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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended January 31, 2004

or

For the transition period from              to             

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

(Address of principal executive offices, including zip code)

(510) 748-4100

(Registrant’s telephone number, including area code)

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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x    No  ¨

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, computed by reference to the closing price on July 31, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $445,571,089. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of April 9, 2004, there were 81,508,830 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III of this Form 10-K is incorporated by reference to the definitive proxy statement for the Registrant’s 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after January 31, 2004.

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WIND RIVER SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

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Unless stated otherwise, references in this report to “Wind River,” “we,” “our,” “us” or “the Company” refer to Wind River Systems, Inc., a Delaware corporation, and its consolidated subsidiaries.

Wind River Systems and the Wind River Systems logo are trademarks of Wind River Systems, Inc. and Wind River, VxWorks, Tornado and Wind are registered trademarks of Wind River Systems, Inc. All other names mentioned are trademarks, registered trademarks or service marks of their respective companies or organizations.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Annual Report on Form 10-K, the words “could,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to our management or to Wind River are intended to identify these forward-looking statements. These forward-looking statements address our expected business, results of operations, future financial position, business strategy, financing plans and capital requirements, forecasted trends relating to our services or the markets in which we operate and similar matters and include statements based on current expectations, estimates, forecasts and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets. This information and such statements are subject to important risks, uncertainties and assumptions, which are difficult to predict. The results or events predicted in these statements may differ materially from actual results or events. Factors that could cause or contribute to such differences include, but are not limited to, the continuing weakness in the economy generally, our ability to align our costs with decreased revenue levels, the impact of competitive products and pricing, the success of our implementation of our new business models and the rate of their adoption, potential slow downs in customer sales, the impact of charges for restructuring and other costs, political and economic conditions in the U.S. and globally, intellectual property disputes, litigation and other factors discussed under the caption “Factors That May Affect Future Results” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

These forward-looking statements speak only as of the date this Annual Report on Form 10-K was filed and of information currently and actually known. We do not intend to update these forward-looking statements to reflect events or circumstances that occur after the filing of this Annual Report on Form 10-K or to reflect the occurrence or effect of anticipated events, except as required by law.

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PART I

ITEM 1.    BUSINESS

Overview

Wind River is a global leader in device software optimization, or DSO. Our software is used to optimize the development and functionality of devices as diverse as digital imaging products, auto braking systems, internet routers, jet fighter control panels and factory automation machines. Our products and professional services are used in multiple markets including aerospace and defense, automotive, digital consumer, industrial, and network infrastructure, and help customers to enhance product performance, standardize designs across projects, reduce research and development costs, and shorten product development cycles.

We simplify our customers’ process of programming for these devices by providing integrated software platforms targeted to specific markets, as well as off-the-shelf device software, programming tools and hardware. Our Wind River Platforms integrate our operating systems software with tools and middleware to meet the requirements of specific industries. Our off-the-shelf software includes operating systems and middleware applications, such as networking and security protocols that offer additional capabilities beyond those in the operating systems. Our software programming tools help customers design, develop and test their own applications for these devices. We also offer a range of hardware reference designs that customers can incorporate into their products or use as a development environment.

To complement our broad range of software products and hardware reference designs, our professional services team provides comprehensive design engineering services and technical support. We also provide training and worldwide maintenance and support for our products.

We market our software products in a variety of ways designed to address the needs of a wide range of customers. The requirements of these customers vary significantly. Customers seeking to design their own target applications entirely may work with Wind River as a component supplier, while those looking to outsource a larger portion of their software development effort may look to Wind River as a strategic partner.

Wind River was incorporated in California in February 1983 and reincorporated in Delaware in April 1993. Our principal executive offices are located at 500 Wind River Way, Alameda, California 94501, and the telephone number at that location is (510) 748-4100. Our internet website is http://www.windriver.com.

Products and Services

Our products and services help customers to create complex device software applications more quickly, more economically, and with less risk than creating such applications using internally developed systems and tools. Our product family is comprised of market specific platforms, development tools, device software components, hardware and professional services.

Industry Background

Device software systems are incorporated into a larger device and are used to control, monitor or assist the operation of that device. As a result, device software systems are designed to provide an immediate, predictable response to an unpredictable sequence of external events. To succeed in today’s increasingly competitive environment, manufacturers using device software systems must bring complex applications for new products to market rapidly and economically. Developing device software applications has evolved from a relatively modest programming task to a complex engineering effort. As more powerful microprocessors have become available and have decreased in price, these device software systems are being used in a wider range of applications and digital appliances and are facilitating the development of entirely new products. Additionally, software with a higher degree of sophistication is required to develop these more complex applications, frequently including an

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integrated platform that provides developers far more features, higher performance and greater productivity than was necessary or feasible for programming prior generations of microprocessors.

Wind River Platforms

The cornerstone of our software products is our suite of Wind River Platforms, which we license using an enterprise license model. Our Wind River Platforms bundle a combination of development tools, an operating system and various protocols and interfaces into market specific platforms. With the enterprise license model, we license these market specific platforms under an annual subscription-based development license and aggregated production licenses. See “—Licensing Models” below for more information about the enterprise license model.

The Wind River Platforms comprise:

The Wind River Platforms include:

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Off-the-Shelf Software, Development Tools, and Hardware

Both VxWorks and our IDE products may be licensed individually, without purchase of a Wind River Platform. We also provide a line of stand-alone development tools that customers can use with their own proprietary systems or with other third-party operating systems.

We provide optional extensions or middleware to our operating systems, which provide additional capabilities to developers, such as networking, connectivity, security protocols and device management. Our middleware products act as an interface between the operating system software and application specific software. Customers can license and incorporate these extensions and middleware into the underlying operating system to provide features required for their specific applications. As applications become more complex, especially for Web-enabled products, prepackaged middleware solutions such as those offered by us have become more widely used to simplify development.

Our product family also includes a range of hardware reference designs and hardware bring-up tools that help customer’s design and implement software solutions. 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, improving product quality and accelerating time-to-market.

Services

To complement our broad range of software and hardware products, we provide comprehensive design services and technical support. These services help customers complete a product specification, design critical drivers, ports or interfaces, and/or provide a complete design for the customer’s product or 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. We offer training through partners who provide a series of formal technical courses designed to teach developers the basics of device software development and how to use of our tools, operating systems and middleware effectively. We also provide worldwide maintenance and support for our products.

Licensing Models

Prior to October 2002, we licensed a majority of our software on a perpetual basis. Under this model, our customers pay an initial license fee together with an annual maintenance fee, which is based on a fixed percentage of the total licensing fees. For device software products, the customer would typically also pay a per-unit, per-project production-license fee based on the number of target applications running our operating system and placed in distribution. The terms of the perpetual license for our software restricted the customer’s use to a specific project, such as a line of printers or digital camera and, as a result, any software licenses or prepaid production license fees can generally only be used on that specific project.

In November 2002, we introduced our Wind River Platforms, which are licensed under an enterprise license model. To date, our enterprise license model includes an annual subscription-based development license and aggregated production licensing, but eliminates the traditional “project” and “site” restrictions. At the end of the subscription period, the customer’s right to use the Wind River Platforms expires unless renewed. Most enterprise licenses (i) have an initial duration of one year, with annual renewals, (ii) include payment terms for the full cost of the annual subscription within 30-60 days after entering into the enterprise license agreement,

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(iii) include a number of service credits for field engineering support and (iv) include production license reporting once a customer makes a commercial release of a device that incorporates our products.

We currently sell our products using both our perpetual licensing and enterprise license models and anticipate that this will continue. However, we expect the proportion of business that is sold under our enterprise license model will continue to increase. We believe that the enterprise license model allows us to:

Under our traditional perpetual license model, we sell our products at the specific project level and are dealing primarily with the engineers leading and making decisions for individual projects. The strategy for our Wind River Platform products is to seek enterprise wide adoption. As a result, the customer’s decision to adopt our products is now more strategic leading to longer sales lead times and ultimately more complex and time consuming negotiations. Our success is therefore dependent upon our ability to first educate our current and potential customers of the value associated with our Wind River Platform products and services and, secondly, our ability to negotiate and close such transactions with these customers on terms which are mutually agreeable.

Due to the introduction of the enterprise licensing model in November 2002, we have experienced a decline in near-term revenue and an increase in deferred revenue. Under the enterprise license model, revenue is recognized ratably over the subscription period. By contrast, our traditional perpetual license requires a majority of license revenue to be recognized in the quarter in which the products are delivered and a much smaller amount relating to the fair value of maintenance being deferred and recognized subsequently over the maintenance period. Therefore, an order for an enterprise license will result in lower current-quarter revenue than an equal-sized order for a perpetual license. We expect customers to continue to transition from perpetual licensing to the enterprise licensing in the coming fiscal year. Depending on the rate at which customers’ transition from our perpetual model to our enterprise license model, our reported revenue may continue to be impacted in the short term.

In February 2004, we announced a new option under our enterprise license model that eliminates per-unit production license fees. This option includes a higher priced per-seat subscription without a separate per-unit production license fee. By expanding our enterprise licensing model, customers can now choose between the “shared success” model that includes production license fees or a pure “per-seat” subscription model without a separate production license fee. We believe that offering a choice of enterprise licensing models will allow our customers to have greater flexibility in meeting their business needs. We expect to offer our customers this new production license-free option commencing in the first quarter of fiscal 2005. We cannot be certain that our customers will prefer and select this option or, if selected, what impact this option will have on our results of operations and financial statements. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—We have recently announced an option for our Wind River Platform customers that eliminates production license fees, which, if adopted by our customers, could adversely impact our revenues.”

Open Source Strategy

Since October 2003, we have made a series of announcements stating our intention to add an open source component to our product strategy. There are two elements to this strategy. First, our next generation, IDE, the Wind River Workbench, will incorporate Eclipse, an open source technology tools framework. We believe this effort will allow us to apply more of our development resources on new technology rather than needing to build a

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basic tool framework. The second part of our strategy is to make our current suite of products and services complement both the Linux operating system as well as our proprietary operating system, VxWorks. This strategy includes offering a range of development tools which can be used with either or both operating systems, expanding our professional services to include support to customers building devices based on Linux, and our partnership with Red Hat, Inc. to develop a platform incorporating Red Hat’s Linux operating system. Pursuant to this strategy, we have joined the Open Source Development Labs, a Linux consortium, the Consumer Electronics Linux Forum, an industry group focused on the advancement of Linux as a platform for consumer electronic devices, as well as the Eclipse Consortium. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—We have recently adopted an open source strategy that may not be successful or may expose us to additional risks.”

Strategic Alliances

We believe that having many strategic relationships with semiconductor manufacturers, board manufacturers, system manufacturers, and our customers is important to our future success in the device systems marketplace. These relationships help us leverage significant investments made to drive innovation and standards across the industry and to better serve our customers’ overall needs. In support of our strategic alliances, we have entered into a number of different partnership agreements. In addition, we offer certain corporate programs, including the Wind River partner program, which is designed to support the development of global alliances and foster a community of third party partners by making it easy for these companies to access our technology, integrate value-added products and jointly market these solutions with us.

We have strategic relationships with many of the major semiconductor companies including ARM Holdings plc, Broadcom Corporation, Hitachi, Inc., IBM Corporation, Intel Corporation, MIPS Technologies, Inc., Motorola, Inc., NEC Corp., Philips Electronics N.V., Texas Instruments Incorporated, Toshiba Corporation and Xilinx, Inc. We have ported our technologies to their semiconductors, allowing us to leverage our partners’ sales channels to give our products broader market exposure. Our gross research and development expenses were offset by $2.8 million, $3.6 million and $4.5 million in fiscal 2004, 2003 and 2002, respectively, in funding from programs with these customers. In addition to our strategic relationships with semiconductor companies, we have entered into joint engineering programs with other key customers. Our gross research and development expenses in fiscal years 2004 and 2003 were offset by $669,000 and $911,000, respectively, in funding from these programs. We did not have any funding from these programs in fiscal 2002.

In February 2004, we announced a partnership with Red Hat, a leading provider of open source solutions, to jointly develop Red Hat Embedded Linux for the DSO market. Red Hat’s Linux will be the foundation of future Linux-based Wind River Platforms and will be integrated with our industry-leading development tools, middleware and services.

Customers

Our 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, defense electronics and aerospace, research, automotive control and telematics, and industrial measurement and control. Our customers consist of end-users, distributors, original equipment manufacturers, system integrators and value-added resellers.

Our top ten customers for fiscal 2004 were: Alcatel, Cisco Systems, Inc., Hewlett-Packard Company, Motorola, Inc., Nortel Networks Corporation, Northrop Grumman Corp., Philips Electronics N.V., Raytheon Company, Siemens AG and The Walt Disney Company. No customer accounted for more than 10% of our revenue in any of the fiscal years ended January 31, 2004, 2003 or 2002.

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Marketing, Sales and Distribution

We market our products and services in North America, Europe (including the Middle East and Africa, “EMEA”), Japan and the Asia Pacific region, primarily through our own direct sales organization, which consists of salespersons, field application engineers and support staff. Our direct sales force presents Wind River and our products for licensing to prospective customers, while application engineers provide technical pre-sales and post-sales support. As of January 31, 2004, we had 153 sales employees located throughout North America, 88 sales employees throughout EMEA, 43 sales employees in Japan and 31 sales employees in the Asia Pacific region. As of January 31, 2004, we had 68 employees in marketing, 110 employees in professional services and 77 employees in customer support.

Revenues from sales to customers outside of North America represented $89.6 million, $103.6 million and $135.8 million, or approximately 44%, 42% and 39% of total revenue, in fiscal 2004, 2003 and 2002, respectively. See Note 15, “Segment and Geographic Information” in the Notes to Consolidated Financial Statements for further information about our international sales. See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—Our significant international business activities subject us to increased costs and economic risks” for further discussion of the risks associated with our international operations generally.

Prices for international customers for our Wind River Platforms are quoted in United States dollars, Euros, United Kingdom Sterling or Japanese Yen and are set globally. Prices for international customers for our perpetual licenses are generally quoted 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 generally invoiced in the currency in which they are quoted. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” for a discussion of the foreign currency fluctuation risks we face.

We have experienced, and expect to continue to experience, seasonality resulting primarily from customer buying patterns and product development cycles. We have generally experienced the strongest demand for our products in the fourth quarter of each fiscal year and the weakest demand in the first quarter of each fiscal year. The continued transition to our enterprise license model may also impact the manner in which seasonality affects quarterly trends in our revenue. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about the impact of our transition to an enterprise license model. See also, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—Numerous factors may cause our total revenues and operating results to fluctuate significantly from period to period. These fluctuations increase the difficulty of financial planning and forecasting and may result in decreases in our available cash and declines in the market price of our stock.”

Competition

The DSO industry is highly competitive. Our primary competition comes from internal research and development departments of companies that develop device systems in-house. In many cases, companies that develop device systems in-house have already made significant investments of time and effort in developing their own internal systems, making acceptance of our products as a replacement more difficult. Additionally, many of these in-house departments may increasingly choose to use open-source software, such as the Linux operating system.

We also compete with independent software vendors, including ENEA OSE Systems AB, Green Hills Software, Inc., Mentor Graphics, Microsoft Corporation and QNX Software Systems, Ltd., as well as a number of other vendors that address one or more segments of the device system design process. We also compete with vendors of Linux-based products such as Metrowerks (a subsidiary of Motorola, Inc.), and MontaVista Software, Inc. Some of the companies that develop device systems in-house and some of these independent software vendors, such as Microsoft Corporation, may have significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than we do.

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We believe that the primary competitive factors in the industry center around the way customers and potential customers manage their process of software development. Key factors driving their approach to software development include managing limited internal resources, controlling costs, minimizing development time and limiting their risks. As a result, the major competitive factors in our industry are reliability, performance, price and customer support. We believe that we compete favorably with respect to each of these factors. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—We face intense competition in the DSO industry, which could decrease demand for our products or cause us to reduce our prices” for a further description of factors that may impact our competitive position.

Product Development and Engineering

We believe that our success will continue to depend primarily on our ability to maintain and enhance our current product line, develop new products, maintain technological competitiveness and meet an ever-expanding range of customer and market requirements. As of January 31, 2004, our product development and engineering group included 344 full-time employees.

During fiscal 2004, 2003 and 2002, product development and engineering expenses were $56.7 million, $74.0 million and $88.7 million, respectively, excluding capitalized software development costs. During the fiscal years ended January 31, 2003 and 2002, we incurred product and development and engineering expenses that qualified for capitalization of $969,000 and $852,000, respectively. There were no costs incurred that qualified for capitalization during fiscal year 2004. See “—Strategic Alliances” above for information on research and development funded by third parties.

Proprietary Rights

Our success is heavily dependent upon our proprietary technology. To protect our proprietary rights, we rely on a combination of patent, copyright, trade secret and trademark laws. As a part of our regular business processes, we generally enter into nondisclosure agreements with employees, consultants, distributors, customers and corporate partners, as appropriate, and thereby limit access to and distribution of our software, documentation and other proprietary information. Furthermore, our licensing agreements provide for protection of our intellectual property both in terms of source code handling and underlying intellectual property ownership of modifications to the Wind River code. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—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.”

Wind River and the Wind River logo are registered trademarks in the United States and other countries worldwide. We have used, registered, and/or applied to register specific trademarks and service marks to distinguish many of our products, technologies and services from those of our competitors in the U.S. and in foreign countries and jurisdictions. We enforce our trademark, service mark and trade name rights in the U.S. and abroad.

We have filed and obtained a number of patents and patent applications in the United States and abroad that relate to various aspects of our products and technology. As of January 31, 2004, we held 20 issued patents in the United States, none of which have expired. The expiration dates of these patents range from 2006 to 2021. While we believe that patent protection of our products is important, any patents obtained may not provide substantial protection or be of commercial benefit to us. It is also possible that their validity will be challenged.

Manufacturing

Our manufacturing operation consists of assembling, packaging and shipping the software products and documentation needed to fulfill each order. Outside vendors provide tape and CD duplication, printing of

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documentation and manufacturing of packaging materials. We also manufacture and assemble our hardware development tools at our factory in Canton, Massachusetts and at certain subcontractor facilities. We do 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.

Employees

As of January 31, 2004, we had 1,078 employees, including 383 in sales and marketing, 187 in professional services and support activities, 344 in product development and engineering and 164 in management, operations, finance and administration. Of these employees, 763 were located in North America and 315 were located outside of North America. None of our employees in North America is represented by a labor union or is subject to a collective bargaining agreement. We have never experienced a work stoppage.

Our employees are vital to our success, and our key management, engineering, sales and other employees are difficult to replace. We generally do not have employment contracts with our key employees or maintain key person life insurance on any of our employees. If we are unable to attract, assimilate, retain or motivate highly qualified technical and sales employees in the future through competitive compensation and employment policies, our ability to develop and introduce competitive new products in a timely manner may suffer.

Executive Officers of the Registrant

The names of our executive officers, their ages as of April 13, 2004 and their positions are shown below:

Mr. Klein has been a director of Wind River since July 2003 and, in January 2004, became the Chairman of the Board, President and Chief Executive Officer of Wind River. Prior to joining Wind River, Mr. Klein was with Mercury Interactive Corporation, a software company focused on business technology optimization, where he served as Chief Operating Officer from January 2000 until December 2003, as a director from July 2000 until December 2003, as President of North American Operations from July 1998 until December 1999, as Vice President of North American Sales from April 1995 to July 1998, and as Western Area Sales Manager from May 1992 to March 1995. From March 1990 to May 1992, Mr. Klein served as Regional Sales Manager for Interactive Development Environments, a CASE tool company. Mr. Klein serves on the board of directors of Tumbleweed Communications Corp., a provider of messaging solutions. Mr. Klein holds a B.S. degree in electrical engineering and biomedical engineering from the University of Southern California.

Mr. Zellner joined Wind River in September 2000 as Vice President of Finance, Chief Financial Officer and Secretary and currently serves as Senior Vice President of Finance and Administration, Chief Financial Officer and Secretary. From 1991 to 2000, Mr. Zellner was at Applied Materials, Inc., a semiconductor equipment manufacturer, 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 an M.B.A and a B.B.A. in accounting from Florida Atlantic University.

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Mr. Bruggeman joined Wind River in February 2004 as Vice President of Worldwide Marketing and Chief Communications Officer. Prior to joining Wind River, Mr. Bruggeman was Vice President of Marketing at Mercury Interactive, a software company focused on business technology optimization, from May 2002 until January 2004. Prior to joining Mercury Interactive, Mr. Bruggerman was Executive Vice President at Alventive, Inc., a provider of web-based collaboration software, from February 1999 to May 2001 and Vice President of Marketing and Business Development at America On-Line, Inc., an internet service provider, from February 1997 to January 1999. Mr. Bruggeman earned a B.S. degree in Statistics and Computer Science from San Jose State University and a M.S. degree in Mathematics from the University of Connecticut.

Mr. Fraser joined Wind River in September 1991 and currently serves as Senior Vice President and Chief Marketing Officer. Mr. Fraser has previously held a number of positions at Wind River, including Group Vice President, Products, Vice President and General Manager of the Networks Business Unit, Vice President of Engineering and Director of Product Development. From 1988 to 1991, he served as a product marketing manager at Unisys Corporation, an information services and technology company. From 1985 to 1988, he was a software engineer at Hewlett-Packard Corporation, a provider of computing and imaging solutions and services, in England. Mr. Fraser holds a B.S. in computing science from Glasgow University, Scotland.

Mr. Galvin joined Wind River in January 2004 as Vice President, Strategy and Corporate Development. Prior to joining Wind River, Mr. Galvin was Managing Director and Global Sector Coordinator for software and services research at JP Morgan Chase, an investment banking firm, from January 2001 to April 2003. Mr. Galvin began his career at Hambrecht & Quist in 1993, became a Managing Director in 1999, and remained at the firm through its merger with Chase Manhattan and then JP Morgan. Mr. Galvin earned a B.A. degree with honors in Comparative and Regional Studies (Latin America) from the University of California, Berkeley.

Mr. Morrison is Vice President of Engineering at Wind River and had previously served as Vice President and General Manager of the transportation, defense and industrial business unit. Mr. Morrison joined Wind River as part of its acquisition of Integrated Systems, Inc. (ISI) in February 2000. Mr. Morrison spent fourteen years with ISI, in various positions where he last served as a Vice President and General Manager of the design automation solutions business unit from March 1999 through February 2000. Mr. Morrison earned his Bachelor of Applied Science degree in Engineering from the University of Toronto, as well as his masters degree at the Massachusetts Institute of Technology, specializing in control systems.

Mr. Wheaton joined Wind River in July 2003 as Vice President of Worldwide Sales and had previously served as Senior Vice President of Sales for Wind River from March 1992 to September 1998. From September 1998 until June 2003, Mr. Wheaton was a private investor. Before joining Wind River in 1992, Mr. Wheaton was employed at ShareBase Corporation, a relational database hardware and software company, first as Vice President of Domestic Sales and then as Vice President of Worldwide Marketing. From 1988 to 1989, he served as the western regional manager of Powersoft Corporation, a computer software company. Mr. Wheaton holds a B.S. degree in automotive engineering from Western Michigan University.

Financial Information About Segments and Geographic Areas

For financial information about segments and geographic areas, see Note 15 “Segment and Geographic Areas,” of the Notes to Consolidated Financial Statements filed as part of this Annual Report.

Available Information

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and

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information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on or through our website at http://www.windriver.com or by contacting the Investor Relations Department at our corporate offices by calling (866) 296-5361. We are not incorporating by reference in this Annual Report on Form 10-K any information from our website.

ITEM 2.    PROPERTIES

We own our corporate headquarters in Alameda, California. The campus provides approximately 273,000 square feet of office space. We also own approximately 150,000 square feet of office space in Sunnyvale, California. We also lease a number of sales, services, customer training, manufacturing, and research and development offices in North America, EMEA, Japan and the Asia Pacific region.

ITEM 3.    LEGAL PROCEEDINGS

Not applicable.

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

At a Special Meeting of Stockholders held on December 19, 2003, we submitted to a vote of the stockholders the following matter: To approve the amendment of Wind River’s 1998 Equity Incentive Plan to (i) increase the aggregate number of shares of our common stock authorized and reserved for option and other stock awards under the 1998 Equity Incentive Plan by 1,900,000 shares and (ii) increase the maximum number of shares of our common stock that may be issued to any employee pursuant to stock options or stock appreciation rights in any calendar year in accordance with Section 162(m) of the Internal Revenue Code. The results of the vote are set forth below:

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PART II

Our common stock is traded on The Nasdaq National Market under the symbol WIND. At April 9, 2004, there were approximately 772 stockholders of record of our common stock. The following table sets forth the low and high sales prices on The Nasdaq National Market for the quarters indicated:

We have not paid cash dividends on our common stock to date. Our loan facility with Wells Fargo Bank prohibits us from declaring or paying any dividend or distribution either in cash, stock or any other property on our common stock without the prior written consent of the lender. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Commitments” for more information on our loan facility. We presently intend to retain all of our earnings for use in our business and, therefore, do not anticipate paying dividends on our common stock within the foreseeable future.

Equity Compensation Plan Information

The following table sets forth information about our common stock that may be issued upon the exercise of options, warrants and rights under our existing equity compensation plans as of January 31, 2004. The table does not include information with respect to shares subject to outstanding options granted under equity compensation plans assumed by Wind River in connection with mergers and acquisitions of the companies that originally granted those options. Footnote (1) to the table sets forth the total number of shares of our common stock issuable upon the exercise of those assumed options as of January 31, 2004, and the weighted average exercise price of those options. No additional options may be granted under those assumed plans.

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The equity compensation plans not approved by security holders generally have the same features as those approved by security holders. For further details regarding Wind River’s equity compensation plans, see Note 12, “Stock-Based Compensation Plans” of Notes to Consolidated Financial Statements filed as part of this Annual Report.

ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data presented below should be read in conjunction with the more detailed Consolidated Financial Statements presented in Item 8 of this Annual Report on Form 10-K. The consolidated financial data for periods prior to the financial statements presented in Item 8 of this Annual Report on Form 10-K are derived from our audited Consolidated Financial Statements not included herein and have been restated to reflect historical financial information of RouterWare, Inc. and Integrated Systems, Inc. through 2000. We acquired RouterWare, Inc. in June 1999 and Integrated Systems, Inc. in February 2000; both acquisitions were accounted for as poolings of interests.

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Executive Operating and Financial Summary

Wind River is a global leader in device software optimization, or DSO. Our software is used to optimize the development and functionality of devices as diverse as digital imaging products, auto braking systems, internet routers, jet fighter control panels and factory automation machines. Our products and professional services are used in multiple markets including aerospace and defense, automotive, digital consumer, industrial, and network infrastructure and help customers to enhance product performance, standardize designs across projects, reduce research and development costs and shorten product development cycles.

How We Earn Our Revenues

Our product revenues are derived from the licensing of our Wind River Platform products, our development tools and real time operating system software, as well as hardware products, which assist our customers with the overall development process of their devices. Our customers use these tools, middleware and our operating system software to develop applications, which are then used in completed devices such as those described above. Generally, we charge our customers a production license fee for every copy of our operating system software that is included in the final manufactured device. Customers can elect to either pre-pay royalties or report their usage on a quarterly basis as they manufacture units. Our services revenues are derived from maintenance services, such as telephone support and provision of updates to our products on a when and if available basis, as well as professional services on both a time and materials and fixed price contract basis. These professional services are designed to assist our customers with the design and development of a completed device or application. We do not provide support or updates and enhancements to the customers’ end products.

Our Licensing Models

Prior to November 2002, we licensed the majority of our software on a perpetual basis. Under this model, our customers pay an initial license fee together with an annual maintenance fee, which was based on a fixed percentage of the total licensing fees. The terms of the perpetual license for our software restricted the customer’s use to a specific project, such as a line of printers or digital camera and, as a result, any software licenses or prepaid production license fees could generally only be used on that specific project. Under this perpetual licensing model, the majority of revenue is recognized in the quarter in which the products are delivered, with a much smaller amount relating to the fair value of maintenance services being deferred and recognized subsequently over the maintenance period.

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In November 2002, we introduced our Wind River Platforms, which we license using an enterprise license model. These platforms bundle a combination of development tools, an operating system and various protocols and interfaces into market specific platforms. Under the enterprise license model, we license these market specific platforms under an annual subscription-based development license and aggregated production licenses, while eliminating our traditional “project” and “site” restrictions. At the end of the subscription period, the customer’s usage rights to the products expire unless renewed. Under the enterprise license model, we recognize the fees paid as revenue ratably over the subscription period. In comparison to our more traditional licensing model, an order for an enterprise license will result in lower current-quarter revenue than an equal-sized order for a perpetual license.

We currently sell our products using both perpetual licensing and enterprise licensing models and anticipate that this will continue. However, we expect the proportion of business that is sold under our enterprise license model will continue to increase. The adoption of our enterprise model has been in line with our expectations and we believe that this model will allow us to increase the number of our customer’s developers using our products and will provide an opportunity to increase other revenues such as professional services revenues.

Since the introduction of our Wind River Platforms in November 2002, we review the combination of revenue and increase in deferred revenue as a measure of the performance of the company. Our deferred revenue has increased from $28.9 million at January 31, 2003 to $39.1 million at January 31, 2004, primarily as a result of the adoption of this new business model.

Recent Changes to Our Business Model

In February 2004, we announced a new option under our enterprise license model that eliminates the per-unit production license fees. Under this option, the annual license fee will be higher, but a customer will not pay per-unit production license fees for distribution of their products which incorporate our software. Production license fees have traditionally been a significant portion of our revenue, representing 29% and 28% of our total revenues in fiscal 2004 and 2003, respectively. We anticipate that offering this option will allow our customers to have greater flexibility in meeting their business needs. We cannot be certain that our customers will prefer and select this option or, if selected, what impact this option will have on our results of operations and financial statements. See “— Factors That May Affect Future Results — We have recently announced an option for our Wind River Platform customers that eliminates production license fees, which, if adopted by our customers, could adversely impacted our revenues.”

Recent Operating Results

Beginning in fiscal 2002 and continuing throughout fiscal 2004, we were significantly impacted by the general economic downturn, which has been especially pronounced in the high-technology sector generally and the networking infrastructure sector in particular. Our customers have cancelled projects or placed them on hold, which has had an impact on our revenues. Our customers have also seen a decline in the demand for their devices, which has impacted our production license revenues. Our total revenues decreased 18% in fiscal 2004 compared to fiscal 2003 and decreased 29% in fiscal 2003, compared to fiscal 2002. Our net loss was $24.6 million, $106.9 million and $375.6 million, or a net loss of $0.31 per share, $1.35 per share and $4.84 per share, in fiscal 2004, 2003 and 2002, respectively. On February 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) and, accordingly, we did not amortize any goodwill in fiscal 2004 or 2003. If we had not amortized goodwill in fiscal 2002, net loss would have been $306.9 million, or $3.96 net loss per share.

The decline in our revenues has led us to take a number of actions to reduce our costs in order to return to profitability. Accordingly, we have implemented a number of restructuring plans to match our costs with our revenues. The overall effect of these restructuring plans has been to reduce our headcount from approximately 2,018 at the beginning of fiscal 2002 to 1,078 at the end of fiscal 2004. This headcount reduction has

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significantly lowered our overall cost structure. We have also reduced our consulting costs, discretionary spending and other general operating costs and have closed or consolidated excess operating facilities. See “—Results of Operations for the Years Ended January 31, 2004, 2003 and 2002—Restructuring and Other Costs.” See also “—Factors that May Affect Future Results.”

Future Considerations

As discussed above, the strategy for our Wind River Platforms is to seek enterprise-wide adoption. Under our traditional perpetual model we sold our products at the specific project level and were dealing primarily with the engineers leading and making decisions for individual projects. As a result, the customer’s decision to adopt our products is now more strategic leading to longer sales lead times and ultimately more complex and time consuming negotiations. Our success is therefore dependent upon our ability to first educate our current and potential customers of the value associated with our Wind River Platforms and secondly our ability to negotiate and close such transactions with these customers on terms which are mutually agreeable.

In addition, the success of the introduction of our Wind River Platforms that includes a per-seat subscription model with no production licenses is dependent upon customer acceptance of this business model and the success that we have in ensuring that the upfront fees will be sufficient to offset the loss of subsequent production license fee revenues. If the additional upfront fees are not sufficient, our revenues and earnings could decline.

As discussed above, we also have experienced a decline in revenues, net losses and operating cash flows in recent years. To ensure our long-term success we need to increase our revenues, return to profitability and generate positive cash flow from operations. For further discussion of the risks associated with these items, see “—Factors that May Affect Future Results” below.

Key Operating Metrics

Members of our senior management regularly review key financial information including net revenues, operating income or loss, earnings or loss per share, changes in deferred revenue, cash flow from operations and free cash. We define free cash as the sum of cash and cash equivalents, short and long-term investments and restricted investments less long-term debt. This information allows us to monitor the profitability of our business and evaluate the effectiveness of investments that we have made in the areas of customer support, product development, marketing and site operations. We believe that an understanding of key financial information and how it changes over time is important to investors, analysts and other parties analyzing our business results and future market opportunities.

Critical Accounting Policies and Estimates

General

Management’s discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which were prepared in accordance with accounting principles generally accepted in the United States, or GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Note 2, “Summary of Significant Accounting Policies” of Notes to the Consolidated Financial Statements describes our significant accounting policies which are reviewed by us on a regular basis and which are also reviewed by senior management with the Audit Committee of our Board of Directors.

An accounting policy is deemed by us to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. The policies and estimates that we believe are

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most critical to an understanding of our financial results and condition and that require a higher degree of judgment and complexity are:

Revenue Recognition

We recognize revenues from three sources: (1) product revenues, (2) service revenues and (3) subscription revenues, net of sales returns and other allowances. Product revenues consist of revenues from production licenses (sometimes referred to as royalties), and fees for stand-alone software and software programming tools sold under our perpetual licensing and for sales of our hardware. Service revenues are derived from fees from professional services, which include design and development fees, software maintenance contracts, and customer training and consulting. Subscription revenues consist of primarily revenues from the licensing under our enterprise licensing model, the Wind River Platforms, which include a combination of product and services, including items such as development tools, an operating system, various protocols and interfaces and maintenance and support services such as installation and training, which are licensed over a limited period of time, typically 12 months. Revenues for fiscal 2003, when we introduced our Wind River Platforms, have been reclassified to conform to the current year presentation. For fiscal years prior to fiscal 2003, subscription revenues have been reported as part of product revenues due to their immateriality. Agreements generally do not allow the right of return or sales price adjustments.

We recognize revenues in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended (“SOP 97-2”), SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition” (“SAB 104”). We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable and vendor-specific objective evidence (“VSOE”) exists for all undelivered elements of the arrangement and collection is determined to be probable. These four criteria are further defined as follows:

Persuasive evidence of an arrangement exists. It is our customary practice to have non-cancelable contracts and a customer purchase order prior to recognizing revenues on an arrangement.

Delivery has occurred. Product revenues for software and hardware are recognized at the time of shipment or upon the delivery of a product master, with standard transfer terms of FOB shipping point. If undelivered products or services exist that are essential to the functionality of the delivered product in an arrangement, delivery is not considered to have occurred. If only non-essential products or services are undelivered and if evidence of fair value of all undelivered elements exists, then revenue is recognized using the residual method. Under the residual method, the recognition of fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

We recognize revenues from time-based and subscription-based licenses ratably over the term of the agreement.

Our enterprise license model agreements require that we deliver unspecified future updates and upgrades within the same product family during the subscription term. Accordingly, fees from our enterprise license agreements are recognized ratably over their term.

Sales to distributors, original equipment manufacturers, system integrators and value-added resellers are recognized either at the time the risks of ownership have transferred or upon receipt of production

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reports related to the sale of product to an end-user, depending on our historical experience with these customers.

Professional service revenues are separately priced, are generally available from a number of suppliers, and are typically not essential to the functionality of our software products. Revenue from these services is recognized separately from the license fee because the arrangements qualify as “service transactions” as defined by SOP 97-2. Generally, revenue from time-and-materials consulting contracts are recognized as services are performed.

Contract accounting is utilized for service revenues from fixed-price contracts and those requiring significant software modification, development or customization. In such instances, the arrangement fee is accounted for in accordance with SOP 81-1, whereby the arrangement fee is recognized, generally using the percentage-of-completion method measured on labor input costs. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known. The complexity of the estimation process and judgments related to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization, changes to specification and testing requirements and collectibility of unbilled receivables.

Service revenues from software maintenance, support and update fees are recognized ratably over the contract period, typically 12 months. Service revenues from training and consulting are recognized when the services are provided.

The vendor’s fee is fixed or determinable. At the time of each transaction, we assess whether the fee associated with a revenue transaction is fixed or determinable based on the payment terms associated with the transaction. For product and subscription revenues, if a significant portion of a fee is due after our standard payment terms, which are generally no greater than 90 days from invoice date, we account for the fee as not being fixed or determinable. In these cases, revenue is recognized as the fees become due.

Collection is probable. We assess probability of collection based on a number of factors, including our past transaction history with the customer and the credit-worthiness of the customer. New customers and certain existing customers are subject to a credit review process that evaluates each customer’s financial position and ultimately its ability to pay according to the original terms of the arrangement. Based on our review process, if it is determined from the outset of an arrangement that collection of the resulting receivable is not probable, then revenue is recognized on a cash-collected basis.

Significant management judgments and estimates are made in connection with the revenues recognized in any accounting period. We must assess whether the fee associated with a revenue transaction is fixed or determinable and whether or not collection is probable and, for fixed-price contracts, make estimates of costs to complete. Material differences could result in the amount and timing of revenues for any period if management were to make different judgments or utilize different estimates.

Estimating sales returns and other allowances, and allowance for doubtful accounts

We record estimated reductions in revenue for potential returns of products by customers and other allowances. As a result, management must make estimates of potential future product returns and other allowances related to current period product revenue. In making such estimates, management analyzes historical returns, current economic trends and changes in customer demand and acceptance of our products. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported revenue could result.

Similarly, management makes estimates of the non-collectibility of accounts receivables, specifically analyzing accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance

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for doubtful accounts. In addition to the identification of individual specific doubtful accounts receivable, we provide allowances for other accounts receivable based on our historical experience. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could result.

Valuation of long-lived assets, including goodwill and purchased intangibles

Goodwill and purchased intangibles. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. These include acquired customer base, workforce, technological know-how, trademarks and goodwill. Intangible assets are amortized over the estimated useful lives ranging from one year to four years on a straight-line basis. Intangible assets acquired subsequent to June 30, 2001 have been accounted for in accordance with the provisions of SFAS No. 141 “Business Combinations” (“SFAS No. 141”) and have been amortized in accordance with the provisions of SFAS No. 142. For all other intangible assets, Wind River adopted the provisions of SFAS 142 on February 1, 2002, which requires that goodwill be no longer amortized, but continue to be evaluated for impairment.

We review goodwill for impairment annually in the second quarter of each fiscal year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS No. 142. We currently operate in one reportable segment, which is also the only reporting unit for the purposes of SFAS No. 142. The primary methods used to determine the fair value of goodwill for impairment purposes were the discounted cash flow and market methods. We typically complete this assessment with the assistance of a third-party consultant.

Impairment of long-lived assets. We evaluate the recoverability of our long-lived assets such as property and equipment and intangible assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.144”). SFAS No. 144 requires the recognition of the impairment of long-lived assets when circumstances indicate an impairment has occurred and in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Accordingly, we evaluate asset recoverability when an event occurs that may impair recoverability of the asset. We determine the recoverability of the carrying amount of each asset by reviewing the following factors: the undiscounted value of expected operating cash flows in relation to its net capital investments, the estimated useful or contractual life of the asset, the contract or product supporting the asset. In the case of purchased intangibles and capitalized software development costs, we periodically review the recoverability of the asset’s value by evaluating its products with respect to technological advances, competitive products and the needs of its customers.

The impairment charge for goodwill, purchased intangibles and other long-lived assets is assessed based upon estimated discounted cash flows over the remaining useful life of the goodwill, purchased intangibles or long-lived assets using an appropriate discount rate that incorporates our cost of capital and the risk profile of the associated investment. The assumptions supporting the cash flows, including the discount rates, are determined using our best estimates as of the date of the impairment review. These estimates are highly subjective and require significant management judgment as these estimates require us to make assumptions regarding future operating results, which are inherently difficult to predict, particularly in the current business environment. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges for these assets not previously recorded. For details about the impairment charges we recorded during fiscal 2004, 2003 and 2002, see “—Results of Operations—Years Ended January 31, 2004, 2003 and 2002—Impairment of Goodwill and Purchased Intangibles” below.

Restructuring charges

In fiscal 2004, 2003 and 2002, restructuring and other charges consist of costs associated with restructuring programs implemented by Wind River. We account for the individual components of our restructuring activities as discussed further below.

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In June 2002, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs To Exit an Activity (Including Certain Costs Associated with a Restructuring)” (“EITF 94-3”), SAB 100 “Restructuring and Impairment Charges” (“SAB 100”) and EITF Issue No. 88-10 “Costs Associated with Lease Modification or Termination” (“EITF 88-10”). We adopted SFAS No. 146 effective January 1, 2003; therefore, our 2004 restructuring activities were accounted for in accordance with SFAS No. 146. The adoption of SFAS No. 146 did not impact our restructuring obligations recognized in connection with our restructuring activities initiated in fiscal 2003 and 2002, as these obligations continue to be accounted for in accordance with EITF 94-3 and EITF 88-10 and other applicable pre-existing guidance.

The following is a summary of the accounting principles used to record and measure our 2004, 2003 and 2002 restructuring activities and associated obligations:

2004 Restructuring. The expenses incurred in connection with our 2004 restructuring are comprised entirely of severance and associated employee termination costs related to the reduction of our workforce, which have been accounted for primarily in accordance with SFAS No. 146. SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to when management commits to an exit plan. SFAS No. 146 also requires that: (i) liabilities associated with exit and disposal activities be measured at fair value; and (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period.

A small portion of our restructuring costs for fiscal 2004 have been accounted for in accordance with SFAS No. 112 “Employers’ Accounting for Postemployment Benefits, an Amendment of FASB Statements No. 5 and 43, (“SFAS No. 112”). We have applied SFAS No. 112 to a small number of international employees where we have historically provided substantially the same termination benefits based on local statutory regulations. Accordingly, we record the liability related to these termination costs when we determine that they are both probable and estimable, which is generally when: (i) we approve a termination plan that commits us to such plan and establishes the benefits the employees will receive upon termination; (ii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iii) the period of time to implement the plan does not indicate changes to the plan are likely.

2003 and 2002 Restructuring. Restructuring obligations incurred prior to the adoption of SFAS No. 146 in fiscal 2003 and 2002 were accounted for and continue to be accounted for in accordance with EITF 94-3, SAB 100 and EITF 88-10. The expenses incurred in connection with our 2003 and 2002 restructurings are comprised primarily of: (i) severance and associated employee termination costs related to the reduction of our workforce; (ii) consolidation of excess facilities; and (iii) impairment costs associated with certain other assets. We accounted for the individual components of the 2003 and 2002 restructurings as follows:

Severance and associated employee termination costs. In accordance with EITF 94-3 and SAB 100, we recorded the liability related to these termination costs when the following conditions had been met: (i) management with the appropriate level of authority approves a termination plan that commits us to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by us are not associated with, nor do they benefit, continuing activities.

Consolidation of excess facilities. We accounted for the costs associated with the consolidation of excess facilities in accordance with EITF 88-10 and, accordingly, we recorded the costs associated with excess facilities when the related leased property had no substantive future use or benefit to us. Our estimated

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excess facility costs represent the remaining lease payments and estimated costs less estimated proceeds from subleasing certain facilities. The estimated proceeds from subleasing these facilities are based on current comparable rates for leases in the respective markets.

Impairment costs associated with certain other assets. During fiscal 2003, we recorded a charge of $3.5 million related to certain other assets, primarily assets associated with certain products that management decided to discontinue as a result of our restructuring programs.

Inherent in the estimation of the costs related to our restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. In determining our restructuring charges, the majority of estimates made by management related to our charges for excess facilities. In determining the charge for excess facilities, we were required to estimate future sublease income, negotiated lease settlement costs, future net operating expenses of the facilities, and brokerage commissions, among other expenses. These estimates, along with other estimates made by management in connection with our restructuring, may vary significantly depending, in part, on factors that may be beyond our control. Specifically, these estimates will depend on our success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to our reserve for the consolidation of excess facilities will be required if actual lease exit costs or sublease income differ from amounts currently expected. We review the status of our restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations as part of operating expenses based on management’s most current estimates.

Accounting for Income Taxes

Significant management judgment is required in determining our provision for income taxes, income tax liabilities, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. Judgment is applied to estimate taxable income by jurisdiction and our ability to utilize any unexpired credits and/or net operating losses. We are subject to income tax audits in all of the jurisdictions in which we operate and, as a result, must also assess exposures to any potential issues arising from current or future audits of current and prior years tax returns. Accordingly, we must assess such potential exposure and, where necessary, provide a reserve to cover any expected loss. To the extent that we establish a reserve, our provision for income taxes would be increased. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

We have recorded a valuation allowance due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. Should we determine that we would be able to realize our deferred tax asset in the foreseeable future, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Results of Operations for the Years Ended January 31, 2004, 2003 and 2002

Revenues

We recognize revenues from three sources: (1) product revenues, (2) service revenues and (3) subscription revenues, net of sales returns and other allowances. Product revenues consist of revenues from production licenses (sometimes referred to as royalties), and fees for stand-alone software and software programming tools sold under our perpetual licensing and for sales of our hardware. Service revenues are derived from fees from professional services, which include design and development fees, software maintenance contracts, and customer training and consulting. Subscription revenues consist of revenues from the licensing under our enterprise licensing model, of our Wind River Platforms, which include a combination of product and services, including items such as development tools, an operating system, various protocols and interfaces and maintenance and

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support services such as installation and training, which are licensed over a limited period of time, typically 12 months. Revenues for fiscal 2003, when we introduced our Wind River Platforms, have been reclassified to conform to the current year presentation. For fiscal years prior to fiscal 2003, subscription revenues have been reported as part of product revenues due to their immateriality. We accrue for sales returns and allowances based on our historical experience.

Total revenues decreased 18% in fiscal 2004 compared to fiscal 2003 and decreased 29% in fiscal 2003 compared to 2002.

The general decline in our revenues over the last few years is primarily due to lower customer demand for hardware and software products, including revenues from production licenses, which are generally tied to the number of devices deployed by our customers. This lower customer demand is mainly a result of the continuing economic downturn in the high-technology sector, which started during fiscal 2002 and has continued through fiscal 2004. This downturn has affected us both directly, by decreasing our sales, and indirectly, because our products are incorporated into our customers’ products, and as our customers’ sales decline, our production license revenues have declined as well. The general economic downturn has also impacted our service revenues as the lower demand for hardware and software has reduced our customers’ maintenance requirements and decreased the number of projects our customers are undertaking that use our professional services.

Our product and service revenues have also been affected as the result of the transition of some of our customers to our Wind River Platforms. Fees from the Wind River Platforms are recorded as subscription revenue ratably over the license term, which is typically one year. In contrast under our perpetual model, a significant percentage of the transaction fee is recognized in the quarter the transaction is completed. While this has impacted, and will continue to impact, our revenues in the short term as customers transition to the Wind River Platforms, our deferred revenues have increased to $39.1 million at January 31, 2004 from $28.9 million at January 31, 2003, primarily as a result of the transition of business to our Wind River Platforms.

Product Revenues

Product revenues for our products sold under perpetual licenses are comprised of two components: upfront software licensing revenue and production license revenue. The table below sets forth information for such components.

Software licenses declined 37% in fiscal 2004 compared to fiscal 2003 and declined 42% in fiscal 2003 compared to fiscal 2002. Production license revenues declined 15% in fiscal 2004 compared to fiscal 2003 and

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declined 14% in fiscal 2003 compared to fiscal 2002. Software licenses have decreased as a percentage of revenue in fiscal 2004 compared to fiscal 2003 due to the transition to our Wind River Platforms, which are accounted for as subscription revenues.

During the last three fiscal years, some of our customers, notably those in the networking and communications sectors, have (i) decreased research and development budgets, (ii) sought to increase the value they receive from vendors, including us, (iii) attempted to leverage a more competitive bidding process when spending research and development budgets, and/or (iv) deferred or canceled projects, in whole or in part. As a result of these factors, we believe that some of our customers have undertaken development in-house, selected solutions they perceive to be less expensive or have relied on existing licenses rather than purchasing new products from us. Also the increase in the use of open source software, which is royalty free, has provided our customers with an additional option for selecting development tools, which may be more appealing than our existing royalty-bearing products.

Subscription Revenues. Subscription revenues were $19.1 million in fiscal 2004 compared to $2.6 million in fiscal 2003. Due to their immateriality, subscription revenues in fiscal 2002 were reported as part of product revenues. Fiscal 2004 was the first full fiscal year in which we sold our Wind River Platform products under the enterprise license model. Thus, the significant increase in subscription revenues in fiscal 2004 compared to fiscal 2003 resulted from the transition of a number of our customers from our traditional perpetual licensing model to our enterprise license model. We expect that subscription revenues will increase both in absolute dollars and as a percentage of revenue in the future. In the short term, the transition of customers to enterprise license model will affect the level of our overall revenues because we recognize fees under the this business model ratably as opposed to our perpetual model where a significant proportion of the fee is recognized at the time the transaction is completed.

Service Revenues

Maintenance revenues declined 12% in fiscal 2004 compared to fiscal 2003, and declined 20% in fiscal 2003 compared to fiscal 2002. We expect maintenance revenues will continue to decline as our customers’ transition to our Wind River Platforms, which includes maintenance as a part of the subscription fee. Other service revenues declined 32% in fiscal 2004 compared to fiscal 2003 and declined 31% in fiscal 2003 compared to fiscal 2002. In addition to the impact from the general economic environment, other service revenues were also impacted in fiscal 2004 due to a disruption in services backlog arising from a reorganization of our sales force. During fiscal year 2004, we generated $8.0 million in revenue from fixed-price services contracts accounted for under the percentage-of-completion method of accounting.

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Revenues by Geography

Revenues from international sales decreased by 14% to $89.6 million in fiscal 2004 from $103.6 million in fiscal 2003 and by 24% in fiscal 2003 from $135.8 million in fiscal 2002. The overall decreases were due to a 16% and 21% decrease in revenues from Europe, the Middle East and Africa, or “EMEA”, a 4% and 24% decrease in revenues from Japan, and a 20% and 30% decrease in revenues from Asia Pacific, between fiscal 2004 and 2003 and fiscal 2003 and 2002, respectively. The decrease in international revenues over these periods resulted primarily from the same macroeconomic factors that have impacted our business in North America and have caused our customers to reduce their research and development spending and purchase fewer of our products and services. Additionally, many of our customers are large multinational corporations that have reduced capital spending across all geographic regions. Our international revenues have also been affected as the result of the transition of some of our customers to our Wind River Platforms, in which revenue is recognized ratably as opposed to being recognized immediately under our perpetual license model. International revenues accounted for 44%, 42% and 39% of total revenues in fiscal 2004, 2003 and 2002, respectively. We expect international sales to continue to represent a significant portion of our revenues, although the actual percentage may fluctuate from period to period. Our international sales are generally denominated in local currencies.

The economic downturn experienced in the past three years, together with the continued uncertainties surrounding the timing and strength of an economic recovery, continues to make forecasting and financial and strategic planning difficult for us. The adverse impact of the downturn on the capital markets and any uncertainty surrounding the timing and strength of any recovery could impair our ability to raise capital as needed and impede our ability to expand our business. In addition, as discussed earlier, our continued success is dependant upon our ability to successfully transition customers to our Wind River Platforms and to generate sufficient revenues from our production license-free business model to offset any resultant reduction in production license revenues. For further discussion about factors affecting our revenues see “—Factors That May Affect Future Results” below.

Cost of Revenues

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The general decline in overall costs of products and services was due to lower fixed costs such as employee costs, consulting cost and manufacturing and distribution costs arising from our restructuring activities during fiscal 2004, 2003 and 2002 and also due to a reduction in third-party royalty costs as sales volume declined over the last few years. Also cost of product and cost of services have decreased in absolute dollars in fiscal 2004 compared to fiscal 2003, due to the transition to our Wind River Platforms, which are accounted for as cost of subscription.

Cost of Product. Cost of products decreased by 48%, or $8.8 million, in fiscal 2004 compared to fiscal 2003 and by 29%, or $7.6 million, in fiscal 2003 compared to fiscal 2002. Product-related costs consist primarily of salaries and benefits for production employees, other direct production costs, amortization of capitalized software development costs, royalty payments to third parties for the use of their software, and shipping costs. The decline in product-related costs in absolute dollars in fiscal 2004, 2003 and 2002 was primarily due to lower direct production costs as well as lower third-party royalty costs. Direct production costs were $5.8 million, $11.0 million and $13.2 million in fiscal 2004, 2003 and 2002, respectively. Amortization of capitalized software development costs in fiscal 2004, 2003 and 2002 amounted to $381,000, $952,000 and $1.5 million, respectively; and third-party royalty costs for fiscal 2004, 2003 and 2002 were $3.0 million, $5.7 million and $9.9 million, respectively. The decline in product-related costs as a percentage of product revenues in fiscal 2004 compared to fiscal 2003 and 2002 was related to the decline in direct production costs as a percentage of revenues resulting from our restructuring activities undertaken in fiscal 2003 and 2004. Product-related cost of revenues may be affected in the future by the amortization of capitalized software development costs, costs of distribution related to the introduction of new products and by royalty costs for use of third-party software in our products.

Cost of Subscription. Subscription-related costs of revenues consists primarily of subscription-related costs, including salaries and benefits for production employees, other direct production costs, amortization of capitalized software development costs, royalty payments to third parties for the use of their software, shipping costs and costs of providing subscription-related maintenance and support services. The increase in absolute dollars in subscription costs in fiscal 2004 as compared to fiscal 2003 was due to fiscal 2004 being the first full year in which we sold our Wind River Platforms under the enterprise license model. Prior to fiscal 2003, subscription-related costs of revenues were reported primarily as costs of product revenue and service revenue. The increase in cost of subscription revenues as a percentage of subscription revenues in fiscal 2004 was due to the fact that our Wind River Platforms include a higher mixture of services costs which traditionally carry a proportionally lower gross margin. Subscription-related production costs were $1.4 million and $211,000 during fiscal 2004 and 2003, respectively. Subscription-related maintenance and support services costs were $3.4 million and $163,000 during fiscal 2004 and 2003, respectively. Amortization of capitalized software developments costs for fiscal 2004 and 2003 were $179,000 and $36,000, respectively, and third party royalty costs were $331,000 for fiscal 2004. We expect costs of subscriptions to continue to fluctuate as a percentage of subscription revenue based on the level of sales of our Wind River Platforms and the transition of existing customers from our perpetual based licensing to the enterprise license model. Cost of subscriptions may be affected in the future by the direct production costs, amortization of capitalized software development costs, costs of distribution, royalty costs for use of third party software in our products, and the costs of providing subscription-related maintenance and support services.

Cost of Services. Cost of services decreased by 28%, or $14.4 million, in fiscal 2004 compared to fiscal 2003 and by 17%, or $10.1 million, in fiscal 2003 compared to fiscal 2002. Service-related cost of revenues consist primarily of personnel related costs associated with providing services, including consulting services, to customers and the infrastructure to manage a services organization, as well as costs to recruit, develop and retain services professionals. The decrease in absolute dollars of service costs in fiscal 2004 compared to fiscal 2003 and in fiscal 2003 compared to fiscal 2002, was primarily due to reduced use of outside consultants and a reduction of full-time employees as part of the restructuring programs implemented in fiscal 2003 and 2002. We realized overall cost reductions of $9.6 million and $4.7 million in professional service costs relating primarily to internal payroll and external contractor costs, $2.7 million and $2.0 million in training costs, and $2.1 million and

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$2.4 million in maintenance costs in fiscal 2004 compared to fiscal 2003 and in fiscal 2003 compared to fiscal 2002, respectively. In addition, cost of service revenues decreased as a percentage of services revenue in fiscal 2004 compared to fiscal 2003 and 2002 due in part to the transition to our Wind River Platforms which are accounted for as costs of subscriptions. We expect cost of services to continue to fluctuate as a percentage of service revenue based on our ability to fully utilize our professional services organization.

Amortization of Purchased Intangibles. Amortization of purchased intangibles relates to amortization of completed technology acquired through purchase transactions. The decrease in amortization in fiscal 2004 compared to fiscal 2003 and in fiscal 2003 compared to fiscal 2002 was due to a lower amortizable base of purchased intangible assets. At January 31, 2004, the net book value of completed technology was $2.0 million, which is expected to be fully amortized in fiscal 2005.

During the year ended January 31, 2004, we reclassified from operating expenses to cost of revenue the amortization of purchased intangibles for the years ended January 31, 2004, 2003 and 2002. The reclassification did not change total net revenues, net loss or net loss per share.

Operating Expenses

The general decline in selling and marketing, product development and engineering and general and administrative costs as shown below, was due in a large part to the restructuring programs we implemented during fiscal 2004, 2003 and 2002, which led to decreased overall costs, primarily payroll related expenses, consulting expenses, general operating expenses, such as travel costs and reduced depreciation expenses arising from reduced capital expenditures.

Selling and Marketing. Selling and marketing expenses consist primarily of advertising and other marketing related expenses, compensation related expenses, sales commissions and travel costs.

The decrease in absolute dollars of selling and marketing expenses in fiscal 2004 compared to fiscal 2003 and from fiscal 2003 to fiscal 2002 was attributable to lower sales commission expenses as a result of decreased sales volume in each consecutive fiscal year and from decreased expenditures as a result of the restructuring programs implemented during fiscal 2003 and 2002. Sales commission costs decreased by $6.6 million in fiscal 2004 compared to fiscal 2003 and by $6.5 million in fiscal 2003 compared to fiscal 2002. Salaries and related fringe costs decreased by $10.2 million, travel expenses decreased by $2.9 million, consulting expenses decreased by $2.3 million and rent and utilities decreased by $2.9 million, in fiscal 2004 compared to fiscal 2003. In addition, depreciation expense decreased by $4.2 million due to a lower depreciable base of our short-lived fixed assets in fiscal 2004 compared to fiscal 2003. Salaries and related fringe costs decreased by $11.1 million, travel expenses decreased by $2.7 million, trade show expenses decreased by $2.0 million and rent and utilities decreased by $1.9 million, in fiscal 2003 compared to fiscal 2002. In addition, bad debt expense decreased by $3.4 million in fiscal 2003 compared to fiscal 2002. The higher level of bad debt expense in fiscal 2002 was primarily due to an increase in our exposure from customers who filed for bankruptcy during that year. Although selling and marketing expenses decreased in absolute dollars in fiscal 2003 compared to fiscal 2002, these expenses as a percentage of revenue increased because expenses declined at a lower rate than revenues. We believe selling and marketing expenses in absolute dollars will not increase significantly in the short-term. However, we do expect an increase in absolute dollars in the long-term, as we continue to focus on long-term growth in the areas of sales and marketing personnel and marketing and advertising programs.

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Product Development and Engineering Expenses. Product development and engineering expenses consist primarily of payroll related expenses, facility costs and consulting fees for our product research and development organization.

The decrease in absolute dollars of product development and engineering expenses in fiscal 2004 compared to fiscal 2003 and fiscal 2003 to fiscal 2002 was primarily due to cost-control measures relating to our restructuring programs implemented in fiscal 2003 and 2002. Salaries and fringe costs decreased by $11.6 million in fiscal 2004 compared to fiscal 2003 and by $7.3 million in fiscal 2003 compared to fiscal 2002. In addition, depreciation expense decreased $2.1 million in fiscal 2004 compared to fiscal 2003 due to a lower depreciable base of our short-lived fixed assets. Although product development and engineering expenses decreased in absolute dollars in fiscal 2003 compared to fiscal 2002, these expenses as a percentage of revenue increased because expenses declined at a lower rate than revenues. We also received $3.5 million in fiscal 2004, and $4.5 million in both fiscal 2003 and 2002, respectively, of third party funded research and development which offset a portion of our gross research and development expenses. We expect the dollars received for funded research and development accounted for as an offset to gross research and development expenses to be reduced significantly in the long-term due to our winding down of these programs. We believe that product development and engineering expenses in absolute dollars will not increase significantly in the short-term. However, we do expect an increase in absolute dollars, in the long-term, as we continue to focus on long-term growth in the areas of research and development.

General and Administrative Expenses. General and administrative expenses consist primarily of compensation related expenses, facilities related expenses and external fees for professional services, such as legal and accounting.

The decrease in absolute dollars of general and administrative expenses in fiscal 2004 compared to fiscal 2003 and fiscal 2003 to fiscal 2002 was primarily due to cost-control measures relating to our restructuring programs implemented in fiscal 2004, 2003 and 2002. Due to these restructuring plans, we realized $4.3 million in payroll-related cost reductions in fiscal 2004 compared to fiscal 2003 and $2.0 million in fiscal 2003 compared to fiscal 2002. Our legal and accounting costs were $2.9 million less in fiscal 2004 compared to fiscal 2003, primarily as a result of lower legal costs resulting from our restructuring plans, and from having incurred $800,000 of legal costs in fiscal 2003 relating to an employee litigation matter. Travel costs also decreased by $2.2 million in fiscal 2003 compared to fiscal 2002. The decrease in costs in fiscal 2004 was offset by $1.4 million in stock compensation charges associated with the separation of our former Chief Executive Officer, Thomas St. Dennis. We believe that general and administrative expenses will not increase significantly in the short term. However, we do expect an increase in absolute dollars in the long-term, as we invest in worldwide staff and infrastructure in the areas of information systems and finance and administration.

We allocate the total costs for information technology, facilities and fixed asset depreciation to each of the functional areas based on certain headcount data. Information technology allocated costs include salaries, information technology, project costs, communication costs and depreciation expense for fixed assets. Facilities allocated costs include facility rent for the corporate offices as well as shared function offices, property taxes,

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depreciation expenses for office furniture and other department operating costs. Fixed asset depreciation allocated costs includes straight-line depreciation expense on buildings, leasehold improvements, computer equipment, software, furniture and office equipment.

Amortization of Goodwill and Other Intangibles

The decrease in amortization in fiscal 2004 compared to 2003 was due to a lower amortizable base of other intangible assets. The decrease in amortization in fiscal 2003 compared to fiscal 2002 primarily related to the adoption of SFAS No. 142 on February 1, 2002. SFAS No. 142 required that effective for our fiscal 2003, goodwill no longer be amortized, but continue to be evaluated for impairment. During the year ended January 31, 2002, we recorded amortization of goodwill of $65.6 million and amortized $3.1 million of acquired workforce previously classified as purchased intangible assets, under the accounting rules applicable to that period. At January 31, 2004, the net book value of other intangibles was $233,000, which is expected to be fully amortized in fiscal 2005.

Acquisition-Related Reversals. Acquisition-related reversals totaled $367,000, $406,000 and $761,000 in fiscal 2004, 2003 and 2002, respectively. The acquisition-related reversals in fiscal 2004 related to the reversal of fees associated with the consolidation of duplicate international subsidiaries and the reversals in 2003 and 2002 related primarily to leasehold properties from our merger with Integrated Systems. We were able to sublease some properties for longer than we had anticipated and were able to exit other leasehold properties earlier than originally estimated. The reversal in fiscal 2002 was offset in part by $350,000 of in-process research and development write-off associated with an acquisition.

Impairment of Goodwill and Purchased Intangibles

During the second quarters of fiscal 2004, 2003 and 2002 and during the fourth quarters of fiscal 2003 and 2002, we identified possible impairments of goodwill and certain purchased technologies relating to previous acquisitions. The impairments were based on a change in the long-term strategic plan for these purchased technologies following a deterioration in the business climate and changes in sales and cash flow forecasts.

In anticipation of continued customer spending and as part of our strategic plans, we acquired businesses to complement and extend our product offerings. Since these acquisitions were made, many companies in the high technology and software industries had experienced significant decreases in capital funding and customer spending and, as a result, had curtailed research and development activities. Therefore, revenues associated with these businesses did not meet the original expectations at the time of acquisition.

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Accordingly, we compared the undiscounted cash flows associated with such acquired business and long-lived assets with the respective carrying amounts and determined that an impairment of certain of these assets existed. As a result, we recorded aggregate charges of $1.4 million, $4.3 million and $257.4 million during fiscal 2004, 2003 and 2002, respectively. The entire charge for both fiscal 2004 and 2003 related to the impairment of purchased intangible assets; $1.4 million of the charge for fiscal 2002 related to the impairment of purchased intangible assets and $256.0 million of the charge for fiscal 2002 related to the impairment of goodwill. The impaired amount was measured as the amount by which the carrying amount exceeded the present value of the estimated future cash flows for the businesses acquired from which goodwill and purchased intangibles arose as follows:

The impairment review of these assets was determined based upon the estimated discounted cash flows over the remaining useful life of the goodwill and purchased intangibles, using discount rates ranging from 17% to 30% for fiscal 2003 and 17% to 23% for fiscal 2002. No discount rate was applied in fiscal 2004 due to the short-term nature of remaining cash flows. The assumptions supporting the cash flows, including the discount rates, were determined using our best estimate as of the date of the impairment review. The impairment charge for those assets held for disposal was determined based on the expected proceeds of disposition. As of January 31, 2004 and 2003, we had net book values of goodwill of $84.4 million and $84.3 million, respectively, and net book values of purchased intangibles of $2.2 million and $10.1 million, respectively. All identifiable intangible assets, other than goodwill, will continue to be amortized in accordance with SFAS No. 142. See Note 3, “Impairment of Goodwill and Purchased Intangibles” in Notes to the Consolidated Financial Statements.

Restructuring and Other Costs. Restructuring and other costs consist of costs associated with restructuring programs, a settlement with our former chief executive officer and with the settlement of litigation and related remediation efforts.

Restructuring Charges. We recorded net restructuring charges of $2.2 million, $32.7 million and $21.7 million in fiscal 2004, 2003 and 2002, respectively, which in each case were classified as operating expenses.

In response to market conditions and the decline in our revenues, in fiscal 2004, 2003 and 2002, we implemented restructuring plans that were designed to align our anticipated revenues more closely with our cost structure. Our restructuring plans have been based on certain assumptions regarding the cost structure of our business and the nature and severity of the current industry adjustment and general economic trends, and involved the implementation of a number of initiatives, including headcount reductions, facilities closures, and other cost-control measures such as employing a program of office closure days and reducing discretionary spending on items such as consulting and travel. As a result of the headcount reductions, we eliminated an aggregate of 70 employee positions in fiscal 2004, 591 employee positions in fiscal 2003 and 475 employee positions in fiscal 2002, which collectively represented approximately one-half of our employee base as of the beginning of fiscal 2002. Our restructuring programs for fiscal 2003 and 2002 were initiated prior to our adoption

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of SFAS No. 146 and have been accounted for in accordance with the provisions of SAB 100, EITF 94-3 and EITF 88-10. Our restructuring programs for fiscal 2004 have been accounted for in accordance with SFAS No. 146 and SFAS No. 112. For a further discussion of factors that may affect the success of the restructuring program, see “—Factors That May Affect Future Results—Our restructuring plans may not enable us to achieve profitability in a difficult economic environment or achieve our business objectives.”

As of January 31, 2004, our total restructuring liabilities related to our restructuring plans for fiscal 2004 and 2003 were approximately $2.9 million and there were no remaining restructuring liabilities related to our restructuring plans for fiscal 2002. The following table summarizes our restructuring liabilities as of January 31, 2004, 2003 and 2002:

The worldwide workforce reductions implemented during fiscal 2002 were fully completed in fiscal 2003 and the workforce reductions implemented during fiscal 2003 were substantially completed during the first half of fiscal 2004. The workforce reductions implemented in fiscal 2004 will be substantially completed by the end of the third quarter of fiscal 2005. Each workforce reduction affected all business functions, including sales and marketing, professional services, product development and engineering, and finance and administration and impacted employees from our operations in North America, EMEA and Japan. In addition, we reduced the number of contractors and temporary workers used by us as a result of the fiscal 2003 and 2002 restructuring programs. We recorded net workforce reduction charges of approximately $2.2 million, $25.7 million and $20.1 million in fiscal 2004, 2003 and 2002 respectively, relating primarily to severance payments and the continuation of benefits. Equipment disposed of or removed from operations as a result of the workforce reduction resulted in non-cash charges of $206,000 in fiscal 2003 and $765,000 in fiscal 2002 and consisted primarily of computer equipment.

We recorded a net restructuring charge of $3.5 million and $1.5 million during fiscal 2003 and 2002, respectively, relating to the consolidation of certain excess facilities primarily in the United States, Japan and Europe. The consolidation of excess facilities includes the closure of certain leased corporate facilities and sales offices that related to business activities that were restructured. The estimated excess facility costs represent the

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remaining lease payments and estimated costs less estimated proceeds from sub-leasing certain facilities. The estimated proceeds from sub-leasing these facilities are based on current comparable rates for leases in the respective markets. If rental rates for our leased facilities continue to decrease in these markets or it takes longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate. Cash and non-cash charges relate primarily to lease terminations, non-cancelable lease costs and impairment of leasehold improvements related to the excess facilities. In the fourth quarter of fiscal 2002, we recorded a reversal of $6.9 million against the original $8.4 million charge recorded in the second quarter of fiscal 2002 after we determined that it would be more efficient and cost-effective if certain of the excess facilities originally provided for continued to be used by Wind River personnel. The decision to maintain such facilities was based on changes in the local business environment and lack of competitive leasing rates for new sites. As a result, we recorded a net charge for excess facilities of $1.5 million for fiscal 2002, which primarily related to excess facilities located in the United States. As of January 31, 2003, there were no remaining liabilities relating to excess facilities provided for during the fiscal 2002 restructuring. Amounts accrued due to the consolidation of excess facilities as a result of the fiscal 2003 restructuring programs will be paid through fiscal 2007, unless we successfully negotiate to exit the leases at an earlier date.

During fiscal 2003, we recorded a restructuring charge of $3.5 million for other items primarily relating to research and development activities that management decided to discontinue as a result of our restructuring activities.

Other Charges. During fiscal 2004, we recorded a charge of $766,000 associated with a settlement with our former Chief Executive Officer, Thomas St. Dennis. The charge primarily related to compensation for tax liabilities arising from the settlement of a shareholder loan that Mr. St. Dennis held with us. See Note 7, “Management Changes” in Notes to the Consolidated Financial Statements.

During fiscal 2003, we recorded a charge of $3.7 million relating to the settlement of litigation with a third party and related remediation efforts.

Other Income (Expense)

Interest Income. Interest income declined by 29% in fiscal 2004 compared to fiscal 2003 and declined by 24% in fiscal 2003 compared to fiscal 2002. The decrease in interest income was primarily due to lower invested balances, lower interest earned on our investments as a result of lower interest rates and higher amortization expense related to our fixed-income securities. Total cash and cash equivalents, investments and restricted investments at the end of fiscal 2004 and 2003 were approximately $260.8 million and $284.9 million, respectively.

Interest Expense. Interest expense increased by 5% in fiscal 2004 compared to fiscal 2003 and declined by 9% in fiscal 2003 compared to fiscal 2002. We pay interest on our outstanding 3.75% convertible subordinated notes semi-annually and record the amortization of certain issuance costs associated with these notes as other expense. Additionally, since the first quarter of fiscal 2004, we have incurred interest of approximately $184,000 each quarter on our loan facility with Wells Fargo, which was the primary cause of the increase in interest

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expense in fiscal 2004 compared to fiscal 2003. Interest expense declined in fiscal 2003 compared to fiscal 2002 due to the fact that during fiscal 2002 we repurchased and redeemed our convertible subordinated notes which carried a 5% interest rate and replaced them with our current convertible subordinated notes which carry a 3.75% interest rate. See “—Liquidity and Capital Resources” below for further discussion of our convertible subordinated notes and our loan facility.

Other Income (Expense), Net. During fiscal 2004, other income consisted mainly of gains on the sale of investments and technology of $1.0 million. During fiscal 2003, other expense reflected our write-down of certain public and private investments of approximately $4.5 million, costs associated with the termination of our interest rate swap liabilities, which totaled $3.9 million, and a write-down of a receivable and escrow account relating to the disposition of a previously acquired business, which totaled $1.3 million. During fiscal 2002, the net expense was primarily due to the write-down of certain private and publicly traded investments of $11.3 million and a loss on the disposition of a previously acquired business of $1.3 million, offset in part by a realized gain of $1.4 million related to the disposition of the remaining shares of Liberate Technologies, Inc. As a result of the write-downs during fiscal 2003 and 2002, we have no remaining investment book value on our balance sheet relating to private companies as of January 31, 2004 or 2003.

Provision For Income Taxes

Despite incurring net losses in fiscal 2004, 2003 and 2002, we had a tax provision of $2.4 million, $2.0 million and $1.8 million and an effective tax rate of 10.8%, 1.9% and 0.5% in fiscal 2004, 2003 and 2002, respectively. This represents our estimated liability for state and foreign income taxes as well as foreign withholding taxes incurred during the year. In each fiscal year we recorded a valuation allowance based on management’s determination that it is more likely than not that our deferred tax assets as of January 31, 2004, 2003 and 2002 will not be realized due to our ongoing operating losses and the challenging current economic environment.

As of January 31, 2004, deferred tax assets of approximately $19.5 million consisting of certain net operating loss and credit carry-forwards resulting from the exercise of employee stock options had not been recognized in the financial statements. When utilized, the tax benefit of these losses and credit carry-forwards will be accounted for as a credit to additional paid-in-capital.

Post Close Events

After our announcement on February 23, 2004 of our preliminary financial results for the quarter and year ended January 31, 2004, we entered into a settlement agreement with our former Chief Executive Officer, Thomas St. Dennis and resolved a settlement dispute with a vendor. As a result, in accordance with GAAP, the preliminary financial results have been adjusted by an increase to net income of $979,000 to reflect these settlements. See Note 7, “Management Changes” in the Notes to the Consolidated Financial Statements.

Liquidity and Capital Resources

As of January 31, 2004, we had working capital of approximately $25.8 million, and cash, cash equivalents and investments of approximately $214.5 million, which includes $32.3 million of cash and cash equivalents, $19.6 million of short-term investments and $162.7 million of investments with maturities of greater than one year, but excludes restricted investments of $46.3 million associated with our loan facility. We invest primarily in highly liquid, investment-grade instruments. We have substantial debt service and principal repayment obligations, which could affect our liquidity, cash reserves and ability to obtain additional financing if we need to do so.

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Cash Flows

Operating activities primarily include the net loss for the periods under consideration, non-cash charges such as depreciation and amortization expense and changes in assets and liabilities. In fiscal 2004, our operating activities used net cash of $8.6 million compared to net cash used of $38.7 million in fiscal 2003 and net cash generated of $26.3 million in fiscal 2002.

Net cash used in operating activities for fiscal 2004 consisted of cash provided by operations of $1.4 million offset by an decrease in cash of $10.1 million arising from changes in assets and liabilities, primarily restructuring costs. During fiscal 2004, we paid $18.1 million relating to our restructuring activities, primarily severance costs. The cash paid for restructuring activities was offset primarily by an increase in deferred revenue of $9.5 million relating primarily to the customer adoption of our Wind River Platforms under the enterprise license model. Under this model, customers typically pay for the associated subscription fees upfront under our standard business terms although revenue is recognized ratably over the term of the subscription period, typically one year.

Net cash used in operating activities for fiscal 2003 consisted of cash used by operations of $60.6 million offset by an increase in cash of $21.9 million arising from changes in assets and liabilities, primarily accounts receivable. Accounts receivable decreased by $18.0 million due primarily to the lower sales volume and to an increased rate of collections compared to fiscal 2002.

Net cash provided by operating activities in fiscal 2002 consisted of a decrease in cash generated from operations of $16.6 million offset by an increase in cash of $42.9 million arising from changes in assets and liabilities, primarily accounts receivable, which decreased by $54.7 million.

Cash from operations includes net loss of $24.6 million, $106.9 million and $375.6 million offset primarily by depreciation and amortization of $19.8 million, $30.5 million and $100.8 million in fiscal 2004, 2003 and 2002, respectively, and impairment of goodwill and purchased intangibles of $1.4 million, $4.3 million and $257.4 million in fiscal 2004, 2003 and 2002, respectively. Our operating cash flows depend heavily on the level of our sales. To a large extent our sales depend on general economic conditions affecting us and our customers, as well as the timing of new product introductions and other competitive factors and our ability to control expenses successfully.

In fiscal 2004, our investing activities used net cash of $35.4 million, compared to $50.2 million in fiscal 2003 and $12.7 million in fiscal 2002. Investing activities generally relate to the purchase of investments, business acquisitions and equipment purchases, partially offset by cash provided from the sale and maturity of investments. Acquisitions of property and equipment totaled $59.8 million, $6.7 million and $15.1 million in fiscal 2004, 2003, and 2002, respectively, of which $57.4 million in fiscal 2004 represented the purchase price of our headquarters buildings. See “—Commitments” below for further information on the exercise of a purchase option related to these buildings. During fiscal 2004, the net decrease in our restricted investments was $14.2 million as a result of the release of restricted cash associated with our synthetic leases offset by the restricted cash being held to secure the loan facility. Additionally, during fiscal 2002, we used $42.3 million for acquisition-related activities.

In fiscal 2004, our financing activities provided net cash of $43.5 million and used net cash of $12.1 million in fiscal 2003 and provided net cash of $28.5 million in fiscal 2002. During fiscal 2004, the primary source of

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cash was the $40.0 million that we borrowed under our loan facility and $3.5 million received from the issuance of common stock from employee stock option exercises and employee stock purchase plan activity. During fiscal 2003, the primary source of cash from financing activities was $7.6 million received from the issuance of common stock from employee stock option exercises and employee stock purchase plan activity, offset by $4.7 million used for the repurchase of common stock and $15.0 million in repayment of a line of credit at our Japanese subsidiary. In June 2002, the Board of Directors approved a program to repurchase up to $30.0 million of our common stock over a two-year period, primarily to manage future dilution from employee incentive plans including option and employee stock purchase plans, as well as potential dilution relating to our convertible bond. During fiscal 2002, the primary source of cash was $150.0 million from the offering of our 3.75% convertible notes, as discussed below, along with proceeds of $19.5 million received from the issuance of common stock from employee stock option exercises and employee stock purchase plan purchases. Cash provided by these sources was partially offset by cash of $141.1 million used to repurchase or redeem the outstanding 5.0% convertible notes as discussed below.

Convertible Subordinated Notes

During fiscal 2002, we repurchased and retired $81.9 million in face value of our 5.0% convertible subordinated notes. In January 2002, we redeemed the remaining $58.1 million of the 5.0% convertible subordinated notes at a redemption price of 101% of the principal. The net impact of gains and losses on the repurchase, retirement and redemption of the 5.0% convertible subordinated notes was a gain of $252,000, net of taxes, which was reflected in other income (expense), net for fiscal 2002.

In December 2001, we issued $150.0 million of 3.75% convertible subordinated notes due December 2006. The notes are unsecured, subordinated to all existing and future senior debt and convertible into shares of our common stock at an initial conversion price of $24.115 per share. The notes mature on December 15, 2006, unless earlier redeemed or converted. Interest is payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 2002. At the option of the holder, the notes may be converted into our common stock at any time at the then-current conversion price. We may redeem all or a portion of the notes for cash at a redemption price of 100.75% of the principal amount between December 15, 2004 and December 14, 2005, and 100.0% of the principal amount beginning December 15, 2005 and thereafter.

The indenture under which the notes were issued provides that an event of default will occur if (i) we fail to pay principal or premium on the notes, (ii) we fail to pay interest on the notes and fail to cure such non-payment within 30 days, (iii) we fail to perform any other covenant required of us in the indenture and the failure is not cured or waived within 60 days, or (iv) we or one of our significant subsidiaries fails to pay, at final maturity or upon acceleration, any indebtedness for money borrowed in an outstanding principal amount in excess of $35.0 million, including lease commitments, and the indebtedness is not discharged, or the default is not cured, waived or rescinded within 60 days after written notice is provided in accordance with the terms of the indenture. If any of these events of default occurs, either the trustee or the holders of at least 25% of the outstanding notes may declare the principal amount of the notes to be due and payable. In addition, an event of bankruptcy, insolvency or reorganization (involving us or any of our significant subsidiaries) will constitute an event of default under the indenture and, in that case, the principal amount of the notes will automatically become due and payable.

In the event of a change in control, the bondholders may require us to purchase our notes at 100% of the principal amount, plus accrued interest; this purchase could be completed in cash, our common stock or common stock of the parent corporation of the acquiring corporation, if publicly traded, or a combination thereof.

Commitments

In September 1997 and November 1999, we entered into two operating leases for our headquarters facility constructed on land owned by us in Alameda, California. After consideration of various financing alternatives for

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the construction of our headquarters buildings on land owned by us, the related economic impact of each alternative and the ability to retain control of the property, we chose a form of financing that we believed offered beneficial economic terms, commonly referred to as a “synthetic lease.” These leases were treated as operating leases for accounting purposes and financing leases for tax purposes. A synthetic lease is a form of off-balance sheet financing under which an unrelated third party funds 100% of the costs for the acquisition and/or construction of the property and leases the asset back to the company, as lessee. None of our officers or employees had any financial interest in these synthetic lease arrangements.

In January 2003, we notified the lessor of our intent to exercise the purchase options under the synthetic leases. In April 2003, we completed the transactions, terminated the synthetic leases and purchased the buildings for a purchase price of $57.4 million. As a result of our completion of the purchase options, we reflect the buildings as an asset on our balance sheet. Additionally, restricted investments of $60.3 million held under the leases were released. Prior to the exercise of the purchase options, we reflected lease payments as a rental expense in our statement of operations. Having acquired the buildings, we no longer record a lease expense for the buildings and we record depreciation expense for the buildings over their estimated useful lives of 30 years.

In connection with the termination of the synthetic leases, in April 2003, we entered into a loan facility for an aggregate principal amount of $57.4 million, consisting of a $37.4 million non-revolving loan commitment and $20.0 million term loan, both of which mature in April 2005. During the quarter ended April 30, 2003, we borrowed $40.0 million of the facility at an interest rate currently equal to 1.84%. Under the terms of the facility, we are holding $46.3 million in marketable securities as restricted investments to secure the performance of our obligations under the facility. We may prepay the loan facility at any time. See Note 8, “Convertible Subordinated Notes and Other Borrowings” in Notes to Consolidated Financial Statements for further information regarding the loan facility. The facility agreement contains customary events of defaults, including payment defaults, breaches of representations and warranties, covenant defaults, certain events of bankruptcy, insolvency and change of control, material judgments, and a cross-default to other material agreements and debt where we have incurred any liability in excess of $3.0 million. If an event of default occurs, and we do not or cannot cure the default within the time periods specified in the facility agreement, the lender would be entitled to terminate the facility and declare the outstanding amounts under the loan facility to be immediately due and payable.

Contractual Obligations

As of January 31, 2004, our future financial commitments, including interest payments, are as set forth in the table below: