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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended October 31, 2004

or

For the transition period from              to             

Commission file number: 000-21342

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)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of November 30, 2004, there were 82,956,302 shares of the registrant’s common stock outstanding.

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WIND RIVER SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2004

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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.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WIND RIVER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

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

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WIND RIVER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

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

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WIND RIVER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

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WIND RIVER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

Wind River Systems, Inc. (“Wind River”) has prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, Wind River believes that the disclosures are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in Wind River’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004, filed with the Securities and Exchange Commission on April 14, 2004 (“2004 Form 10-K”).

Wind River believes that all necessary adjustments, which consisted of normal recurring items, have been included in the accompanying financial statements to state fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for Wind River’s fiscal year ending January 31, 2005. Certain prior period balances have been reclassified to conform to the current period presentation.

The condensed consolidated financial statements include the financial information of Wind River and its subsidiaries. All inter-company accounts and transactions have been eliminated.

Note 2: Stock-Based Compensation

Wind River issues stock options to its employees and outside directors and provides employees the right to purchase stock pursuant to stock option and employee stock purchase programs. Wind River accounts for its stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Wind River applies the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure.” For pro-forma disclosures, the estimated fair value of the options is amortized over the vesting period, typically four years, and the estimated fair value of the stock purchases is amortized over the six-month purchase period.

Wind River accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Wind River uses the Black-Scholes option-pricing model to value options granted to non-employees.

Pro Forma Disclosures. Under SFAS 123, the fair value of each employee option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants made during the three and nine months ended October 31, 2004 and 2003:

The weighted average fair value per share of employee options granted during the three months ended October 31, 2004 and 2003 was $7.18 and $4.69, respectively, and the weighted average fair value per share of options granted during the nine months ended October 31, 2004 and 2003 was $6.13 and $4.62, respectively.

The fair value of employees’ stock purchase rights under Wind River’s 1993 Employee Stock Purchase Plan (the “Purchase Plan”) was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for purchases made during the three months ended October 31, 2004 and 2003:

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The weighted fair value of the common stock purchase rights granted under the Purchase Plan during the three months ended October 31, 2004 was $3.60, as compared to a weighted average fair value of $1.52 per share during the three months ended October 31, 2003.

Had compensation expense under these employee arrangements been determined pursuant to SFAS 123, Wind River’s net income (loss) and net income (loss) per share for the three and nine months ended October 31, 2004 and 2003 would have changed to the pro forma amounts indicated below:

The pro forma amounts include compensation expense related to employee stock option grants and stock purchases. The effects of applying SFAS 123 on pro forma disclosures of net income (loss) and net income (loss) per share in the three and nine months ended October 31, 2004 and 2003 are not likely to be representative of the pro forma effects on net income (loss) and net income (loss) per share in future fiscal periods.

During the three and nine months ended October 31, 2003, Wind River recorded charges of $428,000 and $640,000, respectively, relating to employee options previously granted to Wind River’s former President and Chief Executive Officer who resigned in June 2003.

Note 3: Derivative Financial Instruments

Wind River may enter into foreign currency forward exchange contracts to manage foreign currency exposures related to certain foreign currency denominated inter-company balances. Additionally, Wind River may adjust its foreign currency hedging position by taking out additional contracts or by terminating or offsetting existing forward contracts. These adjustments may result from changes in the underlying foreign currency exposures or from fundamental shifts in the economics of particular exchange rates. Gains and losses on terminated forward contracts, or on contracts that are offset, are recognized in income in the period of contract termination or offset. As of October 31, 2004, we had outstanding contracts for the following terms:

Contract amounts are representative of the expected amounts to be paid under the terms of these instruments. Wind River does not enter into derivative financial instruments for trading or speculative purposes. As of October 31, 2004, the change in fair value of the above contracts was not significant.

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Note 4: Asset Held for Sale

As a result of Wind River’s workforce reductions and relocation of certain departments to its Alameda headquarters during fiscal year 2004 and the first six months in fiscal 2005, Wind River has excess office space in a building that it owns in Sunnyvale, California. During the three months ended July 31, 2004, Wind River announced a plan to market and dispose of the building and associated land in Sunnyvale (“Sunnyvale Property”). Wind River believes it is probable that the property will be sold within one year from July 31, 2004 and determined that the plan for sale criteria contained in SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) had been met. Accordingly, the carrying value of the property of $9.8 million has been separately presented as an “Asset Held for Sale” in current assets on the Condensed Consolidated Balance Sheet at October 31, 2004. Also in accordance with SFAS 144, the Sunnyvale property will not be depreciated while it is classified as held for sale. No impairment charge has been recorded because the carrying value of the Sunnyvale Property is less than its fair value net of estimated costs to sell. Subsequent to October 31, 2004, the Sunnyvale Property was in fact sold. See Note 14 “Subsequent Events” for further discussion.

Note 5: Goodwill

Wind River performed its annual test for goodwill impairment as required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) as of June 30, 2004. Wind River currently operates in one reportable segment, which is also the only reporting unit for the purposes of SFAS 142. The primary methods used to determine the fair values for SFAS 142 impairment purposes were the income and market approach. The income approach provides an estimation of the fair value of a reporting unit based on the discounted cash flows derived from the reporting unit’s estimated remaining life plus any residual value. The market approach indicates the fair value of a reporting unit based upon a comparison to publicly-traded companies in similar lines of business. The assumptions supporting the income approach, including the discount rate which was assumed to be 17%, were determined using Wind River’s best estimates as of the impairment review. Wind River completed its evaluation under both methods and concluded that goodwill was not impaired as the fair value of the reporting unit exceeded its carrying value, including goodwill.

Note 6: Restructuring and Other Charges

Restructuring and other charges consist of costs associated with restructuring programs implemented by Wind River and in fiscal 2004, costs associated with the separation of Wind River’s former President and Chief Executive Officer, Thomas St. Dennis.

Restructuring Charges. As a result of decisions undertaken by Wind River regarding the cost structure of its business, Wind River implemented several restructuring programs from fiscal 2002 onwards. Wind River recorded net restructuring charges of $2.2 million, $32.7 million and $21.7 million in the years ended January 31, 2004, 2003 and 2002, respectively. During fiscal 2005, Wind River undertook further limited restructurings in the areas of professional services and marketing which involved a headcount reduction of 47 employees. Wind River also incurred charges associated with restructurings from previous quarters. In addition, during the second quarter of fiscal 2005, Wind River incurred charges associated with vacating an office in Canada and in the third quarter of fiscal 2005, incurred charges associated with employee litigation as a result of previous restructurings. Additionally, in the third quarter of fiscal 2005, Wind River adjusted $446,000 in employee related items which includes outplacement fees, COBRA fees and employer related taxes. All charges have been calculated in accordance with the provisions of SFAS No. 146. “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), SFAS No. 112 “Employers’ Accounting for Postemployment Benefits,” and Staff Accounting Bulletin No. 100 (“SAB 100”). As a result, Wind River recorded restructuring charges of $313,000 and $971,000 in the three months ended October 31, 2004 and 2003, respectively, and $2.4 million and $1.8 million during the nine months ended October 31, 2004 and 2003, respectively. These charges were classified as operating expenses. Wind River expects to incur restructuring charges related to the office closure in Canada in future quarters in accordance with the provisions of SFAS 146.

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As of October 31, 2004, the total restructuring liabilities related to the restructuring programs for the nine months ended October 31, 2004 and fiscal year 2003 were approximately $1.7 million. The following table summarizes the restructuring liabilities as of October 31, 2004:

Wind River expects the workforce reduction liability to be paid out by the first quarter of fiscal 2006.

Other Charges. Thomas St. Dennis, Wind River’s former President and Chief Executive Officer, resigned in June 2003. During the three months ended July 31, 2003, Wind River recorded a charge of $1.2 million, in other charges, relating to a provision against the value of an outstanding Secured Promissory Note made by Mr. St. Dennis. On February 25, 2004, Wind River signed a Separation Agreement with this officer under which Mr. St. Dennis assigned to Wind River all outstanding stock options and 126,000 shares of Wind River common stock that had been held as collateral for the note. In return, Wind River forgave the remaining principal and accrued interest relating to the note. For a more detailed discussion, please see Note 7, “Management Changes” in Notes to Consolidated Financial Statements in Wind River’s 2004 Form 10-K.

Note 7: Other Long-term Debt

In April 2003, Wind River entered into a loan facility with a financial institution in the aggregate principal amount of $57.4 million, consisting of a non-revolving loan commitment of $37.4 million and a term loan of $20.0 million, of which Wind River borrowed $40.0 million during fiscal 2004. During the three months ended July 31, 2004, Wind River repaid the entire balance of the term loan and the related restricted investments that had been held as collateral for that facility were released. Of the original facility, $17.5 million is still available through October 15, 2005.

Note 8: Provision for Income Taxes

During the three months ended July 31, 2004, Wind River realized a benefit of $1.0 million arising from a final assessment of a foreign tax audit.

Note 9: Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. The difference between net income (loss) and comprehensive income (loss) results from foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities, net of taxes.

Comprehensive income (loss) for the three and nine months ended October 31, 2004 and 2003 is as follows:

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Note 10: Net Income (Loss) Per Share Computation

In accordance with SFAS No. 128, “Earnings Per Share,” the calculation of shares used in basic and diluted net income (loss) per share computation for the three and nine months ended October 31, 2004 and 2003 is presented below:

The effect of assumed conversion of the 3.75% convertible subordinated notes into 6.2 million shares of Wind River’s common stock for the three and nine months ended October 31, 2004 and 2003 is anti-dilutive, and is, therefore, excluded from the above computation. If Wind River had recorded net income for the three and nine months ended October 31, 2003, Wind River would have included in the computation dilutive potential common shares from outstanding stock options totaling approximately 739,000 and 123,000 shares, respectively. Because Wind River recorded a net loss for the three and nine months ended October 31, 2003, there is no difference between basic and diluted net loss per share for these periods.

Note 11: Common Stock

In June 2002, the Board of Directors authorized a stock repurchase program to enable Wind River to acquire outstanding common stock in the open market or through negotiated transactions. Under the program, Wind River may, but is not required to, purchase up to $30.0 million of Wind River common stock over a period of two years, of which $4.7 million had been repurchased through October 31, 2004. In June 2004, the Board of Directors extended the term of the existing share repurchase program for an additional two years through June 2006. In addition, the Board approved the purchase of 300,000 shares each year for replenishment of the Employee Stock Purchase Plan.

Note 12: Commitments and Contingencies

From time to time, Wind River is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents and other intellectual property rights. Wind River believes the outcome of its outstanding legal proceedings, claims and litigation will not have a material adverse effect on its business, results of operations, cash flows or financial condition. However, such matters involve complex questions of fact and law and could involve significant costs and the diversion of resources to defend. Additionally, the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible. Wind River is unable to estimate the range of possible loss from outstanding litigation and other legal proceedings and no amounts have been provided for such matters in the accompanying condensed consolidated financial statements.

Note 13: Segment and Geographic Information

Wind River reports in one industry segment—technology for embedded operating systems. Wind River markets its products and related services to customers in four geographic regions: North America (the United States and Canada), EMEA (Europe, the Middle East and Africa), Japan, and Asia Pacific. Internationally, Wind River markets its products and services primarily through its subsidiaries and various distributors. Revenues are generally attributed to geographic areas based on the country in which the customer is domiciled. Substantially all of Wind River’s long-lived assets, including goodwill, are located in North America. The distribution of revenues and long-lived assets, net of depreciation and amortization, by geographic location is as follows:

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Revenue information on a product, subscription and services basis is as follows:

No single customer accounted for more than 10% of our total revenues during the three and nine months ended October 31, 2004 or 2003.

Note 14: Subsequent Events

On November 19, 2004, Wind River sold to a third party the Sunnyvale Property as discussed in Note 4, “Asset Held for Sale” above for cash consideration, net of selling costs, of $11.7 million. The gain on the sale of this asset of approximately $1.8 million will be recorded in the fourth quarter of fiscal 2005.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements” within the meaning of various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “foresee,” “project” and similar expressions and are found in the sections below entitled “—Overview,” “—Liquidity and Capital Resources,”“ —Results of Operations” and “—Factors That May Affect Our Future Results or the Market Price of Our Stock” and elsewhere in this Quarterly Report. Factors that could cause or contribute to such differences include but are not limited to the success of Wind River’s implementation of its new business models, products and market strategies, the ability of our customers to sell products that include our software, our ability to address new markets and complex technologies by delivering successful, new products on a timely basis, the impact of competitive products and pricing, the success of our strategic relationships, the impact of the economic downturn, charges for restructuring and other costs and other risk factors detailed in Wind River’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004, its Quarterly Reports on Form 10-Q and other periodic filings with the Securities and Exchange Commission.

These forward-looking statements are based on current expectations and involve known and unknown risks and uncertainties that may cause the results, levels of activity, performance or achievements of Wind River or its industry to be materially different from those expressed or implied by the forward-looking statements. You should carefully review the risk factors described in the “—Factors That May Affect Our Future Results or the Market Price of Our Stock” section below and in other documents we file from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended January 31, 2004 (“2004 Form 10-K”), and the other quarterly and periodic reports we file. We do not intend to update any of the forward-looking statements contained in this report to reflect any future events or developments unless required by law.

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

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, digital consumer, automotive and industrial, and network infrastructure. Our products and services help customers enhance product performance, standardize designs across projects, reduce research and development costs and shorten product development cycles.

Recent Operating Results

Our revenues were $60.0 million and $49.6 million for the three months ended October 31, 2004 and 2003, respectively, and $172.2 million and $148.5 million for the nine months ended October 31, 2004 and 2003, respectively. Net income was $2.3 million or $0.03 net income per share, for the three months ended October 31, 2004 compared to a net loss of $6.9 million or $0.09 net loss per share for the three months ended October 31, 2003. Net income was $1.8 million or $0.02 net income per share for the nine months ended October 31, 2004 compared to a net loss of $27.0 million or $0.34 net loss per share for the nine months ended October 31, 2003.

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.

For additional information about our business and operating model, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption, “Executive Operating and Financial Summary” in our 2004 Form 10-K.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. We review the accounting policies we use in reporting our results on a regular basis. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are also areas in which our judgments in selecting among available accounting alternatives would not produce a materially different result. We have identified certain policies as critical to our business operation and to the understanding of our financial condition and results of operations, and our senior management have reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors. Those policies and estimates that we believe are most critical to an understanding of our financial results and condition and that require a higher degree of judgment and complexities are:

For a more comprehensive discussion of these critical accounting policies, please see “—Critical Accounting Policies,” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2004 Form 10-K.

Results of Operations

Revenues

We recognize revenues from three sources: (1) product revenues, (2) service revenues and (3) subscription revenues. Each source of revenue is recorded net of sales returns and other allowances, based on our historical experience. Product revenues consist of revenues from production licenses (sometimes referred to as royalties), fees for stand-alone development software and software programming tools sold under our perpetual licensing model and fees for sales of our hardware. Service revenues are derived from fees from professional services, which include design and development fees, software maintenance contracts, 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 support services such as installation and training, which are licensed over a limited period of time, typically 12 months.

Total revenues increased 21% in the three months ended October 31, 2004 compared to the three months ended October 31, 2003 and increased 16% in the nine months ended October 31, 2004 compared to the nine months ended October 31, 2003. This was primarily due to higher customer demand for our software and hardware, improvement in production license revenues and increased investment in device software optimization solutions as a result of an improvement in the overall economy. See “—Factors That May Affect Our Future Results or the Market Price of Our Stock.” The economic downturn over the last three fiscal years has adversely affected, and may continue to adversely affect, our earnings and revenues. In addition, uncertainties associated with the downturn increase the difficulty of financial planning and forecasting.

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Two significant trends have impacted, and will continue to impact, our reported revenue. Firstly, our subscription revenues have increased significantly relative to our software license and services revenues as a result of our introduction of the Wind River Platforms, which are sold under subscription licenses and contain a combination of products and services. As customers purchase more of our Wind River Platforms rather than stand-alone products and services, we would expect the reported software license and service revenues to decrease while our subscription revenues increase. Secondly, in the short term, the transition of customers to subscription licenses will affect the level of our overall revenues because we recognize fees under subscription licenses ratably over the subscription period, which is typically one year. In contrast, a significant proportion of the fees for stand-alone products licensed under our perpetual model, which are recorded as product revenues, are recognized at the time the transaction is completed. As a result, an order for a subscription license will result in lower current-quarter revenue than an equal sized order for a perpetual license. While we have experienced and expect to continue to experience an impact on overall revenues as a result of the transition to our Wind River Platforms, our deferred revenues have increased to $58.0 million at October 31, 2004 from $39.1 million at January 31, 2004 and we would expect this trend to continue during the transition to our Wind River Platforms. Deferred revenue includes $5.3 million which is classified as long-term and represents revenue related to the portion of contracts which have a term of greater than one year.

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

Software license revenues declined 14% in the three months ended October 31, 2004 compared to the three months ended October 31, 2003 and declined 12% in the nine months ended October 31, 2004 compared to the nine months ended October 31, 2003. This decline is primarily due to the transition of our customers to our Wind River Platforms, which includes product as part of the subscription fee. We expect software license revenues to continue to decline as the transition to our Wind River Platforms continues.

Production license revenues increased 46% in the three months ended October 31, 2004 compared to the three months ended October 31, 2003 and increased 31% in the nine months ended October 31, 2004 compared to the nine months ended October 31, 2003. This increase was primarily due to our customers manufacturing more embedded devices that include our technology, especially in the digital consumer and networking segments, improvement in our execution in the area of customer compliance and reporting and improvement in our customers’ own quarterly reporting processes.

Subscription Revenues. Subscription revenues increased 107% in the three months ended October 31, 2004 compared to the three months ended October 31, 2003 and increased 174% in the nine months ended October 31, 2004 compared to the nine months ended October 31, 2003. Fiscal 2004 was the first full fiscal year in which we sold our Wind River Platforms under our enterprise license model. This significant increase in subscription revenues resulted from the continued transition of a number of our customers from our traditional perpetual licensing model to our Wind River Platforms under the enterprise license model. We expect that subscription revenues will continue to increase both in absolute dollars and as a percentage of revenue in the future.

Service Revenues. Service revenues are derived from fees from professional services, which include design and development fees, software maintenance contracts, customer training and consulting.