof, as to ______ 
shares,
at any time on or after the second anniversary of the date hereof, as to ______ 
additional shares,
at any time on or after the third anniversary of the date hereof, as to ______
additional shares,
at any time on or after the fourth anniversary of the date hereof, as to ______
additional shares,

provided that this Optionee is a member of the Board of Directors of the Company
(the "Board") at the opening of business on the date described above and 
provided that this Option may not be exercised as to any shares after the 
expiration of ten years from the date hereof.

     By signing this Stock Option Agreement and returning one signed copy to the
Company, the Optionee accepts the Option described herein on the terms and 
conditions set forth herein or in the plan.

PARAMETRIC TECHNOLOGY                  Accepted and agreed to:
CORPORATION

By:                         
   ---------------------------         ---------------------------
Title:                                 Optionee

<PAGE>
 
TERMS AND CONDITIONS

                       PARAMETRIC TECHNOLOGY CORPORATION
                        1992 DIRECTOR STOCK OPTION PLAN


1. This Option may be exercised from time to time in accordance with the
Exercisability Schedule for up to the aggregate number of shares specified
therein, but in no event for the purchase of other than full shares; provided,
however, that this Option may not be exercised as to any shares after the
expiration of ten years from the date hereof. Written notice of exercise shall
be delivered to the Company specifying the number of shares with respect to
which the Option is being exercised, which notice shall be accompanied by full
payment of the option price for the number of shares then being acquired. Such
payment shall be made in cash or by certified or bank check payable to the order
of the Company, credit to the Company's account at a financial or brokerage
institution on the date of exercise or a payment commitment of such an
institution acceptable to the Company or in shares of the Company's Common
Stock, valued at their fair market value as of the date of exercise as
determined as provided in the Plan, equal to the total option price for the
number of shares for which payment is then being made, or in any combination of
cash, certified or bank check and shares of Common Stock. Shares of Common Stock
surrendered in payment of the option price shall have been held by the person
exercising the option for at least six months unless otherwise permitted by the
Board of Directors of the Company (the "Board"). Not later than twenty days
after the date of the delivery of such notice the Company will deliver or cause
to be delivered to the Optionee a certificate for the number of shares with
respect to which the Option is being exercised.

    2. The Optionee shall not be deemed, for any purpose, to have any rights 
whatever in respect of shares to which the Option shall not have been exercised 
and payment made as aforesaid. The Optionee shall not be deemed to have any 
rights to continued service as a director by virtue of the grant of this Option.

    3. In the event of a stock dividend, split-up, combination or
reclassification of shares, recapitalization or other similar capital change
relating to the Common Stock, the maximum aggregate number and kind of shares or
securities of the Company subject to this Option and the exercise price of this
Option shall be appropriately adjusted by the Board (whose determination shall
be conclusive) so that the proportionate number of shares or other securities
subject to this Option and the proportionate interest of the Optionholder shall
be maintained as before the occurrence of such event.

    4. In the event of any reorganization, consolidation or merger to which the
Company is a party and in which the Company does not survive, or upon the
dissolution or liquidation of the Company, this Option, to the extent
outstanding and unexercised, shall terminate; provided, however, that (i) in the
event of the liquidation or dissolution of the Company, or in the event of any
such reorganization, consolidation or merger in which the Company does not
survive and with respect to which the resulting or surviving corporation does
not assume this Option, to the extent outstanding and unexercised, or issue a
substitute option therefor, this Option shall be exercisable in full, without
regard to any installment restrictions on exercise imposed pursuant






























 


<PAGE>
 
to the Plan or this Option Agreement, during such period preceding the effective
date of such liquidation, dissolution, reorganization, consolidation or merger 
(unless this Option is terminated earlier by its terms) as may be specified by 
the Board; and (ii) in the event of any such reorganization, consolidation or 
merger, the Board may, in its good faith discretion, arrange to have the 
resulting or surviving corporation assume this Option, to the extent outstanding
and unexercised, or issue a substitute option therefor.

    5. This Option is not transferable by the Optionee otherwise than by will or
the laws of descent and distribution; provided that the Board may waive this 
restriction in its discretion. This Option is exercisable during the Optionee's 
lifetime only by the Optionee, provided that this Option may be exercised by the
Optionholder's guardian or legal representative in the case of disability and, 
in the case of death, by the beneficiary designated by the Optionholder in 
writing delivered to the Company, or, if none has been designated, by the 
Optionholder's estate or his or her transferee on death in accordance with this 
Option Agreement.

    6. If the Optionee ceases to serve as a member of the Board for any 
reason other than death, the Optionee may, for a period of seven months 
following such cessation of service, exercise the rights which the Optionee had 
hereunder at the time the Optionee ceased serving as a director. Upon the death 
of the Optionee, those entitled to do so, as set forth in Section 5 of this 
Option Agreement, shall have the right, at any time within twelve months after 
the date of death (subject to the prior expiration of the Option exercise 
period), to exercise in whole or in part any rights which were available to the 
Optionee at the time of the Optionee's death. Any rights that have not yet 
become exercisable shall terminate upon cessation of membership on the Board. 
This Option shall terminate after the expiration of the applicable exercise 
period. Notwithstanding the foregoing provisions of this Section 6, no rights 
under this Option may be exercised after the expiration of ten years from the 
date hereof.

    7. It shall be a condition to the Optionee's right to purchase shares of 
Common Stock hereunder that the Company may, in its discretion, require (a) 
that the shares of Common Stock reserved for issue upon the exercise of this 
Option shall have been duly listed, upon official notice of issuance, upon any 
national securities exchange on which the Company's Common Stock may then be 
listed, (b) that either (i) a Registration Statement under the Securities Act of
1933, as amended, with respect to said shares shall be in effect, or (ii) in the
opinion of counsel for the Company the proposed purchase shall be exempt from 
registration under said Act and the Optionee shall have made such undertakings 
and agreements with the Company as the Company may reasonably require, and (c) 
that such other steps, if any, as counsel for the Company shall deem necessary 
to comply with any law, rule or regulation applicable to the issue of such 
shares by the Company shall have been taken by the Company or the Optionee, or 
both. The certificates representing the shares purchased under this Option may 
contain such legends as counsel for the Company shall deem necessary to comply 
with any applicable law, rule or regulation.

    8. Any exercise of this Option is conditioned upon the payment, if the 
Company so requests, by the Optionee or such other person who may be entitled to
exercise this Option in




<PAGE>
 
accordance with the terms hereof, of all state and federal taxes imposed upon
the exercise of this Option and the issue to the Optionee of the shares covered
hereby.

    9. This Option shall not be treated as an incentive stock option under
Section 422 of the Internal Revenue Code of 1986, as amended.

   10. This Option is issued pursuant to the terms of the Plan. This Certificate
does not set forth all of the terms and conditions of the Plan, which are 
incorporated herein by reference. In the event of any conflict or inconsistency 
between the provisions of this Option Agreement and the Plan, the provisions of 
the Plan will prevail. Capitalized terms used and not otherwise defined herein 
have the meanings given to them in the Plan. Copies of the Plan may be obtained 
upon written request without charge from the Company.





<PAGE>
 
                                                                   EXHIBIT 10.20

                       PARAMETRIC TECHNOLOGY CORPORATION

                        1996 DIRECTOR STOCK OPTION PLAN



1.  PURPOSE.

     This 1996 Director Stock Option Plan (the "Plan") governs options to
purchase Common Stock, $.01 par value per share (the "Common Stock"), of
Parametric Technology Corporation (the "Company") granted by the Company to
members of the Board of Directors of the Company who are not also officers or
employees of the Company.  The purpose of the Plan is to attract and retain
qualified persons to serve as Directors of the Company and to encourage
ownership of the Common Stock of the Company by such Directors.

2.  ADMINISTRATION.

     Grants of stock options under the Plan shall be automatic as provided in
Section 8.  However, all questions of interpretation of the Plan or of any
options granted hereunder shall be determined by the Board of Directors of the
Company (the "Board").  Any and all powers of the Board under the Plan may be
exercised by a committee consisting of one or more Directors appointed by the
Board.

3.  ELIGIBILITY.

     Members of the Board who are not also officers or employees of the Company
shall be eligible to participate in the Plan.

4.  SHARES SUBJECT TO THE PLAN.

     Options may be granted under the Plan in respect of a maximum of 180,000

shares of Common Stock, subject to adjustment as provided in Section 5 below.
Shares to be issued upon the exercise of options granted under the Plan may be
either authorized but unissued shares or shares held by the Company in its
treasury.  Whenever options under the Plan lapse or terminate or otherwise
become unexercisable, the shares of Common Stock which were available for such
options shall again be available for the grant of options under the Plan.  The
Company shall at all times while the Plan is in force reserve such number of
shares of Common Stock as will be sufficient to satisfy the requirements of the
Plan.

5.  ADJUSTMENT OF NUMBER OF OPTION SHARES.

     In the event of a stock dividend, split-up, combination or reclassification
of shares, recapitalization or other similar capital change relating to the
Company's Common Stock, the maximum aggregate number and kind of shares or
securities of the Company as to which options may be granted under this Plan and
as to which options then outstanding shall be


<PAGE>
 
exercisable, and the option price of such options shall be appropriately
adjusted so that the proportionate number of shares or other securities as to
which options may be granted and the proportionate interest of holders of
outstanding options shall be maintained as before the occurrence of such event.

     In the event of any reorganization, consolidation or merger to which the
Company is a party and in which the Company does not survive, or upon the
dissolution or liquidation of the Company, all outstanding options shall
terminate; provided, however, that (i) in the event of the liquidation or
           --------  -------                                             
dissolution of the Company, or in the event of any such reorganization,
consolidation or merger in which the Company does not survive and with respect
to which the resulting or surviving corporation does not assume such outstanding
option or issue a substitute option therefor, such option shall be exercisable
in full, without regard to any installment restrictions on exercise imposed
pursuant to this Plan or any Option Agreement, during such period preceding the
effective date of such liquidation, dissolution, reorganization, consolidation
or merger (unless such option is terminated earlier by its terms) as may be
specified by the Board; and (ii) in the event of any such reorganization,
consolidation or merger, the Board may, in its good faith discretion, arrange to
have the resulting or surviving corporation assume such outstanding option or
issue a substitute option therefor.

     No fraction of a share shall be purchasable or deliverable upon exercise of
an option, but, in the event any adjustment hereunder of the number of shares
covered by the option shall cause such number to include a fraction of a share,
such fraction shall be adjusted to the nearest smaller whole number of shares.

6.  NON-STATUTORY STOCK OPTIONS.

     All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").

7.  FORM OF OPTION AGREEMENTS.

     Options shall be granted hereunder pursuant to the terms of Option
Agreements which shall be substantially in the form of the attached Exhibit A or
                                                                    ---------   
in such other form as the Board may from time to time determine.

8.  GRANT OF OPTIONS AND OPTION TERMS.

     Automatic Grant of Options.  Options to purchase Common Stock shall
automatically be granted as follows:

          (i) Immediately following his or her election, each non-employee
     director of the Company newly elected to the Board of Directors shall
     automatically be granted options to purchase 20,000 shares of Common Stock;
     and

                                       2

<PAGE>
 
          (ii) Immediately following the annual meeting of stockholders each
     year, each non-employee director of the Company continuing in office after
     such meeting shall automatically be granted options to purchase 5,000
     shares of Common Stock.

No options shall be granted hereunder after ten years from the date on which
this Plan was initially approved and adopted by the Board.

     Date of Grant.  The "Date of Grant" for options granted under this Plan
shall be (i) the date of the respective director's election, for each grant
pursuant to clause (i) of the preceding paragraph and (ii) the date of the
respective annual meeting of stockholders, for each grant pursuant to clause
(ii) of the preceding paragraph.

     Option Price.  The option price for each option granted under this Plan
shall be the current fair market value of a share of Common Stock of the
Company, which, for this purpose, shall be the last sale price for the Company's
Common Stock as reported on the Nasdaq Stock Market's National Market, or the
principal exchange on which the Common Stock is then traded, as the case may be,
for the Date of Grant.

     Term of Option.  The term of each option granted under the Plan shall be
ten years from the Date of Grant.

     Period of Exercise.  Options granted under the Plan shall become
exercisable in four equal installments on each of the first, second, third and
fourth anniversaries of the Date of Grant if and only if the option holder is a
member of the Board at the opening of business on that anniversary date.
Directors holding exercisable options under the Plan who cease to serve as
members of the Board of the Company for any reason other than death may, for a
period of seven months following the date of cessation of service, exercise the
rights they had under such options at the time they ceased being a Director.
Any rights that have not yet become exercisable shall terminate upon cessation
of membership on the Board.  Upon the death of a Director, those entitled to do
so under the Director's will or the laws of descent and distribution shall have
the right, at any time within twelve months after the date of death, to exercise
in whole or in part any rights which were available to the Director at the time
of his death.  The rights of the option holder may be exercised by the holder's
guardian or legal representative in the case of disability and by the
beneficiary designated by the holder in writing delivered to the Company or, if
none has been designated, by the holder's estate or his or her transferee on
death in accordance with this Plan, in the case of death.  Options granted under
the Plan shall terminate, and no rights thereunder may be exercised, after the
expiration of the applicable exercise period.  Notwithstanding the foregoing
provisions, no rights under any options may be exercised after the expiration of
ten years from their Date of Grant.

     Method of Exercise and Payment.  Each exercise of an option hereunder may
be effected only by giving written notice, in the manner provided in Section 12
hereof, of intent to exercise the option, specifying the number of shares as to
which the option is being exercised, and accompanied by full payment of the
option price for the number of shares then being acquired.  Such payment shall
be made in cash, by certified or bank check payable to the order of the Company,
credit to the Company's account at a financial or brokerage institution

                                       3

<PAGE>
 
on the date of exercise or a payment commitment of such an institution
acceptable to the Company, or if the option so provides, (i) in shares of Common
Stock having an aggregate Fair Market Value, at the time of such payment, equal
to the total option price for the number of shares of Common Stock for which
payment is then being made, or (ii) partly in cash or by certified or bank check
payable to the order of the Company and the balance in shares of Common Stock
having an aggregate Fair Market Value, at the time of such payment, equal to the
difference between the total option price for the number of shares of Common
Stock for which payment is then being made and the amount of the payment in cash
or by certified or bank check. For purposes hereof, the "Fair Market Value" of
the Common Stock shall be the last sale price of the Common Stock as reported on
the Nasdaq Stock Market's National Market for the business day immediately
preceding the option exercise date.

     Receipt by the Company of such notice and payment shall, for purposes of
this Plan, constitute exercise of the option or a part thereof.  Within twenty
(20) days thereafter, the Company shall deliver or cause to be delivered to the
optionee a certificate or certificates for the number of shares of Common Stock
then being purchased by the optionee.  Such shares shall be fully paid and non-
assessable.  If any law or applicable regulation of the Securities and Exchange
Commission or other public regulatory authority (including, but not limited to,
a stock exchange) shall require the Company or the optionee (i) to register or
qualify, under the Securities Act of 1933, as amended (the "Securities Act"),
any similar federal statute then in force or any state law regulating the sale
of securities, any shares of Common Stock covered by an option with respect to
which notice of intent to exercise shall have been delivered to the Company or
(ii) to take any other action in connection with such shares before issuance
thereof may be effected, then the delivery of the certificate or certificates
for such shares shall be postponed until completion of the necessary action,
which the Company shall take in good faith and without delay.  All such action
shall be taken by the Company at its own expense.

     To the extent determined necessary by counsel to the Company to comply with
any applicable law, the Company may require an individual exercising an option
to represent that his purchase of shares of Common Stock pursuant to such
exercise is for his own account, for investment and without a view to resale or
distribution, and that he will not sell or otherwise dispose of any such shares
except pursuant to (i) an effective registration statement covering such
transaction filed with the Securities and Exchange Commission and in compliance
with all of the applicable provisions of the Securities Act, and the rules and
regulations thereunder, or (ii) an opinion of Company counsel that such
registration is not required.

     Non-transferability.  Options granted under the Plan shall not be
transferable by the holder thereof otherwise than by will or the laws of descent
and shall be exercisable. during the holder's lifetime, only by the option
holder or his or her legal representative; provided that the Board may in its
discretion waive such restriction in any case.

9.   LIMITATION OF RIGHTS.

     No Right to Continue as a Director.  Neither the Plan, nor the granting of
an option or any other action taken pursuant to the Plan, shall constitute an
agreement or understanding,

                                       4

<PAGE>
 
express or implied, that the Company will retain an optionee as a Director for
any period of time or at any particular rate of compensation.

     No Stockholders' Rights for Options.  Directors shall have no rights as
stockholders with respect to the shares covered by their options until the date
they exercise such options and pay the option price to the Company, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such option is exercised and paid for.

10.  STOCKHOLDER APPROVAL.

     The Plan is subject to approval by the stockholders of the Company by the
affirmative vote of a majority of the shares of Common Stock present or
represented and entitled to vote at a meeting of the Company's stockholders.  In
the event such approval is not obtained, all options granted under this Plan
shall be void and without effect.

11.  AMENDMENT OR TERMINATION.

     The Board may amend or terminate this Plan at any time, subject to any
stockholder approval that the Board determines to be necessary or advisable.

12.  NOTICES.

     Any communication or notice required or permitted to be given under this
Plan shall be in writing and mailed by registered or certified mail or delivered
in hand, if to the Company, to its Corporate Counsel at Parametric Technology
Corporation, 128 Technology Drive, Waltham, Massachusetts 02154 and, if to an
optionee, to such address as the optionee shall last have furnished to the
Company.

13.  GOVERNING LAW.

     The Plan shall be governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts.

                    Adopted by the Board of Directors on November 17, 1995.
                    Approved by the Stockholders on February 8, 1996.
                    As amended through the October 2, 1996 meeting of the Board
                    of Directors.

                                       5

<PAGE>
 
                                   EXHIBIT A
                                   ---------
                                        
1996 DSO - _______                                               ________ Shares

                       PARAMETRIC TECHNOLOGY CORPORATION
                        1996 Director Stock Option Plan
                      Non-statutory Stock Option Agreement
                            _______________ __, 199_

          Parametric Technology Corporation (the "Company"), a Massachusetts
corporation, hereby grants to the person named below an option to purchase
shares of Common Stock, $.01 par value per share of the Company (the "Option")
under and subject to the Company's 1996 Director Stock Option Plan (the "Plan")
exercisable only on the following terms and conditions and those set forth on
the reverse side of this Agreement:

Name of Optionee:
Address:
 
Social Security No.
Option Price:
Date of Grant:

Exercisability Schedule:

at any time on or after the first anniversary of the date hereof, as to
_________ shares,
at any time on or after the second anniversary of the date hereof, as to
_________ additional shares,
at any time on or after the third anniversary of the date hereof, as to
_________ additional shares,
at any time on or after the fourth anniversary of the date hereof, as to
_________ additional shares,

provided that this Optionee is a member of the Board of Directors of the Company
(the "Board") at the opening of business on the date described above and
provided that this Option may not be exercised as to any shares after the
expiration of ten years from the date hereof.

          By signing this Stock Option Agreement and returning one signed copy
to the Company, the Optionee accepts the Option described herein on the terms
and conditions set forth herein or in the plan.

PARAMETRIC TECHNOLOGY                             Accepted and agreed to:
CORPORATION


By:  ________________________                     __________________________
Title:                                            Optionee

<PAGE>
 
TERMS AND CONDITIONS

                       PARAMETRIC TECHNOLOGY CORPORATION
                        1996 DIRECTOR STOCK OPTION PLAN

 
1.  This Option may be exercised from time to time in accordance with the
Exercisability Schedule for up to the aggregate number of shares specified
therein, but in no event for the purchase of other than full shares; provided,
however, that this Option may not be exercised as to any shares after the
expiration of ten years from the date hereof.  Written notice of exercise shall
be delivered to the Company specifying the number of shares with respect to
which the Option is being exercised, which notice shall be accompanied by full
payment of the option price for the number of shares then being acquired.  Such
payment shall be made in cash or by certified or bank check payable to the order
of the Company, credit to the Company's account at a financial or brokerage
institution on the date of exercise or a payment commitment of such an
institution acceptable to the Company or in shares of the Company's Common
Stock, valued at their fair market value as of the date of exercise as
determined as provided in the Plan, equal to the total option price for the
number of shares for which payment is then being made, or in any combination of
cash, certified or bank check and shares of Common Stock.  Shares of Common
Stock surrendered in payment of the option price shall have been held by the
person exercising the option for at least six months unless otherwise permitted
by the Board of Directors of the Company (the "Board").  Not later than twenty
days after the date of the delivery of such notice the Company will deliver or
cause to be delivered to the Optionee a certificate for the number of shares
with respect to which the Option is being exercised.

          2.  The Optionee shall not be deemed, for any purpose, to have any
rights whatever in respect of shares to which the Option shall not have been
exercised and payment made as aforesaid.  The Optionee shall not be deemed to
have any rights to continued service as a director by virtue of the grant of
this Option.

          3.  In the event of a stock dividend, split-up, combination or
reclassification of shares, recapitalization or other similar capital change
relating to the Common Stock, the maximum aggregate number and kind of shares or
securities of the Company subject to this Option and the exercise price of this
Option shall be appropriately adjusted by the Board (whose determination shall
be conclusive) so that the proportionate number of shares or other securities
subject to this Option and the proportionate interest of the Optionholder shall
be maintained as before the occurrence of such event.

          4.  In the event of any reorganization, consolidation or merger to
which the Company is a party and in which the Company does not survive, or upon
the dissolution or liquidation of the Company, this Option, to the extent
outstanding and unexercised, shall terminate; provided, however, that (i) in the
event of the liquidation or dissolution of the Company, or in the event of any
such reorganization, consolidation or merger in which the Company does not
survive and with respect to which the resulting or surviving corporation does
not assume this Option, to the extent outstanding and unexercised, or issue a
substitute option therefor, this Option shall be exercisable in full, without
regard to any installment restrictions on exercise imposed pursuant to the Plan
or this Option Agreement, during such period preceding the effective date of
such liquidation, dissolution, reorganization, consolidation or merger (unless
this Option is terminated earlier by its terms) as may be specified by the
Board; and (ii) in the event of any such reorganization, consolidation or
merger, the Board may, in its good faith discretion, arrange to have the
resulting or surviving corporation assume this Option, to the extent outstanding
and unexercised, or issue a substitute option therefor.

          5.  This Option is not transferable by the Optionee otherwise than by
will or the laws of descent and distribution; provided that the Board may waive
this restriction in its discretion..  This Option is exercisable during the
Optionee's lifetime only by the Optionee, provided that this Option may be
exercised by the Optionholder's guardian or legal representative in the case of
disability and, in the case of death, by the beneficiary designated by the
Optionholder in writing delivered to the Company, or, if none has been
designated, by the Optionholder's estate or his or her transferee on death in
accordance with this Option Agreement.

          6.  If the Optionee ceases to serve as a member of the Board for any
reason other than death, the Optionee may, for a period of seven months
following such cessation of service, exercise the rights which the Optionee had
hereunder at the time the Optionee ceased serving as a director.  Upon the death
of the Optionee, those entitled to do so, as set forth in Section 5 of this
Option Agreement, shall have the right, at any time within twelve months after
the date of death (subject to the prior expiration of the Option exercise
period), to exercise in whole or in part any rights which were available to the
Optionee at the time of the Optionee's death.  Any rights that have not yet
become exercisable shall terminate upon cessation of membership on the Board.
This Option shall terminate after the expiration of the applicable exercise
period.  Notwithstanding the foregoing provisions of this Section 6, no rights
under this Option may be exercised after the expiration of ten years from the
date hereof.

          7.   It shall be a condition to the Optionee's right to purchase
shares of Common Stock hereunder that the Company may, in its discretion,
require (a) that the shares of Common Stock reserved for issue upon the exercise
of this Option shall have been duly listed, upon official notice of issuance,
upon any national securities exchange on which the Company's Common Stock may
then be listed, (b) that either (i) a Registration Statement under the
Securities Act of 1933, as amended, with respect to said shares shall be in
effect, or (ii) in the opinion of counsel for the Company the proposed purchase
shall be exempt from registration under said Act and the Optionee shall have
made such undertakings and agreements with the Company as the Company may
reasonably require, and (c) that such other steps, if any, as counsel for the
Company shall deem necessary to comply with any law, rule or regulation
applicable to the issue of such shares by the Company shall have been taken by
the Company or the Optionee, or both.  The certificates representing the shares
purchased under this Option may contain such legends as counsel for the Company
shall deem necessary to comply with any applicable law, rule or regulation.

          8.  Any exercise of this Option is conditioned upon the payment, if
the Company so requests, by the Optionee or such other person who may be
entitled to exercise this Option in accordance with the terms hereof, of all
state and federal taxes imposed upon the exercise of this Option and the issue
to the Optionee of the shares covered hereby.

          9.  This Option shall not be treated as an incentive stock option
under Section 422 of the Internal Revenue Code of 1986, as amended.

          10.  This Option is issued pursuant to the terms of the Plan.  This
Certificate does not set forth all of the terms and conditions of the Plan,
which are incorporated herein by reference.  In the event of any conflict or
inconsistency between the provisions of this Option Agreement and the Plan, the
provisions of the Plan will prevail.  Capitalized terms used and not otherwise
defined herein have the meanings given to them in the Plan.  Copies of the Plan
may be obtained upon written request without charge from the Company.



<PAGE>
 
                                                                    EXHIBIT 13.1
 
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
                                              Parametric Technology Corporation

Parametric Technology Corporation is the leading supplier of software tools used
to automate the mechanical development of a product from its conceptual design
through its release into manufacturing.

     Any forward-looking statements, including projections about growth and the
Company's markets or business, are based on certain assumptions made by
management. Important information about the basis for those assumptions is
contained in "Important Factors Regarding Future Results" beginning on page 25.

RESULTS OF OPERATIONS
- ---------------------

For the fiscal year ended September 30, 1996, the Company's revenue and net
income excluding nonrecurring charges increased 52% and 61%, respectively, over
the previous fiscal year. Net income excludes nonrecurring charges in fiscal
1996 of $32,119,000 related to the acquisition of Reflex technology from
Greenshire License Co. NV ("Reflex") and the nonrecurring charges in fiscal 1995
of $10,438,000 related to the merger of Rasna Corporation ("Rasna") into the
Company and $19,000,000 related to its acquisition of the Conceptual Design and
Rendering
 System ("CDRS") software business from Evans & Sutherland Computer
Corporation. Net income excluding the nonrecurring charges as a percentage of
revenue was 26% in fiscal 1996 compared to 25% in fiscal 1995. Including the
nonrecurring charges, the Company's net income as a percentage of revenue was
23%, 20% and 26% in fiscal 1996, 1995 and 1994, respectively.

The following table sets forth certain consolidated financial data as a
percentage of revenue for the fiscal years ended September 30, 1996, 1995 and
1994.

                                                Year ended September 30,
                                                ------------------------
                                                1996      1995       1994
- --------------------------------------------------------------------------------
Revenue:
  License                                         74.8%     73.1%      77.3%
  Service                                         25.2      26.9       22.7
- --------------------------------------------------------------------------------
    Total revenue                                100.0     100.0      100.0
- --------------------------------------------------------------------------------
Cost of revenue:
  License                                          0.8       0.8        0.8
  Service                                          8.6       8.4        7.1
- --------------------------------------------------------------------------------
    Total cost of revenue                          9.4       9.2        7.9
- --------------------------------------------------------------------------------
Gross profit                                      90.6      90.8       92.1
Operating expenses:
  Sales and marketing                             39.8      41.6       40.4
  Research and development                         6.6       6.5        7.5
  General and administrative                       4.8       5.2        5.5
  Acquisition and related costs                    5.3       7.4       --
- --------------------------------------------------------------------------------
    Total operating expenses                      56.5      60.7       53.4
- --------------------------------------------------------------------------------
Operating income                                  34.1      30.1       38.7
Other income, net                                  1.9       2.3        2.0
- --------------------------------------------------------------------------------
Income before income taxes                        36.0      32.4       40.7
Provision for income taxes                        13.0      12.8       15.2
- --------------------------------------------------------------------------------
Net income                                        23.0%     19.6%      25.5%
================================================================================

Excluding acquisition and related costs:
  Operating income                                39.5%     37.6%      38.7%
  Net income                                      26.4%     25.0%      25.5%
================================================================================

Revenue

The Company derives its revenue from the sale and support of software used in
the mechanical segment of the CAD/CAM/CAE (computer-aided design, manufacturing
and engineering) industry. Revenue growth in fiscal 1996 and 1995 reflects the
continued worldwide acceptance of the Company's products and services and the
Company's ongoing investment in expanding its worldwide direct sales force.
Consistent with fiscal 1995, the Company licensed 91% of its products directly
to end-user customers and 9% via third-party distributors in fiscal 1996.

                                                                              21

<PAGE>
 
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation

License and service revenue for fiscal years 1996, 1995 and 1994 were:

(Dollars in
thousands)                1996    Change      1995    Change      1994
- --------------------------------------------------------------------------------
License                 $448,699   56%      $288,349    40%      $206,243
  Percentage of
    total revenue             75%                 73%                  77%

Service                 $151,423   43%      $105,961    74%      $ 60,731
  Percentage of
    total revenue             25%                 27%                  23%

Total revenue           $600,122   52%      $394,310    48%      $266,974



The increase in license revenue results from an increase in the number of seats
of software licensed and from a higher price realized per seat. A seat of
software generally consists of the Company's core product, Pro/ENGINEER(R),
together with several other software modules, configured to serve the needs of a
single end user. The Company licensed approximately 23,000 seats of software in
fiscal 1996, an increase of 45% from fiscal 1995's 15,900 seats, which was 35%
higher than fiscal 1994's 11,800 seats. The increase in the number of seats
licensed was achieved as a result of continued market penetration of the
Company's products. The average price per seat during fiscal 1996 was
approximately $19,500, compared with an average price of approximately $18,100
in 1995 and $17,500 in 1994. The average price per seat has increased as a
result of customers purchasing configurations of Pro/ENGINEER seats containing
more modules and an increase in the percentage of the Company's revenue derived
from international markets, where the prices are typically higher than in North
America.

   Service revenue is derived from the sale of software maintenance contracts
and the performance of training and consulting services. This revenue increased
during both fiscal 1996 and 1995 as a result of the growth in the Company's
installed customer base and, to a lesser extent, increased training and
consulting services performed for these customers. The smaller increase in
training and consulting revenue is a result of the Company outsourcing a portion
of these services to third parties to allow the Company to focus its resources
on increasing its installed base.

Sales by geographic region for fiscal years 1996, 1995 and 1994 were:

(Dollars in
thousands)                1996     Change     1995     Change     1994
- --------------------------------------------------------------------------------
North America           $264,880     34%    $197,839     31%     $151,491
  Percentage of
    total revenue             44%                 50%                  57%
Europe                  $207,811     55%    $133,873     61%     $ 83,172
  Percentage of
    total revenue             35%                 34%                  31%
Asia/Pacific            $127,431    104%    $ 62,598     94%     $ 32,311
  Percentage of
    total revenue             21%                 16%                  12%



The Company derived 56%, 50% and 43% of its revenue from sales to international
customers in fiscal 1996, 1995 and 1994, respectively. The increase in
international revenue is primarily attributable to continued international
acceptance of the Company's products and services, the establishment of new
subsidiaries and sales offices, and the growth in the sales force in Europe and
Asia/Pacific. Export sales were $84,537,000, $45,147,000 and $37,244,000 in
fiscal 1996, 1995 and 1994, respectively.

The Company expects that total revenue will increase in fiscal 1997 from
continued penetration in the mechanical CAD/CAM/CAE industry, and that
international revenue will continue to account for a significant portion of that
total growth. Although the Company expects revenues to grow in fiscal 1997,
there can be no assurance that quarterly revenue growth rates or geographical
growth rates will be comparable with those achieved in fiscal 1996.

Cost of Revenue

(Dollars in
thousands)                 1996    Change      1995    Change      1994
- --------------------------------------------------------------------------------
Cost of license          $ 4,642    39%      $ 3,348     65%      $ 2,028
  Percentage of
    license revenue            1%                  1%                   1%
Cost of service          $51,812    57%      $32,970     73%      $19,004
  Percentage of 
    service revenue           34%                 31%                  31%

Cost of license revenue consists of the amortization of capitalized computer
software costs and costs associated with reproducing software on compact disks,
printing user manuals, royalties, packaging and shipping. The absolute increase
in cost of license revenue is a result of the increase in the number of seats
licensed during each of the last three fiscal years. Cost of service revenue
includes costs associated with training and consulting personnel, such as
salaries and related costs and

22

<PAGE>
 
travel, and costs related to software maintenance, including costs incurred for
customer support personnel and the release of maintenance updates. Increases in
cost of service revenue resulted primarily from growth in the staffing necessary
to generate and support increased worldwide service revenue and provide ongoing
quality customer support to its increasing installed base.

Operating Expenses

(Dollars in
thousands)                1996     Change     1995     Change     1994
- --------------------------------------------------------------------------------
Sales and
  marketing             $238,860    46%     $163,918     52%     $107,940
  Percentage of
    total revenue             40%                 42%                  40%
Research and
  development           $ 39,476    54%     $ 25,591     29%     $ 19,882
  Percentage of
    total revenue              7%                  6%                   7%
General and
  administrative        $ 28,557    40%     $ 20,414     38%     $ 14,758
  Percentage of
    total revenue              5%                  5%                   6%
Acquisition and
  related costs         $ 32,119            $ 29,438                   --

Sales and Marketing

Sales and marketing expenses primarily include salaries, sales commissions,
travel and facility costs. While sales and marketing expenses as a percentage of
revenue have remained relatively constant during the three most recent fiscal
years, the absolute increases in these expenses were due principally to
worldwide expansion of the sales force and sales commissions associated with
higher revenue. Total sales and marketing headcount increased to 1,645 in fiscal
1996 from 1,098 in fiscal 1995 and 790 in fiscal 1994. International sales and
marketing expenses represented 58% of total sales and marketing expenses in
fiscal 1996, compared with 52% in 1995 and 45% in 1994. These increases are
consistent with the growth in international revenue. The Company expects to
continue the growth of its worldwide sales and marketing organization during
fiscal 1997, reflecting the Company's commitment to focus its resources on
increasing its installed base and to continue to expand its global market
penetration.

Research and Development

The Company continued to make significant investments in research and
development, consisting principally of salaries and benefits, expenses
associated with product translations, costs of computer equipment used in
software development, and facility expenses. The Company believes that research
and development expenditures are essential to maintaining its competitive
position in the CAD/CAM/CAE market and expects the expenditure levels to
increase in absolute dollars in fiscal 1997.

General and Administrative

General and administrative expenses include the costs of corporate, finance,
information technology, human resources and administrative functions of the
Company. The absolute increases in these expenses were principally due to the
hiring of additional employees, primarily in the international offices,
necessary to support the Company's worldwide growth and in the information
technology area as the Company expanded its efforts to upgrade its internal
management information systems. In fiscal 1997, the Company currently expects
that general and administrative expenses will continue to remain relatively
constant as a percentage of revenue.

Acquisition and Related Costs

In conjunction with the Reflex acquisition in the fourth quarter of fiscal 1996,
the Company recorded a nonrecurring charge of $32,119,000 related to the write-
off of purchased research and development in process. In the fourth quarter of
fiscal 1995, the Company recorded a nonrecurring charge of $10,438,000, which
included approximately $6,028,000 for transaction fees, $1,722,000 for 
severance-related expenses and $2,688,000 related to integration costs and 
lease and distributor termination costs in conjunction with the Rasna merger. In
conjunction with the CDRS acquisition in the third quarter of fiscal 1995, the
Company recorded a nonrecurring charge of $19,000,000 related to the write-off
of purchased research and development in process.

Other Income

(Dollars in
thousands)                1996     Change      1995    Change      1994
- --------------------------------------------------------------------------------
Other income, net        $11,501    27%       $9,029     69%       $5,342

Other income, net, primarily includes interest income and expense and foreign
currency gains and losses. Interest income increased to $13,914,000 in fiscal
1996 from $10,159,000 in fiscal 1995 and $4,642,000 in fiscal 1994 due primarily
to higher interest-bearing cash and investment balances. As the international
portion of its business continues to increase, a growing percentage of the
Company's revenue and expenses

                                                                              23

<PAGE>
 

Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
                                             Parametric Technology Corporation

is transacted in foreign currencies. To minimize, where possible, foreign
exchange gains or losses from fluctuations in foreign exchange rates related to
specific foreign currency denominated receivables, the Company has a hedging
program, which involves the use of forward foreign exchange contracts in the
primary European and Asian currencies. Gains (losses) resulting from foreign
currency transactions, including the results of the hedging program, were
($1,389,000), ($781,000) and $222,000 in fiscal 1996, 1995 and 1994,
respectively.

Income Taxes and Net Income

(Dollars in
thousands)                1996     Change     1995     Change      1994
- --------------------------------------------------------------------------------
Provision for
  income taxes          $ 78,247    56%      $50,298     24%      $40,615
Effective income
  tax rate                    36%                 39%                  37%
Net income              $137,910    78%      $77,362     14%      $68,089

The difference between the effective and statutory federal tax rate was due
primarily to the benefits of tax-exempt interest income and the foreign sales
corporation, offset by the impact of state income taxes and, in fiscal 1995, the
nondeductible acquisition costs associated with the Rasna merger.

LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
(Dollars in
thousands)                1996     Change     1995     Change     1994
- --------------------------------------------------------------------------------
Cash, cash
  equivalents
  and investments       $456,112     48%    $308,248     46%     $211,049
Working capital         $416,058     31%    $317,702     38%     $229,878
Net cash provided
  by operating
  activities            $229,724     93%    $119,017     41%     $ 84,452
Net cash used
  by investing
  activities           $(144,511)     2%   $(141,270)   491%     $(23,897)
Net cash provided
  (used) by
  financing
  activities            $(25,926)  (202)%   $ 25,354    138%     $ 10,669

Net cash generated by operating activities and proceeds from issuance of the
Company's stock under stock plans provided sufficient resources to fund the
Company's headcount growth, capital assets needs, stock repurchases and
acquisitions in all periods presented.

     The increase in fiscal 1996 and 1995 in cash and cash equivalents provided
by operations was due to the higher income before depreciation and amortization,
the increases in accounts payable and accrued expenses, accrued compensation,
income taxes and deferred revenue, offset by the increase in accounts
receivable. Even though accounts receivable increased in absolute dollars by
$39,040,000 in fiscal 1996, days sales outstanding was 60 days compared to 61
days in fiscal 1995.

     Excluding the investment of excess cash, investing activities used cash to
primarily purchase property and equipment in all three fiscal years and to
acquire technology and businesses in fiscal 1996 and 1995. In fiscal 1996, 1995
and 1994, the Company acquired $29,650,000, $12,868,000 and $8,705,000,
respectively, of capital equipment consisting principally of computer equipment,
software and office equipment. The increase was a result of the growth in
employee headcount, continued expansion of its worldwide sales and support
operations and increased investment in information technologies and in computer
workstations to keep field and development employees current with changes in the
hardware and software marketplace. In fiscal 1997, the Company expects to spend
at least as much as was spent in fiscal 1996; however, the level of spending
will be dependent on various factors, including the growth of the business and
general economic conditions.

     Net cash was used by financing activities to primarily repurchase
$66,563,000 of the Company's stock in fiscal 1996, offset by proceeds of
$40,763,000 from the issuance of the Company's common stock under stock plans.
In fiscal 1995 and 1994, net cash was provided by financing activities primarily
from the proceeds from issuance of the Company's common stock under stock plans.

     On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allows the Company to repurchase up to 6,000,000 shares
of its common stock. The Company intends to repurchase these shares to partially
offset the dilution caused by the exercise of stock options under the Company's
option plans and the purchase of shares under the employee stock purchase plan.
During fiscal 1996, the Company repurchased 1,779,000 shares, of which 23,000
remained in treasury at September 30, 1996. Since the inception of the plan, the
Company has repurchased 2,093,000 shares. Ongoing repurchases will be funded
through the use of available cash, cash generated from operations, and cash
received for stock option exercises and employee stock purchase plan purchases.

24

<PAGE>
 
     On July 10, 1996, the Company acquired project modeling and management
software (Reflex) technology from Greenshire License Co. NV for $32,119,000,
which included the issuance of 113,000 shares of the Company's common stock with
a fair value of $5,000,000 at the time of the acquisition and $5,000,000 payable
in the fourth quarter of fiscal 1997. Payments of $22,119,000 in fiscal 1996
were from the Company's existing cash balances. The acquisition has been
accounted for as a purchase. The purchase price was allocated to purchased
research and development in process, as no other tangible or intangible assets
were identified. The purchased research and development in process had not
reached technological feasibility, had no alternative future use and was valued
using expected future cash flows, discounted for risks and uncertainties related
to the target markets and the completion of the products that will ultimately be
marketed by the Company. As a result, at the date of acquisition, the
$32,119,000 allocated to purchased research and development in process was
recorded as a nonrecurring charge.

     On August 1, 1995, the Company acquired Rasna by merging it into the
Company pursuant to an Agreement and Plan of Merger dated as of May 30, 1995.
Based on the number of shares of Rasna common stock outstanding, the Company
issued 7,541,000 shares of common stock and reserved 1,045,000 shares of its
common stock for outstanding Rasna stock options assumed. The merger was
accounted for as a pooling of interests.

     On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of the CDRS software business operated by the Design
Software Division of Evans & Sutherland Computer Corporation for approximately
$33,507,000 in cash, which was paid by the Company from its existing cash
balances. The acquisition has been accounted for as a purchase. The purchase
price has been allocated to the assets acquired, including certain intangible
assets, such as purchased computer software and research and development in
process, based on their respective fair values. The excess of the purchase price
over the estimated fair value of the net assets acquired has been recorded as
goodwill ($7,703,000), which is being amortized on a straight-line basis over
seven years.

     The Company believes that existing cash and short-term investment balances,
together with cash generated from operations and issuance of the Company's
common stock under stock plans, will be sufficient to meet the Company's working
capital, financing and capital expenditure requirements through at least fiscal
1997.

     During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 defines a fair-value method of accounting for
employee stock options or similar equity instruments and encourages companies to
adopt that method of accounting beginning in fiscal 1997 for the Company.
However, FAS 123 also allows companies to continue to use the intrinsic value
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company expects to
continue to account for stock options and purchases in accordance with APB 25,
but beginning in fiscal 1997 will also make pro-forma disclosures of net income
and earnings per share as if the fair-value-based method of accounting defined
in FAS 123 had been applied.

IMPORTANT FACTORS REGARDING FUTURE RESULTS
- ------------------------------------------

Information provided by the Company, including information contained in this
Annual Report, or by its spokespersons from time to time may contain forward-
looking statements concerning projected financial performance, market and
industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe harbor
established by recent securities legislation, are based on the assumptions and
expectations of the Company's management at the time such statements are made.
The Company cautions investors that its performance (and, therefore, any 
forward-looking statement) is subject to risks and uncertainties. Various
important factors, including but not limited to the following, may cause the
Company's future results to differ materially from those projected in any
forward-looking statement.

Fluctuations in Operating Results

While the Company's sales cycle varies substantially from customer to customer,
a high percentage of the Company's revenue is expected to be realized in the
third month of each fiscal quarter and tends to be concentrated in the latter
half of that month. The Company's orders early in a quarter will not generally
be large enough to assure that it will meet its revenue targets for any
particular quarter. In addition, the Company's operating expenses are based on
expected future revenue and are relatively fixed for the short term.
Accordingly, the

                                                                              25

<PAGE>
 
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation

Company's quarterly results may be difficult to predict until the end of the
quarter, and a shortfall in shipments or contract orders at the end of any
particular quarter may cause the results for that quarter to fall short of
anticipated levels. In turn, this could adversely impact the market price of the
Company's stock and the ability of the Company to meet its working capital,
financing and capital expenditure requirements.

Stock Market Volatility

Market prices for securities of software companies have generally been volatile.
In particular, the market price of the Company's common stock has been and may
continue to be subject to significant fluctuations as a result of factors
affecting the computer industry or the securities markets in general. These
factors include, but are not limited to, quarterly variations, announcements of
technological innovations by the Company or competitors, changes in prices by
the Company or competitors, change in product mix, and change in revenue or
revenue growth rates for geographic areas or products.

     In addition, a large percentage of the Company's common stock traditionally
has been held by institutional investors. Consequently, actions with respect to
the Company's common stock by certain of these institutional investors could
have a significant impact on the market price for the stock. For more
information, please see the Company's proxy statement with respect to its most
recent annual meeting of stockholders and Schedules 13D and 13G filed with the
U.S. Securities and Exchange Commission with respect to the Company's common
stock.

Market Growth

Any Company projections of revenue growth are based on the assumptions that the
Company will be able to continue to penetrate the relevant market and add to its
industry leadership position and that the mechanical CAD/CAM/CAE market will
continue to grow at a predicted annual rate. Failure of these assumptions to
materialize could adversely impact the Company's operating results.

Rapid Technological and Market Changes

The mechanical CAD/CAM/CAE industry is highly competitive, and is characterized
by rapid technological advances. Accordingly, the Company's ability to realize
its expectations will depend on its success at enhancing its current offerings,
licensing technology from third parties, developing new products and services
that keep pace with developments in technology and meet evolving customer
requirements, and delivering those products through appropriate distribution
channels. This will require, among other things, correctly anticipating customer
needs, hiring and retaining personnel with the necessary skills and creativity,
providing adequate funding for the development efforts, and managing
distribution channels effectively.

     Failure by the Company to anticipate or respond adequately to technological
developments, particularly those by competitors which could make the Company's
technology obsolete or noncompetitive, and customer requirements, significant
delays in the development, production, testing, marketing, or availability of
new or enhanced products or services, or the failure of customers to accept such
products or services, could adversely affect the Company's competitive position
and operating results.

Possibility of New Product Delays

As is common in the computer software industry, the Company may from time to
time experience delays in its product development and "debugging" efforts.
Significant delays in developing, completing or shipping new or enhanced
products could adversely affect the Company's financial performance. Among other
things, such delays could cause the Company to incorrectly predict the fiscal
quarter in which revenue from the shipment of the new or enhanced product will
be realized and give the Company's competitors a greater opportunity to market
competing products.

Management of Growth Through Acquisitions

The Company's product range and customer base have increased in the recent past
due in part to acquisitions. The Company may acquire additional businesses or
product lines in the future. The probability of success of any acquisition may
be dependent upon the Company's ability to integrate the acquired business or
products successfully and to retain key personnel associated with the
acquisition. Failure to do so, or a material increase in the cost of
integration, could cause actual results to differ from those projected in
management's forward-looking statements.

Competition

The Company believes that the principal bases for competition in its markets are
product functionality, price/performance characteristics, product portability,
ease of product use, sales and marketing strength, support services and
corporate reputation. In particular, the Company believes that the current
success of its Pro/ENGINEER product line is due in part to the mechanical

26

<PAGE>
 
and functional superiority of such products over competitive offerings. The
Company is aware of ongoing efforts by competitors, some of whom have greater
resources than the Company, to develop equivalent or superior technology and
market these products at lower prices. Should a competitor successfully bring
such a product to market and be able to sell it at a lower price in the future,
the Company's operating results could be adversely affected. The Company's
future success will depend in a large part on its ability to license additional
products and services to its existing customer base as well as the installed
customer bases of traditional mechanical CAD/CAM/CAE suppliers.

Dependence on Key Personnel

The Company's success depends upon its ability to attract and retain highly
skilled technical, managerial and sales personnel. While the Company has not to
date experienced any significant difficulty in hiring or retaining qualified
personnel, competition for such personnel in the computer industry in general,
and the mechanical CAD/CAM/CAE industry in particular, is intense. Management's
projections necessarily assume that the Company will continue to attract and
retain such personnel, and the failure to do so could have a material adverse
effect on the Company's ability to develop and market competitive products and
its ability to achieve projected operating results.

Risks Associated with International Business

A significant and growing portion of the Company's business comes from outside
the United States. A consequence of the increased international business is that
a growing percentage of the Company's revenue and expenses is denominated in
foreign currencies, which subjects the Company's results of operations to
foreign exchange fluctuations. Although the Company enters into forward exchange
contracts to offset a portion of the foreign exchange fluctuations,
unanticipated foreign events may materially and adversely affect its results.
Additional risks associated with international business include, but are not
limited to, unexpected changes in regulatory practices and tariffs, staffing and
managing foreign operations, longer collection cycles in certain areas,
potential changes in tax laws, greater difficulty in protecting intellectual
property rights, and general economic and political conditions.

Protection of Intellectual Property and Other Proprietary Rights

The Company regards its software products as proprietary and attempts to protect
its intellectual property rights by relying on copyrights, trademarks, patents,
and common law safeguards, including trade secret protection, as well as
restrictions on disclosures and transferability in its agreements with other
parties. Although the Company intends to protect its intellectual property
rights, there can be no assurance that the laws of all jurisdictions in which
the Company's products are or may be developed, manufactured or sold will afford
the same protections to its products and intellectual property, or will be
enforced or enforceable by the Company, to the same extent as under the laws of
the United States. The software industry is characterized by frequent litigation
regarding copyright, patent and other intellectual property rights. While the
Company has not, to date, had any significant claims of such nature asserted
against it, there can be no assurance that third parties will not assert such
claims against the Company with respect to existing or future products or that,
if asserted, such claims would be resolved in a satisfactory manner. In the
event of litigation to determine the validity of any third-party claims, such
litigation could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company.

                                                                              27

<PAGE>
 
Consolidated Balance Sheet


- ------------------------------------------------------------------------------
                                             Parametric Technology Corporation


<TABLE> 
<CAPTION> 
                                                                                                          September 30,
                                                                                                   ---------------------------------
<S>                                                                                                <C>                 <C> 
(amounts in thousands)                                                                                  1996               1995
- ------------------------------------------------------------------------------------------------------------------------------------

ASSETS
Current assets:
  Cash and cash equivalents                                                                         $201,614           $145,638
  Short-term investments                                                                             232,602            162,610
  Accounts receivable, net of allowance for doubtful accounts of $2,910 and $2,733                   117,273             80,405
Other current assets                                                                                  10,561             11,079
- ------------------------------------------------------------------------------------------------------------------------------------
    Total current assets                                                                             562,050            399,732
Marketable investments                                                                                21,896                 --
Property and equipment, net                                                                           36,517             19,811
Other assets                                                                                          38,754             34,184
- ------------------------------------------------------------------------------------------------------------------------------------
    Total assets                                                                                    $659,217           $453,727
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
  Accounts payable and accrued expenses                                                             $ 39,416           $ 19,578
  Accrued compensation                                                                                32,186             19,821
  Deferred revenue                                                                                    56,420             37,953
  Income taxes                                                                                        17,970              4,678
- ------------------------------------------------------------------------------------------------------------------------------------
    Total current liabilities                                                                        145,992             82,030
Other liabilities                                                                                        793                768
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
  Preferred stock, $.01 par value;
    5,000 shares authorized; none issued                                                                 --                 --
  Common stock, $.01 par value; 215,000 shares authorized;
    127,452 and 125,129 shares issued                                                                  1,275              1,251
  Additional paid-in capital                                                                         207,039            155,497
  Foreign currency translation adjustment                                                             (1,316)             1,710
  Retained earnings                                                                                  306,638            212,471
  Treasury stock, at cost, 23 and 0 shares                                                            (1,164)                --
  Unrealized loss on investments                                                                         (40)                --
- ------------------------------------------------------------------------------------------------------------------------------------
    Total stockholders' equity                                                                       512,432            370,929
- ------------------------------------------------------------------------------------------------------------------------------------
    Total liabilities and stockholders' equity                                                      $659,217           $453,727
====================================================================================================================================

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

28

<PAGE>
 
Consolidated Statement of Income


- -------------------------------------------------------------------------------
                                              Parametric Technology Corporation



<TABLE> 
<CAPTION>                                                                
                                                                               Year ended September 30,
                                                                     --------------------------------------------
                                                                                                                 
(amounts in thousands, except per share data)                           1996              1995               1994
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
<S>                                                                 <C>               <C>                <C>     
Revenue:                                                                                                         
  License                                                           $448,699          $288,349           $206,243
  Service                                                            151,423           105,961             60,731
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
    Total revenue                                                    600,122           394,310            266,974
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
Cost of revenue:                                                                                                 
  License                                                              4,642             3,348              2,028
  Service                                                             51,812            32,970             19,004
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
    Total cost of revenue                                             56,454            36,318             21,032
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
Gross profit                                                         543,668           357,992            245,942
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
Operating expenses:                                                                                              
  Sales and marketing                                                238,860           163,918            107,940
  Research and development                                            39,476            25,591             19,882
  General and administrative                                          28,557            20,414             14,758
  Acquisition and related costs                                       32,119            29,438                 --
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
    Total operating expenses                                         339,012           239,361            142,580
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
Operating income                                                     204,656           118,631            103,362
Interest income                                                       13,914            10,159              4,642
Other income (expense), net                                           (2,413)           (1,130)               700
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
Income before income taxes                                           216,157           127,660            108,704
Provision for income taxes                                            78,247            50,298             40,615
- -----------------------------------------------------------------------------------------------------------------
                                                                                                                 
Net income                                                          $137,910          $ 77,362           $ 68,089
=================================================================================================================
                                                                                                                 
Net income per share                                                $   1.04          $   0.60           $   0.54
=================================================================================================================
                                                                                                                 
Weighted average number of common and dilutive                                                                   
  common equivalent shares outstanding                               133,211           129,046            125,051
=================================================================================================================

</TABLE>
 

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

                                                                              29

<PAGE>
 
Consolidated Statement of Stockholders' Equity

- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation


<TABLE> 
<CAPTION> 
                                                                       Foreign
                                                       Additional     currency                            Unrealized         Total
                                        Common stock      paid-in  translation  Retained  Treasury stock     loss on  stockholders' 
                                        --------------                                    --------------   
 (amounts in thousands)                 Shares  Amount    capital   adjustment  earnings  Shares    Cost  investments      equity
<S>                                    <C>      <C>      <C>        <C>         <C>       <C>       <C>   <C>         <C> 
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1993             115,649  $1,156  $ 83,023     $  156    $ 70,320                                   $154,655
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for                                                                                                       
  services and exercise of warrants          92       1       154                                                               155
Issuance of common stock under                                                                                                     
  stock plans                             4,924      49    13,966                                                            14,015
Income-tax benefit related to                                                                                                      
  incentive stock option plan                              16,326                                                            16,326
Purchase of common stock                                                                                                           
  for treasury or retirement               (16)      --      (96)                         (314)     $(4,356)                (4,452)
Issuance of treasury stock under                                                                                                   
  stock plans                                                                    (2,896)   314        4,356                  1,460 
Foreign currency translation adjustment                                  930                                                   930 
Net income                                                                       68,089                                     68,089 
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994             120,649   1,206    113,373     1,086    135,513      0            0                251,178 
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for services        35      --         46                                                              46 
Issuance of common stock under                                                                                                     
  stock plans                             4,517      46     26,127                                                          26,173 
Income-tax benefit related to                                                                                                      
  incentive stock option plan                               16,040                                                          16,040 
Foreign currency translation adjustment                                  578                                                   578 
Net income                                                                       77,362                                     77,362 
Elimination of Rasna's net activity                                                                                                
  for the three months ended                                                                                                       
  December 31, 1994                         (72)    (1)       (89)        46      (404)                                      (448) 
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995              125,129  1,251    155,497     1,710    212,471      0            0      $ 0       370,929 
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock under                                                                                                     
  stock plans                              2,210     23     19,084                                                          19,107 
Issuance of common stock for                                                                                                       
  acquisition                                113      1      4,999                                                           5,000 
Income-tax benefit related to                                                                                                      
  incentive stock option plan                               27,459                                                          27,459 
Purchase of common stock for treasury                                                    (1,779)   (66,563)                (66,563)
Issuance of treasury stock under                                                                                                   
  stock plans                                                                   (43,743)  1,756     65,399                  21,656 
Foreign currency translation adjustment                               (3,026)                                               (3,026)
Unrealized loss on investments                                                                                    (40)         (40)
Net income                                                                      137,910                                    137,910 
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996              127,452 $1,275   $207,039   $(1,316)  $306,638     (23)   $(1,164)      $(40)    $512,432 
===================================================================================================================================

</TABLE>
 

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

30

<PAGE>
 
Consolidated Statement of Cash Flows

- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation


<TABLE> 
<CAPTION> 
                                                                                          Year ended September 30,
                                                                               -----------------------------------------------------

(amounts in thousands)                                                              1996              1995               1994
- ------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                           <C>               <C>                <C>  
Cash flows from operating activities:
  Net income                                                                    $137,910         $  77,362          $  68,089
  Adjustments to reconcile net income to
    net cash provided by operating activities:
    Depreciation and amortization                                                 16,800             9,466              4,814
    Deferred income taxes                                                         (6,420)          (10,599)            (1,304)
    Charge for purchased research and development in process                      32,119            19,000                --
    Changes in assets and liabilities net of effects from acquisitions:
      Increase in accounts receivable                                            (39,040)          (13,129)           (23,753)
      (Increase) decrease in other current assets                                     88            (2,334)             2,045
      (Increase) decrease in other assets                                            205            (4,378)             1,032
      Increase in accounts payable and accrued expenses                           15,377             5,660              3,621
      Increase in accrued compensation                                            12,687             3,131              5,061
      Increase in deferred revenue                                                19,420            16,436              7,028
      Increase in income taxes                                                    40,578            18,402             17,819
- ------------------------------------------------------------------------------------------------------------------------------------

  Net cash provided by operating activities                                      229,724           119,017             84,452
- ------------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
  Additions to property and equipment, net                                       (29,650)          (12,868)            (8,705)
  Payments for acquisitions                                                      (22,119)          (33,507)                --
  Additions to capitalized computer software costs                                  (815)           (1,132)              (912)
  Proceeds from sale of investments                                              244,645           171,163             68,828
  Purchases of investments                                                      (336,572)         (264,926)           (83,108)
- ------------------------------------------------------------------------------------------------------------------------------------

  Net cash used by investing activities                                         (144,511)         (141,270)           (23,897)
- ------------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
  Repayment of long-term obligations                                                (126)             (175)              (209)
  Short-term borrowings, net                                                          --              (600)              (300)
  Proceeds from issuance of common stock                                          40,763            26,129             15,534
  Purchases of treasury stock                                                    (66,563)               --             (4,356)
- ------------------------------------------------------------------------------------------------------------------------------------

  Net cash provided (used) by financing activities                               (25,926)           25,354             10,669
- ------------------------------------------------------------------------------------------------------------------------------------

Elimination of Rasna's net cash activity for the
  three months ended December 31, 1994                                                --              (112)                --
Effects of exchange rate changes on cash                                          (3,311)              447                937
- ------------------------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                         55,976             3,436             72,161
Cash and cash equivalents at beginning of year                                   145,638           142,202             70,041
- ------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                                        $201,614          $145,638           $142,202
====================================================================================================================================

</TABLE>
 

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

                                                                              31

<PAGE>
 

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
                                              Parametric Technology Corporation

A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the financial statements. Certain amounts
in the fiscal 1995 and 1994 financial statements have been reclassified to
conform to the fiscal 1996 presentation. 

     On August 1, 1995, the Company completed its merger with Rasna Corporation
("Rasna"), a developer and marketer of software products for mechanical 
computer-aided engineering. The merger was accounted for as a pooling of 
interests. Accordingly, the accompanying consolidated financial statements have 
been retroactively combined to reflect this transaction.

     Due to the differing year ends of the Company and Rasna, financial
information for dissimilar fiscal years has been combined. Rasna's results of
operations for its fiscal years ended December 31, 1994 and 1993, were combined
with the Company's results of operations for the fiscal years ended September
30, 1994 and 1993, respectively. Balance sheet information as of September 30,
1994 includes the financial position of Rasna as of December 31, 1994 and the
Company as of September 30, 1994. Accordingly, Rasna's results of operations for
the three months ended December 31, 1994 (including revenue, operating income
and net income of $6,832,000, $548,000, and $404,000, respectively) were
duplicated in the combined statements of income for fiscal 1995 and 1994.
Therefore, Rasna's net income for one of the three-month periods ended December
31, 1994 was eliminated from stockholders' equity.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Foreign Currency Translation

Foreign currency financial statements of international subsidiaries, where the
local currency is the functional currency, are translated using exchange rates
in effect at period end for assets and liabilities and at average rates during
the period for results of operations. The resulting foreign currency translation
adjustments are reflected as a separate component of stockholders' equity. For
international subsidiaries where the U.S. dollar is the functional currency,
monetary assets and liabilities are translated using exchange rates in effect at
period end, nonmonetary assets and liabilities are translated at historical
rates, and results of operations are translated at average rates for the period.
The resulting foreign currency translation adjustments are included in income.
Any gains or losses from foreign exchange transactions are included in income.
Currency losses of $1,389,000 and $781,000 and currency gains of $222,000 were
recognized in fiscal 1996, 1995 and 1994, respectively.

Revenue Recognition

Revenue is derived from the licensing of computer software products and from
service revenue consisting of training, consulting and maintenance. License
revenue is recognized upon shipment, unless collection is not reasonably
assured. Revenue from software maintenance contracts is recognized ratably over
the contract period, and other service revenue is recognized upon performance.

Cash Equivalents and Investments

The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Short-term investments are those
with maturities in excess of three months but less than one year. Marketable
investments are those with maturities in excess of one year but less than two
years. All cash equivalents and short-term and marketable investments have been
classified as available for sale and are reported at fair value with unrealized
gains and losses included in stockholders' equity. 

     The Company invests its nonoperating cash in debt instruments of financial
institutions, government entities and corporations, and mutual funds. The
Company has established guidelines relative to credit ratings, diversification
and maturities that maintain safety and liquidity. The Company has not
experienced any losses on its investments.

Concentration of Credit Risk

The Company places its cash, cash equivalents and investments with financial
institutions with high credit standing. The Company's customer base consists of
large numbers of geographically diverse customers dispersed across many
industries. As a result, concentration of credit risk with respect to trade
receivables is not significant.

Forward Foreign Exchange Contracts

The Company enters into transactions denominated in foreign currencies and
includes the exchange gain or loss arising from such transactions in other
income (expense). The Company enters into forward exchange contracts to hedge
specific foreign currency denominated receivables, which require the Company to
exchange foreign currencies for U.S. dollars at maturity at rates agreed to at
inception of the contracts. As of September 30, 1996 and 1995, the Company had
approximately $11,766,000 and $1,389,000, respectively, of foreign exchange
contracts outstanding. All contracts mature within one year. At September 30,
1996 and for all fiscal years presented, gains

32

<PAGE>
 
and losses associated with exchange rate fluctuations on forward foreign
exchange contracts are immaterial. Cash flows from the forward exchange
contracts are classified with the related receivables.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-
line method over the estimated useful lives, typically three years. Leasehold
improvements are amortized over the shorter of the useful lives or the remaining
terms of the related leases. Property and equipment under capital leases are
amortized over the lesser of the lease terms or the estimated useful lives.
Maintenance and repairs are charged to expense when incurred; additions and
improvements are capitalized.

     Upon retirement or sale, the cost of the disposed asset and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is credited or charged to income.

Capitalized Computer Software Costs and Intangible Assets

The Company incurs costs to develop computer software to be licensed or
otherwise marketed to customers. Development costs incurred in the research and
development of new software products and enhancements to existing products are
expensed in the period incurred unless these costs qualify for capitalization.
Capitalized computer software costs are amortized over the economic lives of the
related products, typically three years, beginning at their initial shipment
date. Capitalized computer software costs of $3,174,000 and $4,380,000, included
in other assets, are net of accumulated amortization of $5,672,000 and
$3,651,000 at September 30, 1996 and 1995, respectively. Amortization charged to
expense was $2,021,000, $1,334,000 and $665,000 for the fiscal years ended
September 30, 1996, 1995 and 1994, respectively.

     Purchased software of $3,400,000 and intangible assets of $11,083,000
(including goodwill of $7,703,000) capitalized in fiscal 1995 were attributable
to the acquisition of the Conceptual Design and Rendering System ("CDRS")
software business operated by the Design Software Division of Evans & Sutherland
Computer Corporation. These assets, included in other assets, are amortized on a
straight-line basis, over three and seven years, respectively. Amortization
charges related to intangible assets, the majority of which were reflected in
general and administrative expenses, totaled $1,580,000 and $725,000 for the
fiscal years ended September 30, 1996 and 1995, respectively.

     The Company evaluates the net realizable value of capitalized computer
software costs and intangible assets on an ongoing basis relying on a number of
factors including operating results, business plans, budgets and economic
projections.

Income per Common Share

Income per common share is computed based upon the weighted average number of
common and dilutive common equivalent shares outstanding during the year. Fully
diluted and primary earnings per common share are the same amounts for each of
the years presented. Dilutive common equivalent shares consist of stock options
and are calculated using the treasury stock method.

B.  ACQUISITIONS
- --------------------------------------------------------------------------------

On July 10, 1996, the Company acquired project modeling and management software
("Reflex") technology from Greenshire License Co. NV for $32,119,000, which
included the issuance of 113,000 shares of the Company's common stock with a
fair value of $5,000,000 at the time of the acquisition and $5,000,000 payable
in the fourth quarter of fiscal 1997. Payments of $22,119,000 in fiscal 1996
were from the Company's existing cash balances. The acquisition has been
accounted for as a purchase. The purchase price was allocated to purchased
research and development in process, as no other tangible or intangible assets
were identified. The purchased research and development in process had not
reached technological feasibility, had no alternative future use, and was valued
using expected future cash flows, discounted for risks and uncertainties related
to the target markets and the completion of the products that will ultimately be
marketed by the Company. As a result, at the date of acquisition, the
$32,119,000 allocated to purchased research and development in process was
recorded as a nonrecurring charge. The operating results of Reflex have not been
material in relation to those of the Company, and are included in the Company's
consolidated results of operations from the date of acquisition.

     On August 1, 1995, the Company acquired Rasna by merging it into the
Company pursuant to an Agreement and Plan of Merger dated as of May 30, 1995.
Based on the number of shares of Rasna common stock outstanding, the Company
issued 7,541,000 shares of common stock and reserved 1,045,000 shares of its
common stock for outstanding Rasna stock options assumed. The merger was
accounted for as a pooling of interests. In conjunction with the Rasna merger,
the Company recorded a nonrecurring charge of $10,438,000, which included
approximately $6,028,000 for transaction fees, $1,722,000 for severance-related
expenses, and $2,688,000 related to integration costs and lease and distributor
termination costs. At September 30, 1996, accrued expenses include $500,000 for
future cash outlays associated with this nonrecurring charge.

     The following information shows revenue and net income of the separate
companies during the periods preceding the combination. Adjustments recorded to
conform with the accounting policies of the companies were not material to the
consolidated financial statements.

                                                                              33

<PAGE>
 
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
                                              Parametric Technology Corporation

<TABLE> 
<CAPTION> 

                               Nine months ended               Year ended
(in thousands)                      July 1, 1995       September 30, 1994
- -------------------------------------------------------------------------
<S>                            <C>                     <C>  
Revenue:
  Parametric                            $252,566                 $244,256
  Rasna                                   22,500                   22,718
- -------------------------------------------------------------------------
    Total                               $275,066                 $266,974
=========================================================================

Net income:
  Parametric                            $ 54,809                 $ 66,915
  Rasna                                    2,267                    1,174
- -------------------------------------------------------------------------
    Total                               $ 57,076                 $ 68,089
=========================================================================
</TABLE>
 

On April 12, 1995, the Company acquired substantially all of the assets and
specified liabilities of CDRS for $33,507,000 in cash, which was paid by the
Company from its existing cash balances. The acquisition was accounted for as a
purchase. The purchase price has been allocated to the assets acquired,
including certain intangible assets, such as purchased computer software and
research and development in process, based on their respective fair values. The
excess of the purchase price over the estimated fair value of the net assets
acquired has been recorded as goodwill ($7,703,000), which is being amortized on
a straight-line basis over seven years. In conjunction with the acquisition in
the third quarter, the Company recorded a nonrecurring charge of $19,000,000
related to the write-off of purchased research and development in process.
CDRS's results of operations have been included in the consolidated results of
operations since the date of acquisition.

C.  Investments
- --------------------------------------------------------------------------------
The following is a summary of investments held as available-for-sale:

<TABLE> 
<CAPTION> 
                                         September 30, 1996
                            ---------------------------------------------
                                           Gross        Gross   Estimated
                                      unrealized   unrealized        fair
(in thousands)                  Cost       gains       losses       value
- -------------------------------------------------------------------------
<S>                         <C>        <C>         <C>          <C>  
Municipal debt
  securities                $269,728        $240        $(270)   $269,698
Mutual funds                  20,422           -            -      20,422
Auction rate
  preferred stock             40,287          10          (10)     40,287
U.S. government
  debt securities             13,233          10          (20)     13,223
- -------------------------------------------------------------------------
     Total investments      $343,670        $260        $(300)   $343,630
=========================================================================
Amounts included
  in cash and cash
  equivalents               $ 89,132        $ 10        $ (10)   $ 89,132
Amounts included
  in short-term
  investments                232,522         250         (170)    232,602
Amounts included
  in marketable
  investments                 22,016           -         (120)     21,896
- -------------------------------------------------------------------------
    Total investments       $343,670        $260        $(300)   $343,630
=========================================================================

                                         September 30, 1995
                            ---------------------------------------------
                                           Gross        Gross   Estimated
                                      unrealized   unrealized        fair
(in thousands)                  Cost       gains       losses       value
- -------------------------------------------------------------------------
Municipal debt
  securities                $191,310        $170       $(170)    $191,310
Mutual funds                  26,417           -           -       26,417
Auction rate
  preferred stock             30,328           -           -       30,328
U.S. government
  debt securities             11,074           -           -       11,074
Corporate debt
  securities                   1,022           -           -        1,022
- -------------------------------------------------------------------------
    Total investments       $260,151        $170       $(170)    $260,151
=========================================================================
Amounts included in
  cash and cash
  equivalents               $ 97,541           -           -     $ 97,541
Amounts included in
  short-term
  investments                162,610        $170        $(170)    162,610
- -------------------------------------------------------------------------
    Total investments       $260,151        $170        $(170)   $260,151
=========================================================================
</TABLE>
 

Fair values have been determined through information obtained from market
sources and management estimates. Realized gains and losses on the sale of each
type of security for the years ended September 30, 1996, 1995 and 1994, were
immaterial. For the purpose of determining gross realized gains and losses, the
cost of securities sold is based upon specific identification.

D.  PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------

Property and equipment consists of:

<TABLE> 
<CAPTION> 
                                                        September 30,
                                                    ---------------------  
(in thousands)                                         1996          1995
- -------------------------------------------------------------------------
<S>                                                <C>           <C> 
Computer hardware and software                     $ 55,825      $ 31,583
Furniture and fixtures                                6,530         3,633
Leasehold improvements                                4,501         2,672
- -------------------------------------------------------------------------
                                                     66,856        37,888

Less: accumulated depreciation
  and amortization                                  (30,339)      (18,077)
- -------------------------------------------------------------------------
    Total                                          $ 36,517      $ 19,811
=========================================================================
</TABLE>
 
Depreciation expense totaled $13,171,000, $7,663,000 and $5,007,000 for the
fiscal years ended September 30, 1996, 1995 and 1994, respectively. At September
30, 1996 and 1995, property and equipment (principally computer hardware)
includes assets under capital leases of $312,000 and $211,000, less accumulated
amortization of $167,000 and $75,000, respectively.

34

<PAGE>
 
E.  INCOME TAXES
- --------------------------------------------------------------------------------

In fiscal 1994, the Company adopted the provisions of the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), on a
prospective basis. Adoption of FAS 109 by the Company did not have a material
impact on the Company's consolidated financial statements. Under FAS 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences, utilizing current tax rates, of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets are recognized, net of any valuation allowance, for the estimated future
tax effects of deductible temporary differences and tax operating loss and
credit carryforwards. Deferred tax expense represents the change in the deferred
tax asset or liability balances. 
        
        The provision for income taxes consists of the following:

<TABLE> 
<CAPTION> 
                                            Year ended September 30,
                                       ---------------------------------
(in thousands)                            1996         1995         1994
- ------------------------------------------------------------------------
<S>                                    <C>          <C>          <C> 
Federal income taxes:
  Current                              $57,880      $30,257      $32,213
  Deferred                              (7,730)       7,068          232
- ------------------------------------------------------------------------
                                        50,150       37,325       32,445
- ------------------------------------------------------------------------
State income taxes:
  Current                               10,719        6,113        5,800
  Deferred                                 529        1,997          (94)
- ------------------------------------------------------------------------
                                        11,248        8,110        5,706
- ------------------------------------------------------------------------
Foreign income taxes:
  Current                               16,068        3,329        2,464
  Deferred                                 781        1,534           --
- ------------------------------------------------------------------------
                                        16,849        4,863        2,464
- ------------------------------------------------------------------------
    Total                              $78,247      $50,298      $40,615
========================================================================
</TABLE>
 
The differences between statutory federal income taxes and the provision for
income taxes are as follows:

<TABLE> 
<CAPTION> 
                                            Year ended September 30,
                                       ----------------------------------
(in thousands)                            1996         1995          1994
- -------------------------------------------------------------------------
<S>                                    <C>          <C>           <C> 
Statutory federal income taxes         $75,655      $44,681       $38,046
State income taxes, net of
  federal tax benefit                    7,311        5,386         3,709
Tax-exempt interest income              (3,600)      (2,744)       (1,324)
Tax benefit of foreign sales
  corporation                           (6,308)      (3,357)       (1,856)
Other, net                               5,189        4,006         2,040
- -------------------------------------------------------------------------
    Subtotal                            78,247       47,972        40,615
Nondeductible acquisition costs             --        2,326            --
- -------------------------------------------------------------------------
    Total                              $78,247      $50,298       $40,615
=========================================================================
</TABLE>
 
The components of the net deferred tax asset are as follows:

<TABLE> 
<CAPTION> 
                                                         September 30,
                                                    ---------------------
(in thousands)                                          1996         1995
- -------------------------------------------------------------------------
<S>                                                 <C>          <C> 
Deferred tax assets:
  Reserves not currently deductible                  $ 2,901      $ 1,904
  Net operating loss carryforwards                     1,882        5,308
  Amortization of intangible assets                   18,565        8,301
  Research and development credit
    carryforwards                                        409        1,138
  Other                                                1,018        1,344
- -------------------------------------------------------------------------
    Total deferred tax assets                         24,775       17,995
- -------------------------------------------------------------------------
Deferred tax liabilities:
  Capitalized software                                  (563)        (641)
  Other                                                 (643)        (205)
- -------------------------------------------------------------------------
    Total deferred tax liabilities                    (1,206)        (846)
- -------------------------------------------------------------------------
Valuation allowance                                     (662)        (662)
- -------------------------------------------------------------------------
Net deferred tax asset                               $22,907      $16,487
=========================================================================
</TABLE>
 
The net operating loss carryforwards of $5,381,000 at September 30, 1996 expire
between fiscal 1998 and 2000. Ownership changes, as defined in the Internal
Revenue Code of 1986, as amended, limit the amount of the net operating loss
carryforwards that can be utilized annually. The research and development credit
carryforwards expire between fiscal 2006 and 2010. The Company has recorded a
valuation allowance for the tax benefit of certain foreign net operating loss
carryforwards since realization of these future benefits is not sufficiently
assured at September 30, 1996.

F.  COMMON STOCK
- --------------------------------------------------------------------------------

On February 8, 1996, the stockholders approved an amendment to the Company's
Articles of Organization to increase the number of authorized shares of the
Company's common stock from 75,000,000 to 215,000,000. On November 14, 1996, the
Company's Board of Directors approved, subject to stockholder approval, an
amendment to the Company's Articles of Organization to increase the number of
authorized shares of the Company's common stock from 215,000,000 to 350,000,000.

   On February 8, 1996, the Company's Board of Directors declared a one-for-one
stock dividend on all shares of common stock, which was payable on February 29,
1996 to all stockholders of record on February 22, 1996. These financial
statements and related notes have been retroactively adjusted, as appropriate,
to reflect this one-for-one stock dividend. 

   On May 12, 1994, the Company announced that its Board of Directors had
authorized a plan that allows the Company to repurchase up to 6,000,000 shares
of its common stock. The Company intends to repurchase these shares to partially
offset the dilution caused by the exercise of stock options under the Company's
option plans and the purchase of shares under the

                                                                              35

<PAGE>
 
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation

employee stock purchase plan. During fiscal 1996, the Company repurchased
1,779,000 shares at a cost of $66,563,000, of which 23,000 remained in treasury
at September 30, 1996. Since the inception of the plan, the Company has
repurchased 2,093,000 shares.

G.  STOCK OPTIONS
- --------------------------------------------------------------------------------

Under the 1987 Incentive Stock Option Plan (the "1987 Stock Option Plan"), the
Board of Directors may grant options to key employees to purchase shares at an
option exercise price equal to the fair market value on the date of grant. The
options are exercisable at such times, in installments or otherwise, as the
Board of Directors may determine. Generally, these options vest ratably over a
period of four years and expire ten years from the date of grant. The 1987 Stock
Option Plan limits the number of shares that may be granted to any eligible
employee in any fiscal year to 1,000,000. In fiscal 1996, the stockholders
approved an increase in the number of shares issuable under this plan from
42,792,000 to 48,792,000 and to change the designation of persons eligible to
receive options under the 1987 Stock Option Plan to include consultants. 

        On November 14, 1996, the Board of Directors approved, subject to
stockholder approval, the 1997 Incentive Stock Option Plan (the "1997 Stock
Option Plan") for which 6,000,000 shares of common stock have been reserved. The
1997 Stock Option Plan will replace and have terms and conditions similar to
those contained in the 1987 Stock Option Plan. No additional options will be
granted under the 1987 Stock Option Plan, but the rights and privileges of
holders of outstanding options under the 1987 Stock Option Plan will continue
under the terms of that plan. 

        Under the 1992 Director Stock Option Plan (the "1992 Director Plan"),
640,000 shares of common stock have been reserved. The purpose of the 1992
Director Plan is to attract and retain qualified persons who are not also
officers or employees of the Company (the "Eligible Directors") to serve as
Directors of the Company and to encourage stock ownership in the Company by such
Directors. Options granted under the 1992 Director Plan, at an option price
equal to the fair market value on the date of grant, shall become exercisable in
four equal annual installments following the date of grant if, and only if, the
optionee is a Director of the Company on such anniversary date. The options
expire ten years from the date of grant. Options to purchase 80,000 shares of
common stock were granted in fiscal 1995 to Eligible Directors of the Company.

        In fiscal 1996, the stockholders approved the 1996 Director Stock Option
Plan (the "1996 Director Plan") for which 180,000 shares of common stock have
been reserved. The 1996 Director Plan replaces the 1992 Director Plan. The terms
of the 1996 Director Plan are essentially the same as the 1992 Director Plan,
except that each Eligible Director is automatically granted options to purchase
20,000 shares of common stock at the time of initial election to the Board of
Directors; and immediately following the meeting of stockholders every year,
each Eligible Director continuing in office after such meeting will
automatically be granted options to purchase 5,000 shares of common stock. No
additional options will be granted under the 1992 Director Plan, but the rights
and privileges of holders of outstanding options under the 1992 Director Plan
are not adversely affected by the 1996 Director Plan.

        In conjunction with the Rasna merger, the Company assumed 1,045,000
outstanding options on August 1, 1995. These assumed options were granted at
prices equal to the fair market value at the date of grant, become exercisable
in installments (generally ratably over four years), and expire ten years from
the date of grant. The Company does not intend to issue any additional options
under the Rasna stock option plan. 

        The following table summarizes stock option transactions under all
plans:

                                                              Stock option
                                              Shares              prices
- ----------------------------------------------------------------------------
Outstanding at September 30, 1993         16,190,024          $  .01 -$18.75
  Granted and assumed                      4,517,354            3.06 - 17.38
  Canceled                                  (790,558)            .04 - 18.75
  Exercised                               (5,065,562)            .01 - 15.50
- ----------------------------------------------------------------------------
Outstanding at September 30, 1994         14,851,258             .01 - 18.75
  Granted and assumed                      6,418,626            3.06 - 30.13
  Canceled                                  (883,518)            .82 - 30.13
  Exercised                               (4,324,704)            .01 - 18.75
- ----------------------------------------------------------------------------
Outstanding at September 30, 1995         16,061,662             .01 - 30.13
  Granted                                  5,139,750           33.50 - 48.75
  Canceled                                (1,381,180)            .81 - 42.75
  Exercised                               (3,842,020)            .01 - 30.13
- ----------------------------------------------------------------------------
Outstanding at September 30, 1996         15,978,212          $  .01 -$48.75
============================================================================
Options exercisable at
  September 30, 1996                       4,554,130
Options available for grant at
  September 30, 1996                       4,784,949

Stock options are accounted for in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, no compensation cost has been recorded in connection with stock
option grants under the Company's stock option and employee stock purchase
plans. During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 defines a fair-value method of accounting for
employee stock options or similar equity instruments and encourages companies to
adopt that method of accounting beginning in

36

<PAGE>
 
fiscal 1997 for the Company. However, FAS 123 also allows companies to continue
to use the intrinsic value method of accounting prescribed by APB 25. The
Company expects to continue to account for stock options and purchases in
accordance with APB 25, but beginning in fiscal 1997 will also make pro-forma
disclosures of net income and earnings per share as if the fair-value-based
method of accounting defined in FAS 123 had been applied.

H.  STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------

The 1991 Employee Stock Purchase Plan (the "1991 Purchase Plan") enables
eligible employees to purchase the Company's common stock at 85% of the fair
market value of the stock on the date an offering commences or on the date an
offering terminates, whichever is lower. The 1991 Purchase Plan covers
substantially all employees, subject to certain limitations. Each employee may
elect to have up to 10% of his or her base pay withheld and applied toward the
purchase of shares in such offering (provided that the aggregate amount of his
or her base pay withheld may not exceed $10,000 in any fiscal year). The 1991
Purchase Plan covers an aggregate of up to 2,000,000 shares of common stock to
be issued and sold to participating employees of the Company through a series of
six-month offerings, beginning April 1, 1991. Purchases under the 1991 Purchase
Plan for fiscal 1996, 1995 and 1994 were 169,425, 154,722 and 172,568 shares,
generating proceeds to the Company of $4,906,000, $2,459,000 and $2,031,000,
respectively. At September 30, 1996, approximately 1,110,000 shares of common
stock were reserved for purchases under the 1991 Purchase Plan.

I.  EMPLOYEE BENEFIT PLAN
- --------------------------------------------------------------------------------

The Board of Directors in 1989 adopted the Parametric Technology Corporation
401(k) Savings Plan (the "Plan"), which is intended to qualify under Section
401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers
substantially all employees. Each employee may elect to contribute to the Plan,
through payroll deductions, up to 15% of his or her salary, subject to certain
limitations. The Company makes matching contributions on behalf of each
participating employee in an amount equal to 50% of the amount contributed by
the employee up to a maximum 10% employee contribution. The employee's
entitlement to such Company contributions vests at a rate of 25% per year of
service. For the fiscal years ended September 30, 1996, 1995 and 1994 the
Company made matching contributions to the Plan which totaled $1,867,000,
$1,034,000 and $738,000, respectively.

J.  SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------

Cash paid for interest during the fiscal years ended September 30, 1996, 1995
and 1994 was $169,000, $37,000 and $125,000, respectively. Cash paid for income
taxes in fiscal 1996, 1995 and 1994 was $38,853,000, $40,281,000 and
$22,279,000, respectively. During fiscal 1996, 1995 and 1994, the Company
acquired $114,000, $108,000 and $76,000 of fixed assets under capital leases,
respectively.

K.  COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------

Leasing Arrangements
The Company leases its office facilities and certain equipment under operating
leases expiring at various dates through fiscal 2003. The Company also leases
computer equipment under capital leases which expire through fiscal 1999. 
        At September 30, 1996, future minimum lease payments under capital and
operating leases with initial or remaining terms of one or more years are as
follows:

<TABLE> 
<CAPTION> 
                                                     Capital    Operating
(in thousands)                                        leases       leases
- -------------------------------------------------------------------------
<S>                                                  <C>        <C>  
1997                                                    $ 92      $23,174
1998                                                      68       13,024
1999                                                       2        7,453
2000                                                      --        4,672
2001                                                      --        3,287
Subsequent to 2001                                        --        2,182
- -------------------------------------------------------------------------
Total minimum lease payments                             162      $53,792
                                                                  =======
Less amounts representing interest                       (13)
- ------------------------------------------------------------
Present value of net minimum lease payments             $149
============================================================
</TABLE>
 

Rental expense under operating leases was $21,520,000, $15,186,000 and
$11,122,000 for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.

Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that resolving these
matters will not have a material adverse impact on the Company's financial
position or its results of operations.

                                                                              37

<PAGE>
 
- -------------------------------------------------------

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation

L.  SEGMENT AND GEOGRAPHIC INFORMATION
- --------------------------------------------------------------------------------

The Company is engaged in one industry segment: the development, marketing and
support of software products for the mechanical segment of the CAD/CAM/CAE
(computer-aided design, manufacturing and engineering) industry.
        The Company licenses products to customers on a worldwide basis. Sales
and marketing operations outside the United States are conducted principally
through the Company's foreign sales subsidiaries throughout Europe and
Asia/Pacific. 
        Intercompany sales and transfers between geographic areas are accounted
for at prices which are designed to be representative of unaffiliated party
transactions.


<TABLE> 
<CAPTION> 
(amounts in thousands)                 
Year ended September 30,
- ------------------------------------
1996                                       North America        Europe    Asia/Pacific     Corporate    Eliminations        Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                <C>         <C>              <C>          <C>              <C> 
Revenue from unaffiliated customers
  License                                       $182,494      $115,424        $ 75,970                                   $373,888
  Service                                         82,386        43,804          15,507                                    141,697
Revenue from unaffiliated export
  Europe                                          48,583                                                                   48,583
  Asia/Pacific                                    35,954                                                                   35,954
Intercompany revenue                             167,800        29,006          18,835                     $(215,641)           0
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue                                    517,217       188,234         110,312                      (215,641)     600,122
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income                                 182,656        12,048           9,952                                    204,656
Other income (expense)                             1,177          (418)            (17)    $  10,759                       11,501
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                       183,833        11,630           9,935        10,759                      216,157
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets                              564,107        65,612          37,282       328,037        (335,821)     659,217
=================================================================================================================================

<CAPTION> 

1995                                       North America        Europe    Asia/Pacific     Corporate    Eliminations        Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>          <C>              <C>          <C>              <C> 
Revenue from unaffiliated customers
  License                                       $134,412      $ 76,871        $ 36,739                                   $248,022
  Service                                         63,427        28,484           9,230                                    101,141
Revenue from unaffiliated export
  Europe                                          28,518                                                                   28,518
  Asia/Pacific                                    16,629                                                                   16,629
Intercompany revenue                              92,339        19,422           7,306                     $(119,067)           0
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue                                    335,325       124,777          53,275                      (119,067)     394,310
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income                                 112,620         2,547           3,464                                    118,631
Other income (expense)                             1,794          (790)           (226)    $   8,251                        9,029
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                       114,414         1,757           3,238         8,251                      127,660
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets                              403,247        46,224          19,263       242,568        (257,575)     453,727
=================================================================================================================================

<CAPTION> 

1994                                       North America        Europe    Asia/Pacific     Corporate    Eliminations        Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>          <C>              <C>          <C>              <C> 
Revenue from unaffiliated customers
  License                                       $112,744      $ 47,312        $ 14,418                                   $174,474
  Service                                         38,747        13,139           3,370                                     55,256
Revenue from unaffiliated export
  Europe                                          22,721                                                                   22,721
  Asia/Pacific                                    14,523                                                                   14,523
Intercompany revenue                              47,353        11,982           4,400                     $ (63,735)           0
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue                                    236,088        72,433          22,188                       (63,735)     266,974
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income                                 100,093           777           2,492                                    103,362
Other income (expense)                             2,276          (638)           (120)    $   3,824                        5,342
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                       102,369           139           2,372         3,824                      108,704
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets                              281,444        24,678           9,934       173,317        (184,248)     305,125
=================================================================================================================================
</TABLE>
 

38

<PAGE>
 
- -------------------------------------------------------

R
eport of Independent Accountants
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation


To the Stockholders and Board of Directors of Parametric Technology Corporation:
- --------------------------------------------------------------------------------

We have audited the accompanying consolidated balance sheet of Parametric
Technology Corporation as of September 30, 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. 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. The financial statements of Parametric Technology
Corporation as of September 30, 1995 and for each of the two years in the period
ended September 30, 1995 were audited by other auditors whose report dated
October 19, 1995, except as to Notes F and G which are as of November 17, 1995,

expressed an unqualified opinion on those statements, which was based in part on
the report of other auditors.  
        We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. 
        In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Parametric Technology Corporation as of September 30, 1996, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.


/s/ Coopers & Lybrand L.L.P.

Coopers & Lybrand L.L.P.

Boston, Massachusetts
October 16, 1996


                                                                              39

<PAGE>
 
- ------------------------------------------------------

Selected Financial Data /(1)/                           
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation

<TABLE> 
<CAPTION> 

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                  Year ended September 30,
                                                            ---------------------------------------------------------------------
(in thousands, except per share data)                           1996         1995          1994              1993          1992     
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>           <C>               <C>             <C> 
Revenue                                                     $600,122     $394,310      $266,974          $179,311        $ 98,377
Operating income                                             204,656      118,631       103,362            66,502          30,818
Net income                                                   137,910       77,362        68,089            43,470          21,036
Net income per share /(2)/                                      1.04         0.60          0.54              0.36            0.18
Weighted average number of common and dilutive                                                                                   
  common equivalent shares outstanding /(2)/                 133,211      129,046       125,051           122,424         119,055
Total assets                                                 659,217      453,727       305,125           190,975         119,259
Working capital                                              416,058      317,702       229,878           137,581          73,464
Stockholders' equity                                         512,432      370,929       251,178           154,655          85,895
Excluding acquisition and related costs /(3)/:                                                                                     
  Net income                                                 158,402       98,500        68,089            43,470          21,036
  Net income per share /(2)/                                    1.19         0.76          0.54              0.36            0.18
                                                                                                                         
<CAPTION> 
                                                                                      
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                     Fiscal quarter ended
                                                                    --------------------------------------------------------------
                                                                    September 30,      June 29,         March 30,     December 30,
(in thousands, except per share and stock price data)                        1996          1996              1996             1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                <C>               <C>          <C> 
Revenue                                                                  $177,128      $157,104          $140,493         $125,397
Gross profit                                                              160,607       143,014           127,104          112,943
Operating income                                                           38,664        62,173            55,086           48,733
Net income                                                                 26,433        41,620            36,837           33,020
Net income per share /(2)/                                                   0.20          0.31              0.28             0.25
Excluding acquisition and related costs /(3)/:                                      
  Net income                                                               46,925        41,620            36,837           33,020
  Net income per share /(2)/                                                 0.35          0.31              0.28             0.25
Common stock prices /(4)/:                                                          
  High                                                                      51.63         48.75             39.13            35.63
  Low                                                                       37.38         34.38             27.13            27.38

<CAPTION> 
                                                                                  
                                                                                     Fiscal quarter ended
                                                                    --------------------------------------------------------------
                                                                    September 30,       July 1,          April 1,     December 31,
(in thousands, except per share and stock price data)                        1995          1995              1995             1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                <C>               <C>          <C> 
Revenue                                                                  $119,244      $105,195           $91,023          $78,848
Gross profit                                                              108,092        95,725            82,291           71,884
Operating income                                                           34,931        19,492            34,349           29,859
Net income                                                                 21,035        13,816            22,736           19,775
Net income per share /(2)/                                                   0.16          0.11              0.18             0.16
Excluding acquisition and related costs /(3)/:                                      
Net income                                                                 30,241        25,748            22,736           19,775
Net income per share /(2)/                                                   0.23          0.20              0.18             0.16
Common stock prices /(4)/:                                                          
  High                                                                      31.63         25.13             21.88            18.50
  Low                                                                       24.50         18.22             16.25            15.75
</TABLE>
 

/(1)/ All financial information presented here has been retroactively restated
to reflect the fiscal 1995 Rasna merger which has been accounted for as a
pooling of interests. See Note A of Notes to Consolidated Financial Statements
for additional information.
/(2)/ Per-share data and weighted average number of common and dilutive common
equivalent shares outstanding have been retroactively adjusted to reflect the
one-for-one stock dividends on all shares of capital stock declared by the
Company's Board of Directors on February 4, 1992, February 4, 1993 and 
February 8, 1996, effective February 25, 1992, February 25, 1993 and 
February 29, 1996, respectively.
/(3)/ The acquisition and related costs consist of $32,119,000 in the fourth
quarter of fiscal 1996 related to the acquisition of Reflex technology from
Greenshire License Co. NV, $10,438,000 related to the merger of Rasna
Corporation into the Company in the fourth quarter of fiscal 1995 and
$19,000,000 in the third quarter of fiscal 1995 related to its acquisition of
the Conceptual Design and Rendering System software business from Evans &
Sutherland Computer Corporation. See Note B of Notes to Consolidated Financial
Statements for additional information.
/(4)/ The common stock of the Company is traded on the Nasdaq National Market
under the symbol "PMTC". The common stock prices shown are based on the Nasdaq
daily closing stock price.

40

<PAGE>
 
Supplemental Financial Information
- --------------------------------------------------------------------------------
                                               Parametric Technology Corporation

        The Company has not paid cash dividends on its common stock and has
historically retained earnings for use in its business. The Company intends to
review its policy with respect to the payment of dividends from time to time;
however, there can be no assurance that any dividends will be paid in the
future.
        On September 30, 1996, the number of stockholders of record of the 
Company's common stock was 2,619.


Investor Information
- --------------------------------------------------------------------------------
Requests for information about the Company should be directed to: John W. 
Hudson, Vice President of Investor Relations, Parametric Technology 
Corporation, 128 Technology Drive, Waltham, MA 02154. Telephone: (617) 
398-5000.

Report on Form 10-K 
Stockholders may obtain additional financial information about Parametric 
Technology from the Company's Report on Form 10-K filed with the Securities 
and Exchange Commission. Copies are available from the Company without 
charge upon written request.

Annual Meeting 
The Annual Meeting of Stockholders will be held on February 13, 1997 at 9:00 
a.m. at: Parametric Technology Corporation, 128 Technology Drive, Waltham, 
MA 02154.

Stock Listing 
Nasdaq National Market Symbol: PMTC

General Counsel
Palmer & Dodge LLP, Boston, MA

Independent Accountants
Coopers & Lybrand L.L.P., Boston, MA

Transfer Agent and Registrar
American Stock Transfer & Trust Company, New York, NY


For updated financial information, visit our website at www.ptc.com


Directors
- --------------------------------------------------------------------------------
Steven C. Walske
   Chairman and Chief Executive Officer, 
   Parametric Technology Corporation
C. Richard Harrison
   President and Chief Operating Officer, 
   Parametric Technology Corporation 
Robert N. Goldman
   Chief Executive Officer and President, 
   Object Design Inc., a software developer
Donald K. Grierson
   Chief Executive Officer and President, 
   ABB Vetco Gray, Inc., an oil services business
Oscar B. Marx, III
   Chief Executive Officer and President, 
   TMW Enterprises, a start-up venture in the autoparts industry
Michael E. Porter
   Professor, Harvard Business School, an educational institution
Noel G. Posternak
   Senior Partner, Posternak, Blankstein & Lund L.L.P., a law firm


Corporate Officers 
- --------------------------------------------------------------------------------
Steven C. Walske
   Chairman of the Board of Directors and Chief Executive Officer 
C. Richard Harrison
   President and Chief Operating Officer
Edwin J. Gillis
   Executive Vice President of Finance and Administration, 
   Chief Financial Officer and Treasurer
Michael E. McGuinness
   Executive Vice President of Sales
Kirk D. Bowman
   Senior Vice President of Business Development
Robert C. Gremley
   Senior Vice President, Professional Services
Donald R. Henrich
   Senior Vice President of Marketing
Thomas W. Jensen, Ph.D.
   Senior Vice President of Research and Development
Martha L. Durcan
   Vice President, Corporate Counsel and Clerk
James F. Kelliher
   Vice President of Finance and Assistant Treasurer
John G. Mokas
   Controller


Design: Beagan Design   Photography: Rubenstein Photography   Printing: 
Daniels Printing

Pro/ENGINEER and Parametric Technology Corporation are registered 
trademarks and all product names in the PTC product family and the PTC logo 
are trademarks of Parametric Technology Corporation in the United States and 
other countries. All other companies and products referenced herein have 
trademarks or registered trademarks of their respective holders.



<PAGE>
 
                                  EXHIBIT 21.1

                          Subsidiaries of the Company
                          ---------------------------


Name                                                    Place of Incorporation
- ----                                                    ----------------------

Parametric Holdings Inc.                                Delaware
Parametric International, Inc.                          Delaware
Parametric Securities Corporation                       Massachusetts
PTC International, Inc.                                 Massachusetts
PTC Acquisition Corporation                             Massachusetts
Parametric Technology Australia Pty Limited             Australia
Parametric Technology Gesellschaft m.b.H.               Austria
Parametric Foreign Sales Corporation                    Barbados
Parametric Technology (Belgium) b.v.b.a.                Belgium
Parametric Technology Brasil Ltda.                      Brazil
Parametric Technology (Canada) Ltd.                     Canada
Parametric Technology (C.R.) s.r.o.                     Czech Republic
Parametric Technology (Denmark) A/S                     Denmark
Parametric Technology (Finland) Oy                      Finland
Parametric Technology S.A.                              France
Parametric Technology GmbH                              Germany 
Parametric Technology (Hong Kong) Limited               Hong Kong
Parametric Technology (Hong Kong) Limited-
   Beijing Representative Office                        Hong Kong
Parametric Technology (Hong Kong) Limited-
   Bombay Liaison Office                                Hong Kong
Parametric Technology (Hong Kong) Limited-
   Shanghai Representative Office                       Hong Kong
Parametric Technology (India) Private Limited           India
Parametric Technology (Republic of Ireland) Limited     Ireland
Parametric Technology
 Israel Ltd.                       Israel
Parametric Technology Italia S.r.l.                     Italy
Nihon Parametric Technology K.K.                        Japan
Parametric Korea Co., Ltd.                              Korea
Parametric Technology Europe B.V.                       The Netherlands
Parametric Technology Nederland B.V.                    The Netherlands
Parametric Technology (Norway) AS                       Norway
Parametric Technology Singapore Pte Ltd                 Singapore
Parametric Technology Singapore Pte Ltd -
   Malaysian Rep. Office                                Singapore
Parametric Technology Espana, S.A.                      Spain
PTC Sweden AB                                           Sweden
Parametric Technology (Schweiz) AG                      Switzerland
Parametric Technology Taiwan Ltd.                       Taiwan
Parametric Technology (UK) Limited                      United Kingdom
 




<PAGE>
 
                                  EXHIBIT 23.1


                       Report of Independent Accountants
                       ---------------------------------

To the Stockholders and Board of Directors of Parametric Technology Corporation:

Our report on the consolidated financial statements of Parametric Technology
Corporation has been incorporated by reference in this Form 10-K from page 39 of
the 1996 Annual Report to Stockholders of Parametric Technology Corporation.  In
connection with our audit of such financial statements, we have also audited the
related financial statement schedule listed in item 14(a)(2) on page 8 of this
Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.



/S/COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.



Boston, Massachusetts
October 16, 1996





<PAGE>
 
                                  EXHIBIT 23.2

                       Consent of Independent Accountants
                       ----------------------------------


We consent to the incorporation by reference in the registration statements of
Parametric Technology Corporation on Form S-8 (File Nos. 333-01297, 333-01299,
33-52044, 33-89528, and 33-61485) of our reports dated October 16, 1996, on our
audit of the consolidated financial statements and financial statement schedule
of Parametric Technology Corporation as of September 30, 1996 and for the year
then ended, which reports are included or incorporated by reference in this
Annual Report on Form 10-K.



/S/COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.


Boston, Massachusetts
December 19, 1996





<PAGE>
 
                                  EXHIBIT 23.3


                       Report of Independent Accountants
                       ---------------------------------

To the Stockholders and Board of Directors of Parametric Technology Corporation:

In our opinion, based upon our audits and the report of other auditors, the
consolidated balance sheet and the related consolidated statements of income, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Parametric Technology Corporation
and its subsidiaries at September 30, 1995, and the results of their operations
and their cash flows for each of the two years in the period ended September 30,
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 audits.  We did not audit the consolidated financial statements of Rasna
Corporation, which  statements reflect total revenue of $22,718,000 for the year
ended December 31, 1994.  Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Rasna Corporation,
 is based
solely on the report of the other auditors.  We conducted our audits of these
statements in accordance with the 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 audits provide a
reasonable basis for the opinion expressed above.



/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP

Boston, Massachusetts
October 19, 1995,

except as to Notes F and G
which are as of November 17, 1995



<PAGE>
 
                                  EXHIBIT 23.4


       Report of Independent Accountants on Financial Statement Schedule
       -----------------------------------------------------------------


To the Stockholders and Board of Directors of Parametric Technology Corporation:

Our audits of the consolidated financial statements referred to in our report
dated October 19, 1995, except as to Notes F and G which are as of November 17,
1995, appearing in this Form 10-K also included an audit of the Financial
Statement Schedule listed in Item 14(a) of this Form 10-K for each of the two
years in the period ended September 30, 1995.  In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.  We have not audited the consolidated financial statements
of Parametric Technology Corporation for any period subsequent to September 30,
1995.



/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP

Boston, Massachusetts
October 19, 1995,

except as to Notes F and G
which are as of November 17, 1995





<PAGE>
 
                                  EXHIBIT 23.5

                       Consent of Independent Accountants
                       ----------------------------------



We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-01297, 333-01299, 33-52044, 33-89528, and
33-61485) of Parametric Technology Corporation and its subsidiaries of our
report dated October 19, 1995, except as to Notes F and G which are dated
November 17, 1995, appearing in this Form 10-K.  We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears in this Form 10-K.



/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP

Boston, Massachusetts
December 19, 1996





<PAGE>
 
                                  EXHIBIT 23.6


                          Independent Auditors' Report
                          ----------------------------


To the Board of Directors and Shareholders of Rasna Corporation:

We have audited the consolidated balance sheet of Rasna Corporation and its
subsidiaries as of December 31, 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented separately herein).  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 in accordance with generally accepted auditing standards.
Those standards 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.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated
 financial statements present fairly, in all
material respects, the financial position of Rasna Corporation and its
subsidiaries at December 31, 1994, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.



/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP

San Jose, California
April 4, 1995



<PAGE>
 
                                  EXHIBIT 23.7

                         Independent Auditors' Consent
                         -----------------------------


We consent to the incorporation by reference in Registration Statements Nos.
333-01297, 333-01299, 33-52044, 33-89528, and 33-61485 of Parametric Technology
Corporation on Form S-8 of our report dated April 4, 1995 (relating to the
consolidated financial statements of Rasna Corporation, not presented separately
herein) appearing in this Annual Report on Form 10-K of Parametric Technology
Corporation for the year ended September 30, 1996.



/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP

San Jose, California
December 19, 1996





<TABLE> <S> <C>


<PAGE>
 
                                                                 
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          SEP-30-1996
<PERIOD-START>                             OCT-01-1995
<PERIOD-END>                               SEP-30-1996
<CASH>                                         201,614
<SECURITIES>                                   232,602
<RECEIVABLES>                                  120,183
<ALLOWANCES>                                     2,910
<INVENTORY>                                          0
<CURRENT-ASSETS>                               562,050
<PP&E>                                          66,856
<DEPRECIATION>                                  30,339
<TOTAL-ASSETS>                                 659,217
<CURRENT-LIABILITIES>                          145,992
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                         1,275
<OTHER-SE>                                     511,157
<TOTAL-LIABILITY-AND-EQUITY>                   659,217
<SALES>                                        448,699
<TOTAL-REVENUES>                               600,122
<CGS>                                            4,642
<TOTAL-COSTS>                                   56,454
<OTHER-EXPENSES>                               339,012
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                216,157
<INCOME-TAX>                                    78,247
<INCOME-CONTINUING>                            137,910
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   137,910
<EPS-PRIMARY>                                     1.04
<EPS-DILUTED>                                     1.04
        

</TABLE>