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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended January 31, 2001

OR

Commission file number 0-21342

WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

500 Wind River Way, Alameda, California 94501
(510) 748-4100
(Address of principal executive offices)

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

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

Common Stock, par value $.001 per share
(Title of Class)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

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

    The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 16, 2001 was $1,592,166,364. The number of shares of common stock outstanding as of April 16, 2001 was 77,828,546.

TABLE OF CONTENTS

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    This report contains forward-looking statements. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms and other comparable expressions. These statements involve known and unknown risks and uncertainties that may cause the results, levels of activity, performance or achievements of Wind River Systems, Inc. or its industry to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, Wind River's ability to compete successfully in its industry, to continue to develop products for new and rapidly changing markets, to integrate acquired businesses and technologies, and others discussed below and under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Except as required by law, Wind River does not intend to update any of the forward-looking statements contained in this report to reflect any future events or developments.

ITEM 1. BUSINESS

    Wind River develops, markets and supports advanced software operating systems and development tools, and provides consulting services that allow customers to create complex, robust, software applications for embedded computers. An embedded computer is a microprocessor that is incorporated into a larger device that fulfills a specific purpose and is dedicated to responding to external events by performing specific tasks quickly, predictably and reliably. Wind River products enable customers to enhance product performance, standardize designs across projects, reduce research and development costs and shorten product development cycles.

    Wind River markets its products and services in North America, Europe, and Japan primarily through its own direct sales organization, which consists of salespersons and field engineers. Wind River also has licensed international distributors principally to serve customers in regions not serviced by its direct sales force. Wind River's customers include 3Com Corp., Alcatel, Cisco Systems, Inc., Digeo Broadband, Inc., Ericsson Radio Systems AB, Hewlett-Packard Company, Lucent Technologies Inc., Intel Corporation, Lam Research Corp., Lockheed-Martin Corporation, Motorola, Inc., Nippon Electric Corporation, Nortel Networks Corporation, Raytheon Company, Sandstream Communication & Entertainment, Inc., Siemens AG, Sony Corp., Tellabs Inc., and Westell Technologies Inc.

    Wind River was incorporated in California in February 1983 and reincorporated in Delaware in April 1993. Its principal executive offices are located at 500 Wind River Way, Alameda, California 94501, and its telephone number at that location is (510) 748-4100.

BACKGROUND

    Embedded systems consist of a microprocessor and related software incorporated into a larger device, dedicated to performing a specific set of tasks. Embedded systems provide an immediate, predictable response to an unpredictable sequence of external events. As more powerful microprocessors have become available and have decreased in price, embedded systems are being used in a wider range of applications and digital appliances and are facilitating the development of entirely new products.

    To succeed in today's increasingly competitive markets, manufacturers using embedded systems must bring complex applications for new products to market rapidly and economically. Developing embedded software applications has evolved from a relatively modest programming task to a complex engineering effort. As more powerful and affordable 32-bit microprocessors have become available, products based on them have become richer in features and functions. Increasingly, embedded applications are being designed for 64-bit microprocessors, digital signal processors, and programmable logic devices. In addition, the complexity of embedded software applications is increasing dramatically,

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while the time available for product development is decreasing. More sophisticated software is required to develop these more complex applications, frequently including an operating system that provides developers far more features, higher performance and greater productivity than was necessary or feasible for programming prior generations of microprocessors. Wind River provides end-to-end product solutions, including hardware reference design single board computers, integrated development environments, operating systems, networking protocols, and "standalone" tools that can be used with non-Wind River operating systems. These flexible solutions allow customers to purchase specific products for their particular needs, while improving product reliability and time to market.

    As embedded applications increase in complexity, the costs associated with providing software development, support and training of engineers are rising rapidly. In addition, time to market, conformance to standards, and product reliability have become critical issues for companies developing embedded applications.

PRODUCTS AND SERVICES

    Wind River's operating systems and development tools enable customers to create complex embedded software applications more quickly, more economically, and with less risk than creating such applications using internally developed systems and tools. The Company markets its software products in a variety of ways designed to address the needs of a wide range of customers, including those that seek to design their own target applications entirely, those that seek to leverage an integrated solution toward a particular market, and those that also need design services and consulting with respect to the development of a specification, particular components or the target application itself.

    The cornerstone of Wind River's software products is its suite of embedded operating systems that includes VxWorks® and VxWorks AE, its most advanced family of operating systems offering both protection domains and high availability features; the pSOSystem™ family of operating systems; OSEKWorks™ in the automotive field; a recently acquired operating system for digital signal processors; and Free BSD™, a UNIX-based open source operating system. These operating systems are suitable for use in a broad range of embedded applications, including products in automotive, consumer electronics, wireless, industrial, telecom/datacom and server management technologies.

    Complementing the operating systems, Wind River also licenses the Tornado® integrated development environment (IDE) which consists of a development platform and associated tools allowing customers to design, develop and test intended applications on a host development workstation. The Tornado IDE includes a comprehensive set of core and optional cross-development tools and utilities along with the VxWorks operating system, and allows for the integration of a wide variety of third-party tools. Wind River also provides a line of standalone development tools that customers can use with their own proprietary operating systems or with other third-party operating systems.

    Wind River provides optional extensions and middleware to its operating systems which provide additional capabilities to developers. Customers can license and incorporate these extensions and middleware into the underlying operating system to provide features required for a customer's specific applications. As applications become more complex, especially for Web-enabled products, prepackaged middleware solutions such as those offered by Wind River have become more widely used to simplify development.

    To facilitate the design and implementation of software solutions, Wind River has added hardware reference designs to its software product offerings. Through the use of these hardware products, customers can incorporate portions of the reference design into their products or use the entire design as a development platform before a customer's custom boards are available. This allows software programming to be tested for operability and functionality, and to be corrected for errors, early in the design cycle, thereby advancing overall product development.

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    To complement its broad range of software products and hardware reference designs, Wind River provides comprehensive design services and technical support to help customers complete a specification, design critical drivers, ports or interfaces, and/or provide complete design of a target application. These design services are offered on either a time-and-materials or fixed-price basis and can encompass a broad range of services, including fully project-managed custom hardware development, software development, and product integration. Wind River offers training through a series of formal technical courses designed to help teach developers the basics of embedded software development and the effective use of Wind River's tools, operating systems and middleware. The Company also provides for worldwide maintenance and support of its software products in the field.

    Wind River provides its software to customers through several forms of license agreements wherein the customer is extended the right to use and distribute the Company's products. Operating systems are generally licensed on a per-project basis and distributed by the customer for a per-unit royalty fee based on the number of target applications running the OS and placed in distribution. The Tornado development tools are licensed for a fee based on the number of developer "seats" using the tools. Bundled software integrated for market-specific solutions are similarly licensed, combining both run-time royalties and development fees. A significant number of Wind River's licenses for standard product are "click wrap" agreements contained in the product packaging.

MARKET-SPECIFIC SOLUTIONS

    Wind River offers market-specific solutions built on the Tornado IDE and Wind River operating systems plus fully integrated market-specific middleware, and development tools. With these platforms, customers are able to focus their time and engineering resources on creating unique applications within their particular market segment. These market-specific solutions include the following:

Automotive Market

    Tornado® for OSEKWork™.  Tornado for OSEKWorks incorporates Wind River's OSEKWorks operating system into the Tornado development environment, enabling developers to design complex automotive applications quickly and cost effectively.

Communications Infrastructure

    Tornado® for Managed Switches.  Tornado for Managed Switches (TMS) provides a complete set of functions for enterprise-class data networking switch and router equipment. TMS includes the Tornado II development environment and VxWorks plus communications protocols packaged so that customers can build different classes of data networking equipment.

    Tornado® for Home Gateways.  Tornado for Home Gateways provides a complete set of functions needed for virtually any gateway device for the home or small office. Home gateways can range from a basic DSL or cable modem to a full "media server," which combines broadband access with multimedia capabilities. Small-business gateway equipment can include small office/home office (SOHO) routers or integrated access devices that combine data and voice capabilities.

Internet Appliances

    Tornado® for Internet Appliances.  Tornado for Internet Appliances (TIA) comprises a portfolio of products built on Tornado II and VxWorks that can be used to develop an array of Internet access devices such as Web tablets, screenphones, set-top boxes, kiosks, and point-of-sale devices. TIA is made up of a complete suite of run-time components, including the Personal JWorks™ platform.

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Servers and Storage

    Tornado® for Intelligent I/O.  Tornado for Intelligent I/O (TIO), helps networking and data storage equipment keep pace with the enormous data throughput demands of the Internet. TIO provides additional intelligence to offload the management of networking tasks from server and storage products, thereby increasing overall system performance and capabilities.

Networking Products

    Wind River provides a wide range of networking software products that offer advanced communications, data security, and remote management capabilities. Traditionally, these protocols and management products have been utilized in specialized communications infrastructure equipment. Now with increasing requirements for connected devices and growing use of the Internet, these protocols and management products are being more widely deployed.

    Device Management.  Device management software includes Wind River's RapidControl™ and Envoy™ SNMP product families. These products allow devices attached to a network to be remotely queried, configured, and controlled. Wind River's Wind Web Server™ enables developers to turn any embedded device into a Web server that can provide a powerful interface to the Internet or to a corporate intranet.

    Protocol Stacks Integrated with VxWorks.  Wind River's WindNet™ product line comprises a variety of protocol stacks that are integrated with the VxWorks operating system. Developers can incorporate these protocol stacks as needed to quickly and cost-effectively create routing, wide-area networking, remote access, security, and virtual private networking equipment.

    Core Networking.  Core networking products are provided as the building blocks of applications based on the standard Internet protocol (IP). Products include the VxWorks TCP/IP protocol stack, AttachePlus™ Internet portable TCP/IP protocol stack, and WindNet STREAMS which provides an industry-standard platform for integrating a wide variety of networking protocol modules into an application.

    Portable Protocols.  Wind River's RouterWare® product line provides standard ANSI C source code for a wide range of internetworking protocol stacks, all architected for reliability and scalability.

ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

    The technology related to the embedded market in which Wind River competes is dramatically and rapidly increasing in complexity. To continue to develop and deliver complete solutions for its customers and to retain its competitive advantage in the market place, Wind River has and will continue to pursue a strategy of acquiring key businesses and technologies, making selected investments in companies to partner in the development of key technologies, and forming strategic alliances with significant customers.

    Major acquisitions during the last fiscal year included Integrated Systems, Inc. which was acquired on February 15, 2000; Embedded Support Tools Corporation which was acquired on March 31, 2000; AudeSi Technologies Inc. which was acquired on May 1, 2000; ICESoft AS which was acquired on July 14, 2000; and Rapid Logic, Inc. which was acquired on October 24, 2000. The acquisitions of these companies allowed Wind River to add key technologies to its market specific solutions, integrated development solutions and hardware solutions. See Item 1 "RISK FACTORS" of this Report.

    Wind River also invests in early-stage companies focusing on wireless communications, data and optical networking, semiconductors, and communications software, as well as Internet appliances. These investments are intended to expand opportunities with start-ups, to leverage high growth markets that

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are strategically aligned with Wind River, and to provide a forum for collaboration on leading-edge technologies that we believe will help shape the future of embedded computing.

    Wind River believes that strategic relationships with semiconductor manufacturers and embedded device manufacturers are significant strengths that are key to its future success in the embedded systems marketplace. These relationships include value added reseller agreements which focus on certain markets with target specific applications; the WindLink™ and Wind River Direct programs which provide for joint marketing and sales arrangements with certain developers of third-party applications for industry-specific features; and the Center of Excellence programs in which Wind River partners with leading microprocessor manufacturers to facilitate the porting, interfacing, and optimizing of the Company's software across various families of microprocessors. Wind River has strategic relationships with most of the major semiconductor companies including Advanced RISC Machines Ltd., Fujitsu Ltd., Hitachi, Inc., IBM Corporation, Intel Corporation, MIPS Technologies, Inc., Mitsubishi Electric Corporation, Motorola, Inc., NEC Corporation, ST Microelectronics, Siemens AG, Sun Microsystems, Inc., and Xilinx, Inc. Wind River has ported its VxWorks and pSOSystem technologies to their semiconductors, allowing Wind River to leverage its partners' sales channels to give its products broad market exposure. See Item 1 "RISK FACTORS" of this Report.

CUSTOMERS

    Wind River's products have been deployed by a broad range of organizations, including companies in the following industries: global networking (both data and voice), digital imaging, digital consumer electronics, computers and peripherals, medical instrumentation, defense electronics and aerospace, research, automotive control, and industrial measurement and control. No single customer accounted for more than 10% of Wind River's total revenues in fiscal 2001, 2000, or 1999.

MARKETING, SALES AND DISTRIBUTION

    In North America, Europe and now Japan, Wind River markets products and services primarily through its own direct sales organization, which consists of salespersons, field application engineers and support staff. Wind River's sales force presents Wind River and its products for licensing to prospective customers, while application engineers provide technical pre-sales and post-sales support. As of January 31, 2001; Wind River had 406 domestic sales employees located throughout North America, 192 sales employees throughout Europe, 69 sales employees in Japan, and 22 sales employees in Asia Pacific.

    In Japan, Wind River has transitioned from its joint venture arrangement with three master distributors to market its products through a direct sales force. The joint venture partners, Innotech Corporation ("Innotech"), Kobe Steel Ltd. ("Kobe Steel"), and Nissin Electric Ltd. ("Nissin Electric"), each previously owned a 10% equity interest in the joint venture, Wind River Systems, K.K. ("WRSKK") with Wind River owning the remaining 70% equity interest. In June 2000, Wind River notified the joint venture partners of its intention to terminate the joint venture agreement and on December 28, 2000, purchased each joint venture partner's equity in WRSKK in transactions totaling $1.2 million.

    On March 30, 2001, Wind River signed agreements with Kobe Steel and Nissin Electric for amounts approximating $2.4 million and $1.8 million, respectively, to purchase customer lists and other intangibles (see Note 16 of Notes to Consolidated Financial Statements). See Item 1 "RISK FACTORS" of this Report.

    Wind River has licensed certain international distributors, principally to serve customers in regions not serviced by its direct sales force. Wind River has also established strategic relationships with computer, semiconductor, and software vendors, and works closely with a number of system integrators

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worldwide that enable Wind River to further broaden the geographic and market scope for its products.

    Revenues from sales to customers outside of North America represented $137.3 million, $117.3 million, and $98.1 million or approximately 31%, 37% and 37% of total revenue in fiscal 2001, 2000 and 1999, respectively (see Note 14 of Notes to Consolidated Financial Statements). Prices for international customers are quoted primarily in local currency and are based on the United States price list adjusted to reflect the higher cost of doing business outside the United States. International customers are invoiced primarily in local currency. See Item 1 "RISK FACTORS" of this Report.

    Wind River has experienced, and expects to continue to experience, significant seasonality resulting primarily from customer buying patterns and product development cycles. The Company has generally experienced the strongest demand for its products in the fourth quarter of each fiscal year and the weakest demand in the first quarter of each fiscal year. Quarterly revenue levels have increased over the levels for like quarters in the prior fiscal years, but have typically decreased in the first quarter of each fiscal year from the fourth quarter of the prior fiscal year. See Item 1 "RISK FACTORS" of this Report.

COMPETITION

    The embedded software industry is highly competitive. Wind River believes that its principal competition comes from companies that develop embedded operating systems in-house rather than purchase these systems from independent software vendors such as Wind River. Wind River also competes with other independent software vendors, including Accelerated Technology, Inc., ENEA OSE Systems AB, Mentor Graphics, Inc., Microsoft Corporation, QNX Software Systems, Ltd., Sun Microsystems, Inc., Motorola, Inc., and Symbian Inc., as well as a number of other vendors that address one or more segments of the embedded system design process. Further, a number of companies, including RedHat, Inc., LinuxWorks, Lineo, Inc. and MonteVista Software Inc. have promoted Linux, an open source licensing model, as an operating system for use in embedded applications. The open source licensing model provides readily available source code and a royalty-free operating system, and leverages the added functionality and design improvements available from contributors to the open source community.

PRODUCT DEVELOPMENT AND ENGINEERING

    Wind River believes that its success will continue to depend primarily on its ability to maintain and enhance its current product line, develop new products, maintain technological competitiveness and meet an ever-expanding range of customer and market requirements. Wind River's product development and engineering group, as of January 31, 2001, includes 833 full-time employees. During fiscal 2001, 2000, and 1999, product development and engineering expenses were $83.0 million, $55.3 million, and $37.8 million, respectively, excluding capitalized software development costs. At January 31, 2001, 2000 and 1999, Wind River had capitalized software costs of $1.7 million, $2.6 million and $3.7 million, respectively (see Note 2 of Notes to Consolidated Financial Statements). Wind River anticipates that it will continue to commit substantial resources to research and product development in the future. See Item 1 "RISK FACTORS" of this Report.

PROPRIETARY RIGHTS

    Wind River's success is heavily dependent upon the Company's proprietary technology. To protect our proprietary rights, the Company relies on a combination of patent, copyright, trade secret, and trademark laws. As a part of the Company's regular business processes, Wind River generally enters into nondisclosure agreements with employees, consultants, distributors and corporate partners, as appropriate, and thereby limits access to and distribution of our software, documentation and other

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proprietary information. Further, Wind River's licensing agreements provide for protection of its intellectual property both in terms of source code handling and underlying intellectual property ownership of modifications to the Wind River code. See Item 1 "RISK FACTORS" of this Report.

MANUFACTURING AND BACKLOG

    Wind River's manufacturing operation consists of assembling, packaging and shipping the software products and documentation needed to fulfill each order. Limited manufacturing is currently performed in Wind River's Alameda and Sunnyvale, California, facilities. Outside vendors provide tape and CD duplication, printing of documentation and manufacturing of packaging materials. Wind River also manufactures and assembles its hardware development tools at a factory in Canton, Massachusetts. Wind River does not believe that backlog is a meaningful indicator of sales that can be expected in future periods, particularly in view of the fast pace of technological change in the software industry. At January 31, 2001, and 2000, backlog was approximately 7 to 11 weeks of sales for both years. Backlog includes orders that may be filled at various times throughout the fiscal year.

EMPLOYEES

    Wind River had, at January 31, 2001, 2,018 employees, including 891 in sales, marketing and support activities, 833 in product development and engineering and 294 in management, operations, finance and administration. Of these employees, 1,528 were located in North America and 490 were located outside of North America. No employees of Wind River are represented by a labor union or are subject to a collective bargaining agreement. Wind River has never experienced a work stoppage.

RISK FACTORS

    Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.

Numerous factors may cause our total revenues and operating results to fluctuate significantly from period to period.

    If our quarterly or annual operating results do not meet the expectations of securities analysts and investors, the market price of our common stock could decline significantly. A number of factors, many of which are outside our control, may cause or contribute to these fluctuations including:

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the number and timing of orders we receive, including disproportionately higher receipt and shipment of orders in the last month of the quarter;



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seasonality in product purchases by our customers, which are typically higher in the fourth fiscal quarter than in other quarters;



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changes in the length of our products' sales cycles, which increase as our customers' purchase decisions become more strategic and are made at higher management levels;



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the success of our customers' products from which we derive our royalty revenue;



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the mix of our revenues from the sale of services, which have lower margins than our revenue from the sale of products;



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our ability to control our operating expenses;

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•

our ability to continue to develop, introduce and ship competitive new products and product enhancements quickly;



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announcements, product introductions and price reductions by our competitors;



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our ability to manage costs for fixed-price consulting agreements;



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changes in business cycles that affect the markets in which we sell our products;



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economic conditions generally and in international markets; and



•

foreign currency exchange rates.

    One or more of the foregoing factors may cause our operating expenses to be disproportionately high or may cause our net revenue and operating results to fluctuate significantly. If we experience a shortfall in anticipated revenues or earnings or otherwise fail to meet public market expectations, our business could suffer and the market price of our common stock could decline significantly.

Wind River faces intense competition in the embedded software industry which could decrease demand for our products or cause us to reduce our prices.

    The embedded software industry is characterized by rapid change, new and complex technology and intense competition. Our ability to maintain our current market share depends on our ability to satisfy customer requirements, enhance existing products and develop and introduce new products. We believe our principal competition comes from companies that develop operating systems in-house rather than those which purchase these systems from independent software vendors, such as Wind River. We also compete with other independent software vendors, including Accelerated Technology, Inc.; ENEA OSE Systems AB; Mentor Graphics, Inc.; Microsoft Corporation; Motorola, Inc.; QNX Software Systems, Ltd.; Sun Microsystems, Inc.; and Symbian Inc. Some of our competitors have significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than we do. In addition, our competitors may consolidate or establish strategic alliances to expand product offerings and resources or reach new market segments. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and support of their products. Increased competitiveness may result in reductions in the prices of our products, run-time royalties and services, lower than expected gross margins or loss of market share, any of which would harm our business.

    A number of companies, including Red Hat, Inc., LinuxWorks, Lineo Inc., and MonteVista Software Inc. have been promoting the open source Linux operating system for use in embedded applications. Because Linux is royalty-free, increased use of the Linux operation system may force Wind River to reduce the prices of run-time royalties which could reduce our revenues and profit margins. In addition, the accessibility of the open source code promotes rapid technological changes from contributors in the open source community. If Wind River incurs additional costs or is unable to introduce new product functions or features to meet the broad scope of the functions and features made available through the open source community, the market for our products could suffer.

    The demands for rapid change and increasing complexity of the technology in our industry is driven by a number of factors, including the expansion of microprocessor platforms in embedded markets and the requirement for increased functionality in new products. The demand for increased functionality favors larger competitors who have the resources to develop new technologies or to respond more quickly with new product offerings or product enhancements. Our competitors may foresee the course of market developments more accurately than we do and could in the future develop new technologies that compete with our products or even render our products obsolete. Our continued competitiveness will require a continued high level of investment in research and development, marketing and customer service and support. If we are unable to successfully respond to technological

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changes and bring new or enhanced products to market in a timely and cost-effective manner, our business growth will suffer and demand for our products will decrease.

If we do not continue to successfully address new and rapidly changing markets and increasingly complex technologies and deliver our products on a timely basis, our revenues and operating results will decline.

    The market for embedded software is characterized by ongoing technological developments, evolving industry standards and rapid changes in customer requirements and product offerings in the embedded market. Our success depends upon our ability to adapt and respond to these changes. We must continuously update our existing products to keep them current with customer needs, and must develop new products to take advantage of new technologies, emerging standards, and expanding customer requirements that could render our existing products obsolete. Because customers often defer purchases between the time a new product is announced and its availability, our revenues and operating results may fluctuate if we do not provide new products rapidly.

    We have from time to time experienced delays in the commercial release of new technologies, new products and enhancements of existing products. Such delays are commonplace in the software industry due to the complexity and unpredictability of the development work required. We must achieve design wins on new product offerings with key customers because once a customer has designed a product with a particular operating system, that customer typically is reluctant to change its supplier, due to the significant costs associated with selecting a new supplier. If we cannot adapt or respond in a cost effective and timely manner to new technologies and new customer requirements, the market for our products could suffer.

    In addition, as we undertake the extensive capital outlays to address the changes in the embedded market, we may be unable to realize revenue as soon as we may expect. These costs associated with software development are increasing, including the costs of recruiting and retaining engineering talent, and acquiring or licensing new technologies. Our investment in new and existing market opportunities prior to our ability to generate revenue from these new opportunities may harm our operating results.

Integrating the companies we have acquired and costs associated with acquisitions and investments may disrupt our business and harm our operating results.

    As part of our business strategy, we anticipate that we will continue to acquire or make investments in business, products and technologies that complement ours. We have incurred significant costs in connection with transactions completed in this fiscal year and may incur significant costs in connection with future transactions whether or not they actually occur. Acquisitions involve additional risks including:

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difficulties in integrating the operations, technologies, and products of the acquired companies;



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the risk of diverting management's attention from normal daily operations of the business;



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potential difficulties in completing projects associated with in-process research and development;



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risks of operating in markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;



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disruption of customer relationships;



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increased expenses associated with acquisitions, including costs for employee redeployment, relocation or severance; conversion of information systems; combining research and development teams and processes; reorganization or closures of facilities; and relocation or disposition of excess equipment;

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•

potential delays in realizing anticipated revenues associated with the acquisition; and



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the potential loss of key employees of the acquired companies.

    We may not be successful in integrating the business, products, technologies and personnel we acquire. Similarly, we cannot guarantee that our investments will yield a significant return, if any. If we cannot successfully manage the integration of our acquisitions or are unable to realize the benefits of, or anticipated revenues from, our acquisitions, our business, financial condition and operating results could suffer.

If we are unable to successfully maintain our strategic alliances and collaborative relationships, we could suffer delays in product development and our business would be harmed.

    We have several forms of strategic relationships, primarily with key semiconductor manufacturers, through our Centers of Excellence program and Value Added Reseller agreements. In addition, we have collaborative marketing agreements through our WindLink program and collaborative marketing and distribution agreements through our Wind River Direct programs with certain developers of third-party applications and products. The strategic relationships are complex in that we compete in certain business areas with a company with which we have a strategic relationship and at the same time, cooperate with the same company in other business areas. Our strategic partners may also have concurrent relationships with companies which provide open source and in-house solutions, which may put pressure on our product development roadmaps, timelines and prices. If we are not successful in developing and continuing these strategic relationships in the semiconductor market, our business will be harmed. If our collaborative marketing and distribution agreements terminate or expire, the scope of our product offerings may be restricted, and the distribution of our products and revenues may be adversely impacted.

A significant portion of our revenue is derived from royalties which are dependent on our customers' abilities to develop and penetrate new markets successfully.

    Our operating systems and middleware products are embedded in end-user products marketed by our customers, and we receive royalty fees for each copy of our operating system and middleware products embedded in those products. Therefore, our royalty revenues depend both upon our ability to successfully negotiate royalty agreements with our customers and, in turn, upon our customers' successful commercialization of the underlying products. In particular, we rely heavily on our customers that develop leading edge products in areas such as Internet infrastructure, servers and storage, digital consumer, aerospace and defense, industrial control and automotive. We cannot control their product development or predict their success. In addition, we depend on our customers to accurately report use of their products in order for us to collect our run-time royalties. If our customers are not successful with their products or do not accurately report use of their products, our royalty revenues will decline significantly.

Our significant international business activities subject us to increased costs and economic risks.

    Wind River develops and sells its products world wide. Additionally, we have investments in, or acquisitions of, technology internationally. We also expect to continue to make investments to further support and expand our international operations and increase our direct sales force in Europe and Asia. Risks inherent in international operations include:

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the imposition of governmental controls and regulatory requirements;



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the costs and risks of localizing products for foreign countries;



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differences in business cultures and sales cycles;

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•

differences in operation and sales support expenses;



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unexpected changes in tariffs, import and export restrictions and other barriers and restrictions;



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greater difficulty in accounts receivable collection;



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the restrictions on repatriation of earnings;



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exposure to adverse movements in foreign currency exchange rates;



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the burdens of complying with a variety of foreign laws;



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difficulties in staffing and managing foreign subsidiaries and branch operations;



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difficulties in integrating products and operations from foreign acquisitions;



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our transition to direct sales in Japan; and



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credit instruments extended to support foreign operations, in particular in Japan.

    Any of these events, regionally and as a whole, could reduce our international sales and increase our costs of doing business internationally and have a material adverse affect on our gross margins and net operating results.

We have substantial debt service and principal repayment obligations, which could make it difficult for us to obtain financing and deplete our cash reserves.

    We sold $140 million of 5% convertible subordinated notes in 1997, which mature in 2002. This debt financing increased significantly both the ratio of our long-term debt to our total capitalization and our interest expenses. The degree to which we are leveraged could impair our ability to obtain financing for working capital or acquisitions, should we need to do so. The notes are convertible into our common stock at a price of $32.33 per share, and only a small portion of the notes has been converted to date. On August 1, 2002, we will be required either to pay off or refinance any unconverted notes. We do not know if we will be able to refinance the notes on favorable terms or at all. If a significant amount of the notes remains unconverted at maturity and we are unable to refinance the notes, the repayment would deplete our cash and investment balances significantly.

Failure of our current and planned information systems, controls and infrastructure to adequately manage and support our anticipated growth and global operations could disrupt our business.

    We have experienced, and expect to continue to experience, both through acquisitions and internal expansion, significant growth in our headcount and in the scope, complexity and geographic reach of our operations. To support this expansion, we must standardize, integrate and improve our management controls, reporting systems and procedures and information technology infrastructure. To implement those improvements, we must purchase, develop and maintain complex and expensive information management systems. Our current and planned systems, procedures and controls may not be adequate to support our future operations. Failure of these systems to meet our needs and an inability to efficiently integrate and expand support worldwide could disrupt our operations.

We are exposed to general market conditions which may increase the volatility in our operating results and stock price.

    In recent years and, in particular, the past year, the stock markets in general and the shares of technology companies in particular have experienced extreme price fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of the companies affected. The market price of our common stock is affected by the stock performance of other companies in our industry and other technology companies generally. In addition, other broad market and industry

13

factors may negatively affect our operating results or decrease our stock price, as may general political or economic conditions in the United States and globally, such as recessions, or interest rate or currency fluctuations. Unfavorable economic conditions in the United States could lead to a decrease in research and development and capital spending for emerging technology companies or for new products within established companies. Additionally, both emerging and established companies may seek to extend credit and payment terms as a result of unfavorable economic conditions.

The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable third parties to use our technology and reduce our ability to compete.

    Our success depends significantly upon the proprietary technology contained in our products. We currently rely on a combination of patents, copyrights, trademarks, trade secret laws, and contractual provisions to establish and protect our intellectual property rights in our technology and products. We cannot be certain that the steps we take to protect our intellectual property will adequately protect our rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. In addition, discovery and investigation of unauthorized use of our intellectual property is difficult. Software piracy, while difficult to detect, can be expected to be a persistent problem, particularly in foreign countries, where the laws may not protect our intellectual property as fully as in the United States. Employees, consultants, and others who participate in the development of our products may breach their agreements with us regarding our intellectual property. We might not have adequate remedies for infringement or breach of our proprietary rights by third parties, employees or consultants. Further, we may initiate claims or litigation against third parties for infringement or breach of our proprietary rights or to establish the validity of our proprietary rights. Whether or not such litigation is determined in our favor, such actions could result in significant expense to us, divert the efforts of our technical and management personnel from productive tasks or cause product shipment delays.

    We occasionally receive communications from third parties alleging patent or copyright infringement, and there is always the chance that third parties may assert infringement claims against us. Any such claims, with or without merit, could result in costly litigation, expense of significant resources to develop non-infringing technology, cause product shipment delays or require us to enter into royalty or licensing agreements. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, financial condition and results of operations would be materially adversely affected.

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ITEM 2. PROPERTIES

    Wind River's corporate headquarters are based in Alameda, California. The Company completed the construction of two buildings in January 2001 to add to its existing two buildings in Alameda, California. The new campus, leased by Wind River, provides approximately 273,000 square feet of space. Lease payments for the two additional buildings to be made by Wind River are expected to begin in the second quarter of fiscal year 2002.

    Wind River leases a number of customer training facilities in the United States, Europe and Asia. The Company also leases a number of sales and services as well as research and development offices in North America, Europe, Japan and the Asia Pacific region.

    In connection with the acquisition of Integrated Systems, Wind River acquired approximately 150,000 square feet of owned space, located in Sunnyvale, California.

ITEM 3. LEGAL PROCEEDINGS

    From time to time, Wind River is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents and other intellectual property rights. Wind River is not currently aware of any legal proceedings or claims that Wind River believes will have, individually or in the aggregate, a material adverse affect on Wind River's business, financial position, results of operations, or cash flows.

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

    Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

    The executive officers of Wind River, and certain information about them as of April 16, 2001, are as follows:

    Mr. Fiddler co-founded Wind River in February 1983, and currently serves as Chairman of the Board. From February 1983 to March 1994 he served as Chief Executive Officer of Wind River. He served as interim CEO from April to September 1999. Prior to founding Wind River, he was a computer scientist in the Real-Time Systems Group at Lawrence Berkeley Laboratory. Mr. Fiddler holds a B.A. in music and photography and a M.S. in computer science from the University of Illinois.

    Mr. St. Dennis joined Wind River in September 1999 as Chief Executive Officer and director. From July 1992 to September 1999, Mr. St. Dennis was at Applied Materials, Inc., a semiconductor equipment manufacturer, where he last served as group vice president and president of the planarization and dielectric deposition products business group. From 1987 to 1992, Mr. St. Dennis was

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vice president of technology at the Silicon Valley Group, Inc., also a semiconductor equipment manufacturer. From 1983 to 1987, he served as vice president of sales and marketing at Semiconductor Systems, Inc. Mr. St. Dennis has a B.S. and a M.S. in physics from the University of California at Los Angeles.

    Mr. Zellner joined Wind River in September 2000 as vice president of finance, Chief Financial Officer and secretary. From 1991 to 2000, Mr. Zellner was at Applied Materials, Inc., where he last served as a senior director of finance. Prior to joining Applied Materials, from 1979 to 1991 he served in various financial roles at Unisys Corporation, a computer systems and information management company. Mr. Zellner has completed the Stanford Executive Program at Stanford University Graduate School of Business and holds a B.B.A. and M.B.A. in accounting from Florida Atlantic University.

    Mr. Schacker joined Wind River in 1990 and has served as vice president of marketing and corporate development since November 1997. He has also served as a customer engineering manager, a sales representative, and sales manager for Wind River's northwest region in the United States. From 1988 to 1990, Mr. Schacker was an engineer for Ready Systems, a company that created software for developing embedded devices. Prior to that, he worked as an engineer for Lockheed Missile and Space (now Lockheed Martin Missiles & Space), a company that designs, develops, tests and manufactures a variety of advanced technology systems for space and defense. Mr. Schacker has a B.S. in computer science from Wright State University.

    Ms. Stark joined Wind River in September 1999 as vice president of intellectual property and legal affairs and assistant secretary. From 1995 to 1999, she served as the managing director of intellectual property litigation at Applied Materials, and from 1993 to 1995, as vice president and general counsel of Conner Peripherals Inc., a supplier of disk drives and memory storage management systems. Prior to that, Ms. Stark was in private practice as an attorney at Wilson Sonsini Goodrich & Rosati, and Brown & Bain. Ms. Stark holds a B.A. from Stanford University and a J.D. from the University of California, Hastings School of Law.

    Mr. Fogelin joined Wind River in May 1987 and currently serves as vice president and general manager of the Wind River Platforms business unit. He has held a number of positions at Wind River, including chief technologist, director of application environments, vice president of core technology, vice president of technology, and vice president of platform engineering.

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

    Wind River's Common Stock is traded on the Nasdaq National Market under the symbol WIND.

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    The closing price of Wind River's common stock as reported by the Nasdaq National Market on April 16, 2001, was $23.12 per share. The prices per share in the following table sets forth the low and high prices on the Nasdaq National Market for the quarters indicated:

    Wind River has not paid cash dividends and does not plan to pay dividends on its common stock in the foreseeable future. Wind River presently intends to retain all of its earnings for use in its business.

    At March 19, 2001, there were approximately 883 stockholders of record of Wind River. Certain record holders are represented by brokers and other institutions on behalf of stockholders. Wind River has estimated the total number of such stockholders to be 54,611.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

    The selected consolidated financial data presented below should be read in conjunction with the more detailed financial statements presented in Item 8 of this Form 10-K. The consolidated financial data for periods prior to the financial statements presented in Item 8 of this Form 10-K are derived

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from audited consolidated financial statements not included herein and have been restated to reflect historical financial information of RouterWare, Inc. and Integrated Systems Inc. through 1997.

(1)

Operating loss, net loss, and net loss per share include the effect of $95.9 million of amortization of goodwill, purchased technology and other intangibles and $33.3 million of acquisition related charges associated with the acquisitions of Integrated Systems, Embedded Support Tools, AudeSi, ICESoft and Rapid Logic. Pro forma net income before these charges, net of tax, was $40.7 million.

(2)

Operating income, net income and net income per share include the effect of $6.3 million of amortization of goodwill, purchased technology and other intangibles and $10.4 million in acquisition related charges associated with the purchases of Integrated Systems, Software Development Systems, RouterWare and Xact. Also included was $1.2 million incurred for the retirement package of the former Chief Executive Officer and $1.3 million associated with hiring of the current Chief Executive Officer. Pro forma net income before these charges, net of tax, was $28.2 million.

(3)

Operating income, net income, and net income per share include the effect of $780,000 of amortization of goodwill, purchased technology and other intangibles, $6.3 million in other charges associated with arbitration expenses from a legal settlement and $2.2 million incurred for the retirement package of the former Chief Executive Officer of Integrated Systems. Also included is a one time tax benefit of $2.4 million. Pro forma net income before these charges, net of tax, was $39.2 million.

(4)

Operating income, net income and net income per share include the effect of $15.2 million in acquisition related charges associated with the purchase of in-process technologies from Liberate Technologies, Inc. and Objective Software Technology, Ltd. Pro forma net income before these charges, net of tax, was $23.7 million.

(5)

Operating income, net income and net income per share include the effect of $5.7 million in acquisition charges associated primarily with certain bonuses paid to management and employees of Diab Data, Inc. Pro forma net income before these charges, net of tax, was $22.6 million.

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

    The following discussion should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report.

RESULTS OF OPERATIONS

    The results of operations presented below are for Wind River and have been restated to include the historical financial information of RouterWare and Integrated Systems, which were acquired in transactions accounted for as poolings of interest. Acquisitions accounted for as purchase transactions

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have been included from the date of their purchase. The following table sets forth certain consolidated statement of operations data and its percentage of revenues for the periods indicated:

(1)

Operating loss, net loss, and net loss per share include the effect of $95.9 million of amortization of goodwill, purchased technology and other intangibles and $33.3 million of acquisition related charges associated with the acquisitions of Integrated Systems, Embedded Support Tools, AudeSi, ICESoft and Rapid Logic. Pro forma net income before these charges, net of tax, was $40.7 million.

(2)

Operating income, net income and net income per share include the effect of $6.3 million of amortization of goodwill, purchased technology and other intangibles and $10.4 million in acquisition related charges associated with the purchases of Integrated Systems, Software Development Systems, RouterWare and Xact. Also included was $1.2 million incurred for the retirement package of the former Chief Executive Officer and $1.3 million associated with hiring of the current Chief Executive Officer. Pro forma net income before these charges, net of tax, was $28.2 million.

(3)

Operating income, net income, and net income per share include the effect of $780,000 of amortization of goodwill, purchased technology and other intangibles, $6.3 million in other charges associated with arbitration expenses from a legal settlement and $2.2 million incurred for the retirement package of the former Chief Executive Officer of Integrated Systems. Also included is a one time tax benefit of $2.4 million. Pro forma net income before these charges, net of tax, was $39.2 million.

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YEARS ENDED JANUARY 31, 2001 AND 2000

REVENUES

    Revenues consist of product revenues and service revenues. Product revenues ("product revenues") consist of royalties and fees for operating systems and fees for the use of development tools. Service revenues ("service revenues") are derived from fees from professional services, which include design and development fees, software maintenance contracts, customer training and consulting. Total revenues increased by 39% to $438.0 million in fiscal year 2001 from $316.1 million in fiscal year 2000. The increase in revenues is due to increases in both product revenues and service revenues. Product revenues accounted for approximately 71% and 67% of the total revenues in fiscal 2001 and 2000, respectively, and service revenues accounted for approximately 29% and 33% of total revenues in fiscal 2001 and 2000, respectively.

    Product revenues increased 47% to $309.7 million in fiscal year 2001 from $210.7 million in fiscal year 2000. The increase in product revenues was due primarily to the continued acceptance of Wind River's products, increases in run-time license revenues as customer-developed products continue to be accepted by end-users and to the expansion of Wind River's product lines resulting from research and development and the integration of products from acquired companies. Product revenues are recognized at the time of shipment or upon the delivery of a product master in satisfaction of non-cancelable contractual agreements provided that collection of the resulting receivable is probable, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate the total fee to all delivered and undelivered elements of the arrangement.

    Service revenues increased 22% to $128.3 million in fiscal year 2001 from $105.4 million in fiscal year 2000. The increase was due to growth in revenues from maintenance support agreements, both new and recurring, resulting from Wind River's base of installed development environments and software applications provided to customers. In addition, revenues from professional services increased due to continued strategic emphasis in this area.

    Deferred revenues result primarily from customer prepayments under software maintenance agreements, which are recognized ratably over the life of the agreements, certain run-time agreements, which are recognized as target licenses are delivered and collection is reasonably assured, and professional services and engineering services contracts or training arrangements, which are recognized as services are performed.

    Revenues from international sales were $137.3 million and $117.3 million for fiscal 2001 and 2000, respectively. The percentage of Wind River's total revenues from customers located internationally was 31% in fiscal year 2001, and 37% in fiscal year 2000. The decrease in Wind River's international revenues as a percentage of total revenues in fiscal year 2001 is due primarily to domestic revenues increasing at a faster rate than international revenues and due to a decrease in revenues from Japan as a result of the transition to a direct distribution model. Revenues from Japan were $40.8 million and $42.9 million in fiscal 2001 and 2000, respectively. The percentage of revenues from other international regions remained relatively constant in fiscal years 2001 and 2000 at 22% and 24% of total revenues, respectively, while the percentage of revenues from customers located in Japan decreased to 9% in fiscal 2001 from 14% in fiscal 2000. Wind River expects international sales to continue to represent a significant portion of revenues, although the percentage may fluctuate from period to period. Wind River's international sales are denominated in the local currencies. Wind River actively monitors its foreign currency exchange exposure; and to date such exposures have not had a material impact on Wind River's results of operations or cash flows. See Item 1 "RISK FACTORS" of this Report.

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COST OF REVENUES

    The overall cost of revenues as a percentage of total revenues was 23% in fiscal 2001 and fiscal 2000. Cost of revenues comprises cost of products and cost of services.

    Cost of products was $36.6 million in fiscal 2001 compared to $27.7 million in fiscal 2000. Cost of products as a percentage of product revenues was 12% and 13% in fiscal 2001 and 2000, respectively. As a result, gross profit margins for products were 88% and 87%, respectively. Costs of products consist primarily of salaries and benefits for production employees, product media, and royalty payments to third parties for the use of their software and documentation and packaging. The decrease in costs as a percentage of product revenues are due to production efficiencies achieved as more development, OEM and run time licenses move through Wind River's production cycle as well as a reduction in third party product costs. Wind River's cost of product revenues as a percentage of product revenues will be affected in the future by the distribution rights related to the introduction of new products and by royalty payments to third parties for sales related to their products which are integrated into Wind River's technology and are sold as support tools. Amortization of capitalized software development costs included in cost of products for fiscal 2001 and 2000, amounted to $2.4 million for both years. At January 31, 2001 and 2000, Wind River had net capitalized software costs of $1.7 million and $3.1 million, respectively. In fiscal year 2001, Wind River capitalized an additional $1.0 million in software development related costs. Additions in fiscal year 2001 will be amortized over eight quarters at $125,000 per quarter.

    Cost of services was $63.3 million in fiscal 2001 compared to $43.4 million in fiscal 2000. Service related cost of revenues as a percentage of service revenues was 49% and 41% respectively. Service related cost of revenues consists primarily of personnel related costs associated with providing services to customers and the infrastructure to manage a services organization as well as costs to recruit, develop, and retain services professionals. The increase in costs of service revenues is due to the Company's investment in developing new services offerings and the addition of new personnel and certified third party contractors to Wind River's professional services organization. Wind River expects the cost of service revenues will increase in absolute dollars as the Company continues to increase its customer support staff, customer support capabilities and professional service organization.

SELLING AND MARKETING EXPENSES

    Selling and marketing expenses were $172.2 million in fiscal 2001 compared to $123.3 million in fiscal 2000 or 39% of total revenues for both fiscal years. The increase in absolute dollars from fiscal 2000 to 2001 resulted primarily from the growth of sales and marketing personnel both domestically and internationally, field engineers, expenses related to marketing and advertising programs and third-party marketing costs for product introductions. The increase was also due to costs associated with the integration of acquisitions made during the year. Such costs included redesign and reprinting of marketing material, sales meetings, trade show promotions and advertisements. Wind River expects its selling and marketing expenses to increase in absolute dollars as it continues to increase its sales and marketing personnel and marketing and advertising programs.

PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES

    Product development and engineering expenses were $83.0 million in fiscal 2001 compared to $55.3 million in fiscal 2000, an increase of 50%. As a percentage of revenues, product development and engineering expenses increased to 19% in fiscal 2001 from 17% in fiscal 2000. The increase in product development and engineering expenses is primarily due to the increase in staff and associated support for engineers to expand and enhance Wind River's product line, including the costs associated with integrating engineering staff as a result of the business acquisitions which occurred during the fiscal year. Wind River believes that product development and engineering expenses will continue to increase

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in absolute dollars both as a result of the investment in the internal development of new products and technologies and through acquisitions of companies and technologies. In addition, Wind River had $1.0 million and $600,000 of funded research and development, which reduced its research and development expenses in fiscal years 2001 and 2000, respectively, related to its Center of Excellence initiative. The Company expects the Center of Excellence program to continue to increase in absolute dollars in the next fiscal year.

GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative expenses were $40.0 million in fiscal 2001 compared to $33.9 million in fiscal 2000, an increase of 18%. As a percentage of revenues, general and administrative expenses decreased to 9% in fiscal 2001 from 11% in fiscal 2000. The increase in absolute dollars was primarily due to the growth in worldwide staff and infrastructure investments in the areas of information systems, finance, legal and administration to support the growth of Wind River and to integrate the companies it has acquired. In addition, fiscal 2000 included $1.2 million in costs associated with the retirement costs of the former CEO, $1.3 million in costs associated with the hiring of the current CEO and costs associated with the implementation of Wind River's Oracle software system which contributed to the higher cost as a percentage of revenues in that year. Wind River believes that general and administrative expenses will continue to increase in absolute dollars as it continues to invest in worldwide staff and infrastructure in the areas of information systems, finance and administration and consolidate the financial, manufacturing, customer relations management and customer support information systems of acquired companies.

    Wind River allocates the total costs for information technology and facilities to each of the functional areas that uses the information technology and facilities services based on their headcount. Information technology allocated costs include salaries, information technology, project costs, communication costs and depreciation expense for shared infrastructure costs. Facilities allocated costs include facility rent for the corporate offices as well as shared function offices, property taxes, depreciation expenses for office furniture and other department operating costs.

AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLES

    Amortization of goodwill and purchased intangibles increased to $95.9 million in fiscal 2001 from $6.3 million in fiscal 2000. The increase in amortization of intangibles is due to the amortization of identifiable intangibles and goodwill related to the purchase transactions completed this year, and primarily consists of amortization related to Embedded Support Tools. Wind River expects to amortize, under current accounting rules, approximately $31.0 million per quarter in identifiable intangibles and goodwill for the next thirteen quarters related to intangibles acquired in purchase transactions completed primarily during fiscal 2001. Additional acquisitions could increase the amount of goodwill amortization.

ACQUISITION RELATED COSTS

    Acquisition related costs were $33.3 million in fiscal 2001 compared to $9.9 million in fiscal 2000. The $23.4 million increase is primarily related to costs associated with the integration of Integrated Systems, and the write-off of in-process research and development costs from purchase transactions completed during the year.

    During fiscal 2001, Wind River incurred $25.2 million in acquisition and integration costs associated with the merger of Integrated Systems. Those costs included: (a) $11.1 million for investment banking fees, (b) $6.8 million in severance costs, (c) $3.1 million for office closure and other costs for surplus sales offices in the United States, Europe and Japan, (d) $3.6 million for legal, accounting and other professional fees which relate primarily to the acquisition process for Integrated

22

Systems and the elimination of acquired legal entities in the United States, Europe and Japan, and (e) $600,000 for general integration costs. Severance costs of $6.4 million were paid during fiscal 2001. Remaining severance costs are expected to be paid during fiscal 2002. A total of 87 employees were terminated, including 40 general and administrative employees, 33 sales and marketing employees and 14 employees from other areas. Employees were terminated if their roles or functions were duplicative following the merger with Integrated Systems. The office closure costs relate to remaining lease payments on vacant offices extending to October 31, 2004.

    Wind River recognized in-process research and development charges of $8.1 million during fiscal 2001 related to various purchase transactions completed during the year including amounts related to the acquisition of Embedded Support Tools of $3.7 million, Rapid Logic of $3.3 million, AudeSi of $1.0 million and ICESoft of $100,000. (see Note 3 of Notes to Consolidated Financial Statements). Wind River also recognized an in-process research and development charge of $6.3 million relating to the operations of a subsidiary of Integrated Systems during fiscal 2000. The amounts related to in-process technology represent purchased in-process technology for projects that have not yet reached technological feasibility and have no alternative future use. At the dates of acquisition, the average estimated percentage of completion was 56%, 79%, 49% and 39%, for the in-process research and development projects at Embedded Support Tools, AudeSi, ICESoft and Rapid Logic, respectively. The expected completion dates for these projects were September 2000, December 2000, August 2000 and September 2000, respectively. The value of the in-process research and development was determined by estimating the net cash flows resulting from the completion of the projects reduced by the percentage of completion of the projects. Net cash flows were offset using estimated income taxes consistent with Wind River's anticipated tax rate for the foreseeable future and then discounted back to their present value at a discount rate based on Wind River's required risk adjusted weighted average rate of return. Wind River's estimated revenues, margins and operating costs are based upon historical information about similar product development cycles combined with projections of future revenues and cost patterns, including projections used when initially evaluating the acquisitions. Wind River cannot guarantee that it will realize revenues from these in-process projects in the amounts estimated or that the costs incurred will be materially consistent with estimates made. However, to date, the Company is not aware of any significant variations between costs incurred and estimates made.

    The nature of the efforts to develop all purchased in-process technology into commercially viable products principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the resulting products can meet their design specification, including function, features and technical performance requirements.

    Due to the fact that the projects were in-process, there is uncertainty regarding whether they can be successfully finished and result in the net cash flows that were originally estimated at the time of the acquisitions. It is reasonably possible that the development of the acquired technology could fail because of either prohibitive costs, Wind River's inability to perform the required completion efforts or other factors outside Wind River's control such as a change in the market for the resulting developed products. If the development of the technology is unsuccessful, the technology may be abandoned during the development phase. Should Wind River's development efforts fail or encounter significant delay, then Wind River's future returns may be significantly reduced. In such case, Wind River may be unable to recover its investment in this project, may be less well positioned to benefit from new product markets in these areas and Wind River's future operating results could be adversely affected.

    The assumptions used in determining the value of in-process research and development acquired in connection with Wind River's purchase acquisitions completed during fiscal 2001 and 2000 have been consistent, in all material respects, with the actual results to date. The assumptions primarily consist of the expected completion date for the in-process projects, estimated costs to complete the projects, and revenue and expense projections once the products have entered the market. Failure to achieve the expected levels of revenue and net income from these products during their entire life cycle will

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negatively impact the return on investment expected at the time that the acquisitions were completed and potentially result in impairment of any other assets related to the development activities.

OTHER INCOME AND EXPENSE

    Interest income was $20.8 million in fiscal 2001 compared to $18.9 million in fiscal 2000. The increase is primarily due to higher interest earned on cash balances, short-term investments and restricted cash balances. Total cash, investments and restricted cash at January 31, 2001 and 2000 was approximately $350.9 million and $352.3 million, respectively.

    Interest expense was $7.0 million during fiscal 2001 and 2000, respectively. Wind River pays interest on its outstanding 5.0% convertible subordinated notes due in August of 2002 and maturities of certain issuance costs associated with these notes. The interest on the notes is payable on February 1 and August 1 of each year commencing February 1, 1998.

    Other income and expense, net for fiscal 2001 was income of $8.5 million compared to an expense of $2.4 million in fiscal 2000. The increase in net other income was primarily due to gains of $10.5 million related to the disposition of equity securities of Liberate Technologies, Inc. and e-Sim, Inc. Wind River sold 208,333 common shares of Liberate at prices ranging from $26.94 to $108.00 per share and 95,100 common shares of e-Sim at prices ranging from $18.38 to $36.99 per share during fiscal year 2001. During fiscal year 2000, Wind River recognized a charge totaling $500,000 relating to the difference between the carrying amount of its investment in Xact, Inc. and management's assessment of the net realizable value of the investment.

PROVISION FOR INCOME TAXES

    Net income for fiscal 2001 was negatively impacted by $33.3 million in acquisition related and other charges, including $8.1 million, of in-process research and development costs and $95.9 million in amortization of goodwill and purchased intangibles. Despite the occurrence of a net loss in fiscal 2001, a tax provision resulted due to the exclusion of amortization of goodwill and other purchased intangibles, and the exclusion of in-process research and development and other acquisition charges, which are non-deductible for income tax purposes. The effective tax rate for fiscal 2001 excluding amortization of goodwill and purchased intangibles and acquisition charges was 37.5% compared to 37.2% for fiscal 2000. The change in the effective tax rate excluding amortization of goodwill and purchased intangibles and acquisition charges is attributed to the change in the ratio of foreign taxable income to domestic taxable income and carryforward tax attributes.

YEARS ENDED JANUARY 31, 2000 AND 1999

REVENUES

    Total revenues increased by 19% to $316.1 million in fiscal year 2000 from $265.2 million in fiscal year 1999. The increase in revenues is due to increases in both Wind River's product revenues and services revenues. Product revenues accounted for approximately 67% and 65% of the total revenues in fiscal 2000 and 1999, respectively, and service revenues accounted for approximately 33% and 35% of total revenues in fiscal 2000 and 1999, respectively.

    Product revenues increased by 23% to $210.7 million in fiscal year 2000 from $171.8 million in fiscal year 1999. The increase is due primarily to the continued acceptance of Wind River's products such as the Tornado II integrated development environment and increased run-time license revenues, as well as increased product lines resulting from research and development and integration of products acquired from Integrated Systems, Xact and RouterWare.

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    Service revenues increased 13% to $105.4 million in fiscal year 2000 from $93.4 million in fiscal year 1999. The increase was primarily due to an increase in maintenance support agreements, both new and recurring resulting from Wind River's base of installed development environments and software applications provided to customers.

    The percentage of Wind River's total revenues from customers located internationally was 37% in fiscal years 2000 and 1999. The percentage of revenues from the Europe and Asia Pacific regions remained relatively constant in fiscal years 2000 and 1999 at 24% of total revenues. Wind River expects international sales to continue to represent a significant portion of revenues, although the percentage may fluctuate from period to period. Wind River's international sales are denominated in the local currencies, and an increase in the relative value of the dollar against such currencies would reduce Wind River's revenues in dollar terms or make Wind River's products more expensive and, therefore, potentially less competitive in foreign markets. Wind River actively monitors its foreign currency exchange exposure; and to date such exposures have not had a material impact on Wind River's results of operations. The risks associated with international sales, are more fully discussed in the "Risk Factors" section contained in Item 1 of this Report.

COST OF REVENUES

    The overall cost of revenues as a percentage of total revenues was 23% in fiscal 2000 and fiscal 1999. Cost of revenues comprises cost of products and cost of services.

    Cost of products was $27.7 million in fiscal 2000 compared to $23.5 million in fiscal 1999. Product-related cost of revenues as a percentage of product revenues was 13% and 14% in fiscal years 2000 and 1999, respectively. Product costs include salaries and benefits for production employees, product media, license and other direct purchase costs of third-party software that is distributed by or integrated into Wind River's products and the amortization of capitalized software development costs. Amortization of capitalized software development costs included in cost of products amounted to $2.4 million and $1.9 million in fiscal 2000 and 1999, respectively. At January 31, 2000 and 1999, Wind River had net capitalized software costs of $3.1 million and $3.7 million, respectively.

    Cost of services was $43.4 million in fiscal 2000 compared to $35.9 million in fiscal 1999. Service related cost of revenues as a percentage of service revenues was 41% and 38% in fiscal 2000 and 1999, respectively. The increase in cost of service revenues as a percentage of service revenues is due to investment in developing new service offerings, including consulting, and the addition of service professionals.

SELLING AND MARKETING EXPENSES

    Selling and marketing expenses were $123.3 million in fiscal 2000 compared to $93.7 million in fiscal 1999. As a percentage of total revenues, selling and marketing expenses were 39% and 35%, respectively, in fiscal 2000 and fiscal 1999. The increase as a percentage of revenues from fiscal 1999 to 2000 resulted primarily from the growth of sales and marketing personnel and field engineers and related costs and increases in expenses related to marketing and advertising programs and third-party marketing costs for product introductions, including the Tornado II integrated development environment, and promotions.

PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES

    Product development and engineering expenses were $55.3 million in fiscal 2000 compared to $37.8 million in fiscal 1999, an increase of 46%. As a percentage of revenues, product development and engineering expenses were 17% and 14%, respectively, in fiscal 2000 and fiscal 1999. The increase in product development and engineering expenses as a percentage of revenues was primarily due to the increase in staff and associated support for engineers to expand and enhance Wind River's product

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lines, including the costs associated with integrating engineering teams from Xact, RouterWare and Software Development Systems.

GENERAL AND ADMINISTRATIVE EXPENSES

    General and administrative expenses were $33.9 million in fiscal 2000 compared to $23.3 million in fiscal 1999, an increase of 45%. As a percentage of revenues, general and administrative expenses increased to 11% in fiscal 2000 from 9% in fiscal 1999. The increase was primarily due to the growth in worldwide staff and infrastructure investments in the areas of information systems, finance and administration. Wind River's Oracle financial and production computer systems became operational during the fourth quarter of fiscal year 2000.

AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLES

    Amortization of goodwill and purchased intangibles was $6.3 million in fiscal 2000 and $1.3 million in fiscal 1999. This increase was primarily due to Integrated Systems' acquisition of Software Development Systems in fiscal year 2000. Amortization of goodwill and purchased intangible assets include the amortization of goodwill and other purchased intangible assets relating to various purchase acquisitions.

ACQUISITION RELATED COSTS

    Acquisition related costs were $9.9 million in fiscal 2000 compared to $7.3 million in fiscal 1999. The costs in fiscal 2000 relate primarily to Integrated Systems' acquisition in July 1999 of Software Development Systems, including a $6.3 million charge relating to the write-off of in-process research and development costs, and to the acquisition of RouterWare, and to the costs associated with hiring the Xact employees, acquiring equipment and other assets of Xact and revising a second distribution agreement for another product with Xact. Costs in fiscal 1999 consist of arbitration-related expenses from a legal settlement at Integrated Systems.

OTHER INCOME AND EXPENSE

    Interest income was $18.9 million in fiscal 2000 compared to $18.6 million in fiscal 1999. The increase is primarily due to a larger investment portfolio and restricted cash accounts. Total cash, investments and restricted cash at January 31, 2000 and 1999 was approximately $352.3 million and $325.0 million, respectively.

    Interest expense was $7.0 million during fiscal 2000 and 1999. Wind River pays interest on its outstanding 5.0% convertible subordinated notes due in August of 2002 and maturities of certain issuance costs associated with these notes. The interest on the notes is payable on February 1 and August 1 of each year commending February 1, 1998.

    Other income and expense, net for fiscal 2000 was a net expense of $2.4 million compared to $1.9 million in fiscal 1999. The increase in net expense is primarily due to a charge during the first quarter of fiscal 2000 of $500,000, relating to the difference between the carrying amount of investment in Xact and the net realizable value.

PROVISION FOR INCOME TAXES

    The effective tax rate was 59.7% in fiscal 2000 compared to 32.2% in fiscal 1999. The increase is primarily due to non-deductible acquisition costs related to Software Development Systems. Excluding the impact of these costs, the effective tax rate for fiscal year 2000 was 37.2%. The 32.2% effective tax rate for fiscal year 1999 includes a $2.4 million federal tax benefit related to a tax election at Integrated Systems. Excluding this tax benefit, the effective tax rate for fiscal year 1999 was 36.9%. Variations in the effective tax rate result primarily from differences between foreign and domestic tax rates and the ratio of foreign taxable income to domestic taxable income and varying levels of research and development credits.

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LIQUIDITY AND CAPITAL RESOURCES

    At January 31, 2001, Wind River had working capital of approximately $145.2 million and cash and investments of approximately $289.6 million, which include investments with maturities of greater than one year of $155.4 million and excludes restricted cash of $61.3 million. Wind River invests primarily in instruments that are highly liquid and of investment grade. Cash flows for the fiscal year ended 2001 include cash flows from companies acquired as purchase transactions from the date of their acquisition.

    In fiscal 2001, Wind River's operating activities provided net cash of $24.6 million compared to $35.5 million in fiscal 2000, and $53.8 million in fiscal 1999. Net cash provided by operating activities for fiscal 2001 of $24.6 million was primarily due to net cash flows from operations of $55.4 million before changes in assets and liabilities of $30.8 million. Net cash flows from operations before changes in assets and liabilities consisted of the net loss of $76.4 million and other items for $2.1 million, which were offset by depreciation and amortization of $112.3 million, a tax benefit of $12.0 million and acquired in-process research and development of $8.1 million. Net changes in assets and liabilities consisted primarily of the increase in accounts receivable of $31.5 million due to increased sales activity, and an increase in other assets and liabilities of $9.4 million, which were offset by increases in accrued compensation, deferred revenues, accrued liabilities and accounts payable which totaled $10.7 million.

    In fiscal 2001, Wind River's investing activities used net cash of $70.2 million compared to $23.2 million in fiscal 2000, and $101.5 million in fiscal 1999. Uses of cash relating to the purchase of available-for-sale investments, business acquisitions and the purchase of equipment, were partially offset by cash provided from the sale of available-for-sale investments. As Wind River transitioned its investment portfolio from long-term to short-term investments its short-term investments increased by $13.0 million. Restricted cash increased due to the new collateral funding for the second corporate facility operating lease. The collateral consists of direct obligations of the United States government, with the majority being long-term investments.

    In fiscal 2001, Wind River's financing activities provided net cash of $60.5 million compared to $9.7 million in fiscal 2000, and a usage of cash of $6.0 million in fiscal 1999. During fiscal 2001, cash provided by the issuance of common stock from stock option exercises and the increase in a line of credit at the Wind River's Japanese subsidiary were partially offset by the repayment of bank borrowings associated with acquired companies. During fiscal 1999, both Wind River and Integrated Systems repurchased common stock for amounts totaling approximately $10.0 million through existing stock repurchase programs. In June 1999, the Board of Directors rescinded all stock repurchase authorizations. Wind River has not made any repurchases since March 17, 1999. On September 7, 1999, its CEO signed a secured promissory note with the Company to borrow up to $2.4 million. As of January 31, 2001, the CEO had borrowed $1.8 million against this note.

    In July 1997, Wind River issued $140 million of 5% Convertible Subordinated Notes, which mature on August 1, 2002. The Notes are subordinated to all existing and future senior debt and are convertible into shares of Wind River's common stock at a price of $32.33 per share. The Notes are redeemable at the option of Wind River, in whole or in part, at any time on or after August 2, 2000 at 102% of the principal amount initially, and thereafter at prices declining to 100% at maturity, in each case plus accrued interest. Each holder of these Notes has the right, subject to certain conditions and restrictions, to require Wind River to offer to repurchase all outstanding Notes, in whole or in part, owned by such holder, at specified repurchase prices plus accrued interest upon the occurrence of certain events. The $5.1 million of costs incurred in connection with the offering are included in prepaid and other assets. These costs are being amortized to interest expense over the 5-year term of the Notes using the straight-line method, which approximates the effective interest method. Interest on the Notes began accruing July 31, 1997 and is payable semi-annually on February 1 and August 1,

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commencing on February 1, 1998. We do not know at this time whether we will be able to refinance the Notes on favorable terms or at all. See Item 1 "RISK FACTORS" in this Report.

    In fiscal year 1998 and fiscal year 2000, Wind River entered into operating leases for its headquarters facility constructed on land owned by Wind River. Construction of the latest set of buildings was completed in January 2001. The lessor has funded a total of $32.4 million of construction costs related to the first set of buildings and operating lease and has funded a total of $23.6 million of construction costs related to the second set of buildings and second operating lease. The operating lease payments will vary based upon the total construction costs of the buildings, which include capitalized interest and the London interbank offering rate ("LIBOR"). In connection with the lease of Wind River's headquarters, Wind River has entered into a ground lease of its land in Alameda, California, with the lessor of the building at a nominal rate and for a term of 55 years. If Wind River terminates or does not negotiate an extension of the building lease, the ground lease converts to a market rental rate. The ground lease provides Wind River with the option at the end of the lease terms to either acquire the buildings at the lessor's original cost or arrange for the buildings to be acquired. Wind River has guaranteed the residual value associated with the buildings under the first operating lease and second operating lease to the lessor of approximately 82% and 84.5%, respectively, of the lessor's actual funding of the two leases. Wind River is also required to deposit fixed income securities with a custodian as a deposit to secure the performance of its obligations under the lease. In addition, under the terms of the lease, Wind River must maintain compliance with certain financial covenants. As of January 31, 2001, Wind River was in compliance with these covenants. Management believes that the contingent liability relating to the residual value guarantee will not have a material adverse effect on Wind River's financial condition, results of operations, or cash flows.

    On March 18, 1998, Wind River entered into an accreting interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate operating lease for its new corporate headquarters. The swap agreement effectively changes Wind River's interest rate exposure on its operating lease, which is based on the one month LIBOR, to a fixed rate of 5.9%. At January 31, 2001, the notional amount of the accreting interest rate swap was $28.5 million. On January 10, 2001, Wind River entered into another interest rate swap agreement to reduce the impact of changes in interest rates on its second floating rate operating lease for the additional construction of its headquarters facility. This second swap agreement changes Wind River's interest rate exposure on its second operating lease, which is based on the one month LIBOR, to a fixed rate of 5.6%. At January 31, 2001, the notional amount of the interest rate swap was $27.9 million. The differential to be paid or received under both swap agreements will be recognized as an adjustment to rent expense related to the respective operating leases. The swap agreements mature at the same time as their respective operating lease expires. The amounts potentially subject to credit risk (arising from the possible inability of the counterparties to meet the term of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations exceed the obligations of Wind River. Wind River is required to adopt SFAS 138 and SFAS 133 in the first quarter of fiscal 2002, and believes it will not have a material effect on the financial position, results of operations or cash flows.

    Wind River has an investment portfolio of fixed income securities that are classified as available-for-sale securities. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. Wind River attempts to limit this exposure by investing in high-grade fixed income securities.

    Management believes that Wind River's working capital and cash flow generated from operations are sufficient to meet its working capital requirements for planned expansion, product development and capital expenditures for at least the next twelve months and on a longer term basis; however, Wind River may sell additional equity or debt securities or obtain credit facilities to further enhance its liquidity position. The sale of additional securities could result in additional dilution to Wind River's stockholders.

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EURO CURRENCY

    On January 1, 1999, several member countries of the European Union established fixed conversion rates between their sovereign currencies and adopted the Euro as their new common legal currency. Since that date, the Euro has traded on currency exchanges. The legacy currencies will remain legal tender in the participating countries for a transition period between January 1999 and January 1, 2002. During the transition period, non-cash payments can be made in Euros, and parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency. Between January 1, 2002 and February 28, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies from circulation. The Euro conversion may affect cross-border competition by creating cross-border price transparency. Wind River is assessing its pricing and marketing strategy in order to insure that it remains competitive in a broader European market and is reviewing whether certain existing contracts will need to be modified. Wind River has assessed the ability of information technology systems to allow for transactions to take place in both the legacy currencies and the Euro and the eventual elimination of the legacy currencies and believes that its information technology systems will not be affected by the transition to the Euro. Wind River does not presently expect that introduction and use of the Euro will materially affect Wind River's foreign exchange exposures and hedging activities or will result in any material increase in costs to Wind River. Wind River's currency risk and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro. Final accounting, tax and governmental, legal and regulatory guidance is not available. Wind River will continue to evaluate issues involving introduction of the Euro. Based on current information and Wind River's current assessment, the Company does not expect that the Euro conversion will have a material adverse effect on its business, financial condition, results of operations, or cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the fair values of those derivatives would be accounted for in current earnings unless specific hedge criteria are met. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. Wind River must formally document, designate, and assess the effectiveness of qualifying hedging transactions. In July 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of SFAS 133 until the first fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of SFAS 133." SFAS 138 amends SFAS 133 to permit limited use of central treasury "offsetting" of net exposures of inter-company derivatives for foreign currency cash flow hedges. The adoption of these standards in the first quarter of fiscal 2002 had no material effect on the Company's financial position, results of operations, or cash flows.

    In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB 25." This Interpretation clarifies: (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. Wind River has adopted the provisions of FIN 44, which has not had a material effect on its financial position, results of operations or cash flows.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

    Wind River's exposure to market risk for changes in interest rates relate primarily to its investment portfolio and long-term debt obligations.

    Wind River places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, Wind River's first priority is to reduce the risk of principal loss. Consequently, Wind River seeks to preserve its invested funds by limiting default risk, market risk and reinvestment risk. Wind River mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

    Wind River believes an immediate 100 basis point move in interest rates affecting Wind River's floating and fixed rate financial instruments as of January 31, 2001 would have an immaterial effect on Wind River's pretax earnings. Wind River also believes the immediate 100 basis point move in interest rates would have an immaterial effect on the fair value of Wind River's fixed income securities.

    In March 1998, Wind River entered into a 5.9% accreting interest rate swap to reduce the impact of changes in interest rates on its floating interest rate operating lease for its new headquarters. At January 31, 2001, the notional amount of the accreting interest rate swap was $28.5 million. The estimated fair value at January 31, 2001 was negligible.

    In January 2001, Wind River entered into a 5.6% interest rate swap to mitigate the impact of interest rate changes on its second floating interest rate operating lease for the additional construction of its headquarters facility. The notional amount of the interest rate swap was $27.9 million. The estimated fair value at January 31, 2001 was negligible.

FOREIGN CURRENCY RISK

    Wind River transacts business in various foreign currencies, primarily in Japanese yen and certain European currencies. Wind River has established a foreign currency-hedging program, utilizing foreign currency exchange contracts for its foreign currency transaction exposures in Japan and certain European countries. Under this program, increases or decreases in Wind River's foreign currency transactions are partially offset by gains and losses on the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. Wind River does not use forward contracts for trading purposes. All outstanding forward contracts at the end of a period are marked-to-market with unrealized gains and losses included in other income, net, and thus are recognized in income in advance of the actual foreign currency cash flows. As these forward contracts mature the realized gains and losses are recorded and are included in net income as a component of other income, net. Wind River's ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. At January 31, 2001, Wind River had outstanding forward contracts to hedge Japanese Yen with notional amounts totaling approximately $2.0 million.

    The unrealized gains and losses on the outstanding forward contracts at January 31, 2001 were immaterial to Wind River's consolidated financial statements. Due to the short-term nature of the forward contracts, the fair value at January 31, 2001 was negligible. The realized gains and losses on these contracts as they matured were not material to the consolidated operations of Wind River in fiscal 2001.

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EQUITY PRICE RISK

    Wind River owns 338,652 shares of common stock of e-Sim, an Israeli corporation. Wind River purchased the common stock prior to e-Sim's public offering. e-Sim went public in July 1998 at $7.50 per share, and at January 31, 2001, the closing price of e-Sim's stock was $2.75 per share. Wind River also owns 208,333 shares of common stock of Liberate, a Delaware corporation. Wind River purchased the stock prior to Liberate's public offering. Liberate went public in July 1999 at $16.00 per share, and at January 31, 2001, the closing price of Liberate's stock was $17.31 per share. In addition, Wind River owns 90,909 shares of common stock of Tvia, a Delaware corporation. Wind River purchased the common stock prior to Tvia's public offering. Tvia went public in August 2000 at $11.00 per share, and at January 31, 2001, the closing price of Tvia's stock was $2.75 per share. Wind River values these investments using the closing price of the stock at the end of each month. As a result, Wind River reflects these investment on its balance sheet at January 31, 2001 at their market value of approximately $4.8 million in aggregate, with net unrealized gains of $600,000 excluded from earnings and reported, net of tax effect, in accumulated other comprehensive income component of stockholders' equity. At April 16, 2001, the closing prices of e-Sim's, Liberate's and Tvia's stock were $1.12, $8.83 and $1.74, respectively. In addition to the publicly traded stock, Wind River owns stock in several privately held companies. Wind River monitors the value of these investments periodically and has not found any material differences to the carrying value of the investments.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

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REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
WIND RIVER SYSTEMS, INC.

    In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Wind River Systems, Inc. and its subsidiaries at January 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule identified in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California
March 1, 2001 except for Note 16 as to which the date is April 17, 2001

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WIND RIVER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

34

WIND RIVER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

35

WIND RIVER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY