WIND RIVER SYSTEMS INC, 10-K/A, 2000-05-26

WIND RIVER SYSTEMS INC
10-K/A, 2000-05-26
COMPUTER PROGRAMMING SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
AMENDMENT NO. 1

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2000

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

Commission file number 0-21342

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

Delaware 94-2873391
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

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

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2000 was $2,149,951,000. Number of shares of Common
Stock outstanding as of March 31, 2000: 70,692,511.

DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's annual stockholders' meeting to be held on July
26, 2000, are incorporated by reference into Part III of this Form 10-K.

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TABLE OF CONTENTS

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PART I

Item 1. Business 1

Item 2. Properties 16

Item 3 Legal Proceedings 16

Item 4. Submission of Matters to a Vote of Security Holders 16

Item 4A. Executive Officers of the Registrant 17

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19

Item 6. Selected Consolidated Financial Data 20

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 32

Item 8. Financial Statements and Supplementary Data 33

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34

PART III

Item 10. Directors and Executive Officers of the Registrant 53

Item 11. Executive Compensation 53

Item 12. Security Ownership of Certain Beneficial Owners and Management 53

Item 13. Certain Relationships and Related Transactions 53

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 54

Signature 56

Schedule II Valuations and Qualifying Accounts 58

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

ITEM 1.

BUSINESS

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

Wind River markets its products and services in North America and Europe
primarily through its own direct sales organization, which consists of
salespersons and field engineers. Wind River has eighteen licensed
international distributors principally to serve customers in regions not
serviced by its direct sales force or its Japanese master distributors. Wind
River's customers include Boeing Company, Cisco Systems, Inc., Ericsson Radio
Systems AB, General Motors Corporation, Hewlett-Packard Company, Hitachi, Ltd.,
Hughes Aircraft Company, Lucent Technologies Inc., Intel Corporation,
Lockheed-Martin Corporation, McDonnell Douglas Corporation, Mitsubishi Electric
Corporation, Motorola, Inc., Liberate Technologies, Inc., Nippon Electric
Corporation, Northern Telecom Ltd., Raytheon Company, Siemens AG, Sun
Microsystems, Inc., and TRW Inc.

During April 1999, Wind River entered into an asset purchase agreement with
XACT Inc. ("XACT"), a network software developer, pursuant to which Wind River
acquired certain office and other equipment from XACT and revised the terms of
an existing distribution agreement with XACT. Subsequently, but not pursuant to
the asset purchase agreement, Wind River hired a significant number of XACT
employees.

On June 30, 1999, Wind River acquired RouterWare, Inc. RouterWare develops
and markets a suite of software modules used in data communications products
such as bridges, routers, gateways, and remote access servers. In the
acquisition, Wind River issued 730,923 shares of its common stock and reserved
an additional 634,065 shares for issuance upon exercise of outstanding employee
stock options in exchange for all of the outstanding shares of RouterWare common
stock and shares issuable upon exercise of employee stock options assumed in the
merger. Wind River recorded this transaction using the pooling-of-interests
accounting method, and all financial data of Wind River has been restated to
include the historical financial information of RouterWare.

On February 15, 2000, Wind River acquired Integrated Systems, Inc.,
pursuant to a merger agreement entered into on October 21, 1999. Integrated
Systems provides solutions for embedded software development that consist of
real-time operating systems and software components for embedded
microprocessors; tools for designing, developing and optimizing embedded
applications; networking products for device connectivity and management; and
engineering design services for accelerated co-sourced product development.
Integrated Systems' products help users accelerate the design, development,
debugging, implementation and maintenance of embedded software. Integrated
Systems' products and services are intended to reduce the expense associated
with embedded software and system development and enable customers to develop
systems with a wide variety of features characterized by greater functionality,
enhanced performance, improved reliability and ease of use. In connection with
the acquisition, each outstanding share of Integrated Systems common stock was
exchanged for .92 of a share of Wind River common stock, resulting in the
issuance of an aggregate of 22,499,895 shares of Wind River common stock for all
outstanding shares of Integrated Systems common stock. In addition,
approximately 4,493,000 of Integrated Systems stock options became options to
purchase approximately 4,133,000 shares of Wind River stock. The acquisition was
accounted for as a pooling of interests.

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On March 13, 2000, Wind River announced a definitive agreement to acquire
AudeSi Technologies Inc., a privately held supplier of innovative embedded Java
technology-based tools and other components for building flexible,
multi-application consumer devices. Wind River will acquire AudeSi for
approximately 1.075 million shares of Wind River common stock. The closing of
the acquisition is subject to Canadian regulatory approvals. The merger
agreement provides that Wind River will account for this transaction using the
purchase accounting method.

On March 31, 2000, Wind River completed its acquisition of Embedded
Support Tools Corporation, a worldwide provider of integrated hardware and
software tools for programming, testing and debugging embedded systems. Wind
River issued an aggregate of 5,474,792 shares of its common stock in exchange
for all outstanding common shares of Embedded Support Tools Corporation and
reserved an additional 1,122,855 shares for issuance upon exercise of
outstanding employee stock options assumed in the transaction. The acquisition
was accounted for as a purchase.

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

BACKGROUND

Embedded systems consist of a microprocessor and related software
incorporated into a larger device, dedicated to performing a specific set of
tasks. Embedded systems provide an immediate, predictable response to an
unpredictable sequence of external events. As more powerful microprocessors have
become available and have decreased in price, embedded systems are being used
in a wider range of applications and digital appliances and are facilitating
the development of entirely new products. In addition, emerging Embedded
Internet-Registered Tradmark- applications for interactive entertainment,
network computers, remote maintenance, and other areas may offer significant
additional opportunities for embedded systems.

To succeed in today's increasingly competitive markets, manufacturers using
embedded computers must bring complex applications for embedded systems to
market rapidly and economically. Developing real-time embedded software
applications has evolved from a relatively modest programming task to a complex
engineering effort. As more powerful and affordable 32-bit microprocessors have
become available, products based on them have become richer in features and
functions. In addition, the complexity of embedded software is increasing
dramatically, while the time available for product development is decreasing.
More sophisticated software is required to develop these more complex
applications, frequently including a real-time operating system that provides
developers far more features, higher performance and greater productivity than
was necessary or feasible for programming prior generations of microprocessors.
Wind River's flexible operating systems and powerful development tools allow
customers to create and standardize complex real-time embedded software
applications quickly and efficiently.

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

PRODUCTS AND SERVICES

Wind River's operating systems and development tools allow customers to
create complex real-time embedded software applications more quickly, more
economically and with less risk than creating such applications using internally
developed systems and tools. Wind River typically charges a one-time fee for a
development license and a run-time license fee for each copy of its operating
system embedded in the customer's product. In addition, for certain large
customers, Wind River will charge an annual fee to use a development license and
provide renewal options that reflect customers' future needs. A key component of
Wind River's strategy is to increase revenue through run-time license fees. Any
increase in the percentage of revenues attributable to run-time licenses will
depend on the company's continued efforts to successfully negotiate run-time
license agreements and on the successful commercialization by its customers of
the underlying products. Core Wind River products consist of the Tornado
development environment and VxWorks real-time operating system.

TORNADO

Tornado is a development platform for embedded applications and is
available for UNIX, Windows NT, Windows 95, and Windows 98 host development
workstations. Tornado was introduced in September 1995 and subsequently won the
Electronic Design News award for Innovation of the Year. In November 1998, Wind
River introduced Tornado II. Tornado II provides significant technical advances
for accelerated productivity, advanced networking connectivity, and a platform
for HTML, Java, and C++ graphics development.

Tornado is a scalable cross-development environment that enables engineers
to develop embedded applications on a host workstation or PC and download the
code via a network or other communications channel to an RTOS that runs on all
significant 32- and 64-bit embedded target microprocessors.

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Tornado consists of three integrated components: Tornado tools, which
comprise a comprehensive suite of core and optional cross-development tools and
utilities; the VxWorks run-time system, a high-performance, scalable RTOS that
executes on the target processor; and a full range of communications options for
the target connection to the host.

Tornado core development and debugging tools include an integrated
simulator (VxSim-Lite-TM-), WindView-TM- for the integrated simulator,
project facility and configuration tools, an integrated, high-performance
debugger, C and C++ cross-compilers, a launcher, the interactive WindSh-TM-
user-interface shell, a browser that is a graphical companion to the shell, and
the WindNavigator-Registered Tradmark- multilanguage browsing tool for
evaluating source code. Optional Tornado tools address a particular aspect of
application development for C, C++, and Java developers. Tornado also offers a
completely open and extensible environment that facilitates the integration of a
wide variety of third-party tools as well as the customization of Tornado tools
by the developer. Wind River believes that this open environment may make
Tornado the development foundation of choice for embedded and real-time
applications.

VxWorks is a high-performance, scalable RTOS based on an object-oriented
microkernel architecture that can form the foundation for memory-constrained
applications as small as 20 kilobytes or support large, complex applications.
VxWorks provides broad portability over a wide variety of commercial processors
and custom target hardware boards and adheres to a variety of computing
standards, including POSIX 1003.1/1b, ANSI C, and TCP/IP. VxWorks is flexible,
with more than 1,800 powerful application program interfaces ("APIs") available
and published on the Internet for reference, from the graphical user interface
("GUI") to the connection implementation.

For communication between the development platform and the embedded target,
Tornado provides a variety of options, including Ethernet, serial line,
in-circuit emulator, ROM emulator, or custom backend. Tornado eliminates many of
the dependencies of a traditional cross-development environment. With Tornado,
developers can use any host-target communications option and the capabilities of
the toolset remain the same regardless of target processor resources.

TORNADO FOR INTELLIGENT I/O

A consortium of leading enterprise computing vendors has proposed an
architecture, known as I(2)O, to define and promote an open, standard set of
interface specifications for high-performance I/O subsystems. These
specifications will be used to simplify the task of building and maintaining
those subsystems for interface cards and PC server platforms. The I(2)O
specification makes it possible for systems to distribute I/O functions across
multiple processors, dramatically improving I/O and overall system performance.
Additionally, the specification allows vendors of network and peripheral
interface cards to write a single device driver that will be compatible with a
comprehensive range of operating systems, OS releases, and vendor OS
implementations. Wind River has entered into agreements with Intel Corporation
under which Intel will bundle Wind River's IxWorks-Registered Tradmark-
operating system into their input/output processors ("IOPs"). IxWorks, Wind
River's I(2)O real-time operating system ("IRTOS") based on VxWorks, is a
component of Wind River's Tornado for Intelligent I/O products and facilitates
the development of I(2)O-capable products by ensuring ongoing I(2)O compliance.
It also permits companies to get their products to market faster by offering
immediate availability of the IRTOS, the most significant software building
block of an I(2)O-ready system. A license for IxWorks may be included with IOPs
shipped. This arrangement permits manufacturers to develop their products
quickly, since IxWorks is available immediately. Wind River believes that its
relationships with Intel and LSI Logic for the implementation of the I(2)O
specification may open up a new market opportunity for its products.

CENTER OF EXCELLENCE PROGRAM

Wind River's Center of Excellence program was initiated to enable Wind
River and key microprocessor manufacturers to work closely together in order to
facilitate the porting, optimization, and distribution of Wind River software
across various families of microprocessors. For example, Intel Corporation and
Wind River agreed to work closely together to optimize Wind River's development
software for Intel's family of embedded Pentium microprocessors. Pentium family
microprocessors have traditionally been used in desktop-based applications. This
joint initiative so far has produced new software drivers and evaluation board
support packages ("BSPs").

ADDITIONAL PRODUCT FAMILIES

In addition to the preceding core products and market initiatives, Wind
River offers a variety of products in the following product families:

OPERATING SYSTEM AND RUN-TIME PRODUCTS

MULTIPROCESSING OPTIONS: Wind River offers a suite of multiprocessing
options: The VxVMI-TM- virtual memory interface provides run-time memory
management and debugging facilities and an application program interface
standardized across different microprocessing architectures. The VxMP-TM-
multiprocessing package allows applications to

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be scaled beyond the performance of single microprocessors by allowing tasks
on different microprocessors to synchronize and communicate. The VxFusion-TM-
multiprocessing option permits VxWorks message queues to operate over
any loosely coupled, distributed hardware configuration. VxFusion is tailored
to complement emerging standards-based solutions such as CORBA and DCOM.

VxDCOM. VxDCOM-TM- implements the DCOM standard -- scaled for embedded
applications -- on the Tornado II development platform.

GOAHEAD FIELDUPGRADER 2.1. GoAhead FieldUpgrader 2.1 permits manufacturers
of VxWorks-based embedded devices to automatically upgrade their products in the
field.

TORNADO BOARD SUPPORT PACKAGE DEVELOPER'S KIT. The VxWorks operating system
can be used with a wide variety of processor types and target environments that
isolate all hardware-specific features into a special section of code called a
board support package. The Tornado BSP Developer's Kit provides assistance to
the developer porting Tornado or VxWorks to custom hardware or to a commercial
board not supported by Wind River. It includes comprehensive documentation, a
software validation suite, project management tools and a template BSP to
provide a convenient starting point.

TRUEFFS FOR TORNADO. TrueFFS for Tornado is an integrated flash file system
for embedded products built with Tornado. TrueFFS for Tornado is based on the
data format of M-Systems Flash Disk Pioneers' TrueFFS patented core technology,
which implements the PCMCIA Flash Translation Layer (FTL) standard.

TORNADO FOR AUTOMOTIVE CONTROL. Tornado for Automotive Control implements
the open OSEK/VDX standard as a development platform and real-time operating
system for automotive electronic control units (ECUs). As a result, automotive
manufacturers can write application code on a standard interface that
facilitates portability and makes it easier to interconnect ECUs from different
vendors.

OPTIONAL TORNADO DEVELOPMENT TOOLS

CODETEST FOR TORNADO. CodeTEST for Tornado is a software-only version of
Applied Microsystems' CodeTEST family of embedded software verification tools.
CodeTEST for Tornado enables developers to identify software errors easily,
reliably, and cost effectively.

ESPIAL ARCHITECT. Espial (formerly Kalos) Architect provides an easy-to-use
environment for developing graphical Internet appliances based on Sun
Microsystems' PersonalJava specification.

LOOK! FOR TORNADO. Look! for Tornado is a C++ visualization and debugging
tool designed to graphically explore a C++ program as it executes.

PERFORMANCEPAK. PerformancePak provides Tornado developers two important
visualization tools for developing fast, reliable real-time systems. The
ScopeProfile tool helps developers optimize system performance, while MemScope
quickly locates memory problems.

STETHOSCOPE. StethoScope is a real-time data visualization, profiling and
debugging tool that lets the end user examine and analyze an embedded
application while it is running. StethoScope features a multiwindow environment
that allows program variables to be plotted dynamically on a workstation.

TURBOJ. Wind River's TurboJ ahead-of-time compiler dramatically speeds up
the execution of Java applications on embedded devices.

VISUAL SLICKEDIT - TORNADO EDITION. Visual SlickEdit - Tornado Edition
provides extensive software edit-ing features that help developers improve their
productivity.

VXSIM EMBEDDED SYSTEM SIMULATOR. VxSim-TM- is a comprehensive prototyping
and simulation tool that provides full VxWorks simulation on a UNIX or Windows
NT workstation. VxSim enables application development to begin before hardware
becomes available and allows software testing to occur early in the development
cycle.

WIND FOUNDATION CLASSES. Wind Foundation Classes-TM- enable embedded
systems developers to use and reuse highly optimized and extensively tested code
to create real-time embedded applications.

WINDVIEW. WindView is a diagnostic and analysis tool that provides detailed
visibility into the dynamic operation of an embedded system. With WindView, the
user can quickly and easily visualize the complicated interaction among tasks
and interrupt service routines and system objects in an application. This
information is presented through a GUI.

EMBEDDED INTERNET AND USER INTERFACE TECHNOLOGIES

Wind River's Embedded Internet technologies enable customers to build and deploy
products throughout the Internet, including its infrastructure, servers, and
smart appliances. Wind River's user interface technologies make it possible
for customers to incorporate graphical user interfaces ("GUIs") and to render,
or display, rich graphical content on traditional embedded devices and
leading-edge information and Internet-based appliances. Examples of products
employing Wind River's user interface technologies include process
visualization terminals, front panels for digital imaging devices,
instrumentation and medical equipment, point-of-sale terminals and information
kiosks, as well as graphics and

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Internet-centric devices such as screen phones, television set-top boxes, and
car navigation systems. Products include:

PERSONAL JWORKS. Personal JWorks-TM- is the first RTOS port of Sun
Microsystems' PersonalJava -- a Java application environment targeted at
personal consumer devices -- to be certified for full compatibility. Personal
JWorks is also bundled into a product suite which integrates Java technology-
based components with Wind River's Personal JWorks. Components include a full
deployment and execution environment, an optimized GUI tool kit, a complete
application operating environment, and out-of-box solutions for building
Internet appliances.

WIND WEB SERVER. Wind-Registered Trademark- Web Server displays timely,
dynamic information on an embedded device running VxWorks by means of a standard
Web browser.

ZINC FOR VXWORKS. Zinc-Registered Trademark- for VxWorks is a
comprehensive tool suite for developing small-footprint, natively compiled GUIs
for performance-driven embedded devices. Zinc for VxWorks provides a complete,
object-oriented C++ API for the creation of graphical user interfaces and
event-driven applications.

NETWORKING PRODUCTS

TORNADO FOR MANAGED SWITCHES. Tornado for Managed Switches provides a
software solution for building management capabilities into layer 2 and layer 3
Ethernet switches.

WINDNET. The WindNet-TM- networking environment comprises Wind River core
technology such as TCP/IP, optional products such as SNMP, STREAMS, and OSPF,
and numerous integrated products from third-party partners that provide various
communications protocols and network management and distributed computing
solutions.

ROUTERWARE PRODUCTS. Wind River's RouterWare-Registered Trademark- product
line provides standard ANSI C source code for a wide range of internetworking
protocol stacks.

VXWORKS NETWORK STACK. The VxWorks Network Stack is a real-time,
full-featured, BSD 4.4-compliant TCP/IP suite within the VxWorks RTOS.

PRODUCTS OF INTEGRATED SYSTEMS

Wind River provides a number of additional products and services as a
result of its acquisition of Integrated Systems. These products and services are
suitable for a wide variety of applications and are sold to a broad range of
customers across key markets comprising telecommunications, data
communications, automotive, aerospace, office products and point-of-sale, and
consumer electronics. A complete suite of products has been developed that
addresses these markets, and provides products that reduce the time and expense
associated with system development.

PRISM+. pRISM+-TM- is a software development environment optimized for
embedded systems development with the pSOSystem-Registered Trademark- real-time
operating system. Tools within pRISM+ cover each aspect of embedded application
development: team development across mixed UNIX and PC platforms, software
configuration management interfaces, source code comprehension tools for
effective reuse of legacy code, highly optimized compilers and debuggers, and
real-time systems analysis tools. pRISM+ speeds time to market by providing
network development teams a comprehensive set of pSOSystem-integrated protocol
products for the majority of embedded networking needs: bringing up target
hardware platforms, developing real-time application software, and implementing
networking support for embedded devices. pRISM+ supports Microsoft Windows NT,
Windows 95, UNIX Solaris, and Hewlett-Packard (HP) host platforms and a wide
variety of 32-bit target microprocessors.

PSOSYSTEM. pSOSystem is a modular, high-performance, real-time operating
system designed specifically for embedded microprocessors. It provides a
complete multitasking environment, offering performance, reliability, and ease
of use on custom and commercial hardware. pSOSystem is a priority-based,
interrupt-oriented multitasking kernel requiring as little as 16KB of storage,
operating on either tightly or loosely coupled microprocessors. With companion
software components such as a remote procedure call library, a file system
manager, and an ANSI C library, as well as third-party products from partner
companies, pSOSystem gives developers a full palette of options, tools, and
support that extends far beyond the kernel.

SNiFF+. SNiFF+-TM- is an integrated object-oriented development
environment for UNIX and Windows programmers working with C, C++, Java,
Fortran, CORBA, IDL, and other programming languages. Available as part of
pRISM+ for pSOSystem, SNiFF+ provides advanced, object-oriented comprehensive
source code analysis capabilities such as symbol, hierarchy and class browsers,
component analyzers and cross-referencing tools to assist the developer in
developing application code. The SNiFF+ tool is ideally suited for large teams
and complex application development.

DIAB COMPILERS. Diab-TM- high-performance compiling solutions for 32-bit
embedded microprocessors include Diab C/C++ compiler suites, which are available
for the most demanding embedded applications. The Diab FastJ-Registered
Trademark- cross compiler enables developers to use the Java language in a
manner similar to C/C++ while offering the performance and code size required
for both high performance and deeply embedded applications. Drawing on
information generated by the compiler suites, the Diab RTA Suite provides
visual

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run-time analysis tools for enhancing program performance, reliability, and
memory usage in embedded applications, enabling developers to create faster,
higher quality code in less time.

SINGLESTEP DEBUGGERS. The SingleStep-TM- hardware and software debugging
solution provides developers a mix of debugging and diagnostic capabilities,
including real-time trace, advanced run control, high-speed code downloading,
and C/C++ and Java source-level debugging.

BETTERSTATE. The BetterState-TM- graphical programming product supports
the pSOSystem and OSEK/VDX operating systems. Once designs have been drawn,
BetterState automatically generates consistent, maintainable and accurate
ready-to-use code in a wide range of programming languages, including C/C++,
Java, C++ for MFC, Visual Basic, Perl, and CGI. BetterState also eases the
debugging process through full-featured visual debugging facilities.

MATRIX(X). The MATRIX(X)-Registered Trademark- product family provides a
complete solution for graphical design, simulation, automatic code and
document generation, and testing of real-time dynamic systems. Using these
tools, applications are developed, analyzed, validated, implemented, and
documented by way of a single graphical representation. The product family
features SystemBuild-TM- for graphical modeling and simulation;
Xmath-Registered Trademark- for object-oriented mathematical analysis and
visualization; AutoCode-Registered Trademark- for automatic C and Ada source
code generation; DocumentIt-TM- for automatic document generation; and the
RealSim-TM- AC-104 rapid prototyping computer.

NETWORKING PRODUCTS. A comprehensive suite of networking products enables
users to develop applications for device management, security, monitoring, and
routing technologies. The networking product suite supports the development of
communications devices with networked management and security capabilities and
integrates SNMP, TCP/IP, and HTTP capabilities into the pRISM+ development
environment and pSOSystem RTOS.

SERVICES AND SUPPORT

Wind River provides comprehensive customer service and support to help customers
realize the most benefit from its products.

TRAINING CLASSES. Wind River offers several training courses and workshops
relating to the use of its products. The courses are provided several times each
month at Wind River's training facilities in Alameda, California. Outside North
America, the courses are given under license from Wind River by distributors and
training contractors.

TECHNICAL SUPPORT. Wind River's technical support staff assists customers
with problems and questions in the installation and use of Wind River's
products. Technical support is provided by Wind River's staff of support
engineers in North America, by staff support engineers and /or local
distributors in Europe and by Wind River's Japanese subsidiary. Technical
support is bundled with product updates and maintenance and is offered on an
annual fee basis. Wind River's Tornado includes a tool for submitting problem
reports and receiving responses via the Internet.

ENGINEERING SERVICES. A number of services are provided on a
fee-for-service basis, including board support package validation,
application-level consulting, customization, and porting to strategic
semiconductor architectures. These are coordinated and performed by the
Engineering Services Group in North America and Japan, though they may on
occasion be supported by the Engineering Group or outside subcontractors in
North America and Europe.

PROFESSIONAL SERVICES. Through its Professional Services organization, and
through the acquisition of Integration Systems' Doctor Design-TM- professional
services unit, Wind River offers consulting, design, integration, and
maintenance services to assist customers in developing applications for
embedded devices.

STRATEGIC ALLIANCES

Wind River believes that strategic relationships with semiconductor
manufacturers and embedded device manufacturers are significant strengths that
are key to its future success in the embedded systems marketplace. Wind River
has strategic relationships with most of the major semiconductor companies
including Advanced RISC Machines Limited, Fujitsu Limited, Hitachi, Ltd., Intel
Corporation, MIPS Technologies, Inc., Mitsubishi Electric Corporation, Motorola,
Inc., NEC Corporation, ST Microelectronics, Siemens AG and Sun Microsystems,
Inc. Wind River has ported its VxWorks technology to their semiconductors,
allowing Wind River to leverage its partners' sales channels to give its
products broad market exposure. Wind River also enters into joint marketing and
sales agreements with certain developers of third-party applications as a means
to enhance its products with industry-specific features. In addition, Intel and
Wind River have a strategic relationship pursuant to which Intel supplies an
evaluation copy of Tornado for Intelligent I/O to each customer purchasing an
Intel i960Rx I/O microprocessor and a license for IxWorks for each such
microprocessor sold. Wind River also has developed strategic relationships with
Liberate Technologies, Inc. and Sun Microsystems for Embedded Internet
applications ranging from network computers to handheld and intelligent phones.

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CUSTOMERS

Wind River's products have been deployed by a broad range of organizations,
including companies in the following industries: global communications (both
data and voice), digital imaging, consumer electronics, computers and
peripherals, medical instrumentation, defense electronics and aerospace,
research, automotive control, and industrial measurement and control. No single
customer accounted for more than 10% of our total revenues in fiscal 2000, 1999
or 1998.

MARKETING, SALES AND DISTRIBUTION

In North America and Europe, Wind River markets products and services primarily
through our own direct sales organization, which consists of salespersons and
field application engineers. Wind River's sales force presents Wind River and
its products for licensing to prospective customers, while application engineers
provide technical pre-sales and post-sales support. As of January 31, 2000, Wind
River had 183 domestic direct salespersons and field application engineers
located throughout North America, 70 direct salespersons and field application
engineers throughout Europe and 16 sales employees in Japan.

Wind River distributes products in Japan through Wind River Systems,
K.K.("WRSKK"), a subsidiary in which we own a 70% equity interest. Innotech
Corporation, Kobe Steel Ltd. and Nissin Electric Ltd., each owns a 10% equity
interest. We have licensed our products to WRSKK for distribution in Japan.
WRSKK has in turn entered into master distributor agreements with its three
joint venture partners that provide the right to appoint sub-distributors. See
Note 13 of Notes to Consolidated Financial Statements.

Wind River has licensed six international distributors, principally to
serve customers in regions not serviced by our direct sales force or its
Japanese master distributors. We also have established strategic relationships
with computer, semiconductor and software vendors and work closely with a
number of system integrators worldwide that enable us to further broaden the
geographic and market scope for our products.

Revenues from international sales represented $57.3 million, $41.6 million,
and $26.9 million or approximately 33%, 32% and 29% of total revenue in fiscal
2000, 1999 and 1998, respectively. See Note 14 of Notes to Consolidated
Financial Statements for a summary of operations by geographic region, and
"Additional Risk Factors That May Affect Future Results of Operations." Prices
for international customers are quoted in local currency and are based on U.S.
dollar prices as adjusted to reflect the higher cost of doing business outside
the United States. International customers are invoiced either in the local
currency using current exchange rates, or U.S. dollars.

Wind River has experienced, and expects to continue to experience,
significant 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. Quarterly revenue levels have
increased over the levels for like quarters in the prior fiscal years but have
typically decreased in the first quarter of each fiscal year from the fourth
quarter of the prior fiscal year.

COMPETITION

The embedded real-time software industry is highly competitive. We believe that
our principal competition comes from companies that develop real-time operating
systems in-house rather than purchase these systems from independent software
vendors such as Wind River. We also compete with other independent software
vendors, including, Accelerated Technology, Inc., Mentor Graphics, Inc.,
Microsoft Corporation through its introduction of Windows CE, Microware Systems
Corporation, QNX Software Systems, Ltd., Sun Microsystems, Inc. through its
acquisition of Chorus, Motorola, Inc., and Symbian Inc, as well as a number of
other vendors that address one or more segments of the system design process.

Recently, a number of companies, including RedHat, Inc. and Lynx Real-Time
Systems, Inc. have promoted Linux, an open source licensing model, as an
operating system for use in embedded applications. The open source licensing
model provides readily available source code and a royalty-free operating
system. Because Linux is royalty free, Wind River may be forced to reduce the
prices of run-time royalties, which could result in reduced profit margins.

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technological and other advantages over our competitors, maintaining these
advantages will require a continued high level of investment in research and
development, marketing and customer service and support. In addition,
competitive pressures could cause us to reduce the prices of our products,
run-time royalties and services, which would result in reduced profit margins.

PRODUCT DEVELOPMENT AND ENGINEERING

Wind River believes 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. Wind River's product development and
engineering group, at January 31, 2000, includes 265 full-time employees. During
fiscal 2000, 1999 and 1998, product development and engineering expenses were
$29.7 million, $19.1 million, and $12.9 million, respectively, excluding
capitalized software development costs. In fiscal years 2000 and 1999, Wind
River did not incur any material capitalizable costs. In fiscal year 1998, costs
capitalized for software development were $803,000. See "Notes to Consolidated
Financial Statements" for a more complete description of Wind River's
capitalization of certain software development costs. We anticipate that we will
continue to commit substantial resources to research and product development in
the future.

The market for embedded real-time software is characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. Our success depends upon our ability to adapt and
respond to these changes. We must continuously update our existing products to
keep them current with customer needs, and must develop new products to take
advantage of new technologies, emerging standards, and expanding customer
requirements that could render our existing products obsolete. We have from
time to time experienced delays in the development of new products and the
enhancement of existing products, including, most recently, a delay in the
development of our new product "Tornado for Managed Switches." Such delays are
commonplace in the software industry. We must achieve design wins with key
customers because once a customer has designed a product with a particular
operating system, that customer typically is reluctant to change its supplier,
due to the significant costs associated with selecting a new supplier. If we
cannot adapt or respond in a cost effective and timely manner to new
technologies and new customer requirements, the market for our products would
suffer. From time to time, we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. We cannot provide assurance that
announcements of currently planned or other new products by Wind River or
others will not cause customers to defer purchasing existing Wind River
products. Any failure to anticipate or respond adequately to changing market
conditions, or any significant delays in product development or introduction,
would have a material adverse effect on our business, financial condition and
results of operations. See "Additional Risk Factors That May Affect Future
Results of Operations."

Wind River is continuously engaged in product development for new or
changing markets. In particular, we have invested significant time and
effort, together with a consortium of industry participants, in the
development of I2O, a specification that is intended to create an open
standard set of interface specifications for high performance I/O systems.
The specification is intended to be used by system, network and peripheral
interface card and operating systems vendors to simplify the task of building
and maintaining high-performance I/O subsystems. Wind River also has
developed IxWorks, a real-time operating system for use in conjunction with
the I2O specification. The success of the I2O specification and the IxWorks
product line depends heavily on its adoption by a broad segment of the
industry. We have also expended, and continue to expend, substantial time and
financial resources to develop embedded operating software and development
tools for Internet applications. The commercial Internet market is rapidly
changing and is characterized by an increasing number of new entrants with
competitive products. Moreover, there is an increasing number of new Internet
protocols to which our products must be ported. It is unclear which of these
competing protocols ultimately will achieve market acceptance. If the
protocols upon which our Internet products are based ultimately fail to be
widely adopted, Wind River's business, financial condition and results of
operations may be materially and adversely affected. It is difficult to
predict with any assurance whether demand for any of these products will
develop or increase in the future. If these markets, or any other new market
targeted by Wind River in the future, fail to develop, develop more slowly
than anticipated or become saturated with competitors, if our products are
not developed in a timely manner, or if Wind River's products and services do
not achieve or sustain market acceptance, our business, financial condition
and results of operations would be materially and adversely affected.

Like all software products, Wind River's products may contain undetected
errors that could cause loss or delay in market acceptance or cause failures in
the products containing the embedded systems. Damages and injury from such
failures could result in product liability claims against Wind

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River. See "Additional Risk Factors That May Affect Future Results of
Operations--Defects in Our Products Could Adversely Affect Our Operating Results
and Expose Us to Significant Product Liability Claims."

PROPRIETARY RIGHTS

Wind River's success is heavily dependent upon our proprietary technology. To
protect our proprietary rights, we rely on a combination of copyright, trade
secret, patent and trademark laws, nondisclosure and other contractual
restrictions on copying, distribution and technical measures. Wind River seeks
to protect our software, documentation and other written materials through trade
secret and copyright laws, which provide only limited protection. In addition,
Wind River has seven registered U.S. patents. We can not provide assurance that
the claims allowed will be of sufficient scope or strength (or be upheld in all
countries where our products can be sold) to provide meaningful protection or
any commercial advantage. As a part of ours confidentiality procedures, we
generally enter into nondisclosure agreements with our employees, consultants,
distributors and corporate partners and limit access to and distribution of our
software, documentation and other proprietary information. End user licenses of
our software are frequently in the form of shrink wrap license agreements, which
are not signed by licensees, and therefore may be unenforceable under the laws
of many jurisdictions. Despite Wind River's efforts to protect our proprietary
rights, it may be possible for unauthorized third parties to copy our products
or to reverse engineer or obtain and use information that we regard as
proprietary. Our competitors could independently develop technologies that are
substantially equivalent or superior to our technologies. Policing unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which software piracy of our products exists, software piracy can be
expected to be a persistent problem. In addition, effective protection of
intellectual property rights may be unavailable or limited in certain countries.
The status of U.S. patent protection in the software industry is not well
defined and is likely to evolve as the U.S. Patent and Trademark Office grants
additional patents. Patents have been granted on fundamental technologies in
software, and patents may issue in the future that relate to fundamental
technologies incorporated into our products.

As the number of patents, copyrights, trademarks, trade secrets and other
intellectual property rights in our industry increases, products based on our
technology may increasingly become the subject of infringement claims. Wind
River has received in the past and may receive in the future letters from third
parties asserting infringement claims. Any such claims, whether with or without
merit, could result in costly litigation, cause product shipment delays or
require Wind River to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to Wind River, or at all, which could have a material adverse effect on ours
business, financial condition and results of operations. In the event of an
adverse ruling in any such litigation, we might be required to pay substantial
damages, discontinue the use and sale of infringing products and expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. In addition, we may initiate claims or litigation against
third parties for infringement of our proprietary rights or to establish the
validity of our proprietary rights. Litigation to determine the validity of any
claims, whether or not such litigation is determined in our favor, could result
in significant expense and divert the efforts of our technical and management
personnel from productive tasks.

MANUFACTURING AND BACKLOG

Wind River's manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
Limited manufacturing is currently performed in our Alameda, California,
facility. Outside vendors provide tape and CD duplication, printing of
documentation and manufacturing of packaging materials. Wind River does not
believe that backlog is a meaningful indicator of sales that can be expected in
future periods, particularly in view of the fast pace of technological change
in the software industry. Wind River's order fulfillment process is intended to
efficiently manage the flow of products to customers, often resulting in a
number of weeks of backlog. At January 31, 2000, and 1999, backlog was
approximately 8 to 11 weeks and 9 to 12 weeks of sales. Backlog includes orders
that may be filled at various times throughout the fiscal year.

EMPLOYEES

Wind River had, at January 31, 2000, 818 employees, including 436 in sales,
marketing and support activities, 265 in product development and engineering and
117 in management, operations, finance and administration. Of these employees,
619 were located in North America and 199 were located outside of North America.
No employees of Wind River are represented by a labor union or are subject to a
collective bargaining agreement. Wind River has never experienced a work
stoppage. See "Additional Risk Factors That May Affect Future Results of
Operations."

In connection with the acquisition of Integrated Systems on February 15,
2000, Wind River hired approximately 800 employees of Integrated Systems.

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RISK FACTORS

OUR BUSINESS FACES SIGNIFICANT RISKS. THE RISKS DESCRIBED BELOW MAY NOT BE THE
ONLY RISKS WE FACE. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR THAT WE
CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY
OF THE EVENTS OR CIRCUMSTANCES DESCRIBED IN THE FOLLOWING RISKS ACTUALLY OCCURS,
OUR BUSINESS, FINANCIAL CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.

OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM PERIOD
TO PERIOD AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.

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

- - the amount and timing of orders we receive;

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

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

- - the mix of our revenues from the sale of services (which have lower gross
margins than our revenue from the sale of products) as compared to
products;

- - our ability to control our operating expenses, which we anticipate will
continue to increase;

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

- - announcements, new product introductions and price reductions by our
competitors;

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

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

- - economic conditions generally and in international markets, which
historically have provided a significant portion of our revenues; and

- - foreign currency exchange rates.

In addition, we often recognize a significant portion of our quarterly
revenues from orders we receive and ship in the last month of the quarter and,
as a result, we may not be able to forecast our revenues until late in the
period. Further, our customers historically have purchased more of our products
in our fourth fiscal quarter than in other quarters. A decrease in orders is
likely to adversely and disproportionately affect our operating results, because
a significant portion of our expenses are fixed and are based, in part, on our
expectations of future revenues. Therefore, we have a limited ability to reduce
expenses in response to a shortfall in anticipated revenues. We believe that
period-to-period comparisons of our operating results may not be meaningful, and
should not be relied on as an indication of our future performance.

IF WE DO NOT INTEGRATE OUR PRODUCTS WITH THOSE OF COMPANIES WE HAVE
ACQUIRED, WE MAY LOSE CUSTOMERS AND FAIL TO ACHIEVE OUR FINANCIAL OBJECTIVES.

We recently completed two significant business acquisitions. In February
and March 2000, we acquired Integrated Systems, Inc., and Embedded Support Tools
Corporation in merger transactions. Achieving the benefits of the mergers
depends in part on the integration of Wind River's, Integrated Systems' and
Embedded Support Tools' products in a timely and efficient manner. In order for
us to provide enhanced and more valuable products to our customers since the
mergers, we will need to integrate our product lines and development
organizations. This will be difficult and unpredictable because our products are
highly complex, have been developed independently and were designed without
regard to such integration. If we cannot successfully integrate our products
and continue to provide customers with products and new product features in the
future on a timely basis, we may lose customers and our business and results of
operations may be seriously harmed.

IF WE ARE NOT SUCCESSFUL IN INTEGRATING OUR ORGANIZATIONS, WE WILL NOT BE
ABLE TO OPERATE EFFICIENTLY.

Achieving the benefits of the mergers also depends in part on the
successful integration of Wind River's, Integrated Systems' and Embedded Support
Tools' operations and personnel in a timely and efficient manner. Such
integration requires coordination of different development and engineering
teams. This, too, will be difficult and unpredictable because of possible
cultural conflicts and different opinions on technical decisions and product
roadmaps. If we cannot successfully integrate our operations and personnel, we
will not realize the expected benefits of the mergers.

INTEGRATING OUR COMPANIES MAY DIVERT MANAGEMENT'S ATTENTION AWAY FROM OUR
OPERATIONS.

Successful integration of Wind River's, Integrated Systems' and Embedded
Support Tools' operations, products and personnel may place a significant burden
on our management and our internal resources. The diversion of management
attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on the combined company's business,
financial condition and operating results.

<PAGE>

IF WE DO NOT SUCCESSFULLY INTEGRATE THE COMPANIES INTO A SINGLE BUSINESS
AND REALIZE THE EXPECTED BENEFITS OF THE MERGERS, WE WILL HAVE INCURRED
SIGNIFICANT COSTS WHICH MAY HARM OUR BUSINESS.

Wind River expects to incur costs from integrating Integrated Systems' and
Embedded Support Tools' operations, products and personnel. These costs may be
substantial and may include costs for:

- - employee redeployment, relocation or severance;

- - conversion of information systems;

- - combining research and development teams and processes;

- - reorganization or closures of facilities; and

- - relocation or disposition of excess equipment.

We do not know whether Wind River will be successful in these integration
efforts and cannot assure you that we will realize the expected benefits of the
mergers.

FAILURE TO RETAIN KEY EMPLOYEES COULD DIMINISH THE BENEFITS OF THE MERGERS.

The successful combination of Wind River, Integrated Systems and Embedded
Support Tools depends in part on the retention of key personnel. There can be no
assurance that Wind River will be able to retain Integrated Systems' and
Embedded Support Tools' key management, technical, sales and customer support
personnel, or that Wind River will realize the anticipated benefits of the
mergers.

IF CUSTOMER RELATIONSHIPS ARE DISRUPTED BY THE MERGERS, OUR SALES COULD
DECLINE.

Customers may not continue their buying patterns in place prior to the
mergers. Any significant delay or reduction in orders for Wind River's,
Integrated Systems' or Embedded Support Tools' products could have a material
adverse effect on the combined company's business, financial condition and
results of operations. Customers may defer purchasing decisions as they
evaluate the likelihood of successful integration of Wind River's, Integrated
Systems' and Embedded Support Tools' products and the combined company's future
product strategy. Customers may also consider purchasing products of
competitors. In addition, by increasing the breadth of Wind River's, Integrated
Systems' and Embedded Support Tools' business, the mergers may make it more
difficult for the combined company to enter into relationships, including
customer relationships, with strategic partners, some of whom may view the
combined company as a more direct competitor than Wind River, Integrated Systems
or Embedded Support Tools as an independent company.

WE FACE INTENSE COMPETITION, WHICH COULD DECREASE DEMAND FOR OUR PRODUCTS
OR CAUSE US TO REDUCE THEIR PRICES.

- - Accelerated Technology, Inc.

- - Mentor Graphics, Inc.

- - Microsoft Corporation

- - Microware Systems Corporation

- - Motorola, Inc.

- - QNX Software Systems, Ltd.

- - Sun Microsystems, Inc.; and

- - Symbian Inc.

Recently, a number of companies, including RedHat, Inc. and Lynx Real-Time
Systems, Inc. have promoted Linux, an open source licensing model, as an
operating system for use in embedded applications. The open source licensing
model provides readily available source code and a royalty-free operating
system. Because Linux is royalty free, Wind River may be forced to reduce the
prices of run time royalties, which could result in reduced profit margins.

In addition, hardware or other software vendors could seek to expand their
product offerings by designing and selling products that directly compete with
or adversely affect sales of our products. Many of our existing and potential
competitors have substantially greater financial, technical, marketing and sales
resources than we do. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products. Moreover, our competitors may foresee the course of market
developments more accurately than we do and could in the future develop new
technologies that compete with our products or even render our products
obsolete. Although we believe we presently have certain technological and other
advantages over our competitors, maintaining these advantages will require a
continued high level of investment in research and development, marketing and
customer service and support. In addition, competitive pressures could cause us
to reduce the prices of our products, run-time royalties and services, which
would result in reduced profit margins.

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OUR FAILURE TO RESPOND QUICKLY TO RAPID TECHNOLOGICAL CHANGE WITH PRODUCT
OFFERINGS WILL ADVERSELY AFFECT OUR ABILITY TO COMPETE.

BECAUSE OUR OPERATING RESULTS DEPEND UPON SALES OF A SMALL NUMBER OF
PRODUCTS, A REDUCTION IN DEMAND FOR A SINGLE PRODUCT MAY DISPROPORTIONATELY
DECREASE OUR OPERATING RESULTS.

Revenue from sales of our Tornado and VxWorks family of products and
services has historically accounted for substantially all of our revenue, and
we expect this concentration will continue in the foreseeable future. Although
we have added new products to our offering as a result of the mergers, any
decline in price or reduction in the demand for our Tornado or VxWorks family of
products and services could materially adversely affect our operating results
and cause the price of our common stock to decline.

IF WE DO NOT CONTINUE TO SUCCESSFULLY ADDRESS NEW AND RAPIDLY CHANGING
MARKETS, OUR REVENUES WILL DECLINE.

We are continuously engaged in product development for new or rapidly
changing markets. It is difficult to predict whether demand for any of these
products will develop or increase in the future.

In particular, we have invested significant time and effort, together with
a consortium of industry participants, in the development of I 2 O, a new
specification that is intended to create an open standard set of interface
specifications for high-performance input/output (I/O) systems. In parallel with
this effort, we have developed IxWorks, a real-time operating system for use in
conjunction with the I 2 O specification. The success of the I 2 O
specification and the IxWorks product line depends heavily on its adoption by a
broad segment of the industry. We have also spent, and continue to spend,
substantial time and financial resources, through two new business units, to
develop software solutions for Internet appliances and Internet infrastructure,
including Tornado for Managed Switches. These products must be ported to an
increasing number of Internet protocols and semiconductor architectures designed
specifically for the Internet. If the protocols and semiconductors upon which
our Internet products are based ultimately fail to be widely adopted, our
products based on those protocols and architectures will fail to achieve market
acceptance. If our products fail to achieve market acceptance or if their
targeted markets fail to develop, our revenues will decline.

A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM ROYALTIES, WHICH ARE
DEPENDENT UPON THE EFFORTS OF THIRD PARTIES OUTSIDE OUR CONTROL.

Our operating systems are embedded in customers' end-user products, and we
receive royalty fees for each copy of our operating system embedded in those
products. Our royalty revenues depend upon our ability to successfully negotiate
royalty agreements with our customers and, in turn, their successful
commercialization of the underlying products. We cannot control their product
development or predict its success. If our customers are not successful, our
royalty revenues will decline significantly.

WE HAVE RECENTLY BEGUN TO OFFER SOFTWARE CONSULTING SERVICES, WHICH HAVE
LOWER MARGINS THAN OUR CORE BUSINESS.

Our new professional services business is characterized by fixed-price
commitments and high costs for personnel and consultants. If this business is
not successful, or if it grows more slowly than anticipated, our gross margin
will suffer. In addition, we may enter into contracts with development
schedules in excess of a year. Failure to manage these contracts efficiently
could put additional pressure on our gross margin.

ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND INCREASE
OUR INDEBTEDNESS.

As part of our business strategy, we anticipate that we will continue to
acquire or make investments in businesses, products and technologies that
complement ours. We have incurred significant costs in connection with completed
and pending transactions, and may incur significant costs in connection with
future transactions whether or not they actually occur. The transactions may not
be completed in a timely manner or at all. We may experience difficulties
integrating an acquired company's operations into ours. As a result, we may
divert management attention to the integration that would otherwise be available
for the ongoing development of our business. In particular, if we are unable to
combine our

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financial and customer databases, we will be unable to operate efficiently.
Acquisitions have additional inherent risks, including:

- - difficulties assimilating acquired operations, technologies or products;

- - unanticipated costs; and

- - adverse effects on relationships with customers, suppliers and employees.

We may not be successful in integrating the businesses, products,
technologies or personnel we acquire. Similarly, we cannot guarantee that our
investments will yield a significant return if any. To finance acquisitions, we
may issue equity securities, which may dilute our earnings per share, or incur
significant indebtedness and related interest expense.

FAILURE OF OUR CURRENT AND PLANNED SYSTEMS, PROCEDURES AND CONTROLS TO
ADEQUATELY MANAGE AND SUPPORT OUR ANTICIPATED GROWTH AND FUTURE OPERATIONS,
COULD DISRUPT OUR BUSINESS.

We have experienced, and expect to continue to experience, both through
acquisitions and internal expansion, significant growth in our headcount and in
the scope, complexity and geographic reach of our operations. To support this
expansion, we must continue to improve our management controls, reporting
systems and procedures. To implement those improvements, we must purchase,
develop and maintain complex and expensive systems, such as our enterprise
resource planning system and our planned sales force automation system. Our
current and planned systems, procedures and controls may not be adequate to
support our future operations. Failure of these systems to meet our needs could
disrupt our operations.

IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES IN AN
INCREASINGLY COMPETITIVE ENVIRONMENT, OUR BUSINESS MAY SUFFER.

Our future success depends, and will continue to depend, on our ability to
hire, train, motivate and retain additional highly skilled managerial, product
development, marketing, sales, customer support and operations personnel to
support our growing business. Competition for these personnel is intense,
especially for engineers and especially in the San Francisco Bay Area where we
maintain our headquarters and principal engineering facilities. We cannot be
certain that we will be successful in recruiting and retaining such personnel.
Our failure to do so could impair our ability to compete successfully.

OUR SIGNIFICANT INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO ECONOMIC
RISKS.

During the fiscal years ended January 31, 2000 and 1999, we derived
approximately 33% and 32%, respectively, our total revenue from sales outside of
North America. We expect that international sales will continue to generate a
significant percentage of our total revenue in the foreseeable future, and we
also expect to continue to make investments to further expand our international
operations and to increase our direct sales force in Europe and Asia. Risks
inherent in international operations include:

- - the imposition of governmental controls and regulatory requirements;

- - the costs and risks of localizing products for foreign countries;

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

- - greater difficulty in accounts receivable collection;

- - the restrictions of repatriation of earnings;

- - the burdens of complying with a variety of foreign laws; and

- - difficulties in staffing and managing foreign subsidiaries and branch
operations.

Any of these events could reduce our international sales and increase our
costs of doing business internationally.

GAINS AND LOSSES RESULTING FROM FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE
RATES COULD HARM OUR INTERNATIONAL BUSINESS AND OUR OVERALL OPERATING RESULTS.

As a business with significant international operations, we face exposure
to adverse movements in foreign currency exchange rates. Sales by our foreign
subsidiaries are denominated in the local currency, and an increase in the
relative value of the dollar against such currencies would reduce our revenues
in dollar terms or make our products more expensive and, therefore, potentially
less competitive in foreign markets. Gains and losses on the conversion to
dollars of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to fluctuations
in our results of operations.

OUR INTERNATIONAL BUSINESS DEPENDS ON THE EFFORTS OF THIRD-PARTY
DISTRIBUTORS OUTSIDE OUR CONTROL.

We rely on distributors for sales of our products in certain foreign
countries. Accordingly, we are dependent on their ability to promote and support
our products and, in some cases, to translate them into foreign languages. Wind
River's international distributors generally offer products of

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several different companies, including in some cases products that are
competitive with Wind River's products. We cannot predict that our international
distributors will continue to market our products or provide them with adequate
levels of support. If our international distributors do not promote our products
effectively, our international revenues could decline.

WE SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS DEPENDENT UPON
GOVERNMENT FUNDING, WHICH MAY NOT CONTINUE TO BE AVAILABLE.

We have derived a portion of our revenues historically from sales of
systems built to the VME (versabus module eurocard) standard. These systems
typically are used in high cost, low volume applications, including military,
telecommunications, space and research applications. Although we believe that
revenues from sales of products designed for embedded systems applications
(non-VME customers) will account for an increasing percentage of our revenues in
the future, we do expect revenues from the VME market to continue to be
significant for the foreseeable future. Academic institutions and defense
industry participants, which generate most of our VME revenues, are dependent on
government funding. Any unanticipated future termination of government funding
of VME customers would reduce our revenues.

IF WE LOSE THIRD-PARTY LICENSE RIGHTS, WE MAY NOT BE ABLE TO SELL SOME OF
OUR PRODUCTS.

We license software products from other companies to distribute with some
of our products. These third parties may not be able to provide competitive
products with adequate features and high quality on a timely basis or to provide
sales and marketing cooperation. In addition, our products compete with
products produced by some of our licensors. When these licenses terminate or
expire, continued license rights might not be available to us on reasonable
terms. In addition, we might not be able to obtain similar products to
substitute into our tool suites.

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 IN THE MARKET.

Our success is partially dependent upon the proprietary technology
contained in our products. We currently rely on a combination of patents,
copyrights, trademarks, trade secret laws, and contractual provisions to
establish and protect our intellectual property rights in our products. We
cannot be certain that the steps we take to protect our intellectual property
will adequately protect our rights, that others will not independently develop
or otherwise acquire equivalent or superior technology, or that we can maintain
such technology as trade secrets. For example, end user licenses of our
software are frequently in the form of shrink wrap or click wrap license
agreements, which are not signed by licensees, and these may be unenforceable in
some cases. In addition, policing unauthorized use of our products is difficult,
and while we are unable to determine the extent to which software piracy of our
products exists, software piracy can be expected to be a persistent problem,
particularly in foreign countries, where the laws may not protect our
intellectual property as fully as in the United States. Employees, consultants,
and others who participate in the development of our products may breach their
agreements with us regarding our intellectual property, and we may not have
adequate remedies for any such breach.

IF WE ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS THROUGH LITIGATION, THE
COSTS COULD BE SIGNIFICANT.

We may initiate claims or litigation against third parties for infringement
of our proprietary rights or to establish the validity of our proprietary
rights. Litigation to determine the validity of any claims, whether or not such
litigation is determined in our favor, could result in significant expense to us
and divert the efforts of our technical and management personnel from productive
tasks.

THIRD-PARTY CLAIMS OF PATENT INFRINGEMENT COULD RESULT IN SUBSTANTIAL
COSTS.

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

DEFECTS IN OUR PRODUCTS COULD HURT OUR OPERATING RESULTS AND EXPOSE US TO
SIGNIFICANT PRODUCT LIABILITY CLAIMS.

Because of their complexity, software products, including Wind River's,
have in the past and may in the future contain undetected or unresolved errors,
particularly when first introduced or as new versions are released. Despite
extensive testing, errors may be found in our current or future products or
enhancements after commencement of commercial

14
<PAGE>

shipments. If this occurs, we may experience delay in or loss of market
acceptance and sales, product returns, diversion of development resources,
injury to our reputation, and increased service and warranty costs.

Our products are increasingly used in applications, such as network
infrastructure, transportation, medical and mission-critical business systems,
in which the failure of the embedded system could cause property damage,
personal injury or economic loss resulting in product liability claims against
us. Although our agreements with our customers typically contain provisions
intended to limit our exposure to liability claims, these provisions may not be
effective in doing so in all circumstances or in all jurisdictions. We maintain
product liability insurance covering certain damages arising from use of our
products, however such insurance may not adequately cover claims brought against
us. Liability claims against us could require us to spend significant time and
money in litigation and, if successful, to pay significant damages.

THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Although we have not experienced any significant Year 2000 problems in our
own or third party software or with our suppliers, it is possible that such
problems still exist. If so, we could face unexpected expenses to fix such
problems or suffer unexpected outages, either of which would harm our business.

WE HAVE SUBSTANTIAL DEBT SERVICE AND PRINCIPAL REPAYMENT OBLIGATIONS,
WHICH COULD MAKE IT DIFFICULT FOR US TO OBTAIN FINANCING.

We sold $140 million of 5% convertible subordinated notes in 1997, which
mature in 2002. This debt financing increased significantly both the ratio of
our long-term debt to our total capitalization and our interest expenses. The
degree to which we are leveraged could impair our ability to obtain financing
for working capital or acquisitions, should we need to do so. The notes are
convertible into our common stock at a price of $32.33 per share, and no notes
have been converted to date. On August 1, 2002, we will be required either to
pay off or refinance any unconverted notes. We do not know if we will be able to
refinance the notes on favorable terms or at all. If a significant amount of the
notes remains unconverted at maturity and we are unable to refinance the notes,
the repayment would deplete our cash reserves significantly.

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE; A SIGNIFICANT
DECREASE IN OUR STOCK PRICE MAY INCREASE OUR EXPOSURE TO SECURITIES LITIGATION.

The trading price of our common stock has been and is likely to be volatile. It
could fluctuate widely in response to a variety of factors, including:

- - actual or anticipated variations in our operating results;

- - announcements of new products or significant events or transactions by us
or our competitors;

- - changes in our industry;

- - changes in financial estimates by securities analysts;

- - pricing pressures;

- - general market conditions;

- - events affecting other companies that investors believe to be comparable to
us; and

- - other events or factors that may be beyond our control.

In recent years, the stock markets in general and the shares of technology
companies in particular have experienced extreme price fluctuations. These
fluctuations often have been unrelated or disproportionate to the operating
performance of the companies affected. Any change in investors' perception of
our prospects could depress our stock price regardless of our results. Other
broad market and industry factors may decrease our stock price, as may general
political or economic conditions such as recessions or interest rate or currency
fluctuations. In the past, following declines in the market price of a company's
securities, securities class action litigation often has been instituted against
the company. Litigation of this type, even if ultimately unsuccessful, could
result in substantial costs and a diversion of management's time and focus.

15
<PAGE>

ITEM 2.

PROPERTIES

During the fourth quarter in fiscal 1999, Wind River relocated its principal
administrative, sales, marketing, product development and engineering
facilities to a new headquarters facility consisting of two buildings in
Alameda, California. The new facility provides approximately 148,000 square feet
of space. Lease payments for the new facility began in August 1999. In March
1998, Wind River entered into an accreting interest rate swap agreement to
reduce the impact of changes in interest rates on its floating rate operating
lease for the new corporate headquarters. This agreement effectively changes
Wind River's interest rate exposure on its operating lease to a fixed rate of
5.9%. In addition, Wind River has entered into a second lease agreement for the
construction of two additional buildings. The new buildings will provide
approximately 125,000 square feet of space and are scheduled to be completed by
January 2001. Wind River leases a customer training facility in Alameda,
California, which provides approximately 11,300 square feet of office space as
well as a 3,300 square foot facility in the Washington D.C. area. In addition,
Wind River leases two research and development offices in Dallas, Texas, and
Newport, California. Wind River also leases other domestic sales offices in the
United States and international sales and/or service facilities in Canada,
France, Germany, Israel, Italy, Japan, Korea, Scotland, Singapore, Sweden,
Taiwan and the United Kingdom.

In connection with the acquisition of Integrated Systems, Wind River
acquired approximately 150,000 square feet of owned space, located in Sunnyvale,
California. In addition, Integrated Systems leases a number of sales and
services as well as research and development offices in North America, Europe,
Asia and Israel.

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS

Not applicable.

<PAGE>

ITEM 4A.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Wind River, and certain information about them as of
April 1, 2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH WIND RIVER
- --------------------------------------------------------------------------------
<S> <C> <C>
Jerry L. Fiddler 48 Chairman of the Board

Thomas St. Dennis 46 President, Chief Executive Officer
and Director

David G. Fraser 36 Vice President and General Manager,
Wind River Networks business unit

Richard W. Kraber 59 Vice President of Finance, Chief
Financial Officer and Secretary

Peter J. Richards 52 Vice President of Americas Sales

Curtis B. Schacker 39 Vice President of Marketing and
Corporate Development

Marla A. Stark 47 Vice President, Intellectual Property
and Legal Affairs

John C. Fogelin 34 Vice President and Co-General
Manager, Wind River Platforms
business unit

David E. Stepner 55 Vice President and Co-General
Manager, Wind River Platforms
business unit

Kamran Sokhanvari 39 Vice President and General Manager,
Wind River Services business unit

Scot J. Morrison 37 Vice President and General Manager,
Wind River Transportation, Defense
and Industrial business unit

Jean-Claude Sarner 41 Vice President and General Manager,
Wind River Consumer business unit

Peter S. Dawson 45 Vice President and General Manager,
Wind River Hardware Software
Integration business unit
</TABLE>
Mr. Fiddler co-founded Wind River in February 1983, and currently serves as
chairman of the board. From February 1983 to March 1994 he served as chief
executive officer of Wind River. He served as interim CEO from April to
September 1999. Prior to founding Wind River, he was a computer scientist in the
Real-Time Systems Group at Lawrence Berkeley Laboratory. Mr. Fiddler holds a
B.A. in music and photography and an M.S. in computer science from the
University of Illinois.

Mr. St. Dennis joined Wind River in September 1999 as chief executive
officer. From July 1992 to September 1999, Mr. St. Dennis was at Applied
Materials, Inc., a supplier of semiconductor processing equipment, where he
last served as group vice president and president of the Planarization and
Dielectric Deposition Product business group. From 1987 to 1992, Mr. St. Dennis
was vice president of technology at the Silicon Valley Group, a supplier of
automated wafer processing equipment for the semiconductor industry. From 1983
to 1987 he served as vice president of sales and marketing at Semiconductor
Systems, Inc., a manufacturer of photo-processing tools for the semiconductor
industry. Mr. St. Dennis has an M.S. and a B.S. in physics from the University
of California at Los Angeles.

Mr. Fraser joined Wind River in September 1991 and currently serves as
vice president and general manager of the Wind River Networks business unit.
From 1988 to 1991, he served as a product marketing manager at
Unisys/Convergent. From 1985 to 1988, he was a software engineer at
Hewlett-Packard in England. Mr. Fraser holds a B.S. in computing science from
Glasgow University, Scotland.

Mr. Kraber joined Wind River in August 1995 and has been serving as vice
president of finance and chief financial officer and secretary. From 1991 to
1995, he served as chief operating officer and chief financial officer of
Peerless Lighting, an industrial lighting products company. Prior to then, he
was chief financial officer for GardenAmerica and a consultant and engagement
manager for McKinsey & Company. Mr. Kraber has a B.S. in mathematics from
Stanford University and an M.B.A. from Harvard University.

Mr. Richards joined Wind River in September 1998 as vice president of
sales. From March 1997 to August 1998, he served as president and chief
executive officer for Toronto, Canada-based King Products Inc., which builds
Internet-enabled products. From December 1979 to March 1997, Mr. Richards held
various positions at Tandem Computers, a manufacturer of computer and related
products, where he last served as vice president and general manager. Mr.
Richards studied at Westminster College, United Kingdom, and has an equivalent
B.A. in marketing management.

Mr. Schacker joined Wind River in 1990 and has served as vice president of
marketing and corporate development since November 1997. He has also served as
a customer engineering manager, a sales representative and sales manager for
Wind River's northwest region in the United States. Prior to joining Wind
River, he was an engineer for Ready Systems and for Lockheed Missile and Space
Company. Mr. Schacker has a B.S. in computer science from Wright State
University.

Ms. Stark joined Wind River in September 1999 as vice president of
intellectual property and legal affairs. From 1995 to 1999, she served as the
managing director of intellectual property litigation at Applied Materials.
Prior to then, Ms. Stark was an attorney at Wilson Sonsini Goodrich & Rosati,
and Brown & Bain, law firms that specialize in the high tech-

17
<PAGE>

nology business sector. Ms. Stark holds a B.A. from Stanford University and a
J.D. from the University of California, Hastings School of Law.

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

Dr. Stepner has served as vice president and co-general manager of the
Wind River Platforms business unit since February 2000. From December 1993
until February 2000 Dr. Stepner was vice president, research and development
for Integrated Systems. From April 1984 to March 1993 he served as founder,
president and chief executive officer of Greyhawk Systems, Inc., a manufacturer
of high-resolution liquid crystal displays. In March 1993 Greyhawk Systems,
Inc. was sold to AmPro Corporation. Dr. Stepner served as executive vice
president of AmPro Corporation and general manger of the AmPro/Greyhawk
division from March 1993 to December 1993. Dr. Stepner holds a B.S. in general
engineering from Brown University and an M.S. and a Ph.D., both in electrical
engineering, from Stanford University.

Mr. Sokhanvari joined Wind River in 1998 and currently serves as vice
president and general manager of the Wind River Services business unit. From
1995 to 1998 Mr. Sokhanvari was a senior program manger for the Global
Commercial Enterprise business unit at Silicon Graphics, a manufacturer of
high-performance computing technology. Mr. Sokhanvari started his career at
Imperial Chemical Industries (ICI) (Wales, U.K.) as the plant chemical
engineer, then became senior project engineer at Swiss Life International
(Zurich, Switzerland) at the Advanced Technologies Laboratory. Mr. Sokhanvari
holds a B.S. in chemical engineering from the University of Glamorgan in Wales
and an M.S. in computer science from the University of Maryland.

Mr. Morrison has served as vice president and general manager of the Wind
River Transportation, Defense and Industrial business unit since February 2000.
From 1986 until the present, Mr. Morrison held numerous positions at Integrated
Systems, where he last served as a vice president and general manager of the
Design Automation Solutions business unit. Mr. Morrison holds a B.S. in applied
science from the University of Toronto and an M.S. in aerospace engineering
from the Massachusetts Institute of Technology.

Mr. Sarner has served as vice president and general manager of the Wind
River Consumer business unit since February 2000. From December 1995 until
February 2000 Mr. Sarner was vice president and general manager of the Embedded
Platforms Group business unit at Integrated Systems, and previously, vice
president of sales and marketing for Diab Data, Inc., a subsidiary of
Integrated Systems. Mr. Sarner had joined Diab Data in April 1994, prior to the
company's acquisition by Integrated Systems. From January 1992 to February 1994
Mr. Sarner served as vice president of marketing at Ready Systems. From
September 1984 to January 1992 he was employed at Intel Corporation. Mr. Sarner
holds an M.B.A. from the Harvard Graduate School of Business Administration.

Mr. Dawson has served as vice president of the Wind River Hardware Software
Integration business unit since April 2000. In January 1989, Mr. Dawson founded
Embedded Support Tools Corporation where he served as chairman of the board of
directors, president and chief executive officer until the company's
acquisition by Wind River in April 2000. Prior to 1989, Mr. Dawson served as
principal engineer, software engineer, and project leader at various high
technology companies, including EMC Co., Foxboro Co., and Taylor Instruments.
Mr. Dawson holds a B.S. in electri-cal engineering from the University of Hull
in England.

18
<PAGE>

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Wind River's Common Stock is traded on the Nasdaq National Market under the
symbol WIND. All share and per share amounts below have been adjusted to give
effect to a three-for-two stock split by means of a stock dividend paid on
February 4, 1999.

The closing price of Wind River's common stock as reported by the Nasdaq
National Market on March 31, 2000, was $36.25 per share. The prices per share
in the following table sets forth the low and high prices on the Nasdaq
National Market for the quarters indicated:

<TABLE>
<CAPTION>
LOW HIGH
- --------------------------------------------------------------
<S> <C> <C>
FISCAL 1999

First quarter ended April 30, 1998 $21.58 $28.08

Second quarter ended July 31, 1998 19.00 25.92

Third quarter ended October 31, 1998 18.67 34.42

Fourth quarter ended January 31, 1999 20.17 33.42

<CAPTION>
LOW HIGH
- --------------------------------------------------------------
<S> <C> <C>
FISCAL 2000

First quarter ended April 30, 1999 $11.25 $25.50

Second quarter ended July 31, 1999 13.69 22.75

Third quarter ended October 31, 1999 13.38 21.00

Fourth quarter ended January 31, 2000 20.88 45.00
</TABLE>

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

At March 31, 2000, there were approximately 849 stockholders of record of
Wind River. Certain record holders are represented by brokers and other
institutions on behalf of stockholders. Wind River has estimated the total
number of such stockholders to be 52,844.

19
<PAGE>

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below should be read in
conjunction with the more detailed financial statements presented in Item 8 of
this Form 10-K. The consolidated financial data for periods prior to the
financial statements presented in Item 8 of this Form 10-K are derived from
audited consolidated financial statements not included herein and have been
restated to reflect historical financial information of RouterWare.

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $171,110 $131,902 $93,770 $65,804 $44,000

Operating income 30,641(1) 36,610(2) 9,713(3) 16,372 8,130

Net income 22,471(1) 25,623(2) 4,326(3) 11,524 5,383

Net income per share:

Basic .54(1) .64(2) .11(3) .33 .17

Diluted .50(1) .58(2) .10(3) .28 .15

Working capital 90,271 58,134 152,277 58,336 27,701

Total assets 423,210 329,713 290,841 132,111 45,480

Convertible subordinated notes and long-term debt 140,000 140,000 140,000 - -

Stockholders' equity 202,705 151,892 114,892 112,199 32,813
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Operating income, net income, and net income per share include the effect
of charges of $1.8 million related to the implementation of an enterprise
resource planning system, $205,000 in connection with the integration of
Integrated Systems, Inc., $816,000 of amortization of goodwill, $802,000
incurred with hiring Xact employees and the write-offs of an investment in and
distribution agreement with Xact, $1.2 million incurred for the retirement
package of the chief executive officer, $929,000 for the transaction costs
associated with the acquisition of RouterWare, Inc, and $1.3 million in
connection with hiring our new chief executive officer. Net income before these
charges was $27.2 million.

(2) Operating income, net income, and net income per share include the effect
of amortization of goodwill of $780,000. Net income before this charge was
$26.1 million.

(3) Operating income, net income, and net income per share include the charge
of $15.2 million which resulted from the acquisition of in-process technologies
from Liberate Technologies, Inc. and Objective Software Technology, Ltd. during
the fiscal year ended January 31, 1998. Net income before this charge was $17.7
million.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion contains forward-looking statements that involve
risks and uncertainties. Wind River's actual results could differ materially
from those discussed in any forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this section, as well as under the caption "Business", including
"-Additional Risk Factors That May Affect Future Results of Operations." All
forward-looking statements included in this document are based on information
available to Wind River on the date hereof, and Wind River assumes no
obligation to update any such forward-looking statements. The following
discussion should be read in conjunction with the consolidated financial
statements and notes included elsewhere in this report.

Wind River was founded in 1983 to provide consulting and custom software
development services for a variety of business clients. From its inception,
Wind River directed its development efforts towards real-time and embedded
system applications and released its first commercial product, VxWorks, in
1987. Wind River subsequently broadened its product offerings both internally
and through technology and business acquisitions, and has become a leading
provider of operating systems and development tools for the real-time embedded
systems marketplace. Wind River has invested heavily in the development and
introduction of its products and in the establishment of worldwide sales,
distribution, customer support and consulting capabilities. Wind River markets
its products on a worldwide basis through its direct sales force, distributors
and value-added resellers. Wind River provides sales, marketing and product
support for foreign customers through wholly-owned subsidiary companies in the
United States, Europe and a majority-owned subsidiary in Japan.

20
<PAGE>

Wind River typically charges a one-time fee for a development license and
a run-time license fee for each copy of Wind River's operating system embedded
in the customer's product. A key component of Wind River's strategy is to
significantly increase revenue through run-time license fees. Any increase in
the percentage of revenues attributable to run-time licenses will depend on
Wind River's successful negotiation of run-time license agreements and on the
successful commercialization by Wind River's customers of the underlying
products.

In May 1998, Wind River acquired Zinc Software, Incorporated, a privately
held company that develops, markets and supports graphical application
software. In connection therewith, Wind River issued 339,917 shares of common
stock in exchange for all of the outstanding stock of Zinc. The acquisition was
accounted for as a pooling of interests. As the operations of Zinc were not
material to Wind River's consolidated operations and financial position, the
financial statements of Zinc have been recorded in Wind River's consolidated
financial statements as of May 1, 1998.

During the fiscal year ended January 31, 1999, Wind River paid $500,000
for a 10% interest in the common stock of XACT, Inc. ("XACT") that was
accounted for under the cost method. During April 1999, Wind River entered into
an asset purchase agreement with XACT pursuant to which Wind River acquired
certain office and other equipment from XACT and revised the terms of an
existing distribution agreement with XACT. Subsequently, but not pursuant to
the asset purchase agreement, Wind River hired a significant number of XACT
employees. As a result of these events, Wind River believes the future
operations and cash flows of XACT have become uncertain and that Wind River's
original investment is not recoverable. Accordingly, Wind River recognized a
charge totaling $500,000 for the difference between the carrying amount of its
investment and the net realizable value during the first quarter of fiscal year
2000.

On June 30, 1999, Wind River acquired RouterWare, Incorporated, a
California corporation that develops and markets a suite of software modules
used in data communications products such as bridges, routers, gateways, and
remote access servers. Pursuant to the merger agreement, Wind River issued
730,923 shares of its common stock in exchange for all of the outstanding
shares of RouterWare common stock and reserved an additional 634,065 shares for
issuance upon exercise of outstanding employee stock assumed in the merger.
Wind River recorded this transaction using the pooling of interests accounting
method, and all financial data of Wind River has been restated to include the
historical financial information of RouterWare. In connection with the
acquisition of RouterWare, Wind River incurred approximately $930,000 in
merger related expenses consisting primarily of transaction fees.

On February 15, 2000, Wind River acquired Integrated Systems, an embedded
operating systems and development tool software developer, in a transaction
accounted for as a pooling of interests. In the acquisition, each outstanding
share of Integrated common stock was exchanged for .92 shares of Wind River,
resulting in the issuance of an aggregate of 22,499,895 shares of Wind River
Systems common stock for all outstanding shares of Integrated Systems common
stock. Additionally, approximately 4,493,000 Integrated Systems stock options
became options to purchase approximately 4,133,000 shares of Wind River stock.
In connection with the merger of Integrated Systems, Wind River had incurred
approximately $2.2 million in deferred merger related costs as of January 31,
2000. These costs are to be charged in the period the acquisition was
completed. For additional details on the consummation of the merger, see "Notes
to Consolidated Financial Statements -- Subsequent Events."

On March 13, 2000, Wind River announced a definitive agreement to acquire
AudeSi, a privately held company that supplies innovative embedded Java based
tools and other components for building flexible, multiapplication consumer
devices. Wind River will acquire AudeSi in exchange for an aggregate of 1.075
million shares of Wind River common stock. Consummation of the acquisition is
subject to Canadian regulatory approvals. Upon completion of the acquisition,
certain AudeSi staff members will become part of Wind River's Consumer business
unit and remain located in Calgary, Alberta, Canada.

On March 15, 2000, Wind River announced its strategic equity investment in
Highlander Engineering, Inc. ("Highlander"), a privately held company. A
member of Wind River management will join the Highlander board of directors.
During fiscal 2000, Wind River also made equity investments in Liberate
Technologies, Inc. and privately held FlashPoint Technology, Inc.

On March 31, 2000, Wind River completed its acquisition of Embedded
Support Tools Corporation, a worldwide provider of integrated hardware and
software tools for programming, testing and debugging embedded systems. Wind
River issued an aggregate of 5,474,792 shares of common stock in exchange for
all outstanding shares of Embedded Support Tools Corporation common stock and
reserved an additional 1,122,855 shares for issuance upon exercise of employee
stock options assumed in the merger. The acquisition is being accounted for as
a purchase.

<PAGE>

RESULTS OF OPERATIONS

The results of operations presented below are for Wind River and have been
restated to include the historical financial information of RouterWare. The
results of operations do not include any of the financial information of
Integrated Systems, a company acquired by Wind River subsequent to year end. As
such, Wind River believes that these operating results are not necessarily
indicative of results for any future periods. The acquisition of Integrated
Systems was accounted for as a pooling of interests, and Wind River will,
beginning with the first quarter of fiscal year ending January 31, 2001, restate
all historical financial data of Wind River to include the historical financial
information of Integrated Systems. The following table sets forth certain
consolidated income statement data and its percentage of revenues for the
periods indicated:

YEARS ENDED JANUARY 31,
IN THOUSANDS 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products $125,529 73% $ 98,844 75% $ 68,380 73%
Services 45,581 27 33,058 25 25,390 27
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 171,110 100 131,902 100 93,770 100
- --------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 11,124 7 8,224 6 6,349 7
Services 20,508 12 12,999 10 9,633 10
- --------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 31,632 19 21,223 16 15,982 17
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 139,478 81 110,679 84 77,788 83
- --------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 60,962 36 45,968 35 33,226 35
Product development and engineering 29,659 17 19,147 15 12,898 14
General and administrative 15,964 9 8,174 6 6,792 7
Acquisition related and other 1,436 1 - 0 15,159 16
Amortization of goodwill & purchased intangibles 816 - 780 1 - 0
- --------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 108,837 63 74,069 57 68,075 73
- --------------------------------------------------------------------------------------------------------------------------------
Income from operations 30,641 18 36,610 28 9,713 10
Other income, net 5,939 3 4,801 4 3,442 4
- --------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 36,580 21 41,411 31 13,155 14
Provision for income taxes 14,109 8 15,788 12 8,829 9
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,471(1) 13% $ 25,623(2) 19% $ 4,326(3) 5%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------

</TABLE>

(1) Net income after charges of $1.8 million related to the implementation of an
enterprise resource planning system, $205,000 in connection with the integration
of Integrated Systems, Inc., $816,000 of amortization of goodwill, $802,000
incurred with hiring Xact employees and the write-offs of an investment in and
distribution agreement with Xact, $1.2 million incurred for the retirement
package of the chief executive officer, $929,000 for the transaction costs
associated with the acquisition of RouterWare, Inc, and $1.3 million in
connection with hiring our new chief executive officer. Net income before these
charges was $27.2 million.

(2) Net income after amortization of goodwill of $780,000. Net income before
this charge was $26.1 million.

(3) Net income after charges of $15.2 million resulting from the acquisition of
in-process technologies from Liberate Technologies, Inc. and Objective Software
Technology, Ltd. Net income before this charge was $17.7 million.

22
<PAGE>

YEARS ENDED JANUARY 31, 2000 AND 1999

REVENUES

Revenues for fiscal year 2000 were $171.1 million compared to $131.9 million for
fiscal 1999. Product revenues consist of licensing fees from operating system
and software development tool products and fees from embedded system run-time
licenses. Service revenues are derived from software development and porting
contracts, software maintenance and support contracts, customer training and
consulting. Software maintenance and support contracts are generally sold
separately from the software licenses and tools. The increase in revenues of
30% is due to increases in both product revenues and service revenues. Product
revenues accounted for approximately 73% and 75% of the total revenues in
fiscal 2000 and 1999, respectively, with service revenues accounting for the
balance of total revenue over this period.

Product revenues were $125.5 million for fiscal 2000 compared to $98.8
million for fiscal 1999. The increase of 27% in product revenues was due
primarily to the continued acceptance of Wind River's products, to an increase
in run-time license revenues as customer-developed products continue to be
accepted by end-users and to the expansion of our product lines resulting from
research and development, including the Tornado II integrated development
environment, and the integration of products from acquired companies,
including Tornado for Managed Switches from XACT and network protocols from
RouterWare. Product revenues are generally recognized at the time of shipment or
upon the delivery of a product master in satisfaction of non-cancelable
contractual agreements provided that collection of the resulting receivable is
probable, the fee is fixed or determinable and vendor-specific objective
evidence ("VSOE") exists to allocate the total fee to all delivered and
undelivered elements of the arrangement.

Service revenues were $45.6 million for fiscal 2000 compared to $33.1
million for fiscal 1999. The increase of 38% was primarily due to increases in
revenue from maintenance support agreements, both new and recurring and training
resulting from the increase in Wind River's installed base of Tornado software
development environments and software applications provided to customers. In
addition, revenue from professional services increased as Wind River placed
additional strategic emphasis in this area. In addition, through the acquisition
of Integrated Systems, we expect the percentage of revenue from services to
increase. Maintenance contracts are generally prepaid, with the revenue
recognized ratably over the period of the contract.

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

Revenues from international sales were $57.3 million for fiscal 2000
compared to $41.6 million for fiscal 1999. International revenues accounted for
33% and 32% of total revenues for the fiscal years ended January 31, 2000 and
1999, respectively. Revenues from European sources increased 23% from fiscal
1999 to 2000 while revenues from Japan increased 55% over the same period. Wind
River expects international sales to continue to represent a significant
portion of revenues, although the percentage may fluctuate from period to
period. Revenues derived from indirect sales channels worldwide represented 22%
and 26% of total revenues in fiscal 2000 and 1999, respectively. Significant
portions of these indirect revenues are attributable to revenues from WRSKK, a
Japanese subsidiary in which we own 70% and three distributors own 10% each.
Wind River sells products to WRSKK at discounts that approximate those offered
to other independent distributors of Wind River's products. Wind River's
international sales are denominated in the local currencies, and an increase in
the relative value of the dollar against such currencies would reduce Wind
River's revenues in dollar terms or make Wind River's products more expensive
and, therefore, potentially less competitive in foreign markets. Wind River
actively monitors its foreign currency exchange exposure; and to date such
exposures have not had a material impact on Wind River's results of operations
to date. Wind River enters into forward contracts to hedge the short-term impact
of foreign currency fluctuations. Revenues from Asia Pacific sources including
Japan represented 47% of international revenues for both fiscal 2000 and 1999.
See "Business -- Additional Risk Factors That May Affect Future Results of
Operations."

COST OF PRODUCTS

Cost of products was $11.1 million for fiscal 2000 compared to $8.2 million for
fiscal 1999. Product-related cost of revenues as a percentage of product
revenues was 9% and 8% for fiscal 2000 and 1999, respectively. As a result,
gross profit margins for products were 91% and 92%, respectively.
Product-related costs consist primarily of salaries and benefits for production
employees, product media, and royalty payments to third parties for the use of
their software and documentation and packaging. Wind River's cost of revenue as
a percentage of product revenues will be affected in the future by the
distribution rights related to the introduction of new products, including
Tornado II and a next generation

23
<PAGE>

Tornado product, Tornado for Embedded Internet products and Tornado for Managed
Switches and by royalty payments to third parties for sales related to their
products which are integrated into our technology and are sold as support tools.
During fiscal 2000, Wind River introduced a new pricing model in which it
created product bundles that include third party tools that were previously sold
separately. As a result, Wind River has experienced an increase in absolute
dollars paid to third party vendors for their software tools. We expect the
amount paid to third party vendors in the future to increase in absolute
dollars. Amortization of capitalized software development costs included in
cost of products amounted to $446,000 and $530,000 in fiscal 2000 and 1999,
respectively. Capitalized software development costs were fully amortized as
of January 31, 2000. Through our acquisition of Integrated Systems, Wind River
will amortize approximately $600,000 of capitalized software development costs
in each of the next 5 quarters.

COST OF SERVICES

Cost of services was $20.5 million for fiscal 2000 compared to $13.0 million for
fiscal 1999. Service related cost of revenues as a percentage of service
revenues was 45% and 39% for fiscal 2000 and 1999, respectively. Service related
cost of revenue consists primarily of personnel related costs associated with
providing services to customers and the infrastructure to manage a services
organization as well as costs to recruit, develop, and retain services
professionals. The increase in costs of service revenues is due to our
investment in developing new services offerings and the addition of new
personnel and certified third party contractors to our professional services
organization. We expect the cost of service revenues will increase in absolute
dollars as we continue to increase our customer support staff, customer support
capabilities and professional services organization. In addition, we expect our
cost of services as percentage of total revenues to increase as we invest more
resources in professional services through Integrated Systems' Doctor Design
unit.

SELLING AND MARKETING EXPENSES

Selling and marketing expenses were $61.0 million for fiscal 2000 compared to
$46.0 million for fiscal 1999. The increase resulted primarily from increases in
sales and marketing personnel both domestically and internationally and
increased advertising. As a percentage of total revenues, selling and marketing
expenses were 36% and 35% for fiscal 2000 and 1999, respectively. The increase
in absolute dollars and as a percentage of total revenues from fiscal 1999 to
2000 resulted primarily from the growth of sales and marketing personnel,
field engineers, expenses related to marketing and advertising programs and
third-party marketing costs for product introductions, including Tornado II, and
promotions. We expect our selling and marketing expenses to increase in absolute
dollars as we continue to increase our sales and marketing personnel and
marketing and advertising programs.

PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES

Product development and engineering expenses were $29.7 million for fiscal 2000
compared to $19.1 million for fiscal 1999, an increase of 55%. As a percentage
of revenues, product development and engineering expenses increased from 15% to
17% from fiscal 1999 to 2000, respectively. The increase in product development
and engineering expenses is primarily due to the increase in staff and
associated support for engineers to expand and enhance Wind River's product
line, including the costs associated with integrating the XACT engineering team
Wind River hired in April 1999 and integrating the engineering staff added as a
result of the acquisition of RouterWare in June 1999. In addition, Wind River
had $594,000 of funded research and development which reduced our research and
development expenses for fiscal year 2000 related to our Center of Excellence
initiative. We believe that product development and engineering expenses will
continue to increase in absolute dollars as a result of the investment in the
internal development of new products and technologies and through acquisitions
of companies and technologies. See "Business -- Additional Risk Factors That
May Affect Future Results of Operations."

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $16.0 million for fiscal 2000 compared
to $8.2 million for fiscal 1999, an increase of 95%. As a percentage of
revenues, general and administrative expenses increased to 9% in fiscal 2000
from 6% in fiscal 1999. The increase was primarily due to a charge of $1.2
million associated with the retirement package of the former chief executive
officer, a charge of $1.3 million in connection with the hiring of a new chief
executive officer, the non-capitalizable costs associated with the
implementation of an enterprise resource planning system ("ERP") of
approximately $1.8 million, and the growth in infrastructure investments in the
areas of information systems, finance and administration and worldwide staff. In
1997, Wind River commenced a worldwide financial business and production systems
replacement project that uses software primarily from Oracle. The new systems
brought Wind River's business and production computer systems into compliance
with Year 2000 requirements and will create the financial system infra-

24
<PAGE>

structure to support integration of acquired companies' financial systems.
The financial and production systems became operational during the fourth
quarter of fiscal year 2000. In fiscal years 2000 and 1999, Wind River funded
$4.9 million and $1.1 million, respectively, to implement the Oracle
software. Wind River believes that general and administrative expenses will
increase as it continues to invest in worldwide staff and infrastructure in
the areas of information systems, finance and administration and integrating
the financial and administrative operations of Integrated Systems and future
acquisitions.

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

ACQUISITION RELATED COSTS

Acquisition related costs were $1.4 million for fiscal 2000. These costs relate
to the integration of Integrated Systems into Wind River, and the acquisition of
RouterWare and the costs associated with hiring the XACT employees and acquiring
equipment and other assets of XACT.

In connection with the acquisition of Integrated Systems, we expect to
incur integration costs in fiscal 2001. The costs estimated to be incurred in
fiscal 2001 is approximately $25.0 million of which the majority is expected to
be incurred during the first quarter.

AMORTIZATION OF GOODWILL AND PURCHASED
INTANGIBLES

Amortization of goodwill and purchased intangibles increased to $816,000 in
fiscal 2000 from $780,000 in fiscal 1999. Amortization of goodwill and purchased
intangible assets include the amortization of goodwill and other purchased
intangible assets relating to various purchase acquisitions. In the first
quarter of fiscal year 2001, we expect to expense approximately $6.8 million of
goodwill and purchased technology and write off approximately $3.7 million of
in process research and development as a result of recent acquisitions. During
each of the following 16 quarters, we expect to expense approximately $19.5
million of goodwill and purchased intangibles. The $19.5 million per quarter
primarily consists of amortization of goodwill and purchased technology relating
to the acquisition of Embedded Support Tools Corporation. The increase is
primarily due to our recent acquisition of EST. Wind River's results from
operations will also be affected in the future by the amortization of goodwill
and purchased intangibles related to the acquisition of AudeSi.

OTHER INCOME AND EXPENSE

Other income and expense includes interest income earned from the investment of
excess cash, interest expense incurred on the 5.0% Convertible Subordinated
Notes ("Note"), due in 2002 issued in July 1997, gains and losses related to
intercompany foreign currency transactions and income and losses related to the
30% minority interest held by the Japanese participants in WRSKK.

Interest income was $15.4 million for fiscal 2000 compared to $13.7
million for fiscal 1999. The increase is primarily due to a larger investment
portfolio and restricted cash accounts as well as higher interest rates on
invested balances. Total cash, investments and restricted cash at January 31,
2000 and 1999 was approximately $308.3 million and $246.7 million, respectively.

Net interest expense and other was $9.1 million for fiscal 2000 compared to
$8.7 million for fiscal 1999. The increase in net interest expense and other is
related to a charge during the first quarter of $500,000 relating to the
difference between the carrying amount of our investment in XACT and the net
realizable value. The Company also incurred interest on the Notes and
amortization of certain issuance costs associated with the Notes. The interest
on the Notes is payable on February 1 and August 1 of each year commencing
February 1, 1998. The Notes mature on August 1, 2002.

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY

Minority interest in consolidated subsidiary increased to $327,000 in fiscal
2000 from $151,000 in fiscal 1999. This amount represent the 30% minority
interest held by the Japanese participants in WRSKK. Wind River distributes its
products in Japan through WRSKK, a joint venture in which Wind River owns a 70%
equity interest. Innotech Corporation, Kobe Steel Ltd. and Nissin Electric Ltd.,
the other partners in the joint venture, each owns a 10% equity interest.

PROVISION FOR TAXES

The effective tax rate was 38.6% for fiscal 2000 compared to 38.1% for fiscal
1999. The overall changes in the effective tax rates result primarily from
difference between foreign and domestic tax rates and the ratio of foreign
taxable income to domestic taxable income, varying levels of available research
and development credits and certain nondeductible acquisition costs related to
RouterWare.

25
<PAGE>

YEARS ENDED JANUARY 31, 1999 AND 1998

REVENUES

Revenues for fiscal 1999 were $131.9 million compared to $93.8 million for
fiscal 1998. The increase in revenues of 41% is due to increases in both Wind
River's product revenue and services revenues. Product revenues accounted for
approximately 75% and 73% of the total revenues in fiscal 1999 and 1998,
respectively, with service revenues accounting for the balance of total revenue
over this period.

Revenues from the sale of products were $98.8 million for fiscal 1999
compared to $68.4 million for fiscal 1998. The increase of 45% in product
revenues was due primarily to the continued acceptance of Wind River's products
and increased run-time license revenues. Tornado was first introduced in fiscal
1996, and its sales have continued to grow, as Tornado has become available for
use with more host platforms and microprocessor targets. In addition, demand
grew for Tornado in Windows-based customer development environments. Run-time
license revenue has increased each year in conjunction with growing shipments of
customers' products and systems that incorporate the VxWorks operating system.

Wind River's service revenues were $33.1 million for fiscal 1999 compared
to $25.4 million for fiscal 1998. The increase of 30% was primarily due to an
increase in maintenance support agreements and training resulting from the
increase in Wind River's installed base of Tornado software development
environment and software applications provided to customers and engineering
services contracts primarily related to porting Wind River's VxWorks operating
system to microprocessor families.

Revenues from international sales were $41.6 million for fiscal 1999
compared to $26.9 million for fiscal 1998. International revenues accounted for
32% and 29% of total revenues for the fiscal years ended January 31, 1999 and
1998, respectively. Revenues from European sources increased 34% from fiscal
1998 to 1999 while revenues from Japan increased over 100% over the same
periods. Revenues derived from indirect sales channels worldwide represented 26%
and 21% of total revenues in fiscal 1999 and 1998, respectively. Significant
portions of these indirect revenues are attributable to revenue from WRSKK.
Revenues from Asia Pacific sources including Japan represented 47% and 38% of
international revenues for the year ended January 31, 1999 and 1998,
respectively. (See "Business -- Additional Risk Factors That May Affect Future
Results of Operations: Our International Business Activities Subject Us to Risks
That Could Adversely Affect Our Business").

COST OF PRODUCTS

Cost of products was $8.2 million for fiscal 1999 compared to $6.3 million for
fiscal 1998. Product-related cost of revenues as a percentage of product
revenues was 8% and 9% in fiscal years 1999 and 1998, respectively. Product
costs also include license and other direct purchase costs of third-party
software that is distributed by or integrated into Wind River's products and the
amortization of capitalized software development costs. Amortization of
capitalized software development costs included in cost of products amounted to
$530,000 and $654,000 in fiscal 1999 and 1998, respectively.

COST OF SERVICES

Cost of services was $13.0 million for fiscal 1999 compared to $9.6 million for
fiscal 1998. Service related cost of revenues as a percentage of service
revenues was 39% and 38% for fiscal 1999 and 1998, respectively. The increase in
costs of service revenues is due to investment in developing new services
offerings, including consulting, and the addition of service professionals.

SELLING AND MARKETING EXPENSES

Selling and marketing expenses were $46.0 million for fiscal 1999 compared to
$33.2 million for fiscal 1998 or 35% of total revenues for both fiscal years.
The increase of 38% from fiscal 1998 to 1999 in absolute dollars resulted
primarily from the growth of sales and marketing personnel and field engineers
and related costs and increases in expenses related to marketing and advertising
programs and third-party marketing costs for product introductions and
promotions. During the fourth quarter of fiscal year 1999, Wind River announced
and launched the introduction of Tornado II, an enhanced version of its
integrated development environment.

PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES

Product development and engineering expenses were $19.1 million for fiscal 1999
compared to $12.9 million for fiscal 1998, an increase of 48%. As a percentage
of revenues, product development and engineering expenses increased from 14% to
15% from fiscal 1998 to 1999. The dollar increase in product development and
engineering expense is primarily due to the increase in staff and associated
support for engi-

26
<PAGE>

neers to expand and enhance Wind River's product line, including the Tornado II
integrated development environment.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $8.2 million for fiscal 1999 compared
to $6.8 million for fiscal 1998, an increase of 20%. As a percentage of
revenues, general and administrative expenses decreased to 6% in fiscal 1999
from 7% in fiscal 1998. The increase in absolute dollars was primarily due to
the growth in worldwide staff and infrastructure investments in the areas of
information systems, finance and administration. In 1997, Wind River commenced a
worldwide financial business and production systems replacement project that
uses software primarily from Oracle. The new systems were implemented, in part,
to bring Wind River's business and production computer systems into compliance
with Year 2000 requirements.

ACQUISITION RELATED COSTS

On December 31, 1997, Wind River entered into an OEM license agreement with
Liberate Technologies, Inc. to license the right to access and modify the source
code version of certain Liberate Technologies, Inc. technology and to
duplicate, distribute and sublicense the object code version of such modified
source code included with certain of Wind River's future products. Under this
agreement, Wind River paid $9.8 million for non-exclusive, restricted, perpetual
rights to the technology and $200,000 for Liberate Technologies, Inc.
engineering services incurred prior to source code delivery. In addition,
selected elements of the Liberate Technologies, Inc. technology require Wind
River to pay additional per unit royalties in the event Wind River's future
sales of products that include the modified Liberate Technologies, Inc.
technology exceed specified volume levels. The licensed source code will be
ported by Wind River to its VxWorks, IxWorks, WiSP and other real-time embedded
operating systems and will become a component of future products. At the date
the source code was acquired, there were no working models of such products
incorporating the licensed technology and because of the restrictive nature of
the license agreement, there were no alternative future uses for such technology
in research and development. Accordingly, the aggregate purchase price of $10
million was expensed immediately as in-process research and development.

On January 30, 1998, Wind River acquired Objective Software Technology,
Ltd. ("OST"), a privately held Scotland-based company that designs and markets
visualization tools for development of embedded systems. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. The excess of the
purchase price over the fair market value of the net tangible assets acquired
aggregated approximately $6.1 million, of which $4.1 million was allocated to
in-process research and development and expensed immediately. Wind River used
the discounted cash flow ("DCF") approach to determine the fair value of OST and
its identifiable assets, including the value of the products in the development
stage which were not considered to have reached technological feasibility. The
DCF approach includes an analysis of the markets, completion costs, cash flows,
other required assets, contributions made by core technology, and risks
associated with achieving such cash flows. The balance of the excess acquisition
cost was allocated to acquired technology ($2.0 million) which is being
amortized over three years.

AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLES

Amortization of goodwill and purchased intangibles was $780,000 in fiscal 1999
and $0 in fiscal 1998. Amortization of goodwill and purchased intangible assets
include the amortization of goodwill and other purchased intangible assets
relating to various purchase acquisitions.

OTHER INCOME AND EXPENSE

Interest income was $13.7 million for fiscal 1999 compared to $7.7 million for
fiscal 1998. The increase is primarily due to higher average cash and investment
balances, primarily due to the cash received from the issuance of the Notes, and
to the transition of Wind River's investment portfolio from tax-free investments
to taxable investments.

Net interest expense and other was $8.7 million for fiscal 1999 compared to
$4.2 for fiscal 1998. The increase in net interest expense and other is
primarily related to the interest incurred for the entire year in fiscal year
1999 on the Notes and amortization of certain issuance costs associated with the
Notes. The interest on the Notes is payable on February 1 and August 1 of each
year commencing February 1, 1998. The Notes mature on August 1, 2002.

27
<PAGE>

PROVISION FOR TAXES

The effective tax rate was 38.1% for fiscal 1999 compared to 67.1% for fiscal
1998. The higher tax rate in fiscal 1998 was attributable to a portion of the
write-off of certain acquired in-process research and development being
nondeductible. The overall changes in the effective tax rates is also
attributable to the difference between foreign and domestic tax rates and the
ratio of foreign taxable income to domestic taxable income, varying levels of
available research and development credits, and varying levels of tax-exempt
interest income.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth selected unaudited quarterly information for Wind
River's last eight fiscal quarters, which has been restated to include the
historical financial information of RouterWare. Wind River believes that this
information has been prepared on the same basis as the audited consolidated
financial statements appearing in Item 8 of this Form 10-K and believes that all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in the amounts stated below and present fairly the results of such
periods when read in conjunction with the audited consolidated financial
statements and notes thereto.

All share and per share amounts in this report have been adjusted to give
effect to a three-for-two stock split by means of a stock dividend paid on
February 4, 1999.

THREE MONTHS ENDED,
JAN. 31 OCT. 31 JUL. 31 APR. 30 JAN. 31 OCT. 31 JUL. 31 APR. 30
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1999 1999 1999 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:

Products $40,885 $32,403 $28,702 $23,539 $29,725 $25,716 $23,737 $19,666

Services 12,544 12,198 10,902 9,937 9,452 8,483 8,065 7,058
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 53,429 44,601 39,604 33,476 39,177 34,199 31,802 26,724
- ------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:

Products 3,926 2,965 2,654 1,579 2,237 1,950 2,203 1,834

Services 6,395 5,189 4,708 4,216 3,576 3,343 3,245 2,835
- ------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 10,321 8,154 7,362 5,795 5,813 5,293 5,448 4,669
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 43,108 36,447 32,242 27,681 33,364 28,906 26,354 22,055
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:

Selling and marketing 18,476 15,931 14,269 12,286 13,156 11,596 11,229 9,987

Product development and
Engineering 8,290 7,580 7,306 6,483 5,518 4,765 4,707 4,157

General and administrative 5,339 4,810 3,606 2,209 2,771 1,908 1,896 1,599

Acquisition related and other 205 - 929 302 - - - -

Amortization of goodwill and
purchased intangibles 207 207 207 195 195 195 195 195
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 32,517 28,528 26,317 21,475 21,640 18,464 18,027 15,938
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations 10,591 7,919 5,925 6,206 11,724 10,442 8,327 6,117

Other income, net 2,373 1,510 1,497 559 1,397 1,230 1,225 949
- ------------------------------------------------------------------------------------------------------------------------------
Income before provision for
income taxes 12,964 9,429 7,422 6,765 13,121 11,672 9,552 7,066

Provision for income taxes 4,897 3,535 3,180 2,497 4,751 4,541 3,698 2,798
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,067 $ 5,894 $ 4,242 $ 4,268 $ 8,370 $ 7,131 $ 5,854 $ 4,268
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net income per share:

Basic $ 0.19 $ 0.14 $ 0.10 $ 0.10 $ 0.20 $ 0.18 $ 0.15 $ 0.11

Diluted $ 0.17 $ 0.13 $ 0.10 $ 0.10 $ 0.19 $ 0.16 $ 0.13 $ 0.10
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares:

Basic 42,207 41,837 41,385 41,265 40,840 40,466 40,233 39,527

Diluted 47,416 44,043 43,735 43,918 44,391 43,841 43,833 43,308
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 2000, Wind River had working capital of approximately $90.3
million and cash and investments of approximately $268.6 million, which include
investments with maturities of greater than one year of $181.6 million and
excludes restricted cash of $39.7 million. Wind River invests primarily in
instruments that are highly liquid and of investment grade.

In fiscal 2000, Wind River's operating activities provided net cash of
$32.5 million due primarily to net income, the non-cash impact of depreciation
and amortization, the increase in income taxes payable, an increase in deferred
revenue and the tax benefit related to employee stock option exercises. These
sources of cash were partially offset by increases in accounts receivable and
prepaid and other assets. The increase in accounts receivable is due to the
increased sales activities in response to higher customer demand for Wind
River's products and services and certain delays in the collection of invoices
as a result of the implementation of Oracle financial system. The increase in
prepaid and other current assets is primarily due to a receivable relating to an
equity investment sale, interest receivable on investments, prepaid merger
costs, prepaid royalty costs and prepaid sales expenses.

In fiscal 2000, Wind River's investing activities used net cash of $23.8
million. Uses of cash relating to the purchases of investments, purchases of
investments held as collateral for the second operating lease and the
acquisition of equipment were partially offset by cash provided from the sale
of investments. As Wind River transitioned its investment portfolio from
short-term to long-term investments, its long-term investments increased by
$23.0 million. Restricted cash increased due to the new collateral funding
for the second corporate facility operating lease discussed further below.
The collateral consists of direct obligations of the United States
government, with the majority being long-term investments.

In fiscal 2000, Wind River's financing activities provided net cash of $8.1
million. Cash provided by the issuance of common stock for stock option
exercises and the line of credit through a Japanese subsidiary were offset by a
treasury stock repurchase and a loan to a member of the Board of Directors for
the purchase of Wind River stock. During fiscal 2000, Wind River repurchased
approximately 165,000 shares of common stock at an aggregate cost of
approximately $4.0 million. In June 1999, the Board of Directors rescinded all
stock repurchase authorizations. We have not made any repurchases since March
17, 1999. On September 7, 1999, our chief executive officer signed a secured
promissory note with the Company to borrow up to $2.4 million. As of January 31,
2000, the CEO had borrowed $1.9 million against this note.

In July 1997, Wind River issued $140 million of 5% Convertible
Subordinated Notes (the "Notes"), which mature on August 1, 2002. The Notes
are subordinated to all existing and future senior debt and are convertible
into shares of Wind River's common stock at a price of $32.33 per share. The
Notes are redeemable at the option of Wind River, in whole or in part, at any
time on or after August 2, 2000 at 102% of the principal amount initially,
and thereafter at prices declining to 100% at maturity, in each case plus
accrued interest. Each holder of these Notes has the right, subject to
certain conditions and restrictions, to require Wind River to offer to
repurchase all outstanding Notes, in whole or in part, owned by such holder,
at specified repurchase prices plus accrued interest upon the occurrence of
certain events. The $5.1 million of costs incurred in connection with the
offering are included in prepaid and other assets. These unamortized costs
are being amortized to interest expense over the 5-year term of the Notes
using the straight-line method, which approximates the effective interest
method. Interest on the Notes began accruing July 31, 1997 and is payable
semi-annually on February 1 and August 1, commencing on February 1, 1998.

On February 15, 2000, Wind River acquired Integrated Systems, Inc. In
connection with the acquisition, Wind River issued an aggregate of 22,499,895
shares of Wind River common stock for all outstanding shares of Integrated
Systems common stock. In addition, approximately 4,493,000 of Integrated
Systems stock options became options to purchase approximately 4,133,000
shares of Wind River stock.

On March 31, 2000, Wind River acquired Embedded Support Tools Corporation.
In connection with the acquisition, Wind River issued an aggregate of 5,474,792
shares of its common stock in exchange for all outstanding common shares of
Embedded Support Tools Corporation and reserved an additional 1,122,855 shares
for issuance upon exercise of outstanding employee stock options assumed in the
transaction.

29
<PAGE>

In fiscal 1998, Wind River entered into an operating lease for its new
headquarters facility constructed on land owned by Wind River in Alameda,
California. Construction was completed in the second quarter of fiscal year
2000. The lease was finalized in August 1999 and the lessor has funded a total
of $32.4 million of construction costs. The operating lease payments began in
August 1999 and are based on the total construction costs of the property,
including capitalized interest, and LIBOR.

In fiscal 2000, Wind River entered into a second operating lease
agreement for the construction of two additional buildings at its
headquarters facility. As of January 31, 2000, the lessor has funded a total
of $4.0 million of construction costs and has committed to fund up to a
maximum of $26.0 million. Construction of the buildings is currently expected
to be completed in January 2001. The operating lease payments will vary based
upon the total construction costs of the property, which include capitalized
interest and LIBOR.

In connection with the lease of Wind River's current headquarters, Wind
River is obligated to enter into a ground lease of its land in Alameda,
California, with the lessor of the building at a nominal rate and for a term
of 55 years. If Wind River terminates or does not negotiate an extension of
the building lease the ground lease converts to a market rental rate. The
ground lease provides Wind River with the option at the end of the lease
terms to either acquire the buildings at the lessor's original cost or
arrange for the buildings to be acquired. Wind River has guaranteed the
residual value associated with the buildings under the first operating lease
and second operating lease to the lessor of approximately 82% and 84.5%,
respectively, of the lessor's actual funding of $32.4 million on the first
operating lease and obligated funding of $26.0 million on the second
operating lease, respectively. Wind River is also required to deposit fixed
income securities with a custodian as a deposit to secure the performance of
its obligations under the lease. In addition, under the terms of the lease,
Wind River must maintain compliance with certain financial covenants. As of
January 31, 2000, Wind River was in compliance with these covenants.
Management believes that the contingent liability relating to the residual
value guarantee will not have a material adverse effect on Wind River's
financial condition or results of operations.

On March 18, 1998, Wind River entered into an accreting interest rate
swap agreement to reduce the impact of changes in interest rates on its
floating rate operating lease for its new corporate headquarters. This
agreement effectively changes Wind River's interest rate exposure on its
operating lease, which is based on the one month LIBOR to a fixed rate of
5.9%. The differential to be paid or received under this agreement will be
recognized as an adjustment to rent expense related to the operating lease.
The agreement matures at the same time as the operating lease expires. The
amounts potentially subject to credit risk (arising from the possible
inability of counterparty to meet the term of the contract) are generally
limited to the amounts, if any, by which the counterparty's obligations
exceed the obligations of Wind River. Wind River manages potential
counterparty credit risk prior to entering into transactions by requiring
that all counterparties have at least a AA Standard and Poor's, or Moody's
equivalent, long-term senior debt rating.

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

Management believes that Wind River's working capital and cash flow
generated from operations are sufficient to meet its working capital
requirements for planned expansion, product development and capital
expenditures for at least the next twelve months.

"YEAR 2000" ISSUES

We reviewed and tested our internal programs and those of our newly acquired
businesses and determined that there are no significant Year 2000 issues within
our or their mission-critical systems or services. Our review of the third-party
software we and our subsidiaries use identified certain software "patches" for
third-party software that needed to be implemented for Year 2000 compliance.
All of these patches were implemented prior to January 1, 2000. We have not
experienced any problems with our computer systems relating to such systems
being unable to recognize appropriate dates related to the year 2000. We are
also not aware of any material problems with our customers or suppliers.
Accordingly, we

30
<PAGE>

do not anticipate incurring material expenses or experiencing any material
operational disruption as a result of any year 2000 issues.

EURO CURRENCY

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
in which it agreed to defer for one year the implementation date of SFAS No.
133. See Note 1 of Notes to Consolidated Financial Statements included in "Item
8-Financial Statements and Supplementary Data."

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The Company believes the adoption of SAB 101 will not have a
material impact on the Company's financial position and results of operations.

In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. Wind River has not yet determined the impact, if any, of
adopting this interpretation.

31
<PAGE>

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Wind River believes an immediate 100 basis point move in interest rates
affecting Wind River's floating and fixed rate financial instruments as of
January 31, 2000, would have an immaterial effect on Wind River's pretax
earnings. Wind River also believes the immediate 100 basis point move in
interest rates would have an immaterial effect on the fair value of Wind River's
financial instruments.

FOREIGN CURRENCY RISK
Wind River transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. Wind River has established a
foreign currency-hedging program, utilizing foreign currency exchange
contracts for its foreign currency transaction exposures in Japan and certain
European countries. Under this program, increases or decreases in Wind
River's foreign currency transactions are partially offset by gains and loses
on the forward contracts, so as to mitigate the possibility of foreign
currency transaction gains and losses. Wind River does not use forward
contracts for trading purposes. All outstanding forward contracts at the end
of a period are marked-to-market with unrealized gains and losses included in
other income, net, and thus are recognized in income in advance of the actual
foreign currency cash flows. As these forward contracts mature the realized
gains and losses are recorded and are included in net income as a component
of other income, net. Wind River's ultimate realized gain or loss with
respect to currency fluctuations will depend on the currency exchange rates
and other factors in effect as the contracts mature. At January 31, 2000,
Wind River had outstanding forward contracts to hedge Japanese Yen with
notional amounts totaling approximately $0.9 million.

The unrealized gains and losses on the outstanding forward contracts at
January 31, 2000, were immaterial to Wind River's consolidated financial
statements. Due to the short-term nature of the forward contracts, the fair
value at January 31, 2000 was negligible. The realized gains and losses on these
contracts as they matured were not material to the consolidated operations of
Wind River.

INTEREST RATE SWAP RISK
In March 1998, Wind River entered into a 5.9% accreting interest rate swap to
reduce the impact of changes in interest rates on its floating interest rate
operating lease for its new headquarters. At January 31, 2000, the notional
amount of the accreting interest rate swap was $28.5 million. The estimated fair
value at January 31, 2000, was negligible.

EQUITY PRICE RISK
Wind River owns 433,752 shares of common stock of e-Sim, Inc., an Israeli
corporation. Wind River purchased the common stock prior to e-Sim's public
offering of $7.50 per share. e-Sim went public in July 1998, and at January 31,
2000, the closing price of e-Sim's stock was $19.63 per share. In addition,
Wind River owns 416,666 shares of common stock of Liberate Technologies, Inc, a
Delaware corporation. Wind River purchased the stock prior to Liberate's public
offering. Liberate went public in July 1999 at $16.00 per share, and at January
31, 2000, the closing price of Liberate's stock was $78.81 per share. Wind River
values these investments using the closing price of the stock at the end of each
month. As a result, Wind River reflects these investment on its balance sheet at
January 31, 2000 at their market value of approximately $41.4 million in
aggregate, with the unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income component of stockholders'
equity. At April 20, 2000, the closing prices of e-Sim's and Liberate's stock
were $16.75 and $33.00, respectively.

32
<PAGE>

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Financial Statements:
Report of Independent Accountants 35
Consolidated Statements of Income for the years ended January 31, 2000, 1999, and 1998 36
Consolidated Balance Sheets at January 31, 2000 and 1999 37
Consolidated Statements of Cash Flows for the years ended January 31, 2000, 1999, and 1998 38
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2000, 1999, and 1998 39
Notes to Consolidated Financial Statements 40

Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts 58

</TABLE>

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

33
<PAGE>

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Wind
River Systems, Inc. and its subsidiaries at January 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2000 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule identified in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

San Jose, California
March 2, 2000

<PAGE>

WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:

Products $ 125,529 $ 98,844 $ 68,380
Services 45,581 33,058 25,390
- -------------------------------------------------------------------------------------------
Total revenues 171,110 131,902 93,770
- -------------------------------------------------------------------------------------------
Cost of revenues:

Products 11,124 8,224 6,349
Services 20,508 12,999 9,633
- -------------------------------------------------------------------------------------------
Total cost of revenues 31,632 21,223 15,982
- -------------------------------------------------------------------------------------------
Gross profit 139,478 110,679 77,788
- -------------------------------------------------------------------------------------------

Operating expenses:

Selling and marketing 60,962 45,968 33,226
Product development and engineering 29,659 19,147 12,898
General and administrative 15,964 8,174 6,792
Acquisition related costs 1,436 -- 15,159
Amortization of goodwill and purchased intangibles 816 780 --
- -------------------------------------------------------------------------------------------
Total operating expenses 108,837 74,069 68,075
- -------------------------------------------------------------------------------------------

Income from operations 30,641 36,610 9,713
- -------------------------------------------------------------------------------------------

Other income (expense):

Interest income 15,378 13,679 7,743
Interest expense and other, net (9,112) (8,727) (4,213)
Minority interest in consolidated subsidiary (327) (151) (88)
- -------------------------------------------------------------------------------------------
Total other income 5,939 4,801 3,442
- -------------------------------------------------------------------------------------------
Income before provision for income taxes 36,580 41,411 13,155
Provision for income taxes 14,109 15,788 8,829
- -------------------------------------------------------------------------------------------
Net income $ 22,471 $ 25,623 $ 4,326
- -------------------------------------------------------------------------------------------
Net income per share:
Basic $ .54 $ .64 $ .11
Diluted $ .50 $ .58 $ .10
- -------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares:
Basic 41,674 40,267 38,915
Diluted 44,778 43,843 43,567
- -------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

WIND RIVER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JANUARY 31,
IN THOUSANDS, EXCEPT PAR VALUE 2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 58,621 $ 42,837
Short-term investments 28,355 11,043
Accounts receivable, net of allowances of $2,405 and $1,550 48,621 30,926
Prepaid and other current assets 21,893 10,598
- -------------------------------------------------------------------------------------------
Total current assets 157,490 95,404
Investments 181,600 158,628
Land and equipment, net 35,755 31,513
Other assets 8,621 10,011
Restricted cash 39,744 34,157
- -------------------------------------------------------------------------------------------
Total assets $ 423,210 $ 329,713
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 6,393 $ 3,472
Line of credit 5,094 --
Accrued liabilities 11,059 10,005
Accrued compensation 10,335 6,030
Income taxes payable 9,862 445
Deferred revenue 24,476 17,318
- -------------------------------------------------------------------------------------------
Total current liabilities 67,219 37,270
Deferred taxes payable 12,408 --
Convertible subordinated notes 140,000 140,000
- -------------------------------------------------------------------------------------------
Total liabilities 219,627 177,270
- -------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 878 551
- -------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)

Stockholders' equity:
Common Stock, par value $.001; 125,000 authorized; 43,730
and 42,449 shares issued; 42,453 and 41,337 shares outstanding 43 42
Additional paid in capital 140,715 126,855
Loan to stockholder (1,900) --
Treasury stock, 1,277 and 1,112 shares at cost (29,488) (25,491)
Accumulated other comprehensive income (loss) 18,300 (2,155)
Retained earnings 75,035 52,641
- -------------------------------------------------------------------------------------------
Total stockholders' equity 202,705 151,892
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 423,210 $ 329,713
- -------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

37
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
IN THOUSANDS 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,471 $ 25,623 $ 4,326
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 10,523 8,531 4,806
Tax benefit from stock plan 5,000 13,400 7,000
Write-off of impaired assets 500 -- --
Deferred income taxes (92) (244) (2,894)
Minority interest in consolidated subsidiary 327 151 88
Acquired in-process research and development -- -- 15,159
Change in assets and liabilities:
Accounts receivable (17,695) (12,552) (4,449)
Prepaid and other assets (13,415) (5,318) (5,670)
Accounts payable 2,921 (487) 2,015
Accrued liabilities 1,054 (235) 4,387
Accrued compensation 4,305 489 1,050
Income taxes payable 9,417 (729) 2,368
Deferred revenue 7,158 2,164 8,883
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,474 30,793 37,069
- ---------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
Acquisition of land and equipment (11,755) (12,770) (19,704)
Capitalized software development costs -- -- (803)
Acquisitions, net of cash acquired -- -- (20,553)
Purchases of investments (124,907) (232,193) (264,048)
Sales and maturities of investments 118,422 188,231 236,010
Restricted cash (5,587) (31,647) (2,510)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,827) (88,379) (71,608)
- ---------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
Line of credit 5,094 -- --
Issuance of Common Stock, net 8,861 9,484 4,265
Purchase of treasury stock (3,997) (10,006) (12,364)
Loan to stockholder (1,900) -- --
Issuance of convertible subordinated notes, net -- -- 134,925
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,058 (522) 126,826
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (844) 157 (1,390)
Effect of changing fiscal year of acquired subsidiary (77) -- --
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 15,784 (57,951) 90,897
Cash and cash equivalents at beginning of year 42,837 100,788 9,891
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 58,621 $ 42,837 $ 100,788
- ---------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 9,414 $ 7,000 --
Cash paid for income taxes $ 1,995 $ 1,897 $ 3,372
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<PAGE>

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

ADDITIONAL ACCUMULATED OTHER TOTAL
COMMON STOCK PAID IN LOAN TO TREASURY STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
IN THOUSANDS SHARES AMOUNT CAPITAL STOCKHOLDER SHARES AMOUNT INCOME (LOSS) EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997 38,805 $39 $ 92,127 -- (169) $ (3,121) $ (663) $ 23,817 $ 112,199
--------- ---------
Net income -- -- -- -- -- -- -- 4,326 4,326
Unrealized gain on investments -- -- -- -- -- -- 856 -- 856
Currency translation adjustments -- -- -- -- -- -- (1,390) -- (1,390)
--------- ---------
Comprehensive income -- -- -- -- -- -- (534) -- 3,792
--------- ---------
Common Stock issued
upon exercise of stock options 1,080 1 2,403 -- -- -- -- -- 2,404
Common Stock issued under
stock purchase plan 96 -- 1,861 -- -- -- -- -- 1,861
Tax benefit from stock plans -- -- 7,000 -- -- -- -- -- 7,000
Purchase of treasury stock -- -- -- -- (546) (12,364) -- -- (12,364)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 39,981 40 103,391 -- (715) (15,485) (1,197) 28,143 114,892
--------- ---------

Net income -- -- -- -- -- -- -- 25,623 25,623
Unrealized loss on investments -- -- -- -- -- -- (1,115) -- (1,115)

Currency translation adjustments -- -- -- -- -- -- 157 -- 157
--------- ---------
Comprehensive income -- -- -- -- -- -- (958) -- 24,665
--------- ---------
Common Stock issued upon
acquisition of Zinc Software, Inc. 339 -- 582 -- -- -- -- (1,125) (543)
Common Stock issued
upon exercise of a warrant 337 -- 1,109 -- -- -- -- -- 1,109
Common Stock issued
upon exercise of stock options 1,671 2 5,926 -- -- -- -- -- 5,928

Common Stock issued under
stock purchase plan 121 -- 2,447 -- -- -- -- -- 2,447
Tax benefit from stock plans -- -- 13,400 -- -- -- -- -- 13,400
Purchase of treasury stock -- -- -- -- (397) (10,006) -- -- (10,006)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1999 42,449 42 126,855 -- (1,112) (25,491) (2,155) 52,641 151,892
--------- ---------
Net income -- -- -- -- -- -- -- 22,471 22,471
Unrealized gain on investments -- -- -- -- -- -- 21,299 -- 21,299
Currency translation adjustments -- -- -- -- -- -- (844) -- (844)
--------- ---------
Comprehensive income -- -- -- -- -- -- 20,455 -- 42,926
--------- ---------
Common Stock issued
upon exercise of stock options 955 1 3,917 -- -- -- -- -- 3,918
Common Stock issued under
stock purchase plan 226 -- 3,075 -- -- -- -- -- 3,075

Tax benefit from stock plans -- -- 5,000 -- -- -- -- -- 5,000
Accelerated vesting of stock options -- -- 218 -- -- -- -- -- 218
Loan to stockholder -- -- -- $(1,900) -- -- -- -- (1,900)
Effect of fiscal year end change
for acquired subsidiary -- -- -- -- -- -- -- (77) (77)
Purchase of treasury stock -- -- -- -- (165) (3,997) -- (3,997)
Sale of treasury stock 100 -- 1,650 -- -- -- -- -- 1,650
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2000 43,730 $43 $140,715 $(1,900) (1,277) $(29,488) $ 18,300 $ 75,035 $ 202,705
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Wind River develops, markets, supports and provides consulting services for
advanced software operating systems and development tools that allow
customers to create complex, robust, real-time software applications for
embedded computers. An embedded computer is a microprocessor that is
incorporated into a larger device and is dedicated to responding to external
events by performing specific tasks quickly, predictably and reliably. Wind
River's flagship products, the Tornado II development platform and the
VxWorks real-time operating system ("RTOS"), enable customers to enhance
product performance, standardize designs across projects, reduce research and
development costs and shorten product development cycles.

In June 1999, Wind River issued 730,923 shares of its common stock in
exchange for all of the outstanding common stock of RouterWare, Inc.
("RouterWare") in a transaction accounted for as a pooling of interests and,
accordingly, Wind River's consolidated financial statements have been
restated for all periods prior to the acquisition to include the results of
operations, financial position and cash flows of both Wind River and
RouterWare.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Wind River and
its wholly owned subsidiaries: Wind River Systems International, Inc., a
United States corporation; Wind River Systems, E.C., S.A.R.L., a French
corporation; Wind River Systems GmbH, a German corporation; Wind River
Systems Italia, S.r.l, an Italian corporation; Wind River Systems UK, Ltd., a
United Kingdom corporation; Wind River Systems Scotland Ltd., a Scottish
corporation; Zinc Software, Incorporated, a United States Corporation;
RouterWare, Incorporated, a United States Corporation; and its majority-owned
subsidiary Wind River Systems K.K. ("WRSKK"), a Japanese corporation. All
significant intercompany accounts and transactions have been eliminated.

Wind River has a fiscal year end of January 31. The international
subsidiaries have fiscal year-ends of December 31. The consolidated financial
statements include the subsidiaries' financial information as of December 31.

Certain amounts in the fiscal 1999 financial statements have been
reclassified to conform to the fiscal 2000 presentation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with a remaining
maturity of three months or less. These investments consist of fixed income
securities, which are readily convertible to cash and are stated at cost,
which approximates fair value. Restricted cash consists of the investments
held as collateral under the operating lease of Wind River's headquarters and
an accreting interest rate swap agreement. Fair value is determined based
upon the quoted market prices of the securities as of the balance sheet date.

INVESTMENTS

Investments with original maturities greater than three months and less than
one year are classified as short-term investments. Investments with original
maturities greater than one year are classified as long-term investments.
Wind River accounts for its investments, including money market funds,
municipal bonds, U.S. government and agency obligations, corporate bonds and
other debt securities, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Wind River determines the appropriate classification of
its marketable securities at the time of purchase and re-evaluates such
classification as of each balance sheet date. Wind River has classified all
of its investments as available-for-sale and carries such investments at fair
value, with unrealized gains and losses reported in stockholders' equity
until disposition. Fair value is determined based upon the quoted market
prices of the securities as of the balance sheet date. The cost of securities
sold is based on the specific identification method. Realized gains or losses
and declines in value, if any, judged to be other than temporary on
available-for-sale securities are reported in other income or expense.

<PAGE>

CONCENTRATION OF CREDIT RISK

Wind River's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents, investments, and
accounts receivable. Wind River's investments consist of investment grade
securities managed by qualified professional investment managers. The
investment policy is intended to limit Wind River's exposure to concentration
of credit risk. Wind River's accounts receivable results primarily from
software sales to a broad customer base both domestically and internationally
and are typically unsecured. Wind River performs on-going credit evaluations
of its customers' financial condition, limits the amount of credit when
deemed necessary and maintains allowances for potential credit losses;
historically, such losses have been immaterial. As a consequence,
concentrations of credit risk are limited.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of Wind River's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts
payable, the carrying amounts approximate fair value due to their short
maturities. The estimated fair value for the convertible subordinated notes
(with a carrying amount of $140 million at January 31, 2000) is approximately
$152.8 million at January 31, 2000. The fair value for the convertible
subordinated notes is based on quoted market prices.

LAND AND EQUIPMENT

Land and equipment are stated at cost. Depreciation on equipment is computed
using the straight-line method over the estimated useful lives of the assets,
which is generally two to four years for computer equipment and four to ten
years for furniture and equipment. Leasehold improvements are amortized over
the term of the related lease or useful economic life, if shorter.

INTERNAL USE SOFTWARE

Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. The Company capitalizes
substantially all external costs related to the purchase and implementation
of software projects used for business operations and engineering design
activities. Capitalized software costs primarily include purchased software
and external consulting fees. Capitalized software projects are amortized
over the estimated useful lives of the projects, typically a two to five year
period. The Company had $6.9 million and $4.2 million of capitalized software
costs and $0.8 million and $0.4 million of accumulated amortization included
in land and equipment at January 31, 2000 and 1999, respectively.

SOFTWARE DEVELOPMENT COSTS

Wind River accounts for software development costs in accordance with SFAS
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." Costs incurred to establish the technological
feasibility of a computer software product are considered research and
development costs and are expensed as incurred. When the technological
feasibility of a software product has been established using the working
model approach, development costs are capitalized. Capitalization of these
costs ceases when the product is considered available for general release to
customers. Amortization of capitalized software development costs is provided
on a product-by-product basis at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, an original
estimated economic life of eighteen months is assigned to capitalized
software development costs. Amortization of capitalized software costs is
charged to cost of product revenues. Research and development expenditures
are charged to research and development in the period incurred. The
amortization of capitalized software costs which were charged to cost of
product revenues during fiscal 2000, 1999 and 1998 were $446,000, $530,000
and $654,000, respectively. At January 31, 2000 and 1999, Wind River had
capitalized software costs of $0 and $446,000, respectively.

OTHER ASSETS

Other assets include bond issuance costs, purchased intangibles, capitalized
software development costs, equity investments, and deposits. Bond issuance
costs are amortized over five years.

<PAGE>

Wind River evaluates the recoverability of its property and equipment and
intangible assets in accordance with SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. Accordingly, Wind River evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. Wind River determines the recoverability
of the carrying amount of each intangible 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 intangible asset, the contract or product supporting the intangible
asset, and in the case of purchased intangibles and capitalized software
development costs, Wind River periodically reviews the recoverability of the
assets value by evaluating its products with respect to technological
advances, competitive products and the needs of its customers.

INTANGIBLE ASSETS

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 lists,
workforce, technological know how, covenants not to compete and goodwill.
Intangible assets are amortized over periods from one year to ten years on a
straight-line basis.

REVENUE RECOGNITION

Wind River recognizes revenue in accordance with SOP 97-2, "Software Revenue
Recognition," as amended by SOP 98-4, "Deferral of the Effective Date of
Certain Provisions of SOP 97-2," effective February 1, 1998. SOP 97-2 and SOP
98-4 provide guidance on recognizing revenue on software transactions and
supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did not have a
material impact on Wind River's existing licensing or revenue recognition
practices.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. The Company believes the adoption of SAB 101 will not
have a material impact on the Company's financial position and results of
operations.

Product revenues consist of licensing fees from operating system and
software development tool products and fees from embedded system run-time
licenses. Service revenues are derived from fees from professional services,
software porting and development contracts, software maintenance and support
contracts, customer training and consulting. Maintenance contracts are
generally sold separately from the products. Wind River's customers consist
of end users, distributors, original equipment manufacturers, system
integrators and value-added resellers.

Product revenues are generally recognized at the time of shipment or upon the
delivery of a product master in satisfaction of non-cancelable contractual
agreements provided that collection of the resulting receivable is probable,
the fee is fixed or determinable and vendor-specific objective evidence
("VSOE") exists to allocate the total fee to all delivered and undelivered
elements of the arrangement. Any maintenance included in these arrangements
is deferred based on VSOE and recognized ratably over the term of the
arrangement. Service revenues from engineering services contracts are
generally recognized on the percentage-of-completion basis. Service revenues
from software maintenance, support and update fees (post-contract support)
are recognized ratably over the contract period. Services revenue from
training and consulting are recognized when the services are provided.

In December 1998, the American Institute of Certified Public Accountants
("AICPA") released SOP 98-9, "Modification of SOP 97-2, `Software Revenue
Recognition' with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2
to require that an entity recognize revenue for multiple element arrangements
by means of the "residual method" when (1) there is VSOE of the fair values
of all the undelivered elements that are not accounted for by means of
long-term contract accounting, (2) VSOE of fair value does not exist for one
or more of the delivered elements, and (3) all revenue recognition criteria
of SOP 97-2 (other than the requirement for VSOE of the fair value of each
delivered element) are satisfied.

<PAGE>

FOREIGN CURRENCY TRANSLATION

The functional currency of foreign subsidiaries is the local currency.
Accordingly, assets and liabilities of the subsidiaries are translated using
the exchange rates in effect at the end of the period, while income and
expense items are translated at average rates of exchange during the period.
Gains or losses from translation of foreign operations where the local
currency is the functional currency are included as other comprehensive
income or loss. The net gains and losses resulting from foreign currency
transactions are recorded in net income in the period incurred and were not
significant for any of the periods presented.

STOCK-BASED COMPENSATION PLANS

Wind River accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of SFAS 123, "Accounting for Stock Based Compensation."
Under APB 25, compensation cost is recognized over the vesting period based
on the difference, if any, on the date of grant between the fair market value
of Wind River's stock and the amount an employee must pay to acquire the
stock. Wind River's policy is to grant options with an exercise price equal
to the quoted market price of Wind River's stock on the grant date.
Accordingly, no compensation expense has been recognized for its stock option
plans.

NET INCOME PER SHARE

Net income per share includes basic net income per share, which is based on
the weighted-average number of common shares outstanding, and diluted net
income per share, which is based on the weighted-average number of common
shares outstanding and all dilutive potential common shares outstanding.
Dilutive common equivalent shares consist of stock options and warrants
(using the treasury stock method) and convertible subordinated notes (using
the if converted method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires that an entity
recognizes all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In June
1999, The FASB issued Statement No. 137, in which it agreed to defer for one
year the implementation date of SFAS No. 133. SFAS No. 133, as amended, is
effective for all fiscal years beginning after June 15, 2000. The Company is
assessing the impact of SFAS No. 133 on its consolidated financial
statements.

In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock compensation" - an Interpretation
of APB 25. This Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. Wind River has not yet determined the impact, if any, of
adopting this interpretation.

<PAGE>

NOTE 2: ACQUISITIONS

On December 31, 1997, Wind River entered into an OEM license agreement with
Liberate Technologies, Inc. to license the right to access and modify the
source code version of certain Liberate Technologies, Inc. technology and to
duplicate, distribute and sublicense the object code version of such modified
source code included with certain of Wind River's future products. Under the
agreement, Wind River paid $9.8 million for non-exclusive, restricted,
perpetual rights to the technology and $200,000 for Liberate Technologies,
Inc. engineering services incurred prior to source code delivery. In
addition, selected elements of the Liberate Technologies, Inc. technology
require Wind River to pay additional per unit royalties in the event Wind
River's future sales of products that include the modified Liberate
Technologies, Inc. technology exceed specified volume levels. The licensed
source code will be ported by Wind River to its VxWorks, IxWorks, WiSP and
other real time embedded operating systems and will become a component of
future products. At the date the source code was acquired, there were no
working models of such products incorporating the licensed technology and
because of the restrictive nature of the license agreement, there were no
alternative future uses for such technology in research and development.
Accordingly, the aggregate purchase price of $10 million was expensed
immediately as inprocess research and development.

On January 30, 1998, Wind River acquired Objective Software Technology,
Ltd. ("OST"), a privately held Scotland-based company that designs and
markets visualization tools for development of embedded systems. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair market value of
the net tangible assets acquired aggregated approximately $6.1 million, of
which $4.1 million was allocated to inprocess research and development and
expensed immediately. Wind River used the discounted cash flow ("DCF")
approach to determine the fair value of OST and its identifiable assets,
including the value of the products in the development stage which were not
considered to have reached technological feasibility. The DCF approach
includes an analysis of the markets, completion costs, cash flows, other
required assets, contributions made by core technology, and risks associated
with achieving such cash flows. The balance of the excess acquisition cost
was allocated to acquired technology ($2.0 million) which is being amortized
over three years.

In May 1998, Wind River acquired Zinc Software, Incorporated, a
privately held company that develops, markets and supports graphical
application software. In connection therewith, Wind River issued 339,917
shares of common stock in exchange for all of the outstanding stock of Zinc.
The acquisition was accounted for as a pooling of interests. As the
operations of Zinc were not material to Wind River's consolidated operations
and financial position, the financial statements of Zinc have been recorded
in the consolidated financial statements as of May 1, 1998.

During the fiscal year ended January 31, 1999, Wind River paid $500,000
for a 10% interest in the common stock of XACT, Inc. ("XACT"), that was
accounted for under the cost method. During April 1999, Wind River entered
into an asset purchase agreement with XACT pursuant to which Wind River
acquired certain office and other equipment from XACT and revised the terms
of an existing distribution agreement with XACT. Subsequently, but not
pursuant to the asset purchase agreement, Wind River hired a significant
number of XACT employees.

In June 1999, Wind River acquired RouterWare, Incorporated, a California
corporation that develops and markets a suite of software modules used in
data communications products such as bridges, routers, gateways, and remote
access servers. Pursuant to the merger agreement, Wind River issued 730,923
shares of its common stock and reserved an additional 634,065 shares for
issuance upon exercise of outstanding employee stock options in exchange for
all of the outstanding shares of RouterWare common stock and shares issuable
upon exercise of employee stock options assumed in the merger. Wind River
recorded this transaction using the pooling of interests accounting method,
and all financial data of Wind River has been restated to include the
historical financial information of RouterWare. In connection with the
acquisition of RouterWare, Wind River incurred approximately $930,000 in
merger related expenses consisting primarily of transaction fees.

In October 1999, Wind River entered into an agreement to merge with
Integrated Systems, Inc. ("ISI"), an embedded operating systems and
development tool software developer, in a transaction accounted for as a
pooling of interests. The merger was consummated on February 15, 2000. In
connection with the merger, each outstanding share of ISI common stock was
exchanged for .92 of a share of Wind River common stock, resulting in the
issuance of an aggregate of 22,499,895 shares of Wind River common stock for
all outstanding shares of ISI common stock. In addition, approximately
4,493,000 of ISI stock options became

<PAGE>

options to purchase approximately 4,133,000 shares of Wind River common
stock. As of January 31, 2000, Wind River incurred approximately $205,000 in
one-time integration related expenses consisting primarily of transaction
fees. Wind River's financial statements will be combined with those of
Integrated Systems beginning with the first quarter of fiscal year ending
January 31, 2001. For additional details on the merger, see "Note 17."

NOTE 3: LAND AND EQUIPMENT

<TABLE>
<CAPTION>
JANUARY 31,
(IN THOUSANDS) 2000 1999
- --------------------------------------------------
<S> <C> <C>
Land $ 13,643 $ 13,640
Computer equipment 34,964 28,103
Furniture and equipment 5,766 4,552
Leasehold improvements 1,648 1,127
- --------------------------------------------------
56,021 47,422
Less accumulated depreciation (20,266) (15,909)
- --------------------------------------------------
$ 35,755 $ 31,513
- --------------------------------------------------
</TABLE>

In fiscal 2000 Wind River made virtually no land improvements on its real
property for its headquarters located in the City of Alameda, California. In
fiscal 1999, Wind River made $2.2 million of related land improvements.

NOTE 4: INVESTMENTS

Cash equivalents and investments consist of the following:

<TABLE>
<CAPTION>
JANUARY 31,
(IN THOUSANDS) 2000 1999
- ------------------------------------------------------------------
<S> <C> <C>
Money market fund $ 6,745 $ 8,903
Municipal bonds -- 4,935
U.S. government and agency obligations 33,277 43,267
Corporate bonds 68,133 85,326
Other debt securities 106,760 61,423
- ------------------------------------------------------------------
Total available-for-sale securities 214,915 203,854
Less amounts classified as cash equivalents (46,311) (37,193)
- ------------------------------------------------------------------
Total marketable securities 168,604 166,661
- ------------------------------------------------------------------
Equity investments 41,351 3,010
- ------------------------------------------------------------------
Total market value of investments 209,955 169,671
- ------------------------------------------------------------------
Unrealized gain (loss) on
marketable securities (2,254) 339
Unrealized gain (loss) on
equity investments 36,587 (1,016)
- ------------------------------------------------------------------
Total unrealized gain (loss) on
investments 34,333 (677)
- ------------------------------------------------------------------
Total cost of investments $ 175,622 $ 170,348
- ------------------------------------------------------------------
</TABLE>

Fiscal 2000 equity investments are composed of the market value of Wind
River's stock holdings in Liberate and e-Sim. Fiscal 1999 equity investments
are composed of the market value of Wind River's stock holdings in e-Sim. The
contractual maturities of marketable securities, regardless of their balance
sheet classification, were as follows:

<TABLE>
<CAPTION>
JANUARY 31,
(IN THOUSANDS) 2000
- ---------------------------------------
<S> <C>
Due in 1 year or less $ 28,355
Due in 1-2 years 52,883
Due in 2-5 years 52,490
Due in 5 years or more 34,876
- ---------------------------------------
Total marketable securities $168,604
- ---------------------------------------
</TABLE>

Gross realized gains and losses from the sale of securities classified as
available-for-sale were not material for the years ended January 31, 2000,
1999 and 1998. For the purpose of determining gross realized gains and
losses, the cost of securities is based upon specific identification.

NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS

Wind River enters into foreign currency forward exchange contracts to manage
exposure related to certain foreign currency transactions. Wind River does
not enter into derivative financial instruments for trading purposes. Wind
River may, from time to time, 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. At January 31, 2000, Wind
River had outstanding forward contracts with notional amounts totaling
approximately $0.9 million. These contracts, which mature in less than ninety
days, are hedges of certain foreign currency transaction exposures in certain
European currencies. The difference between cost and estimated fair value at
January 31, 2000, was immaterial.

45
<PAGE>

On March 18, 1998, Wind River entered into an accreting interest rate
swap agreement (the "Swap Agreement") to reduce the impact of changes in
interest rates on its floating rate operating lease for its new corporate
headquarters. The Swap Agreement effectively changes Wind River's interest
rate exposure on its operating lease, which is at one month London interbank
offering rate ("LIBOR"), to a fixed rate of 5.9%. At January 31, 2000, the
notional amount of the accreting interest rate swap was $28.5 million. The
differential to be paid or received under the Swap Agreement will be
recognized as an adjustment to rent expense related to the operating lease.
The Swap Agreement matures at the same time as the operating lease expires.
The amounts potentially subject to credit risk (arising from the possible
inability of the counterparties to meet the term of their contracts) are
generally limited to the amounts, if any, by which the counterparties'
obligations exceed the obligations of Wind River.

NOTE 6: PROVISION FOR INCOME TAXES

The provision for income taxes was composed as follows:

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 6,878 $ 11,754 $ 7,405
State 1,972 1,839 1,610
Foreign 4,985 2,439 2,708
- -------------------------------------------
13,835 16,032 11,723
- -------------------------------------------
Deferred:
Federal 257 (245) (1,901)
State 17 1 (207)
Foreign 0 0 (786)
- -------------------------------------------
274 (244) (2,894)
- -------------------------------------------
$ 14,109 $ 15,788 $ 8,829
- -------------------------------------------
- -------------------------------------------
</TABLE>

The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------
<S> <C> <C> <C>
Expected rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.6 4.1 7.1
Foreign taxes 4.0 1.3 8.8
In-process technology write-off -- -- 26.2
Research and development, net (1.8) (1.3) (0.7)
Tax exempt interest -- (0.3) (8.0)
Foreign sales corporation benefit (1.4) (0.5) (1.3)
Other (0.8) (0.2) --
- -------------------------------------------------------------
38.6% 38.1% 67.1%
- -------------------------------------------------------------
- -------------------------------------------------------------
</TABLE>

The effective consolidated tax rate in fiscal 1998 was higher due to the
permanent difference resulting from the write-off of in-process research and
development during the fourth quarter of fiscal 1998. In fiscal 2000, 1999
and 1998, tax benefits resulting from the exercise of employee stock options
amounting to $5.0 million, $13.4 million, and $7.0 million, respectively,
were credited to stockholders' equity and reduced income taxes payable.

Deferred tax assets which result from temporary differences in the
recognition of certain revenues and expenses for financial and income tax
reporting purposes consist of the following:

<TABLE>
<CAPTION>
JANUARY 31,
(IN THOUSANDS) 2000 1999
- --------------------------------------------------------
<S> <C> <C>
Amortization $ 1,300 $1,898
Employee benefit accruals 1,063 737
Accounts receivable reserves 891 524
Accrued expenses and other 972 1,253
- --------------------------------------------------------
Gross deferred tax assets 4,226 4,412
- --------------------------------------------------------
Depreciation (800) (589)
Unrealized gains on investments (12,500) --
Other (408) (401)
- --------------------------------------------------------
Gross deferred tax liabilities (13,708) (990)
- --------------------------------------------------------
Net deferred tax assets $ (9,482) $3,422
- --------------------------------------------------------
- --------------------------------------------------------
</TABLE>

The tax effect on comprehensive income totaled $12.5 million for fiscal 2000.

<PAGE>

NOTE 7: CONVERTIBLE SUBORDINATED
NOTES AND OTHER BORROWINGS

In July 1997, Wind River issued $140 million of 5% Convertible Subordinated
Notes, which mature on August 1, 2002. The Notes are subordinated to all
existing and future senior debt and are convertible into shares of Wind
River's Common Stock at a conversion price of $32.33 per share. The Notes are
redeemable at the option of Wind River, in whole or in part, at any time on
or after August 2, 2000, at 102% of the principal amount initially, and
thereafter at prices declining to 100% at maturity, in each case plus accrued
interest. Each holder of these Notes has the right, subject to certain
conditions and restrictions, to require Wind River to offer to repurchase all
outstanding Notes, in whole or in part, owned by such holder, at specified
repurchase prices plus accrued interest upon the occurrence of certain
events. The $5.1 million of costs incurred in connection with the offering
are included in prepaid and other assets. These unamortized costs are being
amortized to interest expense over the 5-year term of the Notes using the
straight-line method, which approximates the effective interest method.
Interest on the Notes began accruing July 31, 1997, and is payable
semi-annually on February 1 and August 1, commencing on February 1, 1998.

In December 1999, the Company borrowed approximately $5.1 million from
its $5.9 million line of credit through a subsidiary. The amount borrowed
bears an annual interest rate of 0.81% and was outstanding as of January 31,
2000. The amount borrowed was paid in full during February 2000.

NOTE 8: COMPREHENSIVE INCOME

In February 1998, Wind River adopted SFAS 130, "Reporting Comprehensive
Income." Comprehensive income 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 primary difference between net income and comprehensive
income, for Wind River, results from foreign currency translation adjustments
and unrealized gains and losses on available-for-sale securities. The
adoption of SFAS 130 had no impact on Wind River's results of operations.

Wind River's comprehensive income has been presented in the Consolidated
Statements of Stockholders' Equity. As of January 31, 2000, accumulated other
comprehensive income consisted of foreign currency translation adjustments of
$2,387,000 and unrealized gain on investments of $20,687,000, net of tax.

NOTE 9: NET INCOME PER SHARE

In accordance with SFAS 128, the calculation of basic and diluted net income
per share is presented below:

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 2000 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Basic computation:
Net income $22,471 $25,623 $ 4,326
Weighted average common
shares outstanding 41,674 40,267 38,915
- -----------------------------------------------------------------------
Basic net income per share $ 0.54 $ 0.64 $ 0.11
- -----------------------------------------------------------------------
Diluted computation:
Net income $22,471 $25,623 $ 4,326
- -----------------------------------------------------------------------
Weighted average common
shares outstanding 41,674 40,267 38,915
Incremental shares from assumed conversions:
Stock options 3,104 3,576 4,652
Convertible subordinated notes -- -- --
Dilutive potential common shares 3,104 3,576 4,652
- -----------------------------------------------------------------------
Total dilutive average common
shares outstanding 44,778 43,843 43,567
- -----------------------------------------------------------------------
Diluted net income per share $ 0.50 $ 0.58 $ 0.10
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>

The effect of assumed conversion of the convertible subordinated notes is
anti-dilutive and is therefore excluded from the above computations. Options
to purchase approximately 4.0 million, 1.9 million and 0.8 million common
shares which were outstanding at January 31, 2000, 1999 and 1998,
respectively, were not included in the calculation because the exercise
prices were greater than the average market price of common shares in each
respective fiscal year and the effect would be anti-dilutive. The exercise
prices of these options ranged from $21.88 to $42.88, $26.04 to $31.92 and
$23.67 to $30.68 at January 31, 2000, 1999 and 1998, respectively.

<PAGE>

NOTE 10: COMMON STOCK

On each of March 10, 1997, and February 4, 1999, Wind River effected
three-for-two splits of its common stock in the form of stock dividends.
Accordingly, all share and per share amounts have been adjusted to give
retroactive effect to these stock splits.

During fiscal 1999, Wind River repurchased approximately 397,000 shares
of common stock at an aggregate cost of approximately $10.0 million. During
fiscal 2000, Wind River repurchased approximately 165,000 shares of common
stock at an aggregate cost of approximately $4.0 million. In June 1999, the
Board of Directors rescinded all stock repurchase authorizations. We have not
made any repurchases since March 17, 1999.

In May 1998, Wind River issued 339,917 unregistered shares of its common
sock to the shareholders of Zinc Software, Incorporated in exchange for all
of the then outstanding shares of Zinc. In January 1999, Wind River issued
337,500 of unregistered shares of its common stock to Innotech Corporation
upon Innotech's exercise of a warrant issued in January 1995, for an
aggregate exercise price of approximately $1.1 million. In June 1999, Wind
River issued 730,923 shares of its common stock and reserved an additional
634,065 shares for issuance upon exercise of outstanding employee stock
options in exchange for all of the outstanding shares of RouterWare common
stock and shares issuable upon exercise of employee stock options assumed in
the merger.

On February 15, 2000, Wind River issued an aggregate of 22,499,895
shares of Wind River Systems common stock in conjunction with the acquisition
of Integrated Systems, Inc. Additionally, approximately 4,493,000 of
Integrated Systems' stock options became options to purchase approximately
4,133,000 shares of Wind River common stock.

In October 1999, Wind River's Board of Directors adopted a share
purchase rights plan declaring a dividend of one preferred share purchase
right for each share of Wind River's common stock outstanding on November 15,
1999. Each right entitles the holder to purchase 1/100th of a share of Series
A Junior Participating Preferred Stock, par value $.001 per share, at a price
of $160.00 per 1/100th of a preferred share, subject to certain adjustments.

The rights will not be distributed until the earlier of the date of a
public announcement that a person or a group have acquired beneficial
ownership of 15% or more of the outstanding common stock ("Acquiring
Person"), or 10 business days following the commencement of, or announcement
of an intention to commence a tender offer or exchange offer, the
consummation of which would result in any person or entity becoming an
Acquiring Person. The rights will expire on October 22, 2001, unless earlier
redeemed or exchanged by Wind River.

NOTE 11: STOCK BASED COMPENSATION PLANS

As of January 31, 2000, Wind River had six stock-based compensation plans
including the option plan assumed in connection with the acquisition of
RouterWare. Wind River accounts for its stock-based compensation plans in
conformity with APB 25 and related Interpretations and has adopted the
additional pro forma disclosure provisions of SFAS 123. Accordingly, no
compensation expense has been recognized for its five fixed stock option
plans and its stock purchase plan.

The Amended and Restated 1987 Equity Incentive Plan (the "1987 Plan")
allows for the issuance of options and other stock awards to Company
employees and consultants to purchase a maximum of 14,175,000 shares of
Common Stock. Stock options granted under the 1987 Plan may be incentive
stock options or nonstatutory stock options. Individuals owning more than 10%
of Wind River's stock are not eligible to receive incentive stock options
under the 1987 Plan unless the option's price is at least 110% of the fair
market value of the Common Stock at the date of grant and the term of the
option does not exceed five years from the date of grant. Nonstatutory stock
options issued to holders of less than 10% of Wind River's stock may be
granted at prices of at least 85% of the fair market value of the stock at
the grant date and with expirations not to exceed ten years from the grant
date, although Wind River's current practice is to grant options with
exercise prices at least 100% of the fair market value. Under the terms of
the 1987 Plan, option vesting provisions are established by the Board of
Directors when options are granted. Options generally will vest over four
years, although options may be granted that vest upon achievement of
performance criteria. Unexercised options are automatically canceled three
months after termination of the optionee's employment or other service with
Wind River.

In April 1995, Wind River adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for
automatic grants of nonstatutory stock options to purchase Common Stock of
Wind River to directors of Wind River who are not employees of, or
consultants to, Wind River or any affiliate of Wind River (Non-Employee
Directors). The Directors' Plan allows for the issuance of options to
purchase a maximum of 337,500 shares of Common Stock. Options issued are
granted at prices of 100% of the fair market value of the Common Stock at the
date of grant and with expirations of ten years from the grant date. Initial
options granted to each Non-Employee Director vest in annual increments over
a period of four years from the date of grant, commencing on the date

<PAGE>

one year after the date of grant of the initial options. Subsequent options
shall become 100% vested at the end of the one-year period following the date
of grant as long as the optionee has attended 75% of the meetings of the
board and committees on which he serves. Unexercised options will terminate
six months after such optionee's termination of all service with Wind River
and its affiliates.

In April 1998, Wind River adopted the 1998 Non-Officer Stock Option
Plan (the "Non-Officer Plan"). The Non-Officer Plan provides for grants of
nonstatutory stock options to employees and consultants who are not officers or
directors of Wind River. An aggregate of 3,450,000 shares of Common Stock have
been reserved for issuance under the Non-Officer Plan. The exercise price of
nonstatutory stock option granted under the Non-Officer Plan may not be less
than 85 percent of the fair market value of the Common Stock on the date of
grant. All nonstatutory stock options may be granted under the Non-Officer Plan
have a maximum term of 10 years. Options generally will vest over four years,
although options may be granted that vest upon achievement of performance
criteria. The Non-Officer Plan and options thereunder may be amended by the
Board from time to time. The Non-Officer Plan will terminate on April 22, 2008.

In June 1998, Wind River adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). The 1998 Plan provides for grants of options and other stock
awards to Company employees, directors and consultants to purchase a maximum
of 4,100,000 shares of Common Stock. Stock options granted under the 1998
Plan may be incentive stock options or nonstatutory stock options.
Individuals owning more than 10% of Wind River's stock are not eligible to
receive incentive stock options under the 1998 Plan unless the option's price
is at least 110% of the fair market value of the Common Stock at the date of
grant and the term of the option does not exceed five years from the date of
grant. Nonstatutory stock options issued to holders of less than 10% of Wind
River's stock may be granted at prices of at least 85% of the fair market
value of the stock at the grant date and with expirations not to exceed ten
years from the grant date, although Wind River's current practice is to grant
options with exercise prices at least 100% of the fair market value. Under
the terms of the 1998 Plan, option vesting provisions are established by the
Board of Directors when options are granted. Options generally will vest over
four years, although options may be granted that vest upon achievement of
performance criteria. Unexercised options are automatically canceled three
months after termination of the optionee's employment or other service with
Wind River.

In June 1999, Wind River assumed the 1994 RouterWare Stock Option Plan
in connection with the acquisition of RouterWare. Pursuant to the
acquisition, Wind River reserved 634,065 shares for issuance upon exercise of
outstanding employee stock options in exchange for all of the outstanding
shares of RouterWare common stock and shares issuable upon exercise of
employee stock options assumed in the merger. Wind River recorded this
transaction using the pooling of interests accounting method, and all
financial data, including the number of options outstanding, of Wind River
has been restated to include the historical financial information of
RouterWare.

The number of shares for which options under these five plans were
exercisable was approximately 4,131,644, 2,338,000 and 2,603,000, at January
31, 2000, 1999, and 1998, respectively. Activity under the 1987 Plan, the
Directors' Plan, the 1998 Plan, the Non-Officer Plan and the 1994 RouterWare
Stock Option Plan is summarized as follows:

<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999 FISCAL 1998
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE PRICE OF AVERAGE PRICE OF AVERAGE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
- -------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Beginning
balance 7,614 $ 18.27 7,266 $12.30 5,948 $ 4.58
Granted 3,887 $ 16.85 2,498 $24.52 2,986 $ 22.36
Exercised (956) $ 4.27 (1,671) $ 3.92 (1,080) $ 2.24
Canceled (471) $ 19.87 (479) $17.41 (588) $ 11.45
- -------------------------------------------------------------------------------------
Ending
balance 10,074 $ 17.88 7,614 $18.27 7,266 $ 12.30
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information about fixed stock options outstanding
at January 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES (IN THOUSANDS) LIFE (IN YEARS) PRICE (IN THOUSANDS) PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.07 - $4.69 1,133 4.0 $ 2.42 1,133 $ 2.42
$5.45 - $9.88 569 5.2 $ 7.66 557 $ 7.65
$10.20 - $14.99 2,017 8.1 $ 13.31 514 $ 12.22
$15.00 - $19.75 1,832 9.5 $ 16.21 16 $ 16.19
$20.46 - $24.96 1,472 7.7 $ 22.30 671 $ 22.35
$25.00 - $29.58 2,632 7.1 $ 26.56 1,217 $ 26.44
$30.00 - $34.81 382 9.7 $ 32.15 23 $ 30.74
$36.13 - $39.19 29 9.9 $ 37.15 -- --
$40.69 - $42.88 8 9.9 $ 41.81 -- --
- --------------------------------------------------------------------------------
$.07 - $42.88 10,074 7.5 $ 17.88 4,131 $ 14.87
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>

In March 1993, Wind River adopted the Employee Stock Purchase Plan (the
"Purchase Plan"). In April 1999, the Board amended the Purchase Plan to
increase the aggregate

<PAGE>

shares from 1,350,000 to 1,500,000 shares of Common Stock, which are
authorized for issuance under the Purchase Plan. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the commencement of the
Purchase Plan. Employees who participate in an offering can have up to 15% of
their earnings withheld pursuant to the Purchase Plan. The amount withheld is
used to purchase shares of Common Stock on specified dates determined by the
Board. The price of Common Stock purchased under the Purchase Plan is equal
to 85% of the lower of the fair market value of the Common Stock, determined
by the closing price on the Nasdaq National Market, at the commencement date
or the ending date of each six month offering period.

Shares issued under the Purchase Plan in fiscal 2000, 1999, and 1998
were 226,000, 121,000, and 96,000 shares of Common Stock, respectively, at an
average price of $27.20, $20.28, and $19.43, respectively. At January 31,
2000, 278,456 shares of Common Stock were available for future purchase.

PRO FORMA DISCLOSURES

Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used
for grants during fiscal 2000, 1999 and 1998:

<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
2000 1999 1998
- ----------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rates 5.70% 5.30% 6.04%
Expected volatility 54% 48% 54%
Expected option life 6.5 years 6.5 years 6.3 years
Expected dividends -- -- --
- ----------------------------------------------------------
</TABLE>

Wind River applies the provisions of APB 25 and related Interpretations in
accounting for stock based compensation arrangements. Had compensation
expense under these arrangements been determined pursuant to SFAS 123, Wind
River's net income and net income per share would have been as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT YEARS ENDED JANUARY 31,
PER SHARE AMOUNTS) 2000 1999 1998
<S> <C> <C> <C>
- ----------------------------------------------------------------------
Net income:
As reported $ 22,471 $ 25,623 $ 4,326
Pro Forma $ (8,876) $ 3,275 $ (6,850)

Net income per share:
Basic:
As reported $ 0.54 $ 0.64 $ 0.11
Pro Forma $ (0.21) $ 0.08 $ (0.18)

Diluted:

As reported $ 0.50 $ 0.58 $ 0.10
Pro Forma $ (0.21) $ 0.07 $ (0.18)
- ----------------------------------------------------------------------
</TABLE>

The pro forma amounts include compensation expense related to fiscal 2000,
1999 and 1998 stock option grants and sales of Common Stock under the
Purchase Plan only. The effects of applying SFAS 123 on pro forma disclosures
of net income and net income per share for fiscal 2000, 1999, and 1998 are
not likely to be representative of the pro forma effects on net income and
net income per share in future years.

NOTE 12: COMMITMENTS AND CONTINGENCIES

Wind River leases certain property consisting of subsidiary headquarters,
customer training facilities, sales facilities and equipment under
noncancelable operating leases that expire at various dates through March
2004. Future minimum rental payments under noncancelable operating leases
subsequent to fiscal 2000 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------
Year ending January 31,
<S> <C>
2001 $2,665
2002 1,812
2003 699
2004 632
2005 516
Thereafter 0
- ---------------------------
$6,324
- ---------------------------
- ---------------------------
</TABLE>

Rental expense for fiscal 2000, 1999 and 1998 was $4.9 million, $3.1
million and $2.5 million, respectively.

In fiscal 1998, Wind River entered into an operating lease for its new
headquarters facility constructed on the land Wind River purchased in
Alameda, California. Construction of the buildings was completed in the first
quarter of fiscal year 2000. The lease was finalized in August 1999 and the
lessor has funded a total of $32.4 million of construction costs. The
operating lease payments began in August 1999 and will vary based on the
total construction costs of the property, including capitalized interest, and
LIBOR.

In fiscal 2000, Wind River entered into a second operating lease
agreement for the construction of two additional buildings at its headquarter
facility. As of January 31, 2000, the lessor has funded a total of $4.0
million of construction costs and has committed to fund up to a maximum of
$26.0 million. Construction of the building is currently expected to be
completed in January 2001. The operating lease payments will vary based upon
the total construction costs of the property, including capitalized interest
and LIBOR.

In connection with the lease of Wind River's current headquarters, Wind
River is obligated to enter into a lease of its land in Alameda, California,
with the lessor of the build-

50
<PAGE>

ing at a nominal rate and for a term of 55 years. If Wind River terminates or
does not negotiate an extension of the building leases, the ground lease
converts to a market rental rate. The lease provides Wind River with the
option at the end of the lease term to either acquire the buildings at the
lessor's original cost or arrange for the buildings to be acquired. Wind
River has guaranteed the residual value associated with the buildings under
the first operating lease and second operating lease to the lessor of
approximately 82% and 84.5%, respectively, of the lessor's actual funding of
$32.4 million on the first operating lease and obligated funding of $26.0
million on the second operating lease, respectively. Wind River is also
required to deposit fixed income securities with a custodian as a deposit to
secure the performance of its obligations under the leases. In addition,
under the terms of the leases, Wind River must maintain compliance with
certain financial covenants. As of January 31, 2000, Wind River was in
compliance with these covenants. Management believes that the contingent
liability relating to the residual value guarantee will not have a material
adverse effect on Wind River's financial condition or results of operations.

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

NOTE 13: RELATED PARTY TRANSACTIONS

Wind River distributes its products in Japan through WRSKK, a joint venture
in which Wind River owns a 70% equity interest. Innotech Corporation
("Innotech"), Kobe Steel Ltd. and Nissin Electric Ltd., the other partners in
the joint venture, each owns a 10% equity interest. Wind River entered into
distributor agreements with the three minority interest owners of WRSKK,
Innotech, Kobe Steel, Ltd., and Nissin Electric Ltd., in March 1993, October
1991, and October 1991, respectively. The Innotech agreement was amended in
December 1995 to provide for an extended contract term and to issue to
Innotech a warrant to purchase 337,500 shares of Wind River's Common Stock
for $3.29 per share. The warrant was valued at $100,000 and charged to cost
of sales in fiscal 1996. The warrant was exercised on January 26, 1999.

Products in Japan are sold through WRSKK's three master distributors and
through WRSKK's direct sales force. Revenues derived from master distributor
transactions in Japan amounted to $21.2 million, $17.0 million, and $8.5
million in fiscal 2000, 1999 and 1998, respectively. The percentage of Japan
revenues from Innotech in fiscal year 2000, 1999 and 1998 was 34%, 53% and
32%, respectively. The percentage of Japan revenues from Kobe Steel Ltd. in
fiscal year 2000, 1999 and 1998 was 31%, 34% and 52%, respectively. The
percentage of Japan revenues from Nissin Electric Ltd. in fiscal year 2000,
1999 and 1998 was 15%, 13% and 16%, respectively. Advances from the joint
venture partners were approximately $1.5 million and $310,000 at January 31,
2000 and 1999, respectively.

NOTE 14: SEGMENT AND GEOGRAPHIC INFORMATION

Wind River has adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," effective beginning fiscal year 1999. SFAS 131
supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 changes current practice under SFAS 14 by establishing
a new framework on which to base segment reporting and also requires interim
reporting of segment information.

Wind River operates in one industry segment -- technology for embedded
operating systems. Management uses one measurement of profitability for its
business. Wind River markets its products and related services to customers
in the United States, Canada, Europe and Asia Pacific. Internationally, Wind
River markets its products and services primarily through its subsidiaries
and various distributors. Revenues are attributed to geographic areas based
on the country in which the customer is domiciled. The distribution of
revenues and assets by geographic location is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS) REVENUES ASSETS
- ------------------------------------------------------------
<S> <C> <C>
Fiscal year ended January 31, 2000
North America $113,799 $355,751
Japan 26,411 25,596
Other International 30,900 41,863
- ------------------------------------------------------------
Consolidated $171,110 $423,210
- ------------------------------------------------------------
Fiscal year ended January 31, 1999
North America $ 90,289 $298,739
Japan 17,018 12,043
Other International 24,595 18,931
- ------------------------------------------------------------
Consolidated $131,902 $329,713
- ------------------------------------------------------------
Fiscal year ended January 31, 1998
North America $ 66,845 $270,003
Japan 8,504 7,196
Other International 18,421 13,642
- ------------------------------------------------------------
Consolidated $ 93,770 $290,841
- ------------------------------------------------------------
</TABLE>

Other International consists of the revenues and assets of operations in
Europe and Asia Pacific excluding Japan.

<PAGE>

NOTE 15: SECURED PROMISSORY NOTE WITH A STOCKHOLDER

On September 7, 1999, the Company's chief executive officer signed a secured
promissory note to borrow up to $2.4 million from the Company to purchase
shares of common stock. The note accrues interest at the rate of 5.98% per
year, and is due on September 7, 2008. As of January 31, 2000, Mr. St. Dennis
had borrowed $1.9 million against the note. This loan is full recourse and is
secured by certain personal assets owned by the CEO. The loan amount as of
January 31, 2000 is reflected as a reduction of equity in the accompanying
consolidated balance sheet.

NOTE 16: SPECIAL CHARGES

During the fiscal year ended January 31, 2000, Wind River incurred
approximately $1.2 million associated with the retirement package of its
former chief executive officer, who relinquished his responsibilities as
president and chief executive officer as of June 24, 1999. Subsequent to
that, Wind River incurred approximately $1.3 million in connection with the
hiring of its new chief executive officer. Furthermore, in connection with
the acquisition of RouterWare and planned merger with ISI, Wind River
incurred approximately $930,000 in merger related and $205,000 integration
related expenses, respectively, consisting primarily of transaction fees. All
of these charges are included in general and administrative expenses.

NOTE 17: SUBSEQUENT EVENTS
(UNAUDITED)

On February 15, 2000, Wind River completed its acquisition of ISI in a
stock-for-stock transaction. As a result, ISI became a wholly owned
subsidiary of Wind River. In connection with the acquisition, each
outstanding share of ISI common stock was exchanged for .92 of a share of
Wind River common stock, resulting in the issuance of an aggregate of
22,499,895 shares of Wind River common stock for all outstanding shares of
ISI common stock, and all options to purchase shares of ISI common stock
outstanding immediately prior to the consummation of the acquisition were
converted into options to purchase shares of Wind River common stock. The
acquisition is being accounted for as a pooling of interests. ISI provides
solutions for embedded software development that consist of real-time
operating systems and software components for embedded microprocessors; tools
for designing, developing and optimizing embedded applications; networking
products for device connectivity and management; and engineering design
services for accelerated co-sourced product development.

On March 31, 2000, Wind River completed its acquisition of EST, a
worldwide provider of integrated hardware and software tools for programming,
testing and debugging embedded systems. In connection with the acquisition,
Wind River issued an aggregate of 5,474,792 shares of its common stock and
reserved an additional 1,122,855 shares for issuance upon exercise of
outstanding employee stock options in exchange for all outstanding shares of
EST common stock, including shares issuable upon exercise of employee stock
options. The acquisition was accounted for as a purchase. Based on Wind
River's average share price at the time the merger was announced, the
transaction was valued at approximately $329.1 million.

Presented below are pro forma condensed combined financial statements as
of and for the year ended January 31, 2000:

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, WIND PRO FORMA PRO FORMA
except per share information) RIVER ISI ADJUSTMENTS COMBINED EST ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Year ended January 31, 2000:
Revenue $171,110 $145,845 $ (901) $316,054 $28,451 $ (715) $343,790
Net income (loss) $ 22,471 $ (11,645) $ (463) $ 10,363 $ (3,747) $ (81,324) $(74,708)
Net income (loss) per share:
Basic $ 0.54 $ (0.50) $ 0.16 $ (0.49) $ (1.09)
Diluted $ 0.50 $ (0.50) $ 0.16 $ (0.49) $ (1.09)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item relating to the registrant's executive
officers is included in Item 4A of this 10-K. The information required by the
item relating to the registrant's directors is incorporated by reference from
Wind River's proxy statement related to the annual stockholders' meeting to be
held on July 26, 2000, to be filed by Wind River with the Securities and
Exchange Commission ("Proxy Statement").

ITEM 11.

EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Proxy Statement.

<PAGE>

PART IV

ITEM 14.

EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

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

1. Financial Statements and Schedules
Schedules - See Index to Consolidated Financial Statements at Item 8
of this report.

All other schedules are omitted because they were not required or the
required information is included in the Consolidated Financial
Statements or Notes thereto.

2. Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------------------------------------------------------------------------------
<S> <C>
3.1 (xi) Certificate of Incorporation of Wind River, as amended to date.

3.2 (i) By-laws of Wind River.

10.1* (i) Form of Indemnity Agreement entered into between the
Registrant and its officers and directors.

10.2* (iv) 1987 Equity Incentive Plan, as amended to date.

10.3* (i) Form of Incentive Stock Option Grant under the 1987 Equity
Incentive Plan.

10.4* (i) Form of Nonstatutory Stock Option Grant under the 1987 Equity
Incentive Plan.

10.5* (iv) 1993 Employee Stock Purchase Plan, as amended to date.

10.6 (i) Master Technology License Agreement between the Registrant and
Wind River Systems, K.K., dated as of September 11, 1990.

10.7 (i) Amended Joint Venture Agreement for Wind River Systems, K.K.
between the Registrant and the parties named herein, dated as
of October 1, 1991.

10.9 (i) Marina Village Industrial Gross Lease between the Registrant
and Alameda Real Estate Investments, dated as of March 15,
1990, as amended.

10.12* (iii) Amended and restated Deferred Compensation Agreement between
the Registrant and Ronald A. Abelmann.

10.14* (iv) 1995 Non-Employee Directors' Stock Option Plan.

10.15* (v) Form of Nonstatutory Stock Option Grant under the Non-Employee
Director's Stock Option Plan.

10.16 (vi) Indenture between Wind River and Deutschebank AG as Trustee,
dated as of July 31, 1997.

10.17 (vi) Convertible Subordinated Notes Purchase Agreement between the
Registrant and Deutsche Morgan Grenfell Inc., Hambrecht &
Quist LLC, and Wessels, Arnold & Henderson, L.L.C., dated as
of July 31, 1997.

10.18 (vi) Registration Rights Agreement between the Registrant and
Deutsche Morgan Grenfell Inc., Hambrecht & Quist LLC and
Wessels, Arnold & Henderson, L.L.C., dated as of July 31, 1997.

10.19 (vii) Lease Agreement between Deutsche Bank AG, New York Branch, and
Wind River Systems, Inc., dated as of September 12, 1997.

10.13* (viii) Executive Officers' Change of Control Incentive and Severance
Benefit Plan dated as of November 16, 1995.

10.20* (viii) Form of Performance Option under the Amended and Restated Wind
River Systems, Inc. 1987 Equity Incentive Plan.

10.21 (xvii) 1998 Non-Officer Stock Option Plan as amended.

10.22*(xviii) 1998 Equity Incentive Plan as amended.

10.23* (x) Form of Stock Option Agreement under the 1998 Equity Incentive
Plan.

10.24 (xii) Retirement and Consulting Agreement between the Registrant and
Ronald A. Abelmann, dated as of July 28, 1999.
</TABLE>

<PAGE>

<TABLE>
<S> <C>
10.25 (xiii) Executive Employment Agreement between the Company and Thomas
St. Dennis, dated as of September 7, 1999.

10.26 (xiii) Secured Promissory Note, dated as of September 7, 1999 between
the Company and Thomas St. Dennis.

10.27 (xiii) Investment Propriety Security Agreement by Thomas St. Dennis
in favor of the Company.

10.28 (xiii) Non-Statutory Stock Option Agreement between the Company and
Marla A. Stark.

10.29 (xiv) Agreement and Plan of Merger and Reorganization dated as of
October 21, 1999, among Wind River Systems, Inc., University
Acquisition Corp. and Integrated Systems, Inc.

10.30 (xiv) Stock Option Agreement dated as of October 21, 1999 between
Wind River Systems, Inc. and Integrated Systems, Inc.

10.31 (xiv) Form of Voting Agreement between Wind River Systems. Inc. and
certain shareholders of Integrated Systems, Inc.

10.32 (xiv) Form of Voting Agreement between Integrated Systems, Inc. and
certain stockholders of Wind River Systems, Inc.

10.33 (xv) Stockholder Rights Plan

10.34 (xvi) Lease Agreement between Deutsche Bank AG, and Wind River
Systems, Inc., dated as of November 30, 1999.

21 (xix) Subsidiaries of Registrant.

23 Consent of Independent Accountants.

27.1 (xix) Financial Data Schedule.
- -------------------------------------------------------------------------------
</TABLE>

(i) Incorporated by reference from Wind River's Registration
Statement on Form S-1 (No. 33-59146), filed with the Commission
on March 5, 1993, as amended through the date hereof.

(ii) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1994 and incorporated herein by
reference.

(iii) Filed as an exhibit to Form 10-Q/A, Amendment No. 2, for the
quarter ended April 30, 1996 and incorporated herein by
reference.

(iv) Incorporated by reference from Wind River's Registration
Statement on Form S-8 (No. 333-06921) filed with the Commission
on June 18, 1996.

(v) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1997 and incorporated herein by
reference.

(vi) Filed as an exhibit to Form 10-Q for the quarter ended July 31,
1997 and incorporated herein by reference.

(vii) Filed as an exhibit to Form 10-Q for the quarter ended October
31, 1997 and incorporated herein by reference.

(viii) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1998 and incorporated herein by
reference.

(ix) Filed as an exhibit to Form 10-Q for the quarter ended April 30,
1998 and incorporated herein by reference.

(x) Filed as an exhibit to Form 10-Q for the quarter ended July 31,
1998 and incorporated herein by reference.

(xi) Filed as an exhibit to Form 10-Q for the quarter ended October
31, 1998 and incorporated herein by reference.

(xii) Filed as an exhibit to Form 10-Q for the quarter ended July 31,
1999 and incorporated herein by reference.

(xiii) Filed as an exhibit to Form 10-Q for the quarter ended October
31, 1999 and incorporated herein by reference.

(xiv) Incorporated by reference to the Company's Registration
Statement on Form S-4 filed November 23, 1999 (No. 333-91545).

(xv) Incorporated by reference to the Company's Form 8-K, dated
November 4, 1999.

(xvi) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 2000 and incorporated by reference.

(xvii) Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated April 14, 2000 (No. 333-34874) and incorporated by
reference.

(xviii) Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated March 27, 2000 (No. 333-33348) and incorporated by
reference.

(xix) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended January 31, 2000.

* Indicates management contracts or compensatory arrangements filed
pursuant to Item 601(b) (10) of Regulations S-K.

(b) Reports on Form 8-K

The Company has filed no reports on Form 8-K during the fourth quarter of
fiscal 2000.

<PAGE>

SIGNATURES

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

Wind River Systems, Inc.

Dated: May 25, 2000 /s/ RICHARD W. KRABER
------------------------------
RICHARD W. KRABER
VICE PRESIDENT OF FINANCE AND CHIEF
FINANCIAL OFFICER

<PAGE>

Exhibit 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-34874, 333-33348, 333-86367, 333-82109,
33-63796, 33-59146, 333-06921, 333-66245 and 333-61053) and the Prospectuses
constituting part of Form S-3 (Nos. 333-59311, 333-38987 and 333-36084) of
Wind River Systems, Inc. of our report dated March 2, 2000, relating to the
consolidated financial statements and financial statement schedule, which
appear in this 10-K.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

San Jose, California
May 25, 2000

<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
(In thousands) THE YEAR EXPENSES (1) WRITE-OFFS THE YEAR
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended January 31, 2000:
Allowance for doubtful accounts $ 752 $ 640 $ (287) $1,105
Allowance for sales returns 798 502 -- 1,300
- -------------------------------------------------------------------------------
$1,550 $ 1,142 $ (287) $2,405
- -------------------------------------------------------------------------------
Year ended January 31, 1999:
Allowance for doubtful accounts $ 800 $ -- $ (48) $ 752
Allowance for sales returns 660 288 (150) 798
- -------------------------------------------------------------------------------
$1,460 $ 288 $ (198) $1,550
- -------------------------------------------------------------------------------
Year ended January 31, 1998:
Allowance for doubtful accounts $ 589 $ 223 $ (12) $ 800
Allowance for sales returns 615 114 (69) 660
- -------------------------------------------------------------------------------
$1,204 $ 337 $ (81) $1,460
- -------------------------------------------------------------------------------
</TABLE>

(1) Additions resulting from increase in allowance for sales returns were offset
against revenue.