BSQUARE CORP /WA, S-1/A, 1999-08-19

BSQUARE CORP /WA
S-1/A, 1999-08-19
BUSINESS SERVICES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1999

REGISTRATION NO. 333-85351

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

BSQUARE CORPORATION
(NAME OF ISSUER IN ITS CHARTER)

<TABLE>
<S> <C> <C>
WASHINGTON 7371 91-1650880
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

3633 136TH PLACE S.E., SUITE 100
BELLEVUE, WASHINGTON 98006
(425) 519-5900
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)

WILLIAM T. BAXTER
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
3633 136TH PLACE S.E., SUITE 100
BELLEVUE, WASHINGTON 98006
(425) 519-5900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

COPIES OF ALL COMMUNICATIONS TO BE SENT TO:

MICHAEL J. ERICKSON, ESQ.
KAREN A. ANDERSEN, ESQ.
LAURA A. BERTIN, ESQ.
MARK F. WORTHINGTON, ESQ.
SUMMIT LAW GROUP, PLLC
1505 WESTLAKE AVENUE NORTH, SUITE 300
SEATTLE, WASHINGTON 98109
(206) 281-9881
WILLIAM D. SHERMAN, ESQ.
CORI M. ALLEN, ESQ.
COREY A. LEVENS, ESQ.
MORRISON & FOERSTER LLP
755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 813-5600

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------------

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED AUGUST , 1999

[BSQUARE CORPORATION LOGO]

COMMON STOCK

------------------

Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $
and $ per share. We will apply to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "BSQR."

The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS BSQUARE
--------------- ------------- -----------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about
, 1999.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS

A.G. EDWARDS & SONS, INC. WIT CAPITAL CORPORATION

The date of this prospectus is , 1999.
<PAGE> 3
[Description of Artwork]

Front Inside Cover

[BSQUARE LOGO]

[Text]

ICD Road Map

Chart of

BSQUARE &
WINDOWS CE

BSQUARE provides Windows(R) CE-based
software solutions to enable a wide range
of intelligent computing devices

SET-TOP BOXES

INDUSTRIAL DEVICES

THIN CLIENTS

GAMING SYSTEMS

HANDHELD DEVICES

CONSUMER APPLIANCES

Enabling
the age of
INTELLIGENT
COMPUTING
DEVICES
<PAGE> 4

INSIDE GATEFOLD
[Text]

BSQUARE CORPORATION

BSQUARE - A LEADING WINDOWS CE SOLUTIONS PROVIDER

The growth of the market for intelligent computing devices, compounded by the
growth of the Windows CE operating system, has created an emerging market
opportunity for Windows CE-based software solutions and engineering services.
BSQUARE provides software engineering services to Microsoft to help develop the
Windows CE operating system and the accompanying tool set. BSQUARE provides
OEMs with software infrastructure products and services to help achieve
time-to-market objectives. End-users license BSQUARE's mobile productivity
software, such as bFAX(R), to extend the use of intelligent computing devices.

Off-the-shelf software products help OEMs achieve a faster time-to-market, and
end-users to increase the functionality of intelligent computing devices.

BSQUARE's experienced software engineering team has been developing Windows
CE-based software solutions since January 1995 - prior to the commercial
release of Windows CE.

INTELLIGENT COMPUTING DEVICES

[Pictures reflecting BSQUARE products and models posing
as BSQUARE engineering team]

<PAGE> 5
Inside Gatefold

[Text]

From the operating system to run-time software to value-added applications,
BSQUARE provides end-to-end software solutions for the development and use of
Windows CE-based intelligent computing devices.

Intelligent Computing Device Development Process

[Chart reflecting]

Microsoft
Microprocessor Vendors
Intelligent Computing Device Manufacturers )OEMs)
End-users

Software engineering services for development of Windows CE operating system
and accompanying tools

Software engineering services for development of Windows CE tools and system
level software support

Software products and engineering services for the integration of Windows CE
into devices. End-user applications for bundling on devices

After-market software products to extend the use of intelligent computing
devices

BSQUARE supplies software products and services throughout the process

[BSQUARE LOGO]

Windows CE

<PAGE> 6
Back Cover
[BSQUARE LOGO]
[Text]

BSQUARE provides software solutions to enable the development and
proliferation of Windows CE-based intelligent computing devices. From the
operating system to run-time software to value-added applications.
BSQUARE PRODUCTS AND SERVICES COMPRISE END-TO-END SOLUTIONS.

"We came to BSQUARE because we knew they had the products and expertise to
assist us in the development of Capio[TM], our latest Window[R]-based Terminal,
within our tight timeframe. With BSQUARE's CE Xpress[TM] Kit and a custom
Ethernet driver they developed for us, we were able to shorten our development
time and deliver our product to market quickly."

MIKE OLIVA, DIRECTOR OF MARKETING, BOUNDLESS TECHNOLOGIES INC.

"BSQUARE seems to always be keying in on the most meaningful segments of the
Windows CE product market: They always know what we want as consuming people."

JARED MINIMAN, WINCELAIR

INTELLIGENT
COMPUTING
DEVICES
<PAGE> 7

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 5
FORWARD-LOOKING STATEMENTS............ 14
USE OF PROCEEDS....................... 14
DIVIDEND POLICY....................... 14
CAPITALIZATION........................ 15
DILUTION.............................. 16
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 18
BUSINESS.............................. 27
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT............................ 41
CERTAIN TRANSACTIONS.................. 48
PRINCIPAL SHAREHOLDERS................ 49
DESCRIPTION OF CAPITAL STOCK.......... 51
SHARES ELIGIBLE FOR FUTURE SALE....... 54
UNDERWRITING.......................... 56
NOTICE TO CANADIAN RESIDENTS.......... 58
LEGAL MATTERS......................... 59
EXPERTS............................... 59
WHERE TO FIND ADDITIONAL DOCUMENTS.... 59
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>

------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.

DEALER PROSPECTUS DELIVERY OBLIGATION

UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE> 8

PROSPECTUS SUMMARY

The following summary highlights information that we present more fully
elsewhere in this prospectus. You should read this entire prospectus carefully.

BSQUARE CORPORATION

We are a leading provider of software solutions that enable the development
and proliferation of a wide variety of intelligent computing devices based on
the Microsoft Windows CE operating system.

Intelligent computing devices, or ICDs, are a new class of powerful and
cost-effective devices that have form factors and feature sets closely tailored
to their specific applications and are able to support sophisticated
communications capabilities. ICDs include, among other devices, digital set-top
boxes, gaming systems, handheld data collectors used for industrial purposes and
Windows-based terminals. As businesses and consumers continue to leverage the
Internet to enhance connectivity among suppliers, partners and consumers alike,
users are increasingly looking to ICDs as a cost-effective and more flexible
means of achieving electronic connectivity.

To enable the deployment of ICDs and to support the development of
industry-specific applications, semiconductor vendors and original equipment
manufacturers, or OEMs, demand a highly scalable and customizable operating
system with minimal system requirements. Microsoft's Windows CE operating system
is rapidly gaining market acceptance as an operating system of choice for these
hardware manufacturers.

We help enable the rapid and low-cost deployment of ICDs by providing a
variety of software solutions for the development and integration of the Windows
CE operating system with industry-specific applications. We have also developed
software applications that we license to end users to provide ICDs with
additional functionality. Because we have been building Windows CE-based
software solutions since before the commercial release of Windows CE, we believe
that we offer a greater breadth and depth of Windows CE software solutions
expertise than any of our current competitors.

We provide solutions to Microsoft for the development of the Windows CE
operating system and tools. We also provide Windows CE solutions to OEMs and
semiconductor vendors and license our end-user software applications to OEMs for
bundling on ICDs and to end users. To date, we have provided our products and
services to Microsoft, Hewlett-Packard, Hitachi, Motorola, NEC, Philips
Electronics and Sharp Electronics, among others.

Our strategy is to become the leading provider of software solutions for
the development and proliferation of ICDs. The key elements of our strategy
include continuing to enhance our position as a leading provider of Windows CE
solutions, expanding our strategic relationships with hardware and software
vendors, continuing to leverage our relationship with Microsoft, leveraging our
extensive Windows CE expertise to develop additional software applications and
expanding our international presence.

We were incorporated in the State of Washington in July 1994. Our principal
executive offices are located at 3633 136th Place S.E., Suite 100, Bellevue,
Washington 98006, and our telephone number is (425) 519-5900. Our World Wide Web
address is www.bsquare.com. Information on our website does not constitute a
part of this prospectus.
------------------------

BSQUARE, bFAX and BSQUARE View are our registered trademarks. Additionally,
bTRACK, bREADY, bFIND, bPRINT, bMOBILE, bUSEFUL, bTASK, bPRODUCTIVE, bSTART and
CEValidator are our trademarks. This prospectus also contains trademarks and
tradenames of other companies.

3
<PAGE> 9

THE OFFERING

<TABLE>
<S> <C>
Common stock offered by us...................... shares

Common stock to be outstanding after this
offering...................................... shares

Use of proceeds................................. For general corporate purposes, including planned
relocation expenses. See "Use of Proceeds" on page
14.

Proposed Nasdaq National Market Symbol.......... BSQR
</TABLE>

Unless otherwise indicated, the information in this prospectus reflects the
number of shares outstanding on July 31, 1999 and assumes the conversion of all
outstanding shares of preferred stock into common stock upon the closing of this
offering, the issuance of 1,518,378 shares of common stock to an institutional
investor and no exercise of the underwriters' over-allotment option.

Please see "Capitalization" on page 15 for a more complete discussion
regarding the outstanding shares of common stock, options to purchase common
stock and other related matters.

SUMMARY CONSOLIDATED FINANCIAL DATA

The pro forma consolidated balance sheet data summarized below gives effect
to the issuance of 1,518,378 shares of common stock pursuant to an agreement
entered into with an institutional investor in August 1999 and the conversion of
all outstanding preferred stock into common stock upon completion of this
offering. The pro forma as adjusted consolidated balance sheet data summarized
below reflects the application of the net proceeds from the sale of the
shares of common stock offered by us at the assumed initial
public offering price of $ per share and after deducting the underwriting
discounts and commissions and estimated offering expenses.

<TABLE>
<CAPTION>
JUNE 30, 1999 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 9,284 $27,986 $
Working capital.......................................... 10,675 29,377
Total assets............................................. 18,749 37,451
Long term obligations, net of current portion............ 210 210
Mandatorily redeemable convertible preferred stock....... 14,475 --
Shareholders' equity (deficit)........................... (255) 32,922
</TABLE>

4
<PAGE> 10

RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.

UNANTICIPATED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO FACTORS
SUCH AS CHANGES IN OUR RELATIONSHIP WITH MICROSOFT OR A DECLINE IN THE MARKET
FOR WINDOWS CE-BASED ICDS COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY.

Our operating results have fluctuated in the past, and we expect that they
will continue to do so. We believe that period-to-period comparisons of our
operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. If our operating results fall
below the expectations of stock analysts and investors, the price of our common
stock may fall. Factors that may cause our quarterly operating results to
fluctuate include:

- the failure or perceived failure of Windows CE to achieve widespread
market acceptance;

- the failure of the ICD market to develop;

- adverse changes in our relationship with Microsoft;

- our inability to develop and market new and enhanced products and
services on a timely basis;

- unanticipated delays, or announcement of delays, by Microsoft of Windows
CE product releases;

- changes in demand for our products and services;

- increased competition and changes in our pricing as a result of increased
competitive pressure;

- our ability to control our expenses, a large portion of which are
relatively fixed and which are budgeted based on anticipated revenue
trends, in the event that customer projects, particularly Microsoft
projects, are delayed, curtailed or discontinued;

- changes in the mix of our services and product revenue, which have
different gross margins;

- underestimates by us of the costs to be incurred in significant fixed-fee
service projects; and

- varying customer buying patterns which are often influenced by year-end
budgetary pressures.

In addition, our stock price may fluctuate due to conditions unrelated to our
operating performance, including general economic conditions in the software
industry and the market for technology stocks.

IF THE MARKET FOR THE WINDOWS CE OPERATING SYSTEM FAILS TO DEVELOP FULLY OR
DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR BUSINESS AND OPERATING RESULTS WILL BE
MATERIALLY HARMED.

Windows CE is one of many operating systems developed for the ICD market
and the extent of its future acceptance is uncertain. If the market for the
Windows CE operating system fails to develop fully or develops more slowly than
we expect, our business and operating results will be significantly harmed.
Market acceptance of the Windows CE operating system will depend on many
factors, including:

- Microsoft's development and support of the Windows CE market. Microsoft
could decide to discontinue or lessen its support of the Windows CE
market. In addition, Microsoft has developed a version of its Windows NT
operating system for ICDs and could decide to shift its support to this
operating system to the detriment of Windows CE;

- the ability of the Windows CE operating system to compete against
existing and emerging operating systems for the ICD market including:
VxWorks from WindRiver Systems Inc., pSOS from Integrated Systems, Inc.,
VRTX from Mentor Graphics Corporation, JavaOS from Sun Microsystems, Inc.
and LINUX. In particular, in the market for palm-size devices, Windows CE
faces intense

5
<PAGE> 11

competition from PalmOS used on 3Com Corporation's Palm devices and to
date has had limited success in this market. In the market for cellular
phones, Windows CE faces intense competition from the EPOC operating
system from Symbian. Windows CE may be unsuccessful in capturing a
significant share of the larger segments of the ICD market;

- the acceptance by OEMs and consumers of the mix of functionalities and
features offered by Windows CE; and

- the willingness of software developers to write applications that run on
Windows CE.

IF THE MARKET FOR ICDS FAILS TO DEVELOP FULLY OR DEVELOPS MORE SLOWLY THAN WE
EXPECT, OUR REVENUE WILL NOT GROW AS FAST AS ANTICIPATED, IF AT ALL.

The market for ICDs is emerging and the potential size of this market and
the timing of its development are not known. As a result, our profit potential
is uncertain and our revenue may not grow as fast as we anticipate, if at all.
We are dependent upon the commercialization and broad acceptance by businesses
and consumers of a wide variety of Windows CE-based ICDs. This commercialization
and broad acceptance will depend on many factors, including:

- the development of content and applications for ICDs;

- the willingness of large numbers of businesses and consumers to use
devices other than personal computers to achieve electronic connectivity;
and

- the evolution of industry standards that facilitate the distribution of
content over the Internet to these devices.

A SUBSTANTIAL PORTION OF OUR REVENUE IS GENERATED UNDER A MASTER DEVELOPMENT AND
LICENSE AGREEMENT WITH MICROSOFT, WHICH CAN BE MODIFIED OR TERMINATED BY
MICROSOFT AT ANY TIME.

In 1997 and 1998, and for the six months ended June 30, 1999, 39%, 79% and
87% of our revenue, respectively, was generated under our master development and
license agreement with Microsoft. The master agreement, which concludes in
October 2000, includes a number of project-specific work plans. We bill
Microsoft on a time-and-materials basis, although each project has a maximum
dollar cap. We expect the revenue generated from work plans with Microsoft will
continue to comprise the majority of our revenue for the next several years. We
presently have dedicated approximately 200 of our 270 engineers to these
projects. However, the master agreement and each of the individual work plans
may be terminated or modified by Microsoft at any time. In addition, there is no
guarantee that Microsoft will continue to enter into additional work plans with
us. In the past, Microsoft has modified the timing and scale of certain projects
and requested that our engineers be moved from one project to another. We do not
believe that we could replace the Microsoft revenue in the short- or medium-term
if existing work plans were canceled or curtailed, and such cancellations or
curtailments would substantially reduce our revenue.

IF MICROSOFT ADDS FEATURES TO ITS WINDOWS CE OPERATING SYSTEM THAT DIRECTLY
COMPETE WITH SOLUTIONS WE PROVIDE, OUR REVENUE COULD BE REDUCED AND OUR PROFIT
MARGINS COULD SUFFER.

As the developer of Windows CE, Microsoft could add features to its
operating system that directly compete with the software solutions we provide to
our customers. Such features could include, for example, faxing, board support
packages and quality assurance tools. The ability of our customers or potential
customers to obtain solutions directly from Microsoft that compete with our
solutions could harm our business. Even if the standard features of future
Microsoft operating system software were more limited than our offerings, a
significant number of our customers and potential customers might elect to
accept more limited functionality in lieu of purchasing additional software.
Moreover, the resulting competitive pressures could lead to price reductions for
our products and reduce our profit margins.

6
<PAGE> 12

IF WE DO NOT MAINTAIN OUR FAVORABLE RELATIONSHIP WITH MICROSOFT WE WILL HAVE
DIFFICULTY MARKETING OUR SOLUTIONS AND OUR REVENUE WILL SUFFER.

In the event that our relationship with Microsoft or with individuals
within Microsoft were to deteriorate or Microsoft's distribution model for
Windows CE were to change, then our efforts to market and sell our software
solutions to OEMs could be adversely affected and our business would be harmed.
Microsoft has great influence over the development plans and buying decisions of
OEMs utilizing Windows CE for ICDs. Many of our OEM customers are referred to us
by Microsoft. Moreover, Microsoft controls the marketing activities related to
its operating systems, including trade shows, direct mail campaigns and print
advertising. We must maintain mutually successful relationships with Microsoft
and individuals within Microsoft so that we may continue to participate in joint
marketing activities with and receive referrals from Microsoft. In addition,
Microsoft may at any time make changes to its distribution model for Windows CE.
For example, in late 1997 Microsoft decided to contract with us to provide
Windows CE support services to microprocessor vendors with whom we had
previously contracted directly. As a result, from late 1997 through late 1998
our revenue shifted from being generated by a variety of microprocessor vendors
to being generated primarily by Microsoft.

UNANTICIPATED DELAYS, OR ANNOUNCEMENT OF DELAYS, BY MICROSOFT OF WINDOWS CE
PRODUCT RELEASES COULD ADVERSELY AFFECT OUR SALES.

Unanticipated delays, or announcement of delays, in Microsoft's delivery
schedule for new versions of its Windows CE operating system could cause us to
delay our product introductions and impede our ability to complete customer
projects on a timely basis. These delays or announcements by Microsoft could
also cause our customers to delay or cancel their project development activities
or product introductions. Any resulting delays in, or cancellations of, our
planned product introductions or in our ability to commence or complete customer
projects may adversely affect our revenue and could cause our quarterly
operating results to fluctuate. For example, in 1998 Microsoft delayed the
release of a version of its Windows CE Platform Builder, which delayed our
introduction of a complementary product for an OEM customer.

WE HAVE SIGNED A NON-COMPETITION AGREEMENT WITH MICROSOFT WHICH COULD LIMIT OUR
ABILITY TO SUSTAIN OR GROW OUR BUSINESS.

We must receive written permission from Microsoft in order to design or
develop, or participate in, the design or development of products, or provide
services in connection with products, which compete with Windows CE, the Windows
CE Tools products, the Microsoft Windows card operating system, and/or the
Microsoft Windows card tools in existence as of October 1, 1998, or which we
know or have reason to know Microsoft intends to develop, is developing, or has
developed, or intends to acquire. Therefore, if there is a significant shift
away from Microsoft operating systems in the ICD market segments we are
targeting, we will be unable to target and support other operating system
platforms. Moreover, if our relationship with Microsoft is curtailed or
terminated, we would be required to invest significant time and resources to
transition our operations to target and support other operating systems. In
addition, our ability to make acquisitions and/or to assimilate all of the
operations of any acquired company into our operations may consequently be
limited. These restrictions could limit our ability to develop and market
software solutions which could, in turn, constrain our sales.

THE FIXED-FEE ARRANGEMENTS WE HAVE WITH MANY OF OUR CUSTOMERS EXPOSE US TO THE
RISK THAT WE MAY UNDERESTIMATE OUR COSTS FOR PROJECTS, WHICH COULD LOWER OUR
PROFIT MARGINS.

We provide our services to many of our customers under fixed-fee
arrangements. In the event that we underestimate the scope or work effort
required for a customer's project, we may be required to complete the project at
a loss or at a significantly reduced gross margin. If we underestimate the fees
for a series of projects and/or a very large project, our gross margins for a
fiscal period may decline. In addition, revenue from these contracts is
recognized on the percentage-of-completion method, measured by the cost incurred
to date relative to the estimated total cost for the contract. If we
underestimate the time necessary to complete these

7
<PAGE> 13

projects, we may be required to recognize revenue at a later time than we had
anticipated, which would have a negative impact on our financial condition and
cause our quarterly results to fluctuate.

IF WE FAIL TO SECURE CONTRACTS ON SUFFICIENTLY FAVORABLE TERMS, OR AT ALL, WITH
THE LIMITED NUMBER OF MARKET-LEADING OEMS OUR REVENUE AND PROFIT MARGINS COULD
SUFFER.

There are a limited number of OEM customers that are capable of building
and shipping large quantities of ICDs. In some market segments, one or two OEMs
account for a majority of all unit sales. Competition for the business of these
OEMs is intense. If we fail to secure and maintain service and licensing
contracts with the limited number of OEMs in these markets we may not be able to
participate in those market segments. In addition, as a result of their strong
market position, these companies are typically able to secure favorable terms,
including favorable pricing, in their technology licensing and service
agreements. Further, many of these potential OEM customers have the capability
to replace our services and products by utilizing internal resources. For these
reasons, there is no guarantee that we will be able to secure contracts on
sufficiently favorable terms, or at all, with the market-leading OEMs, which
could harm our business.

OUR MARKET IS BECOMING INCREASINGLY COMPETITIVE, WHICH MAY RESULT IN PRICE
REDUCTIONS, LOWER GROSS MARGINS AND LOSS OF MARKET SHARE.

The market for Windows CE-based solutions is becoming increasingly
competitive. Increased competition may result in price reductions, lower gross
margins and loss of market share, which would harm our business. We face
competition from:

- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary solutions;

- large professional engineering services firms that may enter the market;

- established ICD software and tools manufacturers such as Applied
Microsystems Corporation, Spyglass, Inc., Phoenix Technologies, Inc.,
Mentor Graphics and Integrated Systems;

- small- and medium-size engineering services companies such as VenturCom,
Inc., Eclipse International, Inc., BlueWater Systems, Inc. and Vadem; and

- software and component distributors such as Avnet/Hamilton Hallmark,
Pioneer and Annasoft Systems.

As we develop new products, particularly solutions focused on specific
industries, we may begin competing with companies with whom we have not
previously competed. It is also possible that new competitors will enter the
market or that our competitors will form alliances, including alliances with
Microsoft, that may enable them to rapidly increase their market share. The
barrier to entering the market as a Windows CE-based ICD solutions provider is
low and Microsoft is constantly encouraging new suppliers. New competitors may
have lower overhead than us and therefore be able to offer advantageous pricing.
We expect that competition will increase as other established and emerging
companies enter the Windows CE-based ICD market and as new products and
technologies are introduced.

WE ARE DEPENDENT ON OUR CURRENT KEY PERSONNEL, AND OUR SUCCESS DEPENDS UPON OUR
CONTINUED ABILITY TO ATTRACT, TRAIN AND RETAIN ADDITIONAL QUALIFIED PERSONNEL AT
ACCEPTABLE COMPENSATION LEVELS.

Our performance depends substantially on the continued services of our
executive officers and key employees, in particular William T. Baxter, our
Chairman of the Board, President and Chief Executive Officer. The loss of the
services of Mr. Baxter or any of our other executive officers or key employees
could harm our business. None of our executive officers has a contract that
guarantees employment. Other than a $2.0 million life insurance policy on the
lives of each of Messrs. Baxter, Dosser and Gregory, we do not maintain "key
person" life insurance policies. In addition, we depend on our ability to
attract, train and retain qualified personnel, specifically those with
management, technical and product development skills. Competition for such
personnel is intense, particularly in geographic areas recognized as high
technology centers

8
<PAGE> 14

such as the greater-Seattle area, where substantially all of our employees are
located. There can be no assurance that we will be able to attract, train or
retain additional highly qualified technical and managerial personnel in the
future, which could harm our business. Moreover, to remain competitive we have
had to increase employee compensation and our gross margins have been adversely
impacted. To the extent such competitive wage pressure continues or increases
our gross margins could suffer.

IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS
MAY BE ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS, WHICH COULD WEAKEN OUR
COMPETITIVE POSITION, REDUCE OUR REVENUE AND INCREASE OUR COSTS.

Our intellectual property is critical to our success. If we fail to
adequately protect our intellectual property our competitive position could be
weakened and our revenue adversely affected. We rely primarily on a combination
of patent, copyright, trade secret and trademark laws, confidentiality
procedures and contractual provisions to protect our intellectual property.
These laws and procedures provide only limited protection. We have applied for
three patents relating to our engineering work. These patents, if issued, may
not provide sufficiently broad protection or they may not prove to be
enforceable against alleged infringers. There can be no assurance that any of
our pending patents will be granted. Even if granted, patents may be
circumvented or challenged and, if challenged, may be invalidated. Any patents
obtained may provide limited or no competitive advantage to us. It is also
possible that another party could obtain patents that block our use of some, or
all, of our products and services. If that occurred, we would need to obtain a
license from the patent holder or design around their patent. The patent holder
may or may not choose to make a license available to us at all or on acceptable
terms. Similarly, it may not be possible to design around such a blocking
patent.

In general, there can be no assurance that our efforts to protect our
intellectual property rights through patent, copyright, trade secret and
trademark laws will be effective to prevent misappropriation of our technology,
or to prevent the development and design by others of products or technologies
similar to or competitive with those developed by us. We frequently license the
source code of our products and the source code results of our services to
customers. There can be no assurance that customers with access to our source
code will comply with the license terms or that we will discover any violations
of the license terms or, in the event of discovery of violations, that we will
be able to successfully enforce the license terms and/or recover the economic
value lost from such violations. To license many of our software products, we
rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. As with other software products, our products are susceptible to
unauthorized copying and uses that may go undetected, and policing such
unauthorized use is difficult.

A significant portion of our marks include the word "BSQUARE" or the
preface "b." Other companies use forms of "BSQUARE" or the preface "b" in their
marks alone or in combination with other words, and we cannot prevent all such
third-party uses. We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would harm our
business.

The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce our intellectual property
or to defend against a claim of infringement or invalidity. Litigation could
result in substantial costs and the diversion of resources and could harm our
business and operating results.

THIRD PARTIES COULD ASSERT THAT OUR SOLUTIONS INFRINGE THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD EXPOSE US TO ADDITIONAL COSTS AND LITIGATION.

Third parties may claim that our current or future solutions infringe their
proprietary rights, and these claims, regardless of their merit, could increase
our costs and harm our business. We have not conducted patent searches to
determine whether the technology used in our products infringes patents held by
third parties. In addition, it is difficult to determine whether our solutions
infringe third-party intellectual property

9
<PAGE> 15

rights, particularly in a rapidly evolving technological environment in which
there may be numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies. If we were to
discover that one of our solutions violated a third party's proprietary rights,
we may not be able to obtain a license on commercially reasonable terms or at
all to continue offering that solution. Moreover, although we generally seek to
be indemnified against claims that the technology we license from third parties
infringes the proprietary rights of others, this indemnification is not always
available or may be limited in scope or amount. Even if we receive broad
third-party indemnification, these indemnitors may not have the financial
capability to indemnify us in the event of infringement. In addition, in some
circumstances we could be required to indemnify our customers for claims made
against them that are based on our solutions.

There can be no assurance that infringement or invalidity claims related to
the solutions we develop and/or arising from the incorporation of third-party
technology, and claims for indemnification from our customers resulting from
such claims, will not be asserted or prosecuted against us. We expect that
software product developers will be increasingly subject to infringement claims
as the number of products and competitors in the software industry grows and the
functionality of products in different industry segments overlaps. Such claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential product
redevelopment costs and delays.

IF WE DO NOT RESPOND ON A TIMELY BASIS TO TECHNOLOGICAL ADVANCES AND EVOLVING
INDUSTRY STANDARDS OUR FUTURE PRODUCT SALES COULD BE NEGATIVELY IMPACTED.

The market for Windows CE-based solutions is new and evolving. As a result,
the life cycles of our products are difficult to estimate. To be successful, we
must continue to enhance our current product line and develop new products. We
have experienced delays in enhancements and new product release dates in the
past and may be unable to introduce enhancements or new products successfully or
in a timely manner in the future. Our business may be harmed if we must delay
releases of our products and product enhancements or if these products and
product enhancements fail to achieve market acceptance when released. In
addition, our customers may defer or forego purchases of our products if we,
Microsoft, our competitors or major hardware, systems or software vendors
introduce or announce new products or product enhancements. Such deferrals or
failures to purchase would decrease our revenue.

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE
OUR PROFITABILITY.

We were founded in July 1994, generated our first revenue in October 1994
and shipped our first product in November 1996. Accordingly, we have a limited
operating history and you should not rely on our past results to predict our
future performance. Although we have experienced significant revenue growth
recently, this growth may not continue and we may not be able to sustain or
increase profitability in the future. We anticipate that our expenses will
increase substantially in the foreseeable future as we continue to develop our
technology and expand our product and service offerings. These efforts may prove
more expensive than we currently anticipate, and we may not succeed in
increasing our revenue sufficiently to offset these higher expenses. If we fail
to increase our revenue to keep pace with our expenses, we may experience
losses.

IF WE ARE UNABLE TO MANAGE OUR GROWTH OUR BUSINESS WILL SUFFER.

Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources. From August 1996 to July 1999, we grew from 21 employees to 348
employees, and we expect this rapid growth to continue for the foreseeable
future. To manage our growth, we must implement additional management
information systems, further develop our operational, administrative and
financial systems and expand, train and manage our work force. We will also need
to manage an increasing number of complex relationships with customers,
marketing partners and other third parties. We cannot guarantee that our
systems, procedures or controls will be adequate to support our current or
future operations or that our management will be able to effectively manage our
expansion. Our failure to do so could seriously harm our ability to deliver
products and services in a timely fashion, fulfill existing customer commitments
and attract and retain new customers.
10
<PAGE> 16

OUR INTERNATIONAL OPERATIONS EXPOSE US TO GREATER INTELLECTUAL PROPERTY,
MANAGEMENT, COLLECTIONS, REGULATORY AND OTHER RISKS.

Our international operations expose us to a number of risks, including the
following:

- greater difficulty in protecting intellectual property;

- greater difficulty in staffing and managing foreign operations;

- increased risk of uncollectible accounts;

- longer collection cycles;

- unfavorable changes in regulatory practices and tariffs;

- adverse changes in tax laws;

- more extreme sales seasonality, particularly in the summer months;

- the impact of fluctuating exchange rates between the U.S. dollar and
foreign currencies; and

- general economic and political conditions in these foreign markets.

These risks could have a material adverse effect on the financial and
managerial resources required to operate our foreign offices, as well as on our
future international revenue, which could harm our business.

IF WE CONDUCT FUTURE ACQUISITIONS, THEY COULD PROVE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND ADVERSELY AFFECT OUR
OPERATING RESULTS.

Although we currently have no specific understandings, commitments or
agreements for any acquisition, we may make investments in complementary
companies, services and technologies in the future. We have not made any
material acquisitions or investments to date, and therefore our ability as an
organization to conduct acquisitions or investments is unproven. If we fail to
properly evaluate and execute acquisitions and investments, they may seriously
harm our business and prospects. To successfully complete an acquisition, we
must properly evaluate the technology, accurately forecast the financial impact
of the transaction, including accounting charges and transaction expenses,
integrate and retain personnel, combine potentially different corporate cultures
and effectively integrate products and research and development, sales,
marketing and support operations. If we fail to do any of these, we may suffer
losses or our management may be distracted from our day-to-day operations. In
addition, if we conduct acquisitions using debt or equity securities, existing
shareholders may be diluted, which could affect the market price of our stock.

IF WE ARE UNABLE TO LICENSE KEY TECHNOLOGY FROM THIRD PARTIES OUR BUSINESS COULD
BE HARMED.

We rely on technology that we license from third parties, including
software that is integrated with internally developed software and used in our
products, to perform key functions. There can be no assurance that such
third-party technology licenses will continue to be available to us on
commercially reasonable terms, if at all. In the event that we are unable to
continue to operate under current licenses or obtain additional licenses, we
would be required to develop this technology internally, which could delay or
limit our ability to introduce enhancements or new products or to continue to
sell existing products.

OUR SOFTWARE PRODUCTS OR THE THIRD-PARTY HARDWARE OR SOFTWARE INTEGRATED WITH
OUR SOLUTIONS MAY SUFFER FROM DEFECTS OR ERRORS THAT COULD IMPAIR OUR ABILITY TO
SELL OUR SOLUTIONS.

Software and hardware solutions as complex as those needed for ICDs
frequently contain errors or defects, especially when first introduced or when
new versions are released. We have had to delay commercial release of certain
versions of our solutions until software problems were corrected, and in some
cases have provided product enhancements to correct errors in released products.
Some of our contracts require us to repair or replace products that fail to
work. To the extent that we repair or replace products our expenses may increase
resulting in a decline in our gross margins. In addition, it is possible that by
the time defects are fixed the market opportunity may have been missed which may
result in lost revenue. Moreover, errors that
11
<PAGE> 17

are discovered after commercial release could result in loss of revenue or delay
in market acceptance, diversion of development resources, damage to our
reputation or increased service and warranty costs, all of which could harm our
business.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS.

Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that these provisions may be ineffective under the laws of
certain jurisdictions. Although we have not experienced any product liability
claims to date, the sale and support of our solutions entail the risk of such
claims and we may be subject to such claims in the future. A product liability
claim brought against us, whether successful or not, could harm our business and
operating results.

THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES OUR REVENUE SUSCEPTIBLE TO
FLUCTUATIONS.

Our sales cycle is generally long because the expense and complexity of our
products and services typically require a lengthy approval process for
investment in our products and services, and may be subject to a number of
significant risks over which we have little or no control, including:

- customers' budgetary constraints and internal acceptance review
procedures;

- the timing of budget cycles; and

- the timing of customers' competitive evaluation processes.

In addition, to successfully sell our products and services, we frequently must
educate our potential customers about the full benefits of our products and
services, which can require significant time. If our sales cycle lengthens
unexpectedly, it could adversely affect the timing of our revenue which could
cause our quarterly results to fluctuate.

A SMALL NUMBER OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US.

After this offering, our officers, directors and principal shareholders
holding more than 5% of our common stock will together control approximately
% of our outstanding common stock. As a result, these shareholders, if they
act together, will be able to control our management and affairs of the company
and all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may have the effect of delaying or preventing a change in control
of us and might affect the market price of our common stock.

IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.

Certain provisions of our amended and restated articles of incorporation,
bylaws and Washington law may discourage, delay or prevent a change in the
control of us or a change in our management even if doing so would be beneficial
to our shareholders. Additionally, the existence of these provisions could limit
the price that investors might be willing to pay in the future for shares of our
common stock.

WE WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING. OUR
FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR BUSINESS.

We have not designated any specific use for a substantial portion of the
net proceeds from this offering. We intend to use the net proceeds primarily for
general corporate purposes, including working capital and relocation expenses.
Management will have significant flexibility in applying the net proceeds of the
offering. Our failure to apply such funds effectively could harm our business.

12
<PAGE> 18

THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of the
common stock. As additional shares of our common stock become available for
resale in the public market, the supply of our common stock will increase which
could decrease the price. The number of shares of common stock available for
sale in the public market is limited by restrictions under the federal
securities laws and under agreements some of our shareholders, directors and
employees have entered into with the underwriters. The following table shows the
timing of when shares outstanding on July 31, 1999 may be eligible for resale in
the public market after this offering:

<TABLE>
<CAPTION>
DAYS AFTER DATE OF THIS PROSPECTUS SHARES FIRST ELIGIBLE FOR RESALE COMMENT
- ---------------------------------- -------------------------------- -------------------------------
<S> <C> <C>
- - Upon effectiveness............ - Freely tradeable shares sold
in this offering, and shares
eligible for sale pursuant to
vested and exercisable
options pursuant to our Form
S-8 registration statement
- - 90 days....................... - Shares eligible for sale
under Rules 144 and 701
- - 180 days...................... - Expiration of lock up
agreements
</TABLE>

NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.

Investors in our common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of their shares.
Assuming an initial public offering price of $ per share, dilution to new
investors would be $ per share. Additional dilution will occur upon exercise
of outstanding stock options.

YEAR 2000 ISSUES MAY NEGATIVELY IMPACT OUR BUSINESS.

We believe the current versions of our solutions are "Year 2000
compliant" -- that is, they are capable of adequately distinguishing 21st
century dates from 20th century dates. However, we may learn that our software
solutions do not contain all the necessary routines and codes necessary for the
accurate calculation, display, storage and manipulation of data involving dates.
In addition, in the majority of our software licenses, we have warranted that
dates on or after January 1, 2000 will not adversely affect the performance of
our products. Moreover, our solutions are generally integrated into customer
products involving sophisticated hardware and complex software products. If this
third-party equipment or software does not operate properly with respect to the
Year 2000, we may face claims or incur unexpected expenses to remedy any
resulting problems. The costs of defending and resolving Year 2000-related
disputes, regardless of the merits of such disputes, and any liability we may
have for Year 2000-related damages, including consequential damages, could
adversely affect our operating results. Further, many of our computer systems
are connected to Microsoft's computer systems, and we depend on this
connectivity to communicate with Microsoft on various levels. Any failure of
this connectivity or of Microsoft's computers to be Year 2000 compliant may
disrupt our communications with Microsoft and interfere with our ability to
transact business. In addition, we believe that the purchasing patterns of our
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software solutions such as those we offer.
To the extent Year 2000 issues cause a significant delay in, or cancellation of,
decisions to purchase our products or services, our business would be harmed.
For a more detailed description of our Year 2000 preparedness, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance" on page 25.

13
<PAGE> 19

FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus.

In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus.

USE OF PROCEEDS

We expect to receive approximately $ million in net proceeds from the
sale of the shares of common stock in this offering, assuming the initial public
offering price is $ per share (approximately $ million if the
underwriters' over-allotment option is exercised in full).

The principal purposes of this offering are to create a public market for
our stock and to raise working capital. We plan to use approximately $4.0
million of the net proceeds for capital equipment purchases associated with our
planned relocation of our principal administrative, sales, marketing, support
and research and development facilities in October 1999. We have no specific
uses planned for the remainder of the net proceeds other than for general
corporate purposes. Pending such uses, we intend to invest the net proceeds of
this offering in investment grade, interest-bearing securities. We may use a
portion of the net proceeds to acquire additional businesses, products and
technologies or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so, and are not currently engaged in any negotiations for any
such acquisition or joint venture.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of our current credit facility
prohibit us from paying dividends without our lender's consent.

14
<PAGE> 20

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 1999 on
the following three bases:

- on an actual basis;

- on a pro forma basis after giving effect to the issuance of 1,518,378
shares of common stock pursuant to an agreement we entered into with an
institutional investor in August 1999 and the conversion of 8,333,333
outstanding shares of mandatorily redeemable convertible preferred stock
into shares of common stock; and

- on a pro forma as adjusted basis after giving effect to our receipt of
the net proceeds from the sale of shares of common stock
at $ per share in this offering.

The outstanding share information excludes 2,996,562 shares of common stock
that are reserved for issuance upon exercise of stock options under our stock
option plan outstanding as of June 30, 1999 at a weighted average exercise price
of $0.73 per share.

The capitalization information set forth in the table below is qualified by
and should be read in conjunction with the more detailed consolidated financial
statements and related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1999 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion.............. $ 210 $ 210 $
Mandatorily redeemable convertible preferred stock, no par
value: 10,000,000 shares authorized; 8,333,333 shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as adjusted......... 14,475 -- --
Shareholders' equity:
Common stock, no par value: 50,000,000 authorized,
18,225,205 shares issued and outstanding, actual;
50,000,000 authorized, 28,076,916 outstanding, pro
forma; 50,000,000 authorized, shares
issued and outstanding, pro forma as adjusted......... 3,209 36,386
Deferred stock option compensation....................... (1,157) (1,157)
Stock subscription....................................... (29) (29)
Cumulative foreign currency translation adjustment....... (61) (61)
Retained earnings (accumulated deficit).................. (2,217) (2,217)
------- ------- --
Total shareholders' equity (deficit)............. (255) 32,922
------- ------- --
Total capitalization........................ $14,430 $33,132 $
======= ======= ==
</TABLE>

15
<PAGE> 21

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value by
dividing the net tangible book value (total assets less intangible assets and
total liabilities) by the number of outstanding shares of common stock.

At June 30, 1999, our pro forma net tangible book value, after giving
effect to the issuance of 1,518,378 shares of common stock pursuant to an
agreement entered into with an institutional investor in August 1999 and the
automatic conversion of all outstanding shares of mandatorily redeemable
convertible preferred stock into 8,333,333 shares of common stock upon the
closing of this offering, was $32.9 million, or $1.17 per share of common stock.
After giving effect to the sale of the shares of common stock in this
offering at an assumed initial public offering price of $ per share (less
estimated underwriting discounts and commissions and estimated expenses we
expect to pay in connection with this offering), our pro forma as adjusted net
tangible book value at June 30, 1999 would be $ , or $ per share.
This represents an immediate increase in the pro forma as adjusted net tangible
book value of $ per share to existing shareholders and an immediate
dilution of $ per share to new investors or approximately % of the
assumed offering price of $ per share.

The following table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $
-------
Pro forma net tangible book value per share at June 30,
1999................................................... $ 1.17
-------
Increase per share attributable to new investors.........
-------
Pro forma as adjusted net tangible book value per share
after this offering....................................
-------
Dilution per share to new investors...................... $
=======
</TABLE>

The following table shows on a pro forma as adjusted basis at June 30,
1999, after giving effect to the automatic conversion of all outstanding shares
of mandatorily redeemable convertible preferred stock into shares of common
stock upon the closing of this offering, the number of shares of common stock
purchased from us, the total consideration paid to us and the average price paid
per share by existing shareholders and by new investors purchasing common stock
in this offering (before deducting underwriting discounts and commissions and
estimated offering expenses) at an assumed public offering price of $ per
share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 26,558,538 % $15,012,000 % $0.57
New investors...................... $
---------- --- ----------- ---
Total.................... 100% $ 100%
========== === =========== ===
</TABLE>

The above computations assume no exercise of options after June 30, 1999.
The number of shares outstanding at June 30, 1999 excludes 2,996,562 shares of
common stock issuable upon exercise of options outstanding as of June 30, 1999
having a weighted average exercise price of $0.73 per share. To the extent that
any shares are issued upon exercise of options, there will be further dilution
to new investors. To the extent the option holders exercise these outstanding
options, or any options we grant in the future, there will be further dilution
to new investors. For a more detailed discussion of our stock plans and
outstanding options to purchase common stock see Notes 7 and 8 of the Notes to
Consolidated Financial Statements included elsewhere in this prospectus.

16
<PAGE> 22

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data as of and for the years
ended December 31, 1996, 1997 and 1998 are derived from our consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated financial data as of and for
the periods ending December 31, 1994 and 1995 are derived from unaudited
financial statements. The consolidated financial data as of and for the six
months ended June 30, 1998 and 1999 are derived from unaudited financial
statements included elsewhere in this prospectus. We have prepared this
unaudited information on the same basis as the audited consolidated financial
statements and have included all adjustments, consisting of only normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and operating results. When you read this selected
consolidated financial data, it is important that you also read the historical
consolidated financial statements and related notes included in this prospectus,
as well as the section of this prospectus related to "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Our historical
results are not necessarily indicative of our future results.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(JULY 15) TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------------ ----------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ 151 $ 1,573 $ 4,186 $14,405 $24,612 $10,802 $18,543
Cost of revenue.................................... 83 795 1,404 5,644 11,301 5,028 8,899
------- ------- ------- ------- ------- ------- -------
Gross profit....................................... 68 778 2,782 8,761 13,311 5,774 9,644
Operating expenses
Research and development......................... -- -- 205 1,391 3,671 1,452 2,960
Selling, general and administrative.............. 4 86 606 2,806 6,470 2,618 5,236
------- ------- ------- ------- ------- ------- -------
Total operating expenses................... 4 86 811 4,197 10,141 4,070 8,196
------- ------- ------- ------- ------- ------- -------
Income from operations............................. 64 692 1,971 4,564 3,170 1,704 1,448
Interest income (expense), net..................... -- 1 -- (12) 319 179 130
------- ------- ------- ------- ------- ------- -------
Income before income taxes......................... 64 693 1,971 4,552 3,489 1,883 1,578
Provision for income taxes......................... -- -- -- 746 1,189 666 712
------- ------- ------- ------- ------- ------- -------
Net income......................................... $ 64 $ 693 $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
======= ======= ======= ======= ======= ======= =======
Basic earnings per share(1)........................ $ 0.00 $ 0.03 $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares used to compute basic earnings per
share(1)......................................... 21,000 21,000 22,106 21,400 18,372 18,615 18,206
------- ------- ------- ------- ------- ------- -------
Pro forma basic earnings per share(2).............. $ 0.09 $ 0.03
======= =======
Shares used to compute pro forma basic earnings per
share(2)......................................... 26,021 26,539
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 ACTUAL PRO FORMA(3)
----------- ----------- ------- ------- ------------- ------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................ $ 61 $ 103 $ 187 $ 2,286 $ 6,906 $ 9,284 $27,986
Working capital.......................... 65 236 658 2,918 10,280 10,675 29,377
Total assets............................. 96 514 1,057 6,453 16,158 18,749 37,451
Long-term obligations, net of current
portion................................ -- -- -- 1,743 289 210 210
Mandatorily redeemable convertible
preferred stock........................ -- -- -- -- 14,417 14,475 --
Shareholders' equity (deficit)........... 66 261 924 2,330 (1,298) (255) 32,922
</TABLE>

- ---------------
(1) See Note 12 to the Consolidated Financial Statements for the determination
of shares used in computing basic earnings per share.

(2) Shares used to compute pro forma basic earnings per share is defined as the
weighted average number of shares of common stock outstanding for the period
plus the weighted average number of shares of common stock resulting from
the assumed conversion of all outstanding shares of the mandatorily
redeemable convertible preferred stock as if converted on date of issuance.

(3) Gives effect to the issuance of 1,518,378 shares of common stock pursuant to
an agreement entered into with an institutional investor in August 1999 and
the conversion of all outstanding preferred stock into common stock upon
completion of this offering.

17
<PAGE> 23

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

This section of this prospectus includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipate," "believes," "expects,"
"future," "intends" and similar expressions to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. For a description of these risks, see "Risk Factors."

OVERVIEW

We are a leading provider of software solutions that enable the development
and proliferation of a wide variety of ICDs based on the Microsoft Windows CE
operating system. Our revenue totaled $14.4 million in 1997, $24.6 million in
1998 and $18.5 million for the six months ended June 30, 1999. We generated net
income of $3.8 million in 1997, $2.3 million in 1998 and $866,000 for the six
months ended June 30, 1999.

We began operations in July 1994, generated our first revenue in October
1994 and shipped our first product in November 1996. Through late 1997, we
provided software engineering services directly to microprocessor vendors. In
late 1997, Microsoft decided to contract with us to provide our services to the
microprocessor customers with whom we had previously contracted directly. As a
result, we began to experience a shift from providing engineering services
directly to microprocessor vendors to working for Microsoft for the benefit of
these companies. This shift to Microsoft work was completed in the second
quarter of 1998.

In 1997 we began research and development activities which enabled us to
enhance our ability to provide a broad range of software solutions. These
research and development activities produced software applications for ICD tool
kits and handheld devices. In connection with these activities, we hired
personnel to build our human resource, finance, legal and administrative
infrastructure. In early 1998, we accelerated our investments in research and
development, marketing and domestic and international sales channels. Since
March 1998, we have:

- hired more than 165 employees;

- provided solutions for the development of more than 30 different ICDs;

- established direct sales offices in Germany and Japan; and

- released more than 20 localized versions of our products in German,
Spanish, French, Italian, Japanese, Portugese and International English.

Beginning in early 1999, we expanded our marketing and sales force to
penetrate the growing market for our products and services. These investments
have significantly increased our operating expenses, contributing to reduced
profitability compared to 1997. We anticipate that our operating expenses will
increase substantially for the foreseeable future as we expand our product
development, sales and marketing and professional services staff. If we fail to
increase our revenue to keep pace with these increased expenses, we may
experience quarterly losses.

We derive the majority of our revenue from engineering services. We also
generate revenue from product licenses, and to a lesser extent, from customer
maintenance and training services. We perform services under both
time-and-materials contracts and fixed-fee contracts. In conjunction with our
fixed-fee contracts, we may also derive ongoing license royalties. We sell our
products through our direct sales force as well as through indirect channels,
such as original equipment manufacturers and distributors. To date, the majority
of our sales have resulted from the efforts of our inside sales personnel.

18
<PAGE> 24

We recognize revenue on the following bases:

- Time-and-materials consulting contracts. We recognize revenue as services
are rendered.

- Fixed-fee consulting contracts. Revenue from fixed-fee contracts is
recognized on the percentage-of-completion method, measured by the cost
incurred to date to the estimated total cost for the contract. This
method is used because we consider expended costs to be the best
available measure of contract performance. Contract costs include all
direct labor, material and any other costs related to contract
performance. Selling, general and administrative costs are expensed as
incurred. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job
performance, job conditions and estimated profitability may result in
revisions in the estimate of total costs. Any required adjustments due to
these changes are recognized in the period in which such revisions are
determined.

- Product Revenue. Product revenue, including advanced production royalty
payments, is generally recognized when a customer license agreement has
been executed, the software has been shipped, remaining obligations are
insignificant and collection of the resulting account receivable is
probable. We recognize license royalty income as it is reported by the
reseller when it ships its product to distributors.

HISTORICAL RESULTS OF OPERATIONS

The following table presents certain financial data as a percentage of
total revenue for the years ended December 31, 1996, 1997 and 1998 and for the
six months ended June 30, 1998 and 1999. Our historical operating results are
not necessarily indicative of the results for any future period.

<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-----------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue:
Service....................................... 100% 97% 95% 94% 96%
Product....................................... -- 3 5 6 4
----- ----- ----- ----- -----
Total revenue............................ 100 100 100 100 100
----- ----- ----- ----- -----
Cost of revenue:
Service....................................... 33 39 46 46 47
Product....................................... -- -- -- 1 1
----- ----- ----- ----- -----
Total cost of revenue.................... 33 39 46 47 48
----- ----- ----- ----- -----
Gross margin..................................... 67 61 54 53 52
Operating expenses:
Research and development...................... 5 10 15 13 16
Selling, general and administrative........... 15 20 26 24 28
----- ----- ----- ----- -----
Total operating expenses................. 20 30 41 37 44
----- ----- ----- ----- -----
Income from operations........................... 47 31 13 16 8
Interest income, net............................. -- -- 1 1 1
----- ----- ----- ----- -----
Income before income taxes....................... 47 31 14 17 9
Provision for income taxes....................... -- 5 5 6 4
----- ----- ----- ----- -----
Net income....................................... 47% 26% 9% 11% 5%
===== ===== ===== ===== =====
</TABLE>

19
<PAGE> 25

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1999

Revenue

Revenue consists of service and product revenue, which includes software
license fees and royalties. Total revenue increased 72% from $10.8 million for
the six months ended June 30, 1998 to $18.5 million for the six months ended
June 30, 1999. Microsoft accounted for 73% and 87% of total revenue for the six
months ended June 30, 1998 and 1999, respectively. Revenue outside of North
America totaled $545,000 for the six months ended June 30, 1998 and $271,000 for
the six months ended June 30, 1999. The decrease in international revenue
resulted primarily from the shift from working directly with international
microprocessor vendors to working directly with Microsoft on behalf of those
customers.

Service revenue. Service revenue increased by 75% from $10.2 million for
the six months ended June 30, 1998 to $17.8 million for the six months ended
June 30, 1999. This increase was due to an increase in the number and size of
consulting service projects. As a percentage of total revenue, service revenue
did not increase materially.

Product revenue. Product revenue increased 12% from $621,000 for the six
months ended June 30, 1998 to $695,000 for the six months ended June 30, 1999.
This increase resulted primarily from an increase in sales of pre-packaged
application products including the newly introduced CEValidator quality
assurance test suite. As a percentage of total revenue, product revenue did not
change materially.

Cost of Revenue

Cost of service revenue. Cost of service revenue consists primarily of
salaries and benefits for software developers and quality assurance personnel,
plus an allocation of facilities and depreciation costs. Cost of service revenue
increased 79% from $4.9 million for the six months ended June 30, 1998 to $8.8
million for the six months ended June 30, 1999. The increase in absolute dollars
resulted primarily from the hiring and training of consulting personnel to
support our growing customer base. Cost of service revenue as a percentage of
related service revenue was 48% for the six months ended June 30, 1998 and 49%
for the six months ended June 30, 1999. The increase in cost of service revenue
as a percentage of the related service revenue in the first half of 1999 was
primarily the result of an increase in software engineering salaries due to
competitive employee recruiting and retention pressures in the greater-Seattle
area.

Cost of product revenue. Cost of product revenue consists of license fees
and royalties for third-party software, product media, product duplication and
manuals. Cost of product revenue decreased from $121,000 for the six months
ended June 30, 1998 to $108,000 for the six months ended June 30, 1999.

Operating Expenses

Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, quality assurance
personnel, program managers and an allocation of our facilities and depreciation
costs. Research and development expenses increased 104%, from $1.5 million for
the six months ended June 30, 1998 to $3.0 million for the six months ended June
30, 1999. This increase resulted from an increase in the number of software
developers and quality assurance personnel to expand our product offerings and
to support development and testing activities. Research and development costs
represented 13% of our total revenue for the six months ended June 30, 1998 and
16% for the six months ended June 30, 1999. The increase in research and
development expenses as a percentage of total revenue primarily reflects the
more rapid increase of our investment in product development activities as
compared to the growth in revenue during this period. We anticipate that
research and development expenses will continue to increase in absolute dollars
in future periods.

Selling, general and administrative. Selling expenses are comprised of
salaries and benefits earned by sales and marketing personnel, travel, corporate
advertising and promotional expenses, plus an allocation of facilities and
depreciation costs. General and administrative expenses consist primarily of
salaries, benefits and related costs for our executive, finance, legal,
administrative and information services personnel and professional service fees.

20
<PAGE> 26

Selling expenses increased 68% from $967,000 for the six months ended June
30, 1998 to $1.6 million for the six months ended June 30, 1999. This increase
resulted primarily from our continued investment in sales and marketing
infrastructure, both domestically and internationally, which included
significant personnel-related expenses, travel expenses and related facility and
equipment costs, as well as increased marketing activities, including trade
shows, public relations and other promotional expenses. Selling expenses
represented 9% of our total revenue for the six months ended June 30, 1998 and
June 30, 1999. We anticipate that sales and marketing expenses will increase in
absolute dollars in future periods as we expand our sales and marketing staff
both domestically and internationally.

General and administrative expenses increased 119% from $1.7 million for
the six months ended June 30, 1998 to $3.6 million for the six months ended June
30, 1999. General and administrative expenses represented 15% of our total
revenue for the six months ended June 30, 1998 and 19% for the six months ended
June 30, 1999. This increase in absolute dollars and as a percentage of total
revenue resulted primarily from the addition of executive, finance and
administrative personnel to support the growth of our business as well as
personnel and facility costs associated with our international offices. Our
general and administrative expenses have increased and we anticipate they will
continue to increase in absolute dollars as we expand our administrative staff
and incur expenses associated with becoming a public company.

Interest income, net. Interest income, net consists of earnings on our
cash, cash equivalents and short-term investment balances offset by interest
expense associated with debt obligations. Interest income, net was $179,000 for
the six months ended June 30, 1998 and $130,000 for the six months ended June
30, 1999. The decrease resulted from an increase in interest expense on our
long-term obligations.

Income taxes. Our provision for federal, state and international income
taxes was $666,000 for the six months ended June 30, 1998 as compared to
$712,000 for the six months ended June 30, 1999, yielding effective rates of
35.4% in 1998 and 45.1% in 1999. The increase in the effective rate is due to
the effect of the non-deductibility of losses from our international operations.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Revenue

Total revenue increased 244% from $4.2 million in 1996 to $14.4 million in
1997, and an additional 71% to $24.6 million in 1998. Microsoft accounted for
5%, 39% and 79% of total revenue in 1996, 1997 and 1998, respectively. Revenue
outside of North America totaled $1.8 million in 1996, $4.3 million in 1997 and
$955,000 in 1998. The decrease in international revenue from 1996 to 1998 and
the increase in Microsoft revenue resulted from the shift from working directly
with microprocessor vendors to working with Microsoft for the benefit of those
customers during this period.

Service revenue. Service revenue increased 236% from $4.2 million in 1996
to $14.0 million in 1997, and an additional 67% to $23.4 million in 1998. The
increase in service revenue for all periods was due to the increasing number and
size of service projects and related hiring of engineering personnel to fulfill
project requirements.

Product revenue. Product revenue increased 3,391% from $11,000 in 1996 to
$384,000 in 1997, and an additional 217% to $1.2 million in 1998. The increase
in product revenue from 1996 to 1997 resulted primarily from an increase in the
volume of our software applications bundled on handheld personal computers. The
increase in product revenue from 1997 to 1998 resulted from the expansion of
product offerings from software applications for handheld personal computers to
ICD tool products.

Cost of Revenue

Cost of service revenue. Cost of service revenue increased 298% from $1.4
million in 1996 to $5.6 million in 1997, and an additional 100% to $11.1 million
in 1998. These increases resulted from the hiring and training of consulting
engineers to support our growing customer base. Cost of service revenue as a
percentage of related service revenue was 34% in 1996, 40% in 1997 and 48% in
1998. The increases in cost of service

21
<PAGE> 27

revenue as a percentage of related service revenue reflect higher personnel
costs related to the greater-Seattle personnel market pressures, as well as
higher facilities and depreciation costs associated with expansion.

Cost of product revenue. Cost of product revenue increased 1,850% from
$4,000 in 1996 to $78,000 in 1997, and an additional 113% to $166,000 in 1998.
Cost of product revenue as a percentage of related product revenue was 36% in
1996, 20% in 1997 and 14% in 1998.

Operating Expenses

Research and development. Research and development expenses increased 579%
from $205,000 in 1996 to $1.4 million in 1997, and an additional 164% to $3.7
million in 1998. These increases primarily related to the increase in the number
of software developers and quality assurance personnel hired to expand our
product offerings and to support our product development and testing activities.
Research and development expenses represented 5% of our total revenue in 1996,
10% in 1997 and 15% in 1998. The increases in research and development expenses
as a percentage of total revenue primarily reflect the more rapid investment in
our research and development activities compared to the growth of our revenue
during these periods.

Selling, general and administrative. Selling expenses increased 451% from
$152,000 in 1996 to $837,000 in 1997, and an additional 172% to $2.3 million in
1998. These increases resulted primarily from our investment in sales and
marketing infrastructure, both domestically and internationally, which included
significant personnel-related expenses, travel expenses and related facility and
equipment costs, as well as increased marketing activities, including trade
shows, public relations and other promotional expenses. Selling expenses
represented 4% of our total revenue in 1996, 6% in 1997 and 9% in 1998. The
increases in selling expenses as a percentage of total revenue primarily
reflects the more rapid investment in our sales and marketing infrastructure
compared to the growth of our revenue during these periods.

General and administrative expenses increased 334% from $454,000 in 1996 to
$2.0 million in 1997, and an additional 113% to $4.2 million in 1998. The
increases from 1996 to 1998 primarily resulted from the addition of finance,
executive and administrative personnel to support the growth of our business
during these periods. General and administrative costs represented 11%, 14% and
17% of our total revenue in 1996, 1997 and 1998, respectively.

Interest income (expense), net. Interest income (expense), net was zero in
1996, $12,000 of expense in 1997 and $319,000 of income in 1998. The increase in
interest income in 1998 over prior periods resulted from an increase in interest
income resulting from higher average cash and cash equivalent and short-term
investment balances over the period.

Income taxes. Our provision for federal, state and international income
taxes was zero for 1996, $746,000 for 1997 and $1.2 million for 1998, yielding
effective rates of 0.0%, 16.4% and 34.1% in 1996, 1997 and 1998, respectively.
We were taxed as a subchapter S corporation until October 15, 1997, when our
shareholders elected to convert to a C corporation. Accordingly, taxes on our
income were the responsibility of the shareholders until the conversion.

22
<PAGE> 28

QUARTERLY RESULTS OF OPERATIONS

The following table presents our unaudited quarterly results of operations
for 1998 and the six months ended June 30, 1999. You should read the following
table in conjunction with our consolidated financial statements and related
notes included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as our audited consolidated financial statements.
This table includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for the quarters presented. You should not draw
any conclusions about our future results from the results of operations for any
quarter.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue:
Service............................... $5,159 $5,022 $6,334 $6,878 $8,461 $9,387
Product............................... 333 288 245 353 348 347
------ ------ ------ ------ ------ ------
Total revenue.................... 5,492 5,310 6,579 7,231 8,809 9,734
------ ------ ------ ------ ------ ------
Cost of revenue:
Service............................... 2,360 2,547 2,978 3,250 4,150 4,641
Product............................... 68 53 9 36 58 50
------ ------ ------ ------ ------ ------
Total cost of revenue............ 2,428 2,600 2,987 3,286 4,208 4,691
------ ------ ------ ------ ------ ------
Gross profit............................. 3,064 2,710 3,592 3,945 4,601 5,043
Operating expenses:
Research and development.............. 575 877 1,023 1,196 1,474 1,486
Selling, general and administrative... 1,201 1,417 1,373 2,479 2,405 2,831
------ ------ ------ ------ ------ ------
Total operating expenses......... 1,776 2,294 2,396 3,675 3,879 4,317
------ ------ ------ ------ ------ ------
Income from operations................... 1,288 416 1,196 270 722 726
Interest income, net..................... 33 146 58 82 53 77
------ ------ ------ ------ ------ ------
Income before income taxes............... 1,321 562 1,254 352 775 803
Provision for income taxes............... 465 201 452 71 343 369
------ ------ ------ ------ ------ ------
Net income............................... $ 856 $ 361 $ 802 $ 281 $ 432 $ 434
====== ====== ====== ====== ====== ======
AS PERCENTAGE OF TOTAL REVENUE
Revenue:
Service............................... 94% 95% 96% 95% 96% 96%
Product............................... 6 5 4 5 4 4
------ ------ ------ ------ ------ ------
Total revenue.................... 100 100 100 100 100 100
------ ------ ------ ------ ------ ------
Cost of revenue:
Service............................... 43 48 45 45 47 48
Product............................... 1 1 -- -- 1 --
------ ------ ------ ------ ------ ------
Total cost of revenue............ 44 49 45 45 48 48
------ ------ ------ ------ ------ ------
Gross margin............................. 56 51 55 55 52 52
Operating expenses:
Research and development.............. 10 16 16 17 17 15
Selling, general and administrative... 22 27 21 34 27 29
------ ------ ------ ------ ------ ------
Total operating expenses......... 32 43 37 51 44 44
------ ------ ------ ------ ------ ------
Income from operations................... 24 8 18 4 8 8
Interest income, net..................... -- 3 1 1 1 1
------ ------ ------ ------ ------ ------
Income before income taxes............... 24 11 19 5 9 9
Provision for income taxes............... 8 4 7 1 4 4
------ ------ ------ ------ ------ ------
Net income............................... 16% 7% 12% 4% 5% 5%
====== ====== ====== ====== ====== ======
</TABLE>

23
<PAGE> 29

The trends discussed in the annual comparisons of operating results from
1996 through 1998 and for the six months ended June 30, 1998 and 1999 generally
apply to the comparison of results of operations for these six quarters. Revenue
decreased during the three months ended June 30, 1998 due to the shift from
working directly with microprocessor vendors on a fixed-fee basis to working
with Microsoft on a time-and-materials basis. Research and development expenses
increased significantly as a percentage of revenue during the three months ended
June 30, 1998 due to substantial investments related to the development of
integration tool kits and end-user applications. Selling, general and
administrative expenses increased during the three months ended December 31,
1998 due to the increased personnel and facility costs associated with opening
sales offices in Germany and Japan as well as expenses related to seasonal trade
show activities. Our quarterly operating results have varied widely in the past,
and we expect that they will continue to fluctuate in the future as a result of
a number of factors, many of which are outside our control.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily through cash
flow from operations. As of June 30, 1999, we had $9.3 million of cash and cash
equivalents. This represents an increase of $2.4 million over December 31, 1998.
In January 1998, we issued mandatorily redeemable convertible preferred stock
from which we received net proceeds of approximately $14.3 million. Concurrent
with this transaction, we repurchased 3,333,333 shares of our common stock for
an aggregate of $6.0 million. To a lesser extent, we have financed software
system purchases through traditional financing arrangements. Our working capital
at June 30, 1999 was $10.7 million compared to $10.3 million at December 31,
1998.

We have a working capital revolving line of credit with a financial
institution that is secured by our accounts receivable. This facility allows us
to borrow up to the lesser of 80% of our eligible accounts receivable or $5.0
million. The facility expires in July 2000. The agreement under which the line
of credit was established contains certain covenants, including a provision
requiring us to maintain specified financial ratios. We were in compliance with
these covenants at June 30, 1999, and at that time there were no borrowings
outstanding under this credit facility. We maintain a $1.5 million term loan for
equipment purchases and a $4.0 million term loan for leasehold improvement
purchases. These facilities operate as a revolver through June 2000, after which
time any outstanding balances must be paid over 36-month and 60-month terms,
respectively. These loans also require us to comply with certain financial
covenants, including a requirement that we maintain certain financial ratios. We
were in compliance with these covenants at June 30, 1999 and, at that time,
there was approximately $367,000 outstanding under these credit facilities. To
date, we have borrowed approximately $475,000 under the equipment term loan, of
which $367,000 was outstanding as of June 30, 1999.

Our operating activities resulted in net cash inflows of $1.6 million in
1996, $4.3 million in 1997, $188,000 in 1998 and $3.6 million for the six months
ended June 30, 1999. The sources of cash in 1996, 1997, 1998 and for the six
months ended June 30, 1999 were primarily income from operations, increases in
accounts payable and accrued liabilities, partially offset by increases in
accounts receivable. Investing activities used cash of $248,000 in 1996, $1.4
million in 1997 and $3.7 million in 1998, primarily for the purchase of capital
equipment and short-term investments. Investing activities provided cash of
$512,000 during the six months ended June 30, 1999, primarily due to proceeds
from the maturity of investments offset by cash used for purchases of capital
equipment. Financing activities used cash of $1.3 million in 1996, $775,000 in
1997 and $98,000 for the six months ended June 30, 1999, primarily through
shareholder draws and repayment of long-term obligations. Financing activities
generated $6.5 million in 1998, primarily through the issuance of mandatorily
convertible preferred stock, partially offset by repayment of shareholder loans
and the $6.0 million repurchase of shares of common stock.

In addition, in August 1999, we entered into an agreement to sell 1,518,378
shares of our common stock to an institutional investor for approximately $18.7
million. The closing of this sale is subject to clearance under the
Hart-Scott-Rodino Antitrust Improvements Act.

We currently anticipate that we will continue to experience significant
increases in our operating expenses for the foreseeable future as we enter new
markets for our products and services, increase research and

24
<PAGE> 30

development expenses, increase sales and marketing activities, develop new
distribution channels and broaden our professional service capabilities. Our
operating expenses will consume a material amount of our cash resources,
including a portion of the net proceeds of this offering. We believe that the
net proceeds of this offering, together with our existing cash and cash
equivalents and available bank borrowings, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the
foreseeable future. We currently intend to use the net proceeds of this offering
for general corporate purposes. We may use a portion of the net proceeds to
acquire additional businesses, products and technologies or to establish joint
ventures that we believe will complement our current or future business.
However, we have no specific plans, agreements or commitments to do so, and are
not currently engaged in any negotiations for any such acquisition or joint
venture. Pending such uses, we will invest the net proceeds in government
securities and other short-term, investment grade, interest-bearing instruments.

YEAR 2000 COMPLIANCE

Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries, including technology, transportation, utilities,
finance and telecommunications, will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change. We recognize the need to ensure our operations will not be adversely
affected by Year 2000 software failures. We are assessing the potential overall
impact of the impending century change on our business, financial condition and
operating results.

Based on our assessment to date, we believe the current versions of our
software products are "Year 2000 compliant" -- that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
we may learn that our software solutions do not contain all the necessary
routines and codes necessary for the accurate calculation, display, storage and
manipulation of data involving dates. In addition, in the majority of our
software licenses, we have warranted that dates on or after January 1, 2000 will
not adversely affect the performance of our products. Moreover, our products are
generally integrated into customer products involving sophisticated hardware and
complex software products that may not be Year 2000 compliant. We may face
claims based on Year 2000 problems in other companies' products or issues
arising from the integration of multiple products within an overall system.
Although we have not been a party to any litigation or arbitration proceeding to
date involving our products or services related to Year 2000 compliance issues,
we may in the future be required to defend our products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.
The costs of defending and resolving Year 2000-related disputes, regardless of
the merits of such disputes, and any liability we have for Year 2000-related
damages, including consequential damages, could materially adversely affect our
business, financial condition and operating results. Further, many of our
computer systems are connected to Microsoft's computer systems, and we depend on
this connectivity to communicate with Microsoft on various levels. Any failure
of this connectivity or of Microsoft's computers to be Year 2000 compliant may
disrupt our communications with Microsoft and interfere with our ability to
transact business. In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those we offer. To
the extent Year 2000 issues cause a significant delay in, or cancellation of,
decisions to purchase our products or services, our business would be harmed.

We are reviewing our internal management information and other systems to
identify any products, services or systems that are not Year 2000 compliant and
to take corrective action. To date, we have not encountered any material Year
2000 problems with our computer systems or any other equipment that might be
subject to such problems. We plan to verify compliance by external vendors that
supply us with software and information systems and to communicate with
significant suppliers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of our assessment, we are evaluating the
level of

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<PAGE> 31

validation we will require of third parties to ensure their Year 2000 readiness.
If third parties cannot provide us with products, services or systems that meet
the Year 2000 requirements on a timely basis, our business could be harmed.

We will be relocating our principal offices in October 1999 to a new office
location currently under construction. Before the relocation, we will complete
our evaluation of whether the infrastructure and building systems associated
with our new facility, such as security and sprinkler systems, and all
information technology systems, such as telephony and computer network systems,
are Year 2000 compliant.

We do not expect the total cost of these Year 2000 compliance activities to
be material to our business, financial condition and operating results. To date,
we have spent less than $100,000 for Year 2000 compliance and do not expect to
expend more than $100,000 in the future. These costs and the timing with which
we plan to complete our Year 2000 modifications and testing processes are based
on our management's estimates. However, we may not identify and remediate all
significant Year 2000 problems on a timely basis. Remediation efforts may
involve significant time and expense and unremediated problems could harm our
business.

We have not developed a contingency plan for handling Year 2000 problems
that are not detected and corrected prior to their occurrence. Upon completion
of testing and implementation activities, we will be able to assess areas
requiring contingency planning, and we expect to institute appropriate
contingency planning at that time. Any failure to address any unforeseen Year
2000 issue could harm our business.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We are required to adopt SOP 98-1 for the fiscal
year beginning January 1, 1999. Our adoption of SOP 98-1 did not have a material
impact on our financial statements.

In April 1998, the American Institute of Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on our financial position or results of
operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is, the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We do not use derivative instruments, therefore the
adoption of this statement will not have any effect on our results of operations
or financial position.

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<PAGE> 32

BUSINESS

OVERVIEW

We are a leading provider of software solutions that enable the development
and proliferation of a wide variety of intelligent computing devices based on
the Microsoft Windows CE operating system. Intelligent computing devices, or
ICDs, are a new class of powerful and cost-effective devices that are able to
support sophisticated communications capabilities. ICDs include, among other
devices, digital set-top boxes, gaming systems, handheld data collectors used
for industrial purposes and Windows-based terminals. As businesses and consumers
continue to leverage the Internet to enhance connectivity among suppliers,
partners and consumers alike, users are increasingly looking to ICDs as a
cost-effective and more flexible means of achieving electronic connectivity. To
enable the deployment of ICDs and to support the development of
industry-specific applications, semiconductor vendors and original equipment
manufacturers, or OEMs, demand a highly scalable and customizable operating
system with minimal system requirements. Microsoft's Windows CE operating system
is rapidly gaining market acceptance as an operating system of choice for these
hardware manufacturers.

We help enable the rapid and low-cost deployment of ICDs by providing a
variety of software solutions for the development and integration of the Windows
CE operating system with industry-specific applications. We have also developed
software applications that we license to end users to provide ICDs with
additional functionality. Because we have been building Windows CE-based
software solutions since prior to the commercial release of Windows CE, we
believe that we offer a greater breadth and depth of Windows CE software
solutions expertise than any of our current competitors.

INDUSTRY BACKGROUND

Ubiquitous electronic communications and emerging Internet protocols
increasingly are enabling networks of businesses and consumers to communicate,
collaborate, access information and conduct business and personal interactions
via the Internet. With each additional Internet user, the number of network
connections increases, creating a more comprehensive communications environment
and driving the development of new means and standards of communications among
users. As the number of Internet users grows, so does the diversity of content,
services and applications available via the Internet. According to International
Data Corporation, the number of worldwide Internet users is expected to grow
from 159 million in 1998 to 510 million in 2003. While the Internet is already
having a significant and highly visible impact on business-to-consumer and
consumer-to-consumer relationships, the market for business-to-business Internet
transactions is expected to expand at a greater rate. According to Forrester
Research, U.S.-based Internet commerce between businesses is expected to grow
from $109 billion in 1999 to $1.3 trillion in 2003.

As a result, electronic connectivity is growing increasingly important to
the efficient conduct of business. For example:

- many businesses use thin client computing devices to permit their
employees to access server-based network applications and the Internet
from remote sites;

- numerous retail businesses use handheld point-of-sale terminals to
provide real-time inventory tracking and to automate their procurement
processes, supported by standard Internet communications protocols that
enable companies to publish information instantly to both internal and
external users;

- some healthcare professionals use mobile computing devices to record and
access patient information that can then be shared confidentially via the
Internet among a broader group of professionals responsible for providing
medical care; and

- many consumers have begun utilizing Internet appliances, such as digital
set-top boxes, screen phones, smart cellular phones, game devices and
other purpose-specific computing devices, to access Internet content,
communicate and conduct transactions.

The increasing need for connectivity among both business and consumer users
is driving demand for easy-to-use, cost-effective and customizable methods of
communication. Although the personal computer has

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<PAGE> 33

been the traditional means of connecting suppliers, partners and customers, a
new class of computing devices, including digital set-top boxes, gaming systems,
handheld data collectors used for industrial purposes, and Windows-based
terminals, among others, is emerging. These devices are particularly attractive
to business and consumer users because they are often less expensive than
personal computers; have adaptable form factors, including size, weight and
shape; and are able to support a variety of customized, industry-specific
applications and user interfaces that can be designed for particular tasks.
These devices can also leverage existing business infrastructures, such as those
in existing enterprise systems and computing architectures, helping make
connectivity truly ubiquitous. According to International Data Corporation, the
market for consumer information appliances, a subset of the overall ICD market,
is expected to grow from $2.2 billion in 1998 to $18.7 billion in 2003.

Because ICDs can be used for a variety of purposes, from consumer
information to industrial automation, and can be designed specifically for a
variety of industry-specific solutions, the ICD industry is characterized by
heterogeneity of hardware configurations, microprocessor architectures and
end-user applications, each often designed specifically for a unique vertical
market. To address this heterogeneity without creating economic barriers to the
proliferation of ICDs, semiconductor vendors and OEMs require an operating
system that can support a myriad of devices and an expanding range of
industry-specific content and applications. The Microsoft Windows CE operating
system helps satisfy these requirements because it leverages the existing
infrastructure of Microsoft Windows developers and standard technologies; can be
customized to operate across a variety of hardware devices and to integrate with
existing enterprise information technologies; offers Internet connectivity; and
reduces systems requirements. Because of these characteristics, Windows CE is
emerging as an operating system of choice for many hardware and software
applications vendors. Venture Development Corporation estimates that the number
of ICDs utilizing Windows CE will increase from just under one million units in
1999 to more than 14.0 million units by 2003.

To leverage the multiple benefits of the Windows CE operating system, many
OEMs and semiconductor and software applications vendors require a software
solution provider with the breadth of experience and depth of capabilities to
fully support the Windows CE operating system and related applications across
multiple, heterogeneous microprocessor architectures and devices. These
solutions should encompass the full cycle of the ICD development process,
including hardware support, software development products and services, system
validation and end-user software applications. In addition, these solutions
should leverage existing Microsoft and other industry technologies and standards
to promote rapid and low-cost development, reduced time-to-market and tight
integration with existing enterprise software applications. These solutions
should also be designed to accommodate the varying industry-specific needs of
semiconductor, equipment and software developers without compromising feature
functionality and performance.

THE BSQUARE SOLUTION

We are a leading provider of Microsoft Windows CE-based software solutions
that enable the development and proliferation of Windows CE-based ICDs. OEMs,
semiconductor vendors and Windows CE software developers rely on our solutions
to bring high quality, low-cost, customized ICDs to market in a timely fashion.
Key elements of our solution include:

A BROAD SET OF END-TO-END WINDOWS CE DEVELOPMENT SOLUTIONS TO SUPPORT AN
EXTENDED RANGE OF ICD HARDWARE, SYSTEMS AND APPLICATIONS DEVELOPMENT
REQUIREMENTS:

- Software development. We provide services to Microsoft and semiconductor
vendors to assist in the development of the Windows CE operating system,
the development of software development tools sold in conjunction with
Windows CE and the porting of Windows CE to numerous microprocessor
architectures.

- Hardware support. We provide software products and services that support
the heterogeneity of microprocessor architectures, computer board
products and peripherals upon which many ICDs are based. For example, our
CE Xpress Kits provide pre-configured software packages that support the
microprocessor architecture and peripherals for reference boards from
semiconductor and board manufacturers.

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<PAGE> 34

- System validation. We provide solutions to assist OEMs in the validation
and verification of their hardware and software executing Windows CE,
including services designed to help OEMs develop custom testing suites to
validate the performance and reliability of their ICDs.

- Applications software. We provide development tools to facilitate the
third-party development of Windows CE-based ICD user interfaces. We also
license personal productivity, utility and communications software
applications to OEMs that enhance the functionality of their ICDs.

PRODUCTS AND SERVICES THAT LEVERAGE EXISTING MICROSOFT TECHNOLOGIES AND
STANDARDS. Our Windows CE-based products and services leverage existing
Microsoft technologies and standards to enable semiconductor vendors and OEMs to
deliver highly customizable and cost-efficient ICDs to their end-users. These
technologies enable OEMs to efficiently utilize the existing pool of traditional
Windows programmers to develop differentiating applications for ICDs based upon
Windows CE. Our use of open standards also allows ICDs designed with our
development products and services to integrate tightly with existing enterprise
information technologies as well as with other Microsoft technologies and
applications. By enabling OEMs to standardize on a software platform, our
solutions help OEMs more rapidly deploy new hardware technologies without having
to re-implement their software investments across multiple platforms.

LEVERAGING OUR DEPTH OF EXPERIENCE IN DEVELOPING WINDOWS CE-BASED SOLUTIONS
AND OUR VARIETY OF STRATEGIC RELATIONSHIPS TO DELIVER TANGIBLE BENEFITS TO
WINDOWS CE-BASED ICD DEVELOPERS. We have been building Windows CE-based software
solutions for the development, integration and deployment of the Windows CE
operating system and industry-specific applications since prior to the
commercial release of Windows CE. In addition, we have developed strategic
relationships with Microsoft and have worked with nearly all of the leading
microprocessor vendors to develop Windows CE-based software solutions. This
experience enables us to bring tangible benefits to Microsoft and to a variety
of OEMs, semiconductor vendors and software developers. Such benefits include:

- Reduced time-to-market. By using our software services and pre-configured
software components, our customers can leverage our experience with the
Windows CE platform to help bring quality ICDs to market faster than if
they had chosen to develop their hardware, operating systems and software
applications internally.

- Lower development costs and reduced risks. Because we offer an extensive
library of software solutions required to develop Windows CE-based ICDs,
our customers can reduce the implementation and training time required
for engineers and thereby lower their ICD development costs. Our software
components are thoroughly tested for performance and reliability, thereby
reducing the risk of project failure.

- Rapidly customizable graphical user interfaces. Our software development
solutions help enable our customers to more rapidly design user- and
industry-specific graphical user interfaces to meet the specific needs of
ICD users across a variety of vertical markets.

- Enhanced ICD feature functionality. Our pre-developed software components
help enable OEM customers to quickly add new, differentiating application
features to create unique value to their existing hardware components and
extend product life cycles. Because software typically can be easily
upgraded at significantly lower costs than replacing or upgrading
hardware, we help enable our OEM customers to enhance their competitive
product differentiation.

STRATEGY

We intend to establish BSQUARE as the leading provider of software
solutions enabling the development and proliferation of ICDs. Key elements of
our strategy include:

Continue to enhance our position as a leading provider of Windows CE
solutions. We intend to enhance our leadership position in the development of
software solutions designed to enable the proliferation of Windows CE-based
products across a wide variety of ICDs. Because we have been building Windows
CE-based software solutions since prior to the commercial release of Windows CE,
and our engineers have approximately 330 person-years of experience with Windows
CE, we believe that we offer a greater breadth and depth of Windows CE software
solutions expertise than our current competitors. We intend to continue

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<PAGE> 35

to leverage this expertise, as well as our strong brand reputation in the
Windows CE market, by maintaining strong, quality-focused engineering groups,
developing market-focused products and services, and undertaking sales and
marketing activities that highlight key design wins, product awards and other
third-party endorsements.

Expand our strategic relationships with hardware and software vendors. We
intend to continue to strengthen and extend our relationships with leading
third-party hardware and software vendors that are designing products based on
Windows CE. To date, we have developed alliances with leading manufacturers of
microprocessors, computer boards and other components. We provide software
solutions that enable these companies to develop hardware designs that interface
with Windows CE. We have also developed key alliances with other software
developers to provide connectivity technologies for products that interface with
Windows CE. We believe that the adoption of our solutions by a broad group of
industry leaders is important in increasing market awareness and generating new
business opportunities.

Continue to leverage our relationship with Microsoft. We have developed a
close working relationship with Microsoft and are a "preferred Microsoft vendor"
for the development of the Windows CE operating system and accompanying tools.
Currently, we work closely with Microsoft on a number of different projects
focused on Windows CE and we intend to continue this relationship in the future.
We believe that the success of our company is related to the overall adoption of
Windows CE as an operating platform and therefore we intend to continue to work
with Microsoft toward further proliferation of Windows CE, as well as other
Microsoft operating systems.

Leverage our extensive Windows CE expertise to develop additional software
applications. We believe that as Windows CE is widely adopted in the
marketplace, there will be an increasing demand for complete, end-user software
applications that enhance the capabilities of Windows CE-based ICDs. We intend
to leverage our brand reputation as a Windows CE expert, our alliances with key
strategic manufacturers and our relationship with Microsoft to develop a leading
position in the market for Windows CE-based software applications. We currently
offer a variety of personal productivity, utility and communications software
for Windows CE-based ICDs. We intend to continue to leverage our Windows CE
expertise to develop additional applications to address the evolving
requirements of this market.

Expand our international presence. We intend to continue to expand
internationally in order to enhance our profile and market reach. We believe
that Windows CE is gaining acceptance in the Asian and European markets. These
markets are attractive to us because of their high concentration of OEM
customers focusing on the development of ICDs. We have recently established
sales offices in Tokyo, Japan and Munich, Germany.

SOFTWARE SOLUTIONS

We develop, market and support a wide variety Windows CE software solutions
for the development and integration of the Windows CE operating system to help
enable the rapid and low-cost deployment of ICDs.

Operating system development and accompanying tools

We provide software and engineering services to Microsoft and numerous
microprocessor manufacturers to enable the following:

- assistance in the continued development of the Windows CE operating
system;

- expansion of the utility of the Microsoft Visual Tools series, a set of
software development tools for use with the Windows CE operating system;
and

- porting of Windows CE to multiple microprocessor architectures.

The services we provide these customers include software development,
software testing and program management. We provide these services both as a
comprehensive solution and on a point basis to address specific needs depending
upon customer requirements.

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Integration of Windows CE with ICDs

We offer products and services that are used by OEMs to integrate the
Windows CE operating system with target ICDs. In order to customize the
functionality of Windows CE and integrate it with a particular ICD, OEMs must
develop or purchase software that is used in conjunction with the Visual Tools
series and Windows CE Platform Builder products provided by Microsoft. We offer
a comprehensive set of solutions that enable OEMs to cost-effectively integrate
Windows CE with ICDs, with reduced time-to-market and decreased risk of project
failure. The following table summarizes the key features and benefits of the
products we offer for the integration of Windows CE with ICDs:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BSQUARE PRODUCT DESCRIPTION BENEFIT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
CE Xpress Adaptation - A set of pre-developed and tested - Designed to save OEMs time
Kits device drivers and other code for developing low-level software
low-level support of hardware in a support, reducing time-to-market
Windows CE-based device
- Pre-tested components increase
- Available for a broad range of chip reliability of target device
sets including those manufactured by AMD,
Cyrix, Hitachi, Intel and Motorola
- Sold in source code format to allow
customer modifications
- --------------------------------------------------------------------------------------------------------------
CE Xpress Binary Kits - Includes same functionality as CE - Enables OEMs to rapidly evaluate
Xpress Adaptation Kit without access to Windows CE on a specific reference
source code board with minimal investment
- Enables OEMs to bring reference
board-compatible products to market
with no porting or low-level
customization
- --------------------------------------------------------------------------------------------------------------
CE Xpress Single Board - A development kit that works in - Provides a foundation for OEMs to
Computer Kits conjunction with single board computers begin immediate development of
to quickly install and run Windows CE Windows CE-based ICDs
for the development of ICDs
- Provides all of the infrastructure
normally needed for development of
applications and customizations based
on the PCI/ISA expansion bus
architecture
- --------------------------------------------------------------------------------------------------------------
CE Xpress86 Kit - A development kit that allows OEMs to - Eliminates need to wait for
run Windows CE on a standard PC-based hardware development before
platform beginning software development,
enabling faster time-to-market
- Runs Windows CE without DOS
- Reduces the cost of PC-based
Windows CE systems by eliminating
the DOS license requirement
- --------------------------------------------------------------------------------------------------------------
CE Xpress OnDemand - An online subscription service for - Enables CE Xpress Kit customers to
portable device drivers for CE Xpress Kit access the latest drivers and
customers driver updates online
- --------------------------------------------------------------------------------------------------------------
CEValidator - A quality assurance and testing - Designed to save OEMs testing costs
technology for the validation of Windows
CE integration with ICDs - Enables OEMs to test software
throughout the design process
- A client/server-based test suite of
more than 1,000 individual test cases for
testing compliance and reliability
- Extensible architecture for
incorporating additional and custom test
programs
- --------------------------------------------------------------------------------------------------------------
CE EmbeddedDesktop - A fully customizable desktop building - Gives OEMs the ability to create a
utility device-specific graphical user
interface
- Includes a set of pre-developed
components for creating a custom desktop - Helps enable OEMs to rapidly and
easily create design prototypes and
- Contains customizable security and complete the implementation of
interface features for commercial graphical user interfaces
applications
- --------------------------------------------------------------------------------------------------------------
</TABLE>

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We also provide integration and support services to OEMs developing Windows
CE-based ICDs. For example, we provide implementation services for companies
developing Windows-based terminal designs, industrial automation solutions and
set-top boxes. Our CE Xpress consulting services leverage our existing products,
such as CE Xpress Adaptation Kits and CE EmbeddedDesktop, to implement the
hardware and software specifications of our customer's OEM products. We often
retain a license or other proprietary rights in the resulting work product. At
times, we perform new applications or system software development on behalf of
OEMs. We believe that OEM customers in need of complex adaptations can save time
and resources by outsourcing this work to us. In addition, to support our OEM
customers, we often "bundle" support services with our software solutions. These
support services help enable our OEM customers to finalize ICD development and
reduce time-to-market.

To augment our Windows CE solutions, we occasionally partner with
third-party software vendors to provide additional features and functionality.
Our ability to license these third-party software products to OEMs, in
conjunction with our own solutions, provides our OEM customers with a single
source for Windows CE software solutions. We are currently a licensed
distributor of Windows CE-based software from Communications Intelligence
Corporation, Datalight, Intrinsyc and Microsoft.

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End-User Software Applications

We provide a wide range of commercially available personal productivity,
utility and communications software to enhance the functionality and utility of
Windows CE-based ICDs. We market our end-user software applications through
standard retail and electronic commerce channels, and also license these
products to OEMs in formats suitable for bundling. Our current software
application product offerings include:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BENEFIT
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
bFAX - A product family that provides - Provides a practical and
faxing capabilities for ICDs comprehensive faxing solution for
- bFAX Pro provides send and Windows CE-based devices
receive capability for handheld PCs
- bFAX Express provides send-only
capability for handheld and
palm-size PCs
- ---------------------------------------------------------------------------------------------------------
bMOBILE News - Provides access to Internet - Mobile users can download news
newsgroups for handheld and palm- articles for on- or off-line use
size PCs
- ---------------------------------------------------------------------------------------------------------
bPRINT - Print management software for - Users can spool jobs for batch
palm-size and handheld PCs printing
- Increases the variety of printers
compatible with Windows CE-based
devices
- ---------------------------------------------------------------------------------------------------------
bREADY - An electronic book creation and - Users can store and transport
reading system which includes a large volumes of information and
desktop component for publishing literature
books and a client viewer for
handheld or palm-size PCs - Sample applications include sales
catalogs, forms and event
materials, among others
- ---------------------------------------------------------------------------------------------------------
BSQUARE SpreadSheet - A spreadsheet application for - Provides independent
palm-size PCs functionality while maintaining
Pocket Excel compatibility
- ---------------------------------------------------------------------------------------------------------
bTASK - A navigation, status and control - Alleviates the problem of
program for applications on managing multiple open applications
palm-size PCs
- ---------------------------------------------------------------------------------------------------------
bUSEFUL Backup Plus - A full-featured backup and - Avoids critical information loss
restore application for palm-size by backing up data
and handheld PCs
- ---------------------------------------------------------------------------------------------------------
bUSEFUL Utilities Pak - Utility suite for palm-size and - Provides utility applications
handheld PCs that contains 12 which enhance the performance and
different utility applications functionality of Windows CE-based
including bTASK, bUSEFUL Backup devices
Plus and other utility
applications
- ---------------------------------------------------------------------------------------------------------
bPRODUCTIVE Essentials Pak - Six software titles, including - A single installation program
bFAX, bPRINT, bTRACK, bREADY, saves time
bMOBILE News and bTASK
- ---------------------------------------------------------------------------------------------------------
</TABLE>

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TECHNOLOGY

We have developed a set of technologies relating to the integration of
Windows CE with the target computer boards used by our customers as the core of
their ICD products.
LOGO

The technology contained in our CE Xpress Kits, including the OEM Adaptation
Layer, the CE Platform Layer and the Device Driver Library, provides the
interface between Windows CE and the target computer board.

OEM Adaptation Layer Library

The OEM Adaptation Layer, or OAL, provides a standard interface between the
Windows CE operating system and the core components of a target computer board.
A new OAL must be implemented for each target computer board which is to be used
with Windows CE.

We maintain a library of OAL implementations for several of the target
computer boards used in Windows CE-based ICD products. These implementations are
distributed to our customers in the form of our CE Xpress Kits and are also used
by our engineers when we are contracted to create custom solutions. In addition,
our OAL library serves as a starting point for the rapid creation of new OAL
implementations.

Device Driver Library

Device drivers provide the interface by which the Windows CE operating
system controls peripheral devices connected to a target computer board. A
device driver must be implemented for each peripheral device connected to a
computer board that is under the control of Windows CE. Examples of such
peripheral devices include keyboards, display screens and computer network
interface cards.

We have created a library of device drivers for inclusion in our CE Xpress
Kits and for use in the custom solutions we create for our customers. The
existing set of drivers also provides examples and starting points for the rapid
creation of new device drivers.

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<PAGE> 40

CE Platform Layer

A peripheral device normally requires a different device driver for each
model of target computer board to which it is to be connected. A device driver
for one model of computer board will not generally work with a different model
of computer board.

Our CE Platform Layer, or CEPL, technology allows our engineers and
third-party hardware manufacturers to develop a single driver for a peripheral
device that may be used on many different models of target computer boards. This
increases the value and flexibility of each computer board by increasing the
number of readily available peripheral devices that can be used.

Our CEPL technology is included in our CE Xpress Kits and is used for the
implementation of the majority of our device drivers.

CEValidator

Our CEValidator is a quality assurance and testing product which we
originally developed for our in-house use. We believe that it is important to
test devices early in the design process and to continue testing at a high
frequency throughout the development cycle. We have designed our CEValidator to
support such a testing pattern. CEValidator is based on two primary components:

- a broad suite of over 1,000 tests which evaluates the various subsystems
of Windows CE. These tests have been developed by our engineers in the
course of our own software development efforts. In addition, our
CEValidator allows OEMs to add their own test suites to evaluate specific
features of their ICDs.

- a test control system. This system manages the execution of the tests
suite and the recording of test results. CEValidator provides
communication features which control testing over network connections, a
graphical user interface for displaying user controls and test results,
and simultaneous testing capabilities for multiple systems.

CUSTOMERS

Microsoft is our largest customer, representing approximately 79% and 87%
of our total revenue in 1998 and for the sixth months ended June 30, 1999,
respectively. Our other target customers include OEMs and semiconductor device
manufacturers seeking to leverage the numerous benefits of Windows CE in order
to develop high quality, full-feature products that meet the complex and
evolving requirements of numerous end-markets.

Microprocessor Vendors

We have received revenue in excess of $1.0 million directly from the
following microprocessor vendors:

ARM
Hitachi Semiconductor (America)
Motorola Computer Group
NEC

In addition to these vendors, we have provided software solutions to a
variety of other microprocessor vendors under our master agreement with
Microsoft.

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<PAGE> 41

OEM Customers

The following is a representative list of our OEM customers in the first
six months of 1999:

AT&T
Boundless Technologies
Casio
Cedar Systems
Data General
Development Concepts
Ericsson
Hewlett-Packard
IGEL AG
Lexicon
LG Electronics
NEC Electronics
Philips Electronics
Philips Mobile Computing Group
Sainco
Sharp Electronics
Symbol Technologies
Takaoka Electric
Televideo
Telxon
Total Control Products
Touchstar Technologies
Two Technologies
WebTV

For the first six months of 1999, per customer revenue varied from less
than $5,000 to approximately $575,000. Due to customer confidentiality
requirements, some customers are not disclosed.

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<PAGE> 42

SELECTED CUSTOMER APPLICATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CUSTOMER APPLICATION
- ----------------------------------
<S> <C>
Hitachi Semiconductor Hitachi Semiconductor (America) Inc., a wholly owned
[image] subsidiary of Hitachi America Ltd, markets a broad range of
standard and low power semiconductor solutions in North
America.
When Microsoft Windows CE was first introduced, the Hitachi
SuperH microprocessor architecture was targeted by Microsoft
for Windows CE system-development support. However, at the
time, Hitachi did not possess tools that would be compatible
with Windows CE.
Hitachi turned to us to help enable it to port the Windows
CE operating system to the SuperH architecture. We worked
closely with Hitachi to develop toolkits that helped enable
Hitachi to develop a Windows CE-supported microprocessor
architecture.
- ----------------------------------
Hewlett-Packard Hewlett-Packard is a leading provider of handheld and
[image] palm-size PC devices.
To enhance the functionality of its handheld devices, HP was
seeking to bundle third-party software applications that
provide additional value for users and help distinguish its
devices in a crowded marketplace.
When HP began developing new Windows CE-based handheld
devices, they turned to us to provide an integrated bundle
of utility and personal productivity applications that would
enhance the features of their product. We licensed to HP our
bFAX Pro and bFIND applications. Rather than include these
applications on the third-party CDs in the product box, HP
now bundles these products into the memory of the HP Jornada
820 and HP Jornada 680, providing users instant access to
our software programs without additional installations.
- ----------------------------------
</TABLE>

MICROSOFT RELATIONSHIP

We maintain strategic relationships with Microsoft for furthering the
proliferation of its Windows, and specifically Windows CE, operating systems
within a broad range of industries and applications. Our relationship with
Microsoft extends to the following:

Development partner. We are a "preferred Microsoft vendor" for Windows CE.
Approximately 200 of our software engineers work in a variety of teams on a
number of different Windows CE-based projects for Microsoft. Typically, our
engineers work on products related to tools for Windows CE, including compilers,
assemblers, debuggers and integrated development environments.

Systems integrator. We are a Microsoft-sanctioned systems integrator for
Windows CE. In this capacity, we provide training, consulting and engineering
services and products to OEMs that are building Windows CE-based ICDs. We
actively participate in the Microsoft systems integrator program, including
participating with Microsoft in "partner pavilions" at trade shows and listing
our services and posting our product announcements on the "embedded Windows CE"
portion of Microsoft's website. In addition, Microsoft has periodically utilized
our services when an OEM has required additional engineering resources.

Windows CE distributor. We are a licensed distributor of the Windows CE
operating system. We sub-license Windows CE by reselling the right to bundle
this operating system in ICDs. Microsoft actively assists and manages its
distributors to secure additional licensing opportunities for Windows CE. We are
promoted on the "embedded Windows CE" portion of Microsoft's website as a
distributor, and Microsoft shares with us leads generated from Web inquiries and
tradeshows.

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<PAGE> 43

Windows CE independent software vendor. Microsoft actively encourages
third-party application development through its Developer Relations Group and
Windows CE logo program, which allows third-party applications to receive
Windows CE compatibility logos. We develop several software applications for a
wide variety of Windows CE-based ICDs and participate in marketing opportunities
offered by Microsoft for third-party developers. In addition, Microsoft has from
time to time demonstrated our applications in connection with demonstrations to
third parties of its Windows CE operating system.

SALES AND MARKETING

We market and sell our solutions through partners, representatives,
distributors, retail channels and direct OEM sales. This broad range of channels
is based upon the diversity of our products, including applications, tools and
software technology. We have direct sales offices in the United States, Germany
and Japan. As of July 31, 1999 we had 28 employees in our sales and marketing
department. Key elements of our sales and marketing strategy include direct
advertising, event marketing, an active public relations program, channel
marketing programs, customer and strategic alliance partner co-marketing
programs and a comprehensive website.

We are currently developing new sales channels, including value-added
resellers and systems integrators. We believe that these additional channels
will further increase the brand awareness of our products and services and will
further promote the development of software infrastructures for Windows CE-based
ICDs.

CUSTOMER SUPPORT

We recognize the importance of offering quality service and support to our
resellers and end-user customers. Therefore, we provide a wide range of services
and support to both of these groups, including technical support for our
products, educational services and professional services for implementing and
customizing our products. Both our resellers and end-user customers utilize
web-based, e-mail and/or telephone support 24 hours a day, seven days a week, to
access answers to questions, obtain assistance in determining the source of
defects or errors and acquire solutions to common problems.

RESEARCH AND DEVELOPMENT

As of July 31, 1999 we had 270 engineers engaged in research and
development. Our research and development teams are responsible for the design,
development and release of our products. Members of our research and development
staff work closely with our sales and marketing department, as well as with our
customers and potential customers, to better understand market needs and
requirements.

A substantial majority of our research and development engineers is
involved in the development of the Windows CE operating system and accompanying
tools for Microsoft. These responsibilities require significant expertise due to
the radically different nature of the microprocessors and other hardware
components used in Windows CE-based ICDs. This team has accumulated detailed
knowledge of the Windows CE environment over the past five years, allowing us to
continue to develop solutions that enable the expanding capability and
compatibility of Windows CE-based ICDs. To ensure that compatibility goals are
met and that a high level of product quality is achieved, quality assurance
groups within this team subject our solutions to tens of thousands of individual
tests in multiple test configurations before the solutions are released to our
customers. Due to the broad variety of hardware that hosts Windows CE, the
quality assurance groups have had to develop a special expertise in managing and
extending the test tools used to validate the tool kits for these diverse
operating environments.

The remainder of our research and development engineers develop Windows CE
software for both end-user markets and product/application developers. The
software engineers in this team are responsible for the development of
commercial applications that provide added breadth and functionality for Windows
CE-based ICDs as well as standard products used in the development and testing
of new products utilizing the Windows CE operating system. Our engineers have
significant experience in creating products for Windows CE, which enables us to
bring robust and flexible products to market in a timely manner.

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<PAGE> 44

COMPETITION

The market for Windows CE-based solutions is becoming increasingly
competitive. We face competition from:

- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary solutions;

- large professional engineering services firms that may enter the market;

- established ICD software and tools manufacturers such as Applied
Microsystems, Spyglass, Phoenix Technologies, Mentor Graphics and
Integrated Systems;

- small- and medium-size engineering services companies such as VenturCom,
Eclipse International, BlueWater Systems and Vadem; and

- software and component distributors such as Avnet/Hamilton Hallmark,
Pioneer and Annasoft Systems.

We compete principally on the basis of the breadth of solutions offered,
the experience of the providers, the quality of the solutions, the
time-to-market and price. We believe we compete favorably in each of these
areas.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

Intellectual property is critical to our success. In general, there can be
no assurance that our efforts to protect our intellectual property rights
through patent, copyright, trademark and trade secret laws will be effective to
prevent misappropriation of our technology, or to prevent the development and
design by others of products or technologies similar to or competitive with
those developed by us. We frequently license the source code of our products and
the source code results of our services to customers. There can be no assurance
that customers with access to our source code will comply with the license terms
or that we will discover violations of the license terms or, in the event of
discovery of violations, that we will be able to successfully enforce the
license terms and/or recover the economic value lost from such violations. To
license many of our software products, we rely in part on "shrinkwrap" and
"clickwrap" licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. As with other software
products, our products are susceptible to unauthorized copying and uses that may
go undetected, and policing such unauthorized use is difficult.

The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce and protect our
intellectual property or to defend against a claim of infringement or
invalidity. Litigation could result in substantial costs and the diversion of
resources and could harm our business and operating results.

We currently have three pending U.S. patent applications. We do not have
any issued patents. There can be no assurance that any of our pending patents
will be granted. Even if granted, patents may be circumvented or challenged and,
if challenged, may be invalidated. Any patents obtained may provide limited or
no competitive advantage to us. It is also possible that another party could
obtain patents that block our

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<PAGE> 45

use of some, or all, of our products and services. If that occurred, we would
need to obtain a license from the patent holder or design around their patent.
The patent holder may or may not choose to make a license available to us at all
or on acceptable terms. Similarly, it may not be possible to design around such
a blocking patent.

We pursue registration of certain of our trademarks and service marks in
the United States and in certain other countries, but we have not secured
registration of all of our marks. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States, and effective copyright, trademark and trade secret
protection may not be available in other jurisdictions. Our registration of
"BSQUARE" has been opposed in Germany.

EMPLOYEES

As of July 31, 1999, we had 348 employees, excluding independent
contractors and other temporary employees, including 273 employees in research
and development, 28 employees in sales and marketing and 47 employees in general
and administrative services. Of these employees, 337 are located in the United
States, three are located in Germany and eight are located in Japan. In
addition, from time to time, we employ temporary employees and consultants. None
of our employees is represented by a labor union, and we consider our relations
with our employees to be good.

FACILITIES

We lease approximately 70,000 square feet of space in three buildings in
Bellevue, Washington under multiple leases with various terms, with the longest
term expiring in April 2003. In October 1999, we plan to relocate all of our
U.S. employees to a single new location in Bellevue, Washington with
approximately 126,000 square feet, pursuant to a lease that expires in 2009,
with the option to renew for up to an additional 20 years. We also lease office
space in Munich, Germany and Tokyo, Japan. We believe that our new facilities
will be adequate to meet our needs for at least the next twelve months.

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<PAGE> 46

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding our executive
officers and directors as of July 31, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William T. Baxter............... 36 Chairman of the Board, President and Chief Executive
Officer
Brian V. Turner................. 39 Senior Vice President, Chief Financial Officer and
Secretary
Albert T. Dosser................ 42 Senior Vice President, Director
Peter R. Gregory................ 37 Senior Vice President, Director
David Bialer.................... 39 General Manager
Donald Whitt.................... 53 General Manager
Jeffrey T. Chambers(1)(2)....... 44 Director
Scot E. Land(1)(2).............. 45 Director
William Larson.................. 43 Director
</TABLE>

- ---------------
(1) Member of audit committee

(2) Member of compensation committee

William T. Baxter co-founded BSQUARE in July 1994 and has served as our
President, Chief Executive Officer and Chairman of the Board since our
inception. From June 1993 to October 1994, Mr. Baxter served as Principal
Engineer at Digital Equipment Corporation, a manufacturer of business and
networking computer systems. Between February 1990 and May 1993, Mr. Baxter
served as Manager of Compiler Development at Intergraph Corporation, a developer
and manufacturer of interactive computer graphics systems. Mr. Baxter holds a
B.S. and M.S. in computer science from the University of Wyoming.

Brian V. Turner has been our Senior Vice President, Chief Financial Officer
and Secretary since April 1999. From September 1995 to April 1999, Mr. Turner
was the Chief Financial Officer at RadiSys Corporation, a manufacturer and
designer of computers. Between July 1982 and September 1995, Mr. Turner was with
PricewaterhouseCoopers LLP, an accounting firm, most recently as a director in
Corporate Finance. Mr. Turner holds a B.A. in international political science
and a B.B.A. in accounting from the University of Washington.

Albert T. Dosser co-founded BSQUARE in July 1994 and has served as a Senior
Vice President and a director since our inception. From June 1992 to October
1994, Mr. Dosser served as a software engineer at Digital Equipment Corporation.
Between August 1984 and June 1992, Mr. Dosser served as a software engineer at
Telesoft, a software firm developing Ada compilers and related products, and
from July 1982 to August 1984, he served as a sales support analyst and as
assistant to the national product manager for the OEM Systems Division at NCR, a
manufacturer of business and networking computer systems. Mr. Dosser holds a
B.S. in information science, with a minor in mathematics, from East Tennessee
State University.

Peter R. Gregory co-founded BSQUARE in July 1994 and has served as a Senior
Vice President and a director since our inception. From August 1991 to October
1994, Mr. Gregory served as Senior Software Engineer at Digital Equipment
Corporation. Between February 1990 and August 1991, Mr. Gregory served as Senior
Software Engineer at a subsidiary of Motorola, a computer component and
telecommunications equipment manufacturer. Mr. Gregory holds a B.A. in computer
science from Southern Illinois University at Carbondale.

David Bialer has been a General Manager at BSQUARE since September 1998.
From January 1998 to August 1998, Mr. Bialer was the Director of Business
Development at MobileSoft, a division of Philips Electronics North America
Corporation and a Windows CE e-commerce website founded by Mr. Bialer. From
April 1996 to January 1998, Mr. Bialer served as a Senior Product Manager at
Philips Mobile Computing Group, a manufacturer of Windows CE-based devices, and
from December 1995 to February

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<PAGE> 47

1996, he served as a Senior Manager, Business Development at VDOnet, a developer
of video conferencing, messaging and streaming software. From December 1994 to
December 1995, Mr. Bialer served as a Senior Manager at Oracle Corporation, a
database company, and from January 1993 to December 1994, he served as a Senior
Product Marketing Engineer at Intel Corporation, a manufacturer of
semiconductor, computer and networking products. Mr. Bialer holds a B.S. in
computer science from Cornell University and an M.B.A. from the University of
Pennsylvania, Wharton School of Business.

Donald Whitt has been a General Manager at BSQUARE since April 1998, and
from May 1997 to April 1998, Mr. Whitt held various other positions with us.
From October 1993 to May 1997, Mr. Whitt was a program manager at Secure
Computing Corporation, an Internet security company, and from May 1970 to May
1993, he served in management positions at Control Data Corporation, a computer
manufacturer. Mr. Whitt holds a B.S. in mathematics from California State
University at Fresno.

Jeffrey T. Chambers has been a director of BSQUARE since February 1998. Mr.
Chambers was elected to our board of directors in connection with the purchase
of shares of our preferred stock by affiliates of TA Associates, Inc., a venture
capital firm. Mr. Chambers has been employed by TA Associates or its predecessor
since 1980, where he currently serves as a managing director. In addition to
BSQUARE, Mr. Chambers currently serves as a director of several privately held
companies.

Scot E. Land has been a director of BSQUARE since February 1998. Mr. Land
was elected to our board of directors in connection with the purchase of shares
of our preferred stock by affiliates of Encompass Group, a venture capital firm.
Mr. Land is currently a managing director of Encompass Ventures, an affiliate of
Encompass Group, a position he has held since September 1997. Prior to joining
Encompass, Mr. Land was a Senior Technology Analyst and Strategic Planning
Consultant with Microsoft from June 1993 to September 1997, and a technology
research analyst and investment banker for First Marathon Securities, a Canadian
investment bank, from September 1993 to April 1995. From October 1988 to
February 1993, Mr. Land was the President and Chief Executive Officer of
InVision Technologies, a publicly traded company founded by Mr. Land in October,
1988 that designs and manufacturers high-speed computer-aided topography systems
for automatic explosives detection for aviation security. Prior to founding
InVision Technologies, Mr. Land served as a principal in the international
consulting practice of Ernst and Young LLP, a public accounting firm, from April
1984 to October 1988.

William Larson has been a director of BSQUARE since September 1998. Since
September 1993 Mr. Larson has been the Chief Executive Officer of Network
Associates, Inc., a software company, where he has also served as President and
a director since October 1993 and as Chairman of the Board since April 1995.
From August 1988 to September 1993, Mr. Larson served as a Vice President of
SunSoft, Inc., a systems software subsidiary of Sun Microsystems, where he was
responsible for worldwide sales and marketing.

BOARD OF DIRECTORS

We currently have authorized seven directors; however, one board seat
currently remains vacant. Currently all directors hold office until the next
annual meeting of shareholders or until their successors are duly elected. Our
amended and restated articles of incorporation provide that as of the first
annual meeting of shareholders after the closing of this offering our board of
directors will be divided into three classes, each with staggered three-year
terms. As a result, only one class of directors will be elected at each annual
meeting of our shareholders, with the other classes continuing for the remainder
of their respective three-year terms.

In addition, pursuant to a stock purchase agreement between us and Vulcan
Ventures Incorporated, following this offering we have agreed to use our best
efforts to cause an individual selected by Vulcan Ventures and reasonably
acceptable to us to be elected to our board of directors.

Committees

Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Mr. Chambers and Mr. Land. The audit
committee makes recommendations to our

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<PAGE> 48

board of directors regarding the selection of independent auditors, reviews the
scope of audit and other services by our independent auditors, reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements and reviews the results of our audits. The compensation
committee consists of Mr. Chambers and Mr. Land. The compensation committee
reviews and approves the compensation and benefits for our executive officers,
grants stock options under our stock option plan and makes recommendations to
our board of directors on compensation matters.

Compensation Committee Interlocks and Insider Participation

No interlocking relationship exists between any member of our board of
directors or compensation committee and any member of the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.

In January 1998, we sold 8,333,333 shares of Series A Preferred Stock at a
per share price of $1.80. Purchasers of Series A Preferred Stock included TA
Associates and its affiliates, who collectively purchased 6,666,667 shares and
hold more than 5% of our outstanding common stock on an as-converted basis, and
of which one of our directors, Jeffrey T. Chambers, is a managing director; and
Encompass Ventures and its affiliates, who collectively purchased 1,666,666
shares and hold more than 5% of our outstanding common stock on an as-converted
basis, and of which one of our directors, Scot E. Land, is a member. Upon
closing of this offering, each outstanding share of Series A Preferred Stock
will convert into one share of common stock.

In September 1998, we granted an option to purchase 125,000 shares of
common stock at an exercise price of $1.00 per share to NextGen, an affiliate of
Encompass Ventures, in exchange for consulting services.

We have also granted options to purchase common stock to Messrs. Chambers
and Land. Because of contractual obligations involving Mr. Chambers and his
affiliated investment entities, the option grant to Mr. Chambers was issued in
the name of TA Associates, Inc.

Compensation

Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not otherwise compensated for
their services as board members. In August 1998, we granted to each of TA
Associates, with whom Jeffrey T. Chambers, one of our directors, is affiliated,
and Scot E. Land, one of our directors, an option to purchase 45,000 shares of
our common stock at an exercise price of $1.80 per share, vesting in three
annual installments of 15,000 shares each. In July 1998, we granted to William
Larson, one of our directors, an option to purchase 120,000 shares of our common
stock at an exercise price of $1.80 per share, vesting in three annual
installments of 40,000 shares each. We currently intend to make comparable
option grants to future non-employee directors.

EXECUTIVE OFFICERS

Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.

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<PAGE> 49

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation
for services rendered to us in all capacities during the fiscal year ended
December 31, 1998 by our chief executive officer and our four other most highly
compensated executive officers whose salary and bonus for fiscal 1998 exceeded
$100,000.

<TABLE>
<CAPTION>
ANNUAL LONG TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------------ ------------ -------------------------------------
SECURITIES HEALTH LIFE AND
UNDERLYING INSURANCE DISABILITY MOVING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#S) PREMIUMS PREMIUMS EXPENSES
- --------------------------- -------- ------ ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter.......... $252,625 $ -- -- $2,133 $1,060 $ --
President and Chief
Executive Officer
Albert T. Dosser........... 150,000 -- -- 1,776 1,305 --
Senior Vice President
Peter R. Gregory........... 150,000 -- -- -- 1,070 --
Senior Vice President
David Bialer(1)............ 37,000 1,000 100,000 699 -- 8,676
General Manager
Donald Whitt............... 103,265 2,452 30,000 2,192 -- --
General Manager
</TABLE>

- ---------------
(1) Mr. Bialer was hired by us on September 8, 1998. If he had been employed
during the entire fiscal year ended December 31, 1998, his annual salary
would have been $130,000.

Option Grants in Fiscal Year 1998

The following table sets forth certain information with respect to stock
options granted to each of our named executive officers during the fiscal year
ended December 31, 1998. In accordance with the rules of the Securities and
Exchange Commission, also shown below is the potential realizable value over the
term of the option (the period from the grant date to the expiration date)
giving effect to an assumed initial public offering price of $ per share
and based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These rates are mandated by the SEC and do not represent our estimate
of future stock price. Actual gains, if any, on stock option exercises will
depend on the future performance of our common stock. In the fiscal year ended
December 31, 1998, we granted options to acquire up to an aggregate of 1,108,150
shares of common stock to employees and directors, all under our stock option
plan and all at an exercise price equal to the fair market value of our common
stock on the date of grant as determined in good faith by our board of
directors.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
------------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
NUMBER OF SECURITIES GRANTED TO EXERCISE OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------
NAME GRANTED FISCAL 1998 SHARE DATE 5% 10%
---- -------------------- ------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter.............. -- -- $ -- -- $ -- $ --
Albert T. Dosser............... -- -- -- -- -- --
Peter R. Gregory............... -- -- -- -- -- --
David Bialer................... 100,000 9.0% 1.00 9/25/08 -- --
Donald Whitt................... 10,000 1.0% 1.00 7/17/08 -- --
</TABLE>

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<PAGE> 50

Aggregate Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
Values

With respect to our named executive officers, the following table sets
forth information concerning option exercises in the fiscal year ended December
31, 1998 and exercisable and unexercisable options held as of December 31, 1998.
The "Value Realized" and the "Value of Unexercised In-the-Money Options at
December 31, 1998" are based upon an assumed initial public offering price of
$ per share minus the per share exercise price multiplied by the number of
shares underlying the option.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON EXERCISE OPTIONS AT IN-THE-MONEY OPTIONS AT
----------------------- DECEMBER 31, 1998 DECEMBER 31, 1998
VALUE --------------------------- ---------------------------
NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter............. -- $ -- -- -- $ -- $ --
Albert T. Dosser.............. -- -- -- -- -- --
Peter R. Gregory.............. -- -- -- -- -- --
David Bialer.................. -- -- -- 100,000 -- --
Donald Whitt.................. 5,000 -- 7,500 17,500 -- --
</TABLE>

EMPLOYEE BENEFIT PLANS

Amended and Restated Stock Option Plan

Our board of directors adopted and our shareholders approved our amended
and restated stock option plan in May 1997. As of July 31, 1999, we had reserved
a total of 5,625,000 shares of common stock for issuance under the stock option
plan. The stock option plan provides for the granting to our employees,
including officers and directors, of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986 and for the granting to
employees, consultants and non-employee directors of nonstatutory stock options.
If an optionee would have the right in any calendar year to exercise for the
first time incentive stock options for shares having an aggregate fair market
value (determined for each share as of the date the option to purchase the
shares was granted) in excess of $100,000, any such excess options shall be
treated as nonstatutory stock options. Unless terminated earlier by our board of
directors, the plan will terminate in May 2007. As of July 31, 1999, options to
purchase 2,995,749 shares of common stock were outstanding under this plan and
224,726 shares had been issued upon exercise of options.

The stock option plan may be administered by our board of directors or a
committee of our board. Our board of directors determines the terms of each
option granted under the stock option plan, including the number of shares
subject to an option, exercise price, vesting schedule and duration. The
exercise price of all incentive stock options granted under the stock option
plan cannot be less than the fair market value of the common stock on the date
of grant and, in the case of incentive stock options granted to holders of more
than 10% of our voting power, not less than 110% of the fair market value.
Generally, options granted under the stock option plan have a term of ten years,
vest annually over a four-year period and are nontransferable. Payment of the
exercise price of options may be made in cash or other consideration as
determined by our board of directors.

Our board of directors has the authority to amend or terminate the stock
option plan as long as such action does not adversely affect any outstanding
option and provided that shareholder approval for any amendments to the stock
option plan shall be obtained to the extent required by applicable law.

Employee Stock Purchase Plan

Our board of directors and shareholders adopted an employee stock purchase
plan in August 1999. We will implement the employee stock purchase plan
effective as of the date of this prospectus. The employee stock purchase plan
provides a convenient and practical means by which employees may participate in
stock ownership. Our board of directors believes that the opportunity to acquire
a proprietary interest in our success through the acquisition of shares of
common stock pursuant to the employee stock purchase plan is an important aspect
of our ability to attract and retain highly qualified and motivated employees.
The employee

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<PAGE> 51

stock purchase plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. The employee
stock purchase plan may be administered by our board of directors or by a
committee appointed by our board of directors. The plan administrator has the
power to make and interpret all rules and regulations it deems necessary to
administer the employee stock purchase plan. Our board of directors has broad
authority to amend the employee stock purchase plan, subject in some instances
to shareholder approval. All of our employees who customarily work more than 20
hours per week, including our officers, are eligible to participate in the
employee stock purchase plan. Eligible employees may elect to contribute from 1%
to 10% of the compensation paid to them during each pay period towards stock
purchases under the plan. Other than the first offering, which will have a
duration of approximately 19 months, each participant may enroll in an 18-month
offering in which shares of common stock are purchased on the last day of each
six-month period during the offering. The first offering will commence on the
date of this prospectus and will terminate on May 14, 2001. Thereafter, a
separate offering will commence on November 15 and May 15 of each year. The
purchase price for shares purchased under the employee stock purchase plan will
be equal to 85% of the lower of:

- the fair market value of our common stock on the enrollment date of the
offering; or

- the fair market value on the date of purchase.

Neither payroll deductions credited to an employee's account nor any rights with
regard to the purchase of shares under the employee stock purchase plan may be
assigned, transferred, pledged or otherwise disposed of in any way by a
participant, except that a participant may designate a beneficiary in the event
of his or her death.

Upon termination of employment due to death, retirement or disability, the
payroll deductions credited to an employee's account will be used to purchase
shares on the next purchase date. Any remaining balance will be returned to the
participant or his or her beneficiary. Upon termination of employment for any
other reason, any payroll deductions credited to an employee's account will be
returned to the participant. We have authorized the issuance of up to 1,500,000
shares of common stock under the employee stock purchase plan. In the event of a
merger, consolidation or acquisition by another corporation of all or
substantially all of our assets, each outstanding right to purchase shares under
the employee stock purchase plan shall be assumed or an equivalent stock
purchase right substituted by the successor corporation. If the successor
corporation refuses to assume or substitute for the stock purchase right, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed merger or sale. Similarly, in the event
of our liquidation or dissolution, the offering period during which a
participant may purchase stock will be shortened to a specified date before the
date of the liquidation or dissolution.

401(k) Plan

In March 1997, our board of directors adopted a tax-qualified employee
savings and retirement plan for eligible U.S. employees. Eligible employees may
elect to defer a percentage of their eligible compensation in the 401(k) plan,
subject to the statutorily prescribed annual limit. We make matching
contributions on behalf of all participants in the 401(k) plan in the amount
equal to one-half of the first 6% of an employee's contributions. Matching
contributions are subject to a vesting schedule; all other contributions are at
all times fully vested. We intend the 401(k) plan to qualify under Sections
401(k) and 501 of the Internal Revenue Code so that contributions by employees
or us to the 401(k) plan, and income earned, if any, on plan contributions, are
not taxable to employees until withdrawn from the 401(k) plan, and so that we
will be able to deduct our contributions when made. The trustee of the 401(k)
plan, at the direction of each participant, invests the assets of the 401(k)
plan in any of a number of investment options.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

We currently do not have any employment agreements with any of our named
executive officers. Our stock option plan provides that in the event a third
party acquires us through the purchase of all or substantially all of our
assets, a merger or other business combination, if so provided in applicable
stock option agreements, the unexercised portion of outstanding options will
vest and become immediately exercisable.

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<PAGE> 52

Only two of our officers have stock option agreements that contain change of
control provisions. David Bialer has a stock option agreement which provides for
the acceleration of vesting of 50% of any unvested portion of his options in the
event a third party acquires us. In addition, Brian V. Turner has a stock option
agreement pursuant to which his options are all immediately vested but subject
to repurchase by us over a period of four years from the date of grant. Mr.
Turner's option agreement also provides for the release of 50% of any unreleased
portion of his options in the event a third party acquires us. We do not have
change of control arrangements with any of our other named executive officers.

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY

Our amended and restated articles of incorporation limit the liability of
directors and officers to the fullest extent currently permitted by the
Washington Business Corporation Act or as it may be amended in the future.
Consequently, subject to the WBCA, no director will be personally liable to us
or our shareholders for monetary damages resulting from his conduct as our
director, except liability for:

- acts or omissions involving intentional misconduct or knowing violations
of law;

- unlawful distributions; or

- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.

Our amended and restated articles of incorporation also provide that we
shall indemnify any individual made a party to a proceeding because that
individual is or was one of our directors or officers and shall advance or
reimburse reasonable expenses incurred by such individual in advance of the
final disposition of the proceeding to the fullest extent permitted by
applicable law. Any repeal of or modification to our amended and restated
articles of incorporation may not adversely affect any right of any of our
directors who is or was a director at the time of such repeal or modification.
To the extent the provisions of our amended and restated articles of
incorporation provide for indemnification of directors for liabilities arising
under the Securities Act, those provisions are, in the opinion of the SEC,
against public policy as expressed in the Securities Act and are therefore
unenforceable.

Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our employees and agents to the fullest extent permitted by law.
In addition, we have entered into separate indemnification agreements with our
directors and certain executive officers that could require us, among other
things, to indemnify them against liabilities that arise because of their status
or service as directors or executive officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. Finally, we have purchased and intend to maintain a liability
insurance policy, pursuant to which our directors and officers may be
indemnified against liability they may incur for serving in their capacities as
our directors and officers. We believe that the limitation of liability
provisions in our amended and restated articles of incorporation, the
indemnification provisions in our bylaws, the indemnification agreements and the
liability insurance policy will facilitate our ability to continue to attract
and retain qualified individuals to serve as our directors and officers.

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<PAGE> 53

CERTAIN TRANSACTIONS

In connection with our conversion from a subchapter S corporation to a C
corporation in October 1997, we issued notes payable to William T. Baxter,
Albert T. Dosser and Peter R. Gregory, each in the principal amount of
$654,970.76, which were repaid in full in January 1998.

In January 1998, we sold 8,333,333 shares of Series A Preferred Stock at a
per share price of $1.80. Purchasers of Series A Preferred Stock included TA
Associates and its affiliates, who collectively purchased 6,666,667 shares and
hold more than 5% of our outstanding common stock on an as-converted basis, and
of which one of our directors, Jeffrey T. Chambers, is a partner; and Encompass
Ventures and its affiliates, who collectively purchased 1,666,666 shares and
hold more than 5% of our outstanding common stock on an as-converted basis, and
of which one of our directors, Scot E. Land, is a member. Upon closing of this
offering, each outstanding share of Series A Preferred Stock will convert into
one share of common stock.

In connection with the sale of the Series A Preferred Stock, the investors
were granted registration rights, and we may therefore become obligated to
effect a registration under the Securities Act of shares of common stock held by
these investors upon the conversion of their preferred stock. In addition, in
connection with the Series A Preferred Stock offering, we redeemed 1,111,111
shares of common stock from each of Messrs. Baxter, Dosser and Gregory for
aggregate consideration of $6,000,000, and Messrs. Chambers and Land were
elected to our board of directors.

We granted options to purchase shares of common stock to the following
officers and directors on the date, for the number of shares and with an
exercise price indicated opposite each person's name:

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING EXERCISE
NAME GRANT DATE OPTIONS PRICE
---- ---------- ---------------- --------
<S> <C> <C> <C>
David Bialer............................... 9/25/98 100,000 $ 1.00
Jeffrey T. Chambers........................ 8/3/98 45,000 1.80
Scot E. Land............................... 8/3/98 45,000 1.80
William Larson............................. 7/20/98 120,000 1.80
Brian V. Turner............................ 4/7/99 300,000 1.44
Donald Whitt............................... 6/11/97 20,000 .04956
7/17/98 10,000 1.00
7/5/99 40,000 2.50
</TABLE>

Because of contractual obligations involving Mr. Chambers and his
affiliated investment entities, the option grant to Mr. Chambers was issued in
the name of TA Associates, Inc.

In August 1999, we entered into an agreement to issue 1,518,378 shares of
our common stock to Vulcan Ventures Incorporated for an aggregate purchase price
of approximately $18.7 million. The closing of this sale is subject to clearance
under the Hart-Scott-Rodino Antitrust Improvements Act. In connection with its
purchase of our common stock, Vulcan Ventures will receive piggy-back
registration rights, and we may therefore become obligated to register under the
Securities Act shares of common stock held by Vulcan Ventures. In addition,
pursuant to the stock purchase agreement between us and Vulcan Ventures,
following this offering we have agreed to use our best efforts to cause an
individual selected by Vulcan Ventures and reasonably acceptable to us to be
elected to our board of directors. Vulcan Ventures has the right to require us
to redeem the shares at the original issuance price if this offering is not
completed by December 15, 1999.

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<PAGE> 54

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of July 31, 1999, and as adjusted to reflect
the sale of the common stock offered hereby, by:

- each shareholder known by us to own beneficially more than 5% of our
outstanding common stock;

- each of our directors;

- each of our named executive officers; and

- all current executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC.
For purposes of calculating the number of shares beneficially owned by a
shareholder and the percentage ownership of that shareholder, shares of common
stock subject to options that are currently exercisable or exercisable within 60
days of July 31, 1999 by that shareholder are deemed outstanding. These options
are not treated as outstanding for the purpose of computing the percentage
ownership of any other shareholder. Percentage ownership is based on 28,118,104
shares of common stock outstanding on July 31, 1999 and shares
outstanding upon completion of this offering.

Unless otherwise noted below, the address for each shareholder below is:
c/o BSQUARE Corporation, 3633 136th Place S.E., Suite 100, Bellevue, WA 98006.
Unless otherwise noted, we believe that each of the shareholders has sole
investment and voting power with respect to the common stock indicated, except
to the extent shared by spouses under applicable law.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF ---------------------
SHARES
NUMBER OF UNDERLYING BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OFFERING OFFERING
------------------------------------ ---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Entities affiliated with TA Associates, Inc.(1)..... 7,192,130 15,000 25.6%
High Street Tower
Suite 2500
Boston, MA 02110
Jeffrey T. Chambers(2).............................. 7,192,130 15,000 25.6
Albert T. Dosser.................................... 5,888,889 -- 20.9
Peter R. Gregory.................................... 5,875,089 -- 20.9
William T. Baxter................................... 5,142,362 -- 18.3
Scot E. Land(3)..................................... 1,805,555 15,000 6.5
Entities affiliated with Encompass Ventures(4)...... 1,805,555 15,000 6.5
4040 Lake Washington Blvd. N.E
Suite 205
Kirkland, WA 98033
Vulcan Ventures Incorporated(5)..................... 1,518,378 -- 5.4
110 110th Avenue N.E., Suite 550
Bellevue, WA 98004
Brian V. Turner..................................... -- 300,000 1.1
William Larson...................................... -- 40,000 *
David Bialer........................................ -- 100,000 *
Donald Whitt........................................ 5,000 7,500 *
All executive officers and directors as a
group(9)(6)....................................... 25,909,025 477,500 92.3%
</TABLE>

- ---------------
* Less than 1%

(1) Includes 5,865,962 shares held by TA/Advent VIII L.P., 1,100,968 shares held
by Advent Atlantic and Pacific III, L.P., 117,318 shares held by TA
Investors L.L.C. and 107,882 shares held by TA Executives Fund L.L.C., all
of which are funds managed by TA Associates.

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<PAGE> 55

(2) Includes 5,865,962 shares held by TA/Advent VIII L.P., 1,100,968 shares held
by Advent Atlantic and Pacific III, L.P., 117,318 shares held by TA
Investors L.L.C. and 107,882 shares held by TA Executives Fund L.L.C., all
of which are funds managed by TA Associates. Mr. Chambers is a managing
director of TA Associates. Mr. Chambers directly or indirectly shares voting
and investment power with respect to such shares but disclaims beneficial
ownership.

(3) Includes 1,372,222 shares held by Encompass Group US Information Technology
Partners 1 LP, 277,778 shares held by TCI Club and 155,555 shares held by
Northwest Financing, L.L.C., all of which are funds managed by Encompass
Ventures. Mr. Land is affiliated with Encompass Ventures. Mr. Land directly
or indirectly shares voting and investment power with respect to such shares
but disclaims beneficial ownership.

(4) Includes 1,372,222 shares held by Encompass Group US Information Technology
Partners 1 LP, 277,778 shares held by TCI Club and 155,555 shares held by
Northwest Financing, L.L.C., all of which are funds managed by Encompass
Ventures.

(5) In August 1999, we entered into an agreement to sell 1,518,378 shares of our
common stock to Vulcan Ventures Incorporated. The closing of this sale is
subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act.
Vulcan Ventures has the right to require us to redeem the shares at the
original issuance price if this offering is not completed by December 15,
1999.

(6) See footnotes (1) through (4) above.

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<PAGE> 56

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon completion of this offering, we will be authorized to issue up to
50,000,000 shares of common stock, no par value, and 10,000,000 shares of
preferred stock, no par value. The following summary of certain provisions of
our common stock and preferred stock is not complete and may not contain all the
information you should consider before investing in the common stock. This
description is subject to and qualified in its entirety by provisions of our
amended and restated articles of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus is a part, and
by provisions of applicable Washington law.

COMMON STOCK

As of July 31, 1999, assuming conversion of all outstanding shares of
preferred stock and the issuance of 1,518,378 shares of common stock to an
institutional investor, there were 28,118,104 shares of common stock outstanding
that were held of record by 79 shareholders. After giving effect to the sale of
common stock offered in this offering, there will be shares of common
stock outstanding (assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options). As of July 31, 1999, there were
outstanding options to purchase a total of 2,995,749 shares of common stock.

The holders of common stock are entitled to one vote per share on all
matters to be voted on by the shareholders. Subject to preferences that may be
granted to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive ratably only those dividends our board of
directors declares out of funds legally available for the payment of dividends
as well as any other distributions to the shareholders.

If we are liquidated, dissolved or wound-up, the holders of common stock
are entitled to share pro rata all of our assets remaining after payment of our
liabilities and liquidation preferences of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non-assessable, and the shares of common
stock to be issued in this offering will be fully paid and non-assessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 8,333,333 shares of common stock. Thereafter,
pursuant to our amended and restated articles of incorporation, our board of
directors will have the authority, without further action by the shareholders,
to issue up to 10,000,000 shares of preferred stock in one or more series and to
fix the relative designations, powers, preferences and privileges of the
preferred stock, any or all of which may be greater than the rights of the
common stock. Our board of directors, without shareholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms that could delay or
prevent a change in control of us or make removal of our management more
difficult. Additionally, the issuance of preferred stock may decrease the market
price of the common stock and may adversely affect the voting and other rights
of the holders of common stock. We have no present plans to issue any preferred
stock.

REGISTRATION RIGHTS

Series A Convertible Preferred Stock

After this offering, the holders of 8,333,333 shares of common stock will
be entitled to rights with respect to the registration of such shares under the
Securities Act pursuant to a stock purchase and shareholders agreement among
such holders and us dated January 30, 1998. Under the terms of this agreement,
if we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of the registration

51
<PAGE> 57

and to include their shares of common stock in the registration at our expense.
Additionally, such holders are entitled to demand registration rights pursuant
to which they may require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock.
Further, such holders may require us to file additional registration statements
on Form S-3 at our expense. All of these registration rights are subject to the
right of the underwriters of an offering to limit the number of shares included
in such registration. These registration rights terminate when the holder can
transfer his or her registrable shares pursuant to Rule 144. The holders of
these registration rights have entered into lock-up agreements and waived their
registration rights until 180 days following the closing of this offering.

Vulcan Ventures Incorporated

In connection with its purchase of 1,518,378 shares of our common stock,
Vulcan Ventures Incorporated will be entitled to rights with respect to the
registration of such shares under the Securities Act. If we propose to register
any of our shares under the Securities Act, either for our own account or for
the account of other security holders exercising registration rights, Vulcan
Ventures is entitled to notice of the registration and to include their shares
of common stock in the registration at our expense. Vulcan Ventures'
registration rights are subject to the right of the underwriters of an offering
to limit the number of shares included in such registration. Vulcan Ventures'
registration rights terminate when Vulcan Ventures can sell its registrable
shares pursuant to Rule 144 without restriction. Vulcan has entered into a
lock-up agreement until 180 days following the closing of this offering.

ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED ARTICLES
OF INCORPORATION, BYLAWS AND WASHINGTON LAW

Our board of directors, without shareholder approval, has the authority
under our amended and restated articles of incorporation to issue preferred
stock with rights superior to the rights of the holders of common stock. As a
result, preferred stock could be issued quickly and easily, could adversely
affect the rights of holders of common stock and could be issued with terms
calculated to delay or prevent a change in control of us or make removal of our
management more difficult. In addition, our board of directors is divided into
three classes. The directors in each class will serve for three-year terms, one
class being elected each year by our shareholders and directors can only be
removed for cause. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
shareholders to replace a majority of the directors.

Chapter 19 of the Washington Business Corporation Act generally prohibits a
"target corporation" from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Prohibited significant business transactions include, among other things:

- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;

- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or

- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.

After the five-year period, a "significant business transaction" may occur
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of us.

In addition, our bylaws provide that shareholders may not raise new matters
or nominate directors at a meeting of shareholders unless advance notice
requirements are satisfied, which could have the effect of delaying or deterring
a change in control of us.

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<PAGE> 58

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street,
Suite 1220, Seattle, Washington 98101, and its telephone number is (206)
292-3795.

NATIONAL MARKET LISTING

We will apply to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "BSQR."

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<PAGE> 59

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have shares of common
stock outstanding, assuming no exercise of options after July 31, 1999 and the
issuance of 1,518,378 shares of common stock to an institutional investor. Of
these shares, the shares that we expect to sell in this offering will
be freely tradable in the public market without restriction under the Securities
Act, unless such shares are held by our "affiliates," as that term is defined in
Rule 144 under the Securities Act.

The remaining 28,118,104 shares of common stock that will be outstanding
after this offering will be restricted shares because they were sold in private
transactions in reliance on exemptions from registration under the Securities
Act. of these shares will be subject to the lock-up agreements
described below for 180 days after the date of this prospectus. In addition,
holders of stock options may exercise and sell their options. The following
table shows the timing of when shares may be eligible for resale in the public
market after effectiveness of this offering:

From time to time between the effectiveness of our Form S-8 registration
statement and 90 days after the date of this prospectus additional
shares will become eligible for sale, and 90 days thereafter
additional shares will become eligible for sale, all pursuant to the
exercise of vested options.

S-8 Registration Statement

As of July 31, 1999, there were a total of 2,995,749 shares of common stock
subject to outstanding options under our stock option plan, 1,043,851 of which
were vested. Immediately after the completion of the offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
stock option plan and our employee stock purchase plan. After the effective
dates of the registration statements on Form S-8, shares purchased upon exercise
of options granted pursuant to our stock option plan and employee stock purchase
plan generally would be available for resale in the public market, without
restriction.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell in any three-month period
up to the greater of:

- 1% of the then-outstanding shares of common stock (approximately
shares immediately after this offering); and

- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.

Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.

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<PAGE> 60

Rule 701

Any of our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a written stock or option plan
before the effective date of this offering is entitled to rely on the resale
provisions of Rule 701, subject to the lock-up agreements described above. In
general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days
after the effectiveness of a registration statement relating to a company's
initial public offering without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
holding period of Rule 144.

Rule 144(k)

Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

Lock-Up Agreements

Pursuant to certain "lock-up" agreements, we and our executive officers,
directors and certain of our other shareholders have agreed not to offer, sell,
contract to sell, announce an intention to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the SEC a registration statement under the
Securities Act relating to, any shares of common stock or securities convertible
into or exchangeable or exercisable for any common stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.

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<PAGE> 61

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Lehman Brothers
Inc., A.G. Edwards & Sons, Inc. and Wit Capital Corporation are acting as
representatives, the following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
Number of Shares
Underwriter ----------------
<S> <C>
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc. .......................................
A.G. Edwards & Sons, Inc. ..................................
Wit Capital Corporation.....................................

----------------
Total..................................................
================
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. This option may be
exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.

The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us............. $ $ $ $
Expenses payable by us............... $ $ $ $
</TABLE>

The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

We and our executive officers, directors and certain of our other
shareholders have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating to,
any shares of common stock or securities convertible into or exchangeable or
exercisable for any common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.

The underwriters have reserved for sale, at the initial public offering
price, up to shares of common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering. The number of shares available for
sale to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved

56
<PAGE> 62

shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares.

We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.

We will apply to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "BSQR."

Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors that will be considered
in determining the public offering price include:

- the information in this prospectus and otherwise available to the
underwriters;

- the history and the prospects for the industry in which we will compete;

- the ability of our management;

- the prospects for our future earnings;

- the present state of our development and our current financial condition;

- the general condition of the securities markets at the time of this
offering; and

- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.

A prospectus in electronic format is being made available on an Internet
website maintained by Wit Capital. In addition, pursuant to an e-dealer
agreement, all dealers purchasing shares from Wit Capital in the offering
similarly have agreed to make a prospectus in electronic format available on
websites maintained by each of the e-dealers.

Wit Capital, a member of the National Association of Securities Dealers,
will participate in the offering as one of the underwriters. The NASD approved
the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital
has acted as an underwriter, co-manager or selected dealer in over 75 public
offerings. Except for its participation as a manager in this offering, Wit
Capital has no relationship with us or any of our founders or our significant
shareholders.

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<PAGE> 63

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, that the purchaser is purchasing as principal and not as agent, and (3)
the purchaser has reviewed the text under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer and these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.

58
<PAGE> 64

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for
BSQUARE by Summit Law Group, PLLC, Seattle, Washington. Certain legal matters
will be passed upon for the underwriters by Morrison & Foerster, LLP, Palo Alto,
California.

As of the date of this prospectus, Summit Law Group beneficially owns
34,722 shares of our common stock.

EXPERTS

Our audited consolidated financial statements and schedule of BSQUARE
Corporation and subsidiaries included in this prospectus and elsewhere in the
registration statement to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein as indicated in their reports with respect
thereto, in reliance upon the authority of said firm as experts giving said
reports.

WHERE TO FIND ADDITIONAL DOCUMENTS

We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may read and copy the registration statement,
including exhibits and schedules filed with it, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a
website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as us, that file
electronically with the SEC.

59
<PAGE> 65

BSQUARE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income and Comprehensive
Income.................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 66

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To BSQUARE Corporation:

We have audited the accompanying consolidated balance sheets of BSQUARE
Corporation and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of BSQUARE
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

Seattle, Washington, /s/ ARTHUR ANDERSEN LLP

August 13, 1999 (except for the matter discussed in Note 13 for which the date
is August 18, 1999)

F-2
<PAGE> 67

BSQUARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
---------------- JUNE 30, (NOTE 1) AT
1997 1998 1999 JUNE 30, 1999
------ ------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $2,286 $ 5,324 $ 9,284
Short-term investments................................... -- 1,582 --
Accounts receivable, net of allowance for doubtful
accounts of $10 in 1997, $67 in 1998 and $112 in
1999................................................... 2,700 5,487 4,531
Income taxes receivable.................................. -- 134 --
Prepaid expenses and other current assets................ 89 155 236
Deferred income tax asset................................ -- 237 832
------ ------- -------
Total current assets.............................. 5,075 12,919 14,883
Furniture, equipment and leasehold improvements, net....... 1,320 3,061 3,380
Deposits and other assets.................................. 58 178 486
------ ------- -------
Total assets...................................... $6,453 $16,158 $18,749
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations................. $ -- $ 157 $ 157
Accounts payable......................................... 367 676 507
Accrued compensation..................................... 732 1,331 1,333
Accrued expenses......................................... 147 308 1,509
Income taxes payable..................................... 484 -- 53
Deferred income taxes payable............................ 38 -- --
Deferred revenue......................................... 389 167 649
------ ------- -------
Total current liabilities......................... 2,157 2,639 4,208
Notes payable to shareholders.............................. 1,743 -- --
Long-term obligations, net of current portion.............. -- 289 210
Deferred income tax payable, net of current portion........ 223 111 111
------ ------- -------
Total liabilities................................. 4,123 3,039 4,529
------ ------- -------
Commitments and contingencies (Note 6)
Mandatorily redeemable convertible Series A preferred
stock, no par value: Authorized 10,000,000 shares, issued
and outstanding, no shares in 1997 and 8,333,333 shares
in 1998 and 1999, preference in liquidation of
$15,000,000.............................................. -- 14,417 14,475 --
Shareholders' equity (deficit):
Common stock, no par value: Authorized 50,000,000 shares,
issued and outstanding, 21,375,000 shares in 1997,
18,161,605 shares in 1998, and 18,225,205 in 1999...... 2,766 2,123 3,209 17,684
Deferred stock option compensation....................... (572) (401) (1,157) (1,157)
Stock subscription....................................... -- -- (29) (29)
Cumulative foreign currency translation adjustment....... -- 5 (61) (61)
Retained earnings (accumulated deficit).................. 136 (3,025) (2,217) (2,217)
------ ------- ------- -------
Total shareholders' equity (deficit).............. 2,330 (1,298) (255) $14,220
------ ------- ------- =======
Total liabilities and shareholders' equity........ $6,453 $16,158 $18,749
====== ======= =======
</TABLE>

See notes to Consolidated Financial Statements.

F-3
<PAGE> 68

BSQUARE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Service........................................ $ 4,175 $14,021 $23,393 $10,181 $17,848
Product........................................ 11 384 1,219 621 695
------- ------- ------- ------- -------
Total revenue.......................... 4,186 14,405 24,612 10,802 18,543
------- ------- ------- ------- -------
Cost of revenue:
Service........................................ 1,400 5,566 11,135 4,907 8,791
Product........................................ 4 78 166 121 108
------- ------- ------- ------- -------
Total cost of revenue.................. 1,404 5,644 11,301 5,028 8,899
------- ------- ------- ------- -------
Gross profit........................... 2,782 8,761 13,311 5,774 9,644
------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 205 1,391 3,671 1,452 2,960
Selling, general and administrative............ 606 2,806 6,470 2,618 5,236
------- ------- ------- ------- -------
Total operating expenses............... 811 4,197 10,141 4,070 8,196
------- ------- ------- ------- -------
Income from operations................. 1,971 4,564 3,170 1,704 1,448
------- ------- ------- ------- -------
Other income (expense):
Interest income................................ -- 20 359 196 149
Interest expense............................... -- (32) (40) (17) (19)
------- ------- ------- ------- -------
Total other income (expense)........... -- (12) 319 179 130
------- ------- ------- ------- -------
Income before income taxes....................... 1,971 4,552 3,489 1,883 1,578
Provision for income taxes....................... -- 746 1,189 666 712
------- ------- ------- ------- -------
Net income............................. $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
======= ======= ======= ======= =======
Foreign currency translation adjustment.......... -- -- (5) -- 66
------- ------- ------- ------- -------
Comprehensive net income......................... $ 1,971 $ 3,806 $ 2,295 $ 1,217 $ 932
======= ======= ======= ======= =======
Basic earnings per share......................... $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ======= ======= ======= =======
Weighted average shares outstanding used to
compute basic earnings per share............... 22,106 21,400 18,372 18,615 18,206
======= ======= ======= ======= =======
Diluted earnings per share....................... $ 0.09 $ 0.17 $ 0.08 $ 0.04 $ 0.03
======= ======= ======= ======= =======
Weighted average shares outstanding to compute
diluted earnings per share..................... 22,106 21,781 27,475 27,050 28,615
======= ======= ======= ======= =======
</TABLE>

See notes to Consolidated Financial Statements.

F-4
<PAGE> 69

BSQUARE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN RETAINED TOTAL
COMMON STOCK DEFERRED CURRENCY EARNINGS SHAREHOLDERS'
-------------------- STOCK OPTION STOCK TRANSLATION (ACCUMULATED EQUITY
SHARES AMOUNT COMPENSATION SUBSCRIPTION ADJUSTMENT DEFICIT) (DEFICIT)
---------- ------- ------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 21,000,000 $ 2 $ -- $ -- $ -- $ 259 $ 261
Issuance of common stock...... 1,106,000 14 -- -- -- -- 14
Shareholder draws............. -- -- -- -- -- (1,322) (1,322)
Net income.................... -- -- -- -- -- 1,971 1,971
---------- ------- ------- ---- ---- ------- -------
Balance, December 31, 1996...... 22,106,000 16 -- -- -- 908 924
Issuance of common stock for
services rendered........... 500,000 25 -- -- -- -- 25
Repurchase of common stock.... (1,231,000) (46) -- -- -- -- (46)
Shareholder note payable on S
to C Corporation
conversion.................. -- -- -- -- -- (2,000) (2,000)
Shareholder draws............. -- -- -- -- -- (460) (460)
Net income from January 1,
1997 to October 15, 1997.... 3,670 3,670
Conversion from S corporation
to C corporation............ 2,118 (2,118) --
Issuance of compensatory stock
options..................... -- 653 (653) -- -- -- --
Compensation attributable to
stock option vesting........ -- -- 81 -- -- -- 81
Net income from October 16,
1997 to December 31,
1997........................ -- -- -- -- -- 136 136
---------- ------- ------- ---- ---- ------- -------
Balance, December 31, 1997...... 21,375,000 2,766 (572) -- -- 136 2,330
Repurchase of common stock.... (3,333,333) (649) -- -- -- (5,351) (6,000)
Exercise of stock options..... 119,938 6 -- -- -- -- 6
Compensation attributable to
stock option vesting........ -- -- 171 -- -- -- 171
Foreign currency translation
adjustment.................. -- -- -- -- 5 -- 5
Accretion on mandatorily
redeemable convertible
preferred stock............. -- -- -- -- -- (110) (110)
Net income.................... -- -- -- -- -- 2,300 2,300
---------- ------- ------- ---- ---- ------- -------
Balance, December 31, 1998...... 18,161,605 2,123 (401) -- 5 (3,025) (1,298)
Exercise of stock options..... 63,600 6 -- -- -- -- 6
Note receivable from
shareholder................. -- 30 -- (30) -- -- --
Issuance of compensatory stock
options..................... -- 1,050 (1,050) -- -- -- --
Issuance of common stock upon
payment of subscription
receivable from
shareholder................. -- -- -- 1 -- -- 1
Compensation attributable to
stock option vesting........ -- -- 294 -- -- -- 294
Foreign currency translation
adjustment.................. -- -- -- -- (66) -- (66)
Accretion on mandatorily
redeemable convertible
preferred stock............. -- -- -- -- -- (58) (58)
Net income.................... -- -- -- -- -- 866 866
---------- ------- ------- ---- ---- ------- -------
Balance, June 30, 1999
(unaudited)................... 18,225,205 $ 3,209 $(1,157) $(29) $(61) $(2,217) $ (255)
========== ======= ======= ==== ==== ======= =======
</TABLE>

See notes to Consolidated Financial Statements.

F-5
<PAGE> 70

BSQUARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 35 329 948 387 1,070
Deferred income taxes....................... -- 261 (387) 7 (595)
Stock and stock option compensation......... -- 106 171 83 294
Amortization of deferred financing costs.... -- -- 14 7 --
Changes in operating assets and liabilities:
Accounts receivable....................... (205) (2,109) (2,786) (1,020) 956
Prepaid expenses and other current
assets................................. (13) (66) (76) (60) (56)
Deposits and other assets................. (27) (24) (117) (4) (315)
Accounts payable and accrued expenses..... 101 1,111 960 125 703
Income taxes.............................. -- 484 (221) (562) 187
Deferred revenue.......................... (222) 389 (618) (354) 482
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities................. 1,640 4,287 188 (174) 3,592
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of furniture equipment and leasehold
improvements................................ (248) (1,413) (2,116) (1,628) (1,070)
Maturity (purchase) of short-term investments,
net......................................... -- -- (1,582) (1,552) 1,582
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities................. (248) (1,413) (3,698) (3,180) 512
------- ------- ------- ------- -------
Cash flows from financing activities:
Repayment of shareholder notes payable......... -- (256) (1,743) (1,743) --
Payments on long-term obligations.............. -- -- (26) -- (79)
Repurchase of common stock..................... -- (46) (6,000) (6,000) --
Deferred financing costs....................... -- (13) (2) (2) (25)
Proceeds from exercise of stock options........ -- -- 5 1 6
Shareholders' draws............................ (1,322) (460) -- -- --
Net proceeds from issuance of Series A
Preferred Stock............................. -- -- 14,307 14,307 --
Proceeds from sale of common stock............. 14 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities................. (1,308) (775) 6,541 6,563 (98)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash.......... -- -- 7 -- (46)
------- ------- ------- ------- -------
Net increase in cash and cash
equivalents.......................... 84 2,099 3,038 3,209 3,960
Cash and cash equivalents, beginning of period... 103 187 2,286 2,286 5,324
------- ------- ------- ------- -------
Cash and cash equivalents, end of period......... $ 187 $ 2,286 $ 5,324 $ 5,495 $ 9,284
======= ======= ======= ======= =======
</TABLE>

See notes to Consolidated Financial Statements.

F-6
<PAGE> 71

BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

BSQUARE Corporation, a Washington corporation, and its subsidiaries
(collectively the Company) provides complete software solutions that enable the
proliferation of a wide variety of intelligent computing devices based on the
Microsoft Windows CE operating system. The Company works with semiconductor
vendors and original equipment manufacturers to provide software products and
engineering services for the development of intelligent computing devices, or
ICDs.

The Company helps enable the rapid and low-cost deployment of ICDs by
providing a variety of software solutions for the development, integration and
deployment of the Windows CE operating system with industry-specific
applications. The Company also develops software applications that are licensed
to end users to provide ICDs with additional functionality. The Company markets
and supports its products and provides services on a worldwide basis through a
direct sales force augmented by distributors.

CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

The Company operates in the software industry, and accordingly, can be
affected by a variety of factors. For example, management of the Company
believes that any of the following factors could have a significant negative
effect on the Company's future financial position, results of operations and
cash flows: unanticipated fluctuations in quarterly operating results; failure
of the market for Windows CE operating system to develop fully; failure of the
market for ICDs to develop fully; adverse changes in the Company's relationship
with Microsoft; failure to secure contracts with market-leading OEMs; intense
competition; failure to attract and retain key personnel; failure to protect
intellectual property; risks associated with international operations; inability
to manage growth; litigation or other claims against the Company.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Accounts denominated in foreign currencies
have been re-measured into the functional currency, using the U.S. dollar as the
functional currency.

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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

UNAUDITED INTERIM FINANCIAL DATA

The unaudited interim financial statements as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles. The Company believes that the results
of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for any future period.

F-7
<PAGE> 72
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS PER SHARE

In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Computation of Earnings Per Share," basic earnings per share is computed
by dividing net income available to common stock (net income less accretion of
mandatorily redeemable convertible preferred stock) by the weighted average
number of shares of common stock outstanding during the period. Dilutive
earnings per share is computed by dividing net income by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the shares of common stock issuable
upon the conversion of the mandatorily redeemable convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method); common equivalent shares
are excluded from the calculation if their effect is antidilutive. The Company
has not had any issuances or grants for nominal consideration as defined under
Staff Accounting Bulletin 98.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, include demand deposits, money market accounts
and all highly liquid debt instruments with an original maturity date of three
months or less.

SHORT-TERM INVESTMENTS

The Company's short-term investments consist primarily of investment-grade
marketable securities, which are classified as held to maturity and recorded at
amortized cost. Due to the short-term nature of these investments, changes in
market interest rates would not have a significant impact on the fair value of
these securities that are carried at amortized cost, which approximates fair
value.

At December 31, 1998, all short-term investments had a contractual maturity
of one year or less.

FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, short-term
investments and trade accounts receivable, accounts payable and long-term debt.
Fair values of cash and cash equivalents and short-term investments approximate
cost due to the short period of time to maturity. The fair values of financial
instruments that are short-term and/or that have little or no market risk are
considered to have a fair value equal to book value. Assets and liabilities that
are included in this category are receivables, accounts payable and accrued
liabilities.

The Company performs initial and ongoing evaluations of its customers'
financial position, and generally extends credit on open account, requiring
collateral as deemed necessary. The Company maintains allowances for potential
credit losses.

FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Furniture, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives, as follows: office furniture and
equipment -- four years; computer equipment -- three years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life. Maintenance and repairs are expensed as incurred. When properties
are retired or otherwise disposed, gains or losses are reflected in the income
statement. When facts and circumstances indicate that the cost of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying value of the asset to projected future cash flows. Upon
indication that the carrying value of such assets may not be recoverable, the
Company would recognize an impairment loss by a charge against current
operations.

SOFTWARE DEVELOPMENT COSTS

Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," capitalization of software

F-8
<PAGE> 73
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development costs begins upon the establishment of technological feasibility of
the product, which the Company has defined as the completion of beta testing of
a working product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenue estimated economic life
and changes in software and hardware technology. Amounts that could have been
capitalized under this statement after consideration of the above factors were
immaterial and, therefore, no software development costs have been capitalized
by the Company to date.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred and consist
primarily of salaries and materials.

INCOME TAXES

The Company was taxed as an S Corporation until October 15, 1997, when the
shareholders elected to convert to a C Corporation. Accordingly, taxes on income
to the Company were generally the responsibility of the shareholders until the
conversion.

The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets and liabilities are measured using
currently enacted tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to reduce deferred
tax assets to the amounts expected to be realized.

FOREIGN CURRENCY TRANSLATION

The Company commenced operations in Germany and Japan during 1998. The
functional currency of foreign subsidiaries is the local currency. Accordingly,
assets and liabilities are translated at exchange rates in effect at the balance
sheet date and income and expense accounts at the average exchange rates during
the year. Resulting translation adjustments are recorded as a separate component
of shareholders' equity. The net gains and losses resulting from foreign
currency transactions are recorded in the consolidated statements of income in
the period incurred and were not significant for any of the periods presented.

REVENUE RECOGNITION

The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants' Statement
of Position 97-2, "Software Revenue Recognition." Service revenue is derived
from software porting and development contracts. Product revenue consists of
licensing fees from software application products and operating system and
software development tool products. The Company's customers consist of software
companies, original equipment manufacturers, distributors and end users.

The Company's revenue is recognized as follows:

Time and Material Consulting Contracts. The Company recognizes revenue as
services are rendered.

Fixed-Price Consulting Contracts. Revenue from fixed-price contracts is
recognized on the percentage-of-completion method, measured by the cost incurred
to date to the estimated total cost for the contract. This method is used as
management considers expended costs to be the best available measure of contract
performance. Contract costs include all direct labor, material and any other
costs related to contract performance. Selling, general and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions and estimated
profitability may result in revisions in the estimate of total costs. Any
required adjustments due to these changes are recognized in the period in which
such revisions are determined.

F-9
<PAGE> 74
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Product Revenue. Product revenue consists principally of fees from the
licensing and sale of software products. Product licensing fees, including
advanced production royalty payments, are generally recognized when a customer
license agreement has been executed, the software has been shipped, remaining
obligations are insignificant and collection of the resulting account receivable
is probable. The Company recognizes license royalty income as it is reported by
the reseller when it ships its product to distributors.

ADVERTISING COSTS

The cost of advertising is expensed as incurred. During the years ending
December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1998 and
1999, the Company incurred advertising expense of $159, $279 and $276, $186, and
$128, respectively.

UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY

If the offering contemplated by this prospectus is consummated, all of the
mandatorily redeemable convertible preferred stock outstanding and subscribed to
as of the closing date will automatically be converted into an aggregate of
8,333,333 shares of common stock. Unaudited pro forma shareholders' equity at
June 30, 1999, as adjusted for the conversion of mandatorily redeemable
convertible preferred stock, is presented in the accompanying consolidated
balance sheet.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start up activities
and organization costs to be expensed as incurred. The implementation of SOP
98-5 did not have a material impact on the Company's financial position or
results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133 of Financial Accounting Standards, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after December 15, 1999. The Company does not use derivative instruments,
therefore the adoption of this statement will not have any effect on the
Company's results of operations or financial position.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

F-10
<PAGE> 75
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Major classifications of furniture, equipment and leasehold improvements
consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Computer equipment and system software................. $1,003 $ 2,450 $ 3,158
Office furniture and equipment......................... 404 667 727
Leasehold improvements................................. 293 1,040 1,300
Construction in progress............................... -- 118 114
------ ------- -------
1,700 4,275 5,299
Less: accumulated depreciation and amortization........ (380) (1,214) (1,919)
------ ------- -------
$1,320 $ 3,061 $ 3,380
====== ======= =======
</TABLE>

3. INCOME TAXES

As discussed in Note 1 to the financial statements, the Company was a
Subchapter S Corporation for income tax purposes from inception to October 15,
1997. Effective October 16, 1997, the Company converted to a C Corporation and
was thereafter responsible for U.S. federal income taxes. A net deferred tax
liability of $445, primarily related to the required conversion for income tax
purposes from the cash basis method to the accrual basis method of accounting,
was recorded at the conversion date to reflect the Company's net taxable
temporary differences.

In addition, in accordance with Staff Accounting Bulletin Topic 4.B., the
Company has reclassified accumulated earnings generated prior to the date of
conversion to C corporation status from retained earnings to common stock and
additional paid in capital.

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- ----------------
1997 1998 1998 1999
---- ------ ----- -------
<S> <C> <C> <C> <C>
Current
U.S. Current..................................... $484 $1,549 $655 $1,194
International.................................... -- 27 -- 84
U.S. Deferred...................................... 262 (387) 11 (566)
---- ------ ---- ------
Total tax provision...................... $746 $1,189 $666 $ 712
==== ====== ==== ======
</TABLE>

The components of net deferred tax (assets) liabilities consisted of the
following at December 31:

<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ----- --------
<S> <C> <C> <C>
Deferred income tax (asset) liabilities:
Depreciation............................................. $ -- $ (41) $(163)
Accrued compensation and benefits........................ (64) (206) (265)
Deferred revenue......................................... -- (57) (452)
Allowance for doubtful accounts.......................... (3) (23) (38)
Cash to accrual basis conversion......................... 111 111 111
Other, net............................................... (6) (21) (25)
---- ----- -----
$ 38 $(237) $(832)
==== ===== =====
Deferred income taxes payable:
Cash to accrual basis conversion......................... $223 $ 111 $ 111
---- ----- -----
$223 $ 111 $ 111
==== ===== =====
</TABLE>

F-11
<PAGE> 76
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income, as a result of the following:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------- ------------
1997 1998 1998 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Taxes at the U.S. statutory rate....................... 34.0% 34.0% 34.0% 34.0%
Increase (decreases) in income taxes resulting from:
Conversion from an S Corporation to C Corporation.... 9.8 -- -- --
Shareholder responsibility for taxes associated with
S Corporation status.............................. (27.4) -- -- --
Research and development tax credit.................. (0.8) (6.2) (0.5) (8.4)
International operations............................. -- 4.5 -- 14.7
Other, net........................................... 0.8 1.8 1.9 4.8
----- ---- ---- ----
16.4% 34.1% 35.4% 45.1%
===== ==== ==== ====
</TABLE>

4. SHAREHOLDER NOTES PAYABLE

The Company was a Subchapter S Corporation for income tax purposes from
inception to October 15, 1997. Effective October 16, 1997, the Company converted
to a C Corporation. In connection with the conversion, the Company issued notes
payable totaling $2.0 million to the shareholders. Interest accrued at the
applicable federal long-term rate under Section 1274 of the Internal Revenue
Code of 1986, as amended. Although the notes were not due until December 2002,
or earlier if certain conditions were met, the Company paid in full the
shareholder notes payable and related accrued interest on January 30, 1998.

5. BANK LINE OF CREDIT AND NOTES PAYABLE

At December 31, 1998, the Company had available a $2.0 million secured
domestic revolving bank line of credit to support working capital, and a $500
domestic term loan to finance the purchase of software and equipment. During
1998, the Company used $473 of the domestic term loan to finance the purchase of
certain equipment. Interest accrues at the bank's prime for the line of credit
and the bank's prime plus 0.25% for the term loan. The facility fee is 0.50% per
annum or $10 for the line of credit and bank's prime plus 0.25% per annum, or $3
for the term loan. Restrictive terms of the line of credit require, among other
restrictions that the Company maintains a minimum quick ratio, tangible net
worth and debt service ratio.

Principal maturities of long-term obligations at December 31, 1998 are as
follows:

In July 1999, the Company renewed its bank line of credit, which provided
for a $5.0 million secured domestic revolving line of credit, $1.0 million term
loan for the purchase of equipment and a $4.0 term loan for leasehold
improvements. Interest accrues at the bank's prime rate for the revolving line
of credit, the bank's prime rate plus 0.25% for the equipment term loan and the
bank's prime rate plus 0.5% for the leasehold term loan. The facility fee is
$25. Restrictive terms of the lines require, among other requirements that the
Company maintains a minimum quick ratio, tangible net work and debt service
ratio. The line of credit is secured by substantially all of the assets of the
Company. As of July 31, the Company had $464 in standby letters of credit issued
and outstanding under the domestic revolving line of credit.

F-12
<PAGE> 77
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES

The Company leases its office space under non-cancelable operating leases
that expire at various dates through 2009. During the years ending December 31,
1996, 1997, 1998 and for the six months ended June 30, 1998 and 1999, rental
expense was $370, $482, $980, $400, and $927, respectively. Minimum rental
commitments under non-cancelable operating leases at June 30, 1999 are as
follows:

<TABLE>
<S> <C>
1999 (six months)........................................... $ 1,962
2000........................................................ 4,172
2001........................................................ 4,165
2002........................................................ 3,719
2003........................................................ 3,490
Thereafter.................................................. 20,305
-------
$37,813
=======
</TABLE>

As of June 30, 1999, commitments for construction of leasehold improvements in
1999 total $4.0 million.

In January 1999, the Company signed a ten-year lease for a new corporate
headquarters in Bellevue, Washington, which is expected to commence in October
1999. The minimum lease payments associated with this lease are included in the
commitments above. The Company has the option to extend the lease for four
additional periods of five years each. The Company must provide a $500 letter of
credit as security for the lease. If certain working capital requirements are
not met on the commencement date, the Company must provide an additional $250
letter of credit. The letter of credit may be reduced annually by specified
amounts by specified amounts in the lease agreement upon the Company's achieving
certain economic goals.

7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company has authorized 10.0 million shares of convertible preferred
stock. The Board of Directors has the authority to establish and define, in one
or more series, the price, rights, preferences and dividends of authorized but
unissued shares of preferred stock.

On January 30, 1998, the Company issued 8,333,333 shares of Series A
Convertible Preferred Stock (Preferred Stock) at $1.80 per share. Total
proceeds, net of offering costs, approximated $14.3 million. Concurrent with
this transaction, the Company repurchased 3,333,333 shares of the Company's
common stock from its founders for $6.0 million.

The rights and preferences of the preferred stock are as follows:

- In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series A preferred stock would be entitled to
receive the greater of: (i) an amount in cash equal to $1.80 per share
(adjusted for stock splits, stock dividends and the like) or (ii), cash
in an amount equal to the portion of the assets of the Company remaining
for distribution to shareholders which such shareholder would have
received if each share of Series A Preferred Stock held had been
converted into the number of shares of common stock issuable upon the
conversion of a share of Series A Preferred Stock immediately prior to
any liquidation, dissolution or winding up of the Company.

- The Preferred Stock is voluntarily convertible at any time at the option
of the holder into shares of the Company's common stock at a one-for-one
conversion. The Preferred Stock is automatically convertible upon closing
of a Qualified Public Offering, as defined in the agreement.

- Any time following the fifth anniversary of the closing, holders of the
Preferred Stock have the right to cause the Company to redeem up to 50%
of the Preferred Stock at the original purchase price. Any time following
the sixth anniversary of the closing, the holders shall have the right to
cause the Company to redeem up to 100% of the Preferred Stock at the
original purchase price.

F-13
<PAGE> 78
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- The Preferred Stock converts at a one-for-one conversion rate, and is
adjusted in certain circumstances to prevent dilution of the preferred
shareholder's ownership interest.

- The Preferred shareholders have the same voting rights and voting powers
as common shareholders.

COMMON STOCK RESERVED FOR FUTURE ISSUANCES

At June 30, 1999, the Company has reserved the following shares of common
stock for future issuance:

<TABLE>
<S> <C>
Convertible mandatorily redeemable preferred stock.......... 8,333,333
Employee stock purchase plan................................ 1,500,000
Stock Option Plan........................................... 3,441,462
----------
13,274,795
==========
</TABLE>

8. EMPLOYEE BENEFIT PLANS

STOCK OPTIONS

In May 1997, the Company adopted the 1997 Stock Option Plan (the Plan).
Under the Plan, the Board of Directors may grant nonqualified stock options at a
price determined by the Board, not to be less than 85% of the fair market value
of the common stock. Options have a term of up to 10 years and vest over a
schedule determined by the Board of Directors, generally four years. Incentive
stock options granted under this program may only be granted to employees of the
Company, have a term of up to 10 years, and shall be granted at a price equal to
the fair market value of the Company's stock. A summary of stock option activity
follows:

<TABLE>
<CAPTION>
PRICE PER SHARE
--------------------------------
NUMBER OF OPTIONS AVAILABLE FOR WEIGHTED AVERAGE
OUTSTANDING ISSUANCE EXERCISE PRICE RANGE
----------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996........... -- -- --
Authorized......................... -- 2,500,000 -- --
Granted............................ 1,750,100 (1,750,100) $0.08 $0.05 - $0.50
Exercised.......................... -- -- -- --
Canceled........................... (69,300) 69,300 $0.05 $0.05 - $0.50
--------- ---------- ----- -------------
Balance, December 31, 1997........... 1,680,800 819,200 $0.08 $0.05 - $0.50
Authorized......................... -- 1,125,000 -- --
Granted............................ 1,108,150 (1,108,150) $1.15 $1.00 - $1.80
Exercised.......................... (119,938) -- $0.05 $0.05 - $0.05
Canceled........................... (128,850) 128,850 $0.34 $0.05 - $0.50
--------- ---------- ----- -------------
Balance, December 31, 1998........... 2,540,162 964,900 $0.54 $0.05 - $0.50
Granted............................ 626,400 (626,400) $1.44 $1.44 - $1.44
Exercised.......................... (63,600) -- $0.53 $0.05 - $1.00
Canceled........................... (106,400) 106,400 $0.42 $0.05 - $1.80
--------- ---------- ----- -------------
Balance, June 30, 1999............... 2,996,562 444,900 $0.73 $0.05 - $1.80
========= ========== ===== =============
</TABLE>

In July 1999, the Company authorized an additional 2.0 million shares for
grants under the plan.

F-14
<PAGE> 79
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information concerning currently outstanding
and exercisable options at June 30, 1999:

<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------ EXERCISABLE
WEIGHTED AVERAGE -------------------------------------
REMAINING CONTRACTUAL WEIGHTED AVERAGE
NUMBER OF OPTIONS LIFE (YEARS) NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Rate of Exercise
Price:
$0.05.............. 1,303,012 8.0 578,378 $0.05
$0.50.............. 31,650 8.3 8,100 $0.50
$1.00.............. 827,500 8.3 177,571 $1.00
$1.44.............. 624,400 9.7 300,000 $1.44
$1.80.............. 210,000 9.1 -- $1.80
--------- --- --------- -----
2,996,562 8.5 1,064,049 $0.60
========= === ========= =====
</TABLE>

Had compensation expense been recognized on stock options issued based on
the fair value of the options at the date of the grant and recognized over the
vesting period, the Company's net income would have been reduced to the pro
forma amounts presented below.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Net income, as reported..................................... $3,806 $2,300
(12) (82)
------ ------
Pro forma net income........................................ $3,794 $2,218
====== ======
Pro forma basic earnings per share.......................... $ 0.18 $ 0.11
====== ======
</TABLE>

The fair value of options granted in 1997 and 1998 presented below has been
estimated at the date of grant using the Black-Scholes method with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------
1997 1998
------- -------
<S> <C> <C>
Dividend yield.............................................. 0% 0%
Expected life............................................... 5 years 5 years
Expected volatility......................................... 0% 0%
Risk-free interest rate..................................... 6.0% 5.5%
</TABLE>

The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years.

DEFERRED STOCK OPTION COMPENSATION

In connection with the grant of certain stock options to employees and
consultants during 1997 and the six months ended June 30, 1999, the Company
recorded deferred stock option compensation of $653 and $1.1 million,
respectively, representing the difference between the estimated fair value of
the common stock for accounting purposes and the option exercise price of such
options at the date of grant. Such amount is presented as a reduction of
shareholders' equity and amortized, in accordance with FASB Interpretation No.
28, on an accelerated basis over the vesting period of the applicable options
(generally four years). During the years ended December 31, 1997, 1998 and for
the six months ended June 30, 1998 and 1999, the Company expensed approximately
$106, $171, $83 and $294, respectively. The balance will be expensed over the
period the options vest. Compensation expense is decreased in the period of
forfeiture for any accrued but unvested compensation arising from the early
termination of an option holder's services.

F-15
<PAGE> 80
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999 EMPLOYEE STOCK PURCHASE PLAN

On July 21, 1999, the board of directors approved the adoption of the
Company's 1999 Employee Stock Purchase (the "1999 Purchase Plan"), subject to
shareholder approval. A total of 1.5 million shares of common stock has been
reserved for issuance under the 1999 Purchase Plan. The 1999 Purchase Plan
permits eligible employees to acquire shares of the Company's common stock
through periodic payroll deductions of up to 10% of base cash compensation. No
more than 3,334 shares may be purchased by each employee on any purchase date.
Each offering period will have a maximum duration of 6 months. The price at
which the common stock may be purchased is 85% of the lesser of the fair market
value of the Company's common stock on the first day of the applicable offering
period or on the last day of the respective purchase period. The initial
offering period will commence on the effectiveness of the initial public
offering and will end on May 14, 2001.

PROFIT SHARING AND DEFERRED COMPENSATION PLAN

The Company has a Profit Sharing and Deferred Compensation Plan (Profit
Sharing Plan) under Section 401(k) of the Internal Revenue Code of 1986, as
amended. Substantially all full-time employees are eligible to participate. The
Company, at its discretion, may elect to match the participants' contributions
to the Profit Sharing Plan. Participants will receive their share of the value
of their investments upon retirement or termination, subject to a vesting
schedule. The Company made no matching contributions to the Profit Sharing Plan
during 1998 or 1997. For the six months ended June 30, 1999, the Company made
matching contributions to the profit sharing plan of $228.

9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Issuance of notes payable for equipment............ $-- $-- $ 473 $ -- $ --
Cash paid for interest............................. -- 13 53 38 42
Cash paid for income taxes......................... -- -- 2,170 1,220 1,100
</TABLE>

All significant non-cash financing activities are listed elsewhere in the
financial statements or the notes thereto.

10. SIGNIFICANT CUSTOMERS

Sales to customers, which comprised at least 10% of revenue for the years
ended December 31 were as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Microsoft....................................... 5% 39% 79% 73% 87%
Hitachi......................................... 43% 18% 2% 5% --
NEC............................................. 48% 17% 3% 5% --
ARM............................................. -- 11% 1% -- --
</TABLE>

As of December 31, 1997, and 1998, and as of June 30, 1999, Microsoft
represented 73%, 84% and 72% of total accounts receivable, respectively.

In February 1999, the Company signed a two-year agreement with Microsoft
Corporation to continue to provide services to Microsoft which extend the
capabilities of the Windows CE operating system.

F-16
<PAGE> 81
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. GEOGRAPHIC AND SEGMENT INFORMATION

The Company follows the requirements of Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information. As defined in SFAS No. 131, the Company operates in two reportable
segments, Service and Products for the Microsoft Windows CE environment. The
following table summarizes total revenue and long-lived assets attributed to
significant countries:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1996 1997 1998 1999
------ ------- ------- ----------
<S> <C> <C> <C> <C>
Total revenue:
United States............................... $2,364 $10,065 $23,657 $18,272
Japan....................................... 1,802 2,632 955 271
Other Foreign............................... 20 1,708 -- --
------ ------- ------- -------
Total revenue*...................... $4,186 $14,405 $24,612 $18,543
====== ======= ======= =======
Long-lived assets:
United States............................... $ 1,378 $ 2,795 $ 3,461
Japan....................................... -- 239 219
Germany..................................... -- 205 186
------- ------- -------
Total long-lived assets............. $ 1,378 $ 3,239 $ 3,866
======= ======= =======
</TABLE>

- ---------------
* Revenue is attributed to countries based on location of customer invoiced.

BSQUARE has two operating segments, Services and Products. The Services
segment includes design, development and porting tools for the microprocessor
vendors and the original equipment manufacturer market. The Product segment
derives revenue from licensing of software products to original equipment
manufactures and distributing product through resellers. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies.

The Company does not track assets or operating expenses by operating
segments. Consequently, it is not practicable to show assets or operating
expenses by operating segments.

F-17
<PAGE> 82
BSQUARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators used
in computing basic and diluted earnings per share:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------
--------------------------- JUNE 30,
1996 1997 1998 1998 1999
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net income (numerator diluted),.............. $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
Less: Accretion of mandatorily redeemable
convertible preferred stock............. -- -- (110) (50) (58)
------- ------- ------- ------- -------
Net income available to common shareholders
(numerator basic).......................... $ 1,971 $ 3,806 $ 2,190 $ 1,167 $ 808
======= ======= ======= ======= =======

Shares (denominator basic):
Weighted average common shares
outstanding............................. 22,106 21,400 18,372 18,615 18,206
======= ======= ======= ======= =======
Basic earnings per share..................... $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ======= ======= ======= =======
Shares (denominator diluted):

Weighted average common shares
outstanding............................. 22,106 21,400 18,372 18,615 18,206
Mandatorily redeemable convertible
preferred
stock................................... -- -- 7,648 6,951 8,333
Common stock equivalents................... -- 381 1,455 1,484 2,076
------- ------- ------- ------- -------
Shares used in computation, (denominator
diluted)................................ 22,106 21,781 27,475 27,050 28,615
======= ======= ======= ======= =======
Diluted earnings per share................... $ 0.09 $ 0.17 $ 0.08 $ 0.04 $ 0.03
======= ======= ======= ======= =======
</TABLE>

13. STOCK PURCHASE AGREEMENT

On August 18, 1999, the Company entered into a stock purchase agreement to
sell 1,518,378 shares of common stock to a new investor for approximately $18.7
million. The investor has the right to require the Company to redeem the shares
at the original issuance price if the Company's initial public offering is not
declared effective by December 15, 1999.

F-18
<PAGE> 83

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and The Nasdaq National Market listing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 16,680
NASD Filing Fee............................................. 6,500
Nasdaq National Market Filing Fee........................... 17,500
Printing Costs.............................................. 200,000
Legal Fees and Expenses..................................... 300,000
Accounting Fees and Expenses................................ 100,000
Directors' and Officers' Insurance Policy Premium........... 100,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 49,320
--------
Total............................................. $800,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its directors,
officers, employees and agents against certain liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), provided they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation. The registrant's Amended and Restated Articles of Incorporation
(Exhibit 3.1 hereto) and Bylaws (Exhibit 3.2 hereto) require the registrant to
indemnify its officers and directors to the fullest extent permitted by
Washington law.

Section 23B.08.320 of the WBCA authorizes a corporation to limit or
eliminate a director's liability to the corporation or its shareholders for
monetary damages for breaches of fiduciary duties, other than for (1) acts or
omissions that involve intentional misconduct or a knowing violation of law, (2)
unlawful distributions to shareholders, or (3) transactions from which a
director derives an improper personal benefit. The registrant's Amended and
Restated Articles of Incorporation (Exhibit 3.1 hereto) contain provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.

In addition, the registrant has entered into separate indemnification
agreements with its directors and certain executive officers that could require
the registrant, among other things, to indemnify them against liabilities that
arise because of their status or service as directors or executive officers and
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.

The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification between the underwriters and the registrant from and against
certain liabilities arising in connection with the offering which is the subject
of this registration statement.

II-1
<PAGE> 84

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:

On March 17, 1997, the registrant issued an aggregate of 500,000 shares of
its common stock to two of its employees in exchange for services to be rendered
to the registrant. These issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act.

On January 30, 1998, the registrant sold 8,333,333 shares of the its Series
A redeemable convertible preferred stock at a price of $1.80 per share to 11
accredited investors in a private transaction for an aggregate offering price of
approximately $15.0 million. This issuance was exempt from registration pursuant
to Rule 506 of Regulation D under Section 4(2) of the Securities Act.

From June 1998 to August 1999, 224,726 shares of the registrant's common
stock were issued to 58 individuals upon the exercise of stock options granted
pursuant to the registrant's amended and restated stock option plan at a
weighted average exercise price of $0.29 per share. These issuances were exempt
from registration pursuant to Rule 701 under the Securities Act.

On August 18, 1999, the registrant entered into an agreement to sell
1,518,378 shares of its common stock at a price of $12.31 per share to a
qualified institutional buyer in a private transaction for an aggregate offering
price of approximately $18.7 million. This issuance will be exempt from
registration pursuant to Section 4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1 Articles of Incorporation and all amendments thereto.
3.1(a) Form of Amended and Restated Articles of Incorporation.
3.2 Bylaws and all amendments thereto.
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock.
5.1+ Opinion of Summit Law Group, PLLC regarding legality of
shares.
10.1 Amended and Restated Stock Option Plan.
10.2 Employee Stock Purchase Plan.
10.3 401(k) Plan.
10.4 Form of Indemnification Agreement.
10.5 Loan and Security Agreement and between Imperial Bank and
BSQUARE Corporation dated February 11, 1998.
10.5(a)+ Amended and Restated Loan Agreement between Imperial Bank
and BSQUARE Corporation
10.6 One Bellevue Center Office Lease between EOP Northwest
Properties, LLC and BSQUARE Corporation dated December 14,
1998.
10.7 Mercer Island Partners Associates Building Lease Agreement
between Mercer Island Partners Associates, LLC and BSQUARE
Corporation dated January 30, 1998.
10.8 Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated November 15, 1996 (for
Suite 205).
10.9 Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
310).
10.10 Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
100).
10.11 Sunset North Corporate Campus Lease Agreement between WRC
Sunset North and BSQUARE Corporation.
</TABLE>

II-2
<PAGE> 85

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.12* Microsoft Software For Dedicated Systems Distributor
Agreement between Microsoft Corporation and BSQUARE
Corporation dated November 1, 1997, as amended by Amendment
No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and
Amendment No. 5.
10.13* Master Development & License Agreement between Microsoft
Corporation and BSQUARE Corporation dated effective as of
October 1, 1998.
10.14 Stock Purchase and Shareholders Agreement dated as of
January 30, 1998.
10.15++ Stock Purchase Agreement dated August 18, 1999 by and
between BSQUARE Corporation and Vulcan Ventures
Incorporated.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (See Page II-4).
27.1 Financial Data Schedule.
</TABLE>

- ---------------

* Confidential Treatment Requested

+ To be filed by amendment

++ Filed herewith

(b) Financial Statement Schedules.

All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding), is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-3
<PAGE> 86

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bellevue, State of Washington, on the 19th day of August, 1999.

BSQUARE CORPORATION

By: /s/ BRIAN V. TURNER

------------------------------------

Brian V. Turner

Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities indicated below on the 19th day of August, 1999.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer and President (Principal Executive
William T. Baxter Officer)

/s/ BRIAN V. TURNER Chief Financial Officer (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
Brian V. Turner

* Director
- -----------------------------------------------------
Albert T. Dosser

* Director
- -----------------------------------------------------
Peter R. Gregory

* Director
- -----------------------------------------------------
Jeffrey T. Chambers

* Director
- -----------------------------------------------------
Scot E. Land

* Director
- -----------------------------------------------------
William Larson

*By: /s/ BRIAN V. TURNER
------------------------------------------------
As Attorney-In-Fact
</TABLE>

II-4
<PAGE> 87

EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1 Articles of Incorporation and all amendments thereto.
3.1(a) Form of Amended and Restated Articles of Incorporation
3.2 Bylaws and all amendments thereto.
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock.
5.1+ Opinion of Summit Law Group, PLLC regarding legality of
shares.
10.1 Amended and Restated Stock Option Plan.
10.2 Employee Stock Purchase Plan.
10.3 401(k) Plan.
10.4 Form of Indemnification Agreement.
10.5 Loan and Security Agreement and between Imperial Bank and
BSQUARE Corporation dated February 11, 1998.
10.5(a)+ Amended and Restated Loan Agreement between Imperial Bank
and BSQUARE Corporation
10.6 One Bellevue Center Office Lease between EOP Northwest
Properties, LLC. and BSQUARE Corporation dated December 14,
1998.
10.7 Mercer Island Partners Associates Building Lease Agreement
between Mercer Island Partners Associates, LLC and BSQUARE
Corporation dated January 30, 1998.
10.8 Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated November 15, 1996 (for
Suite 205).
10.9 Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
310).
10.10 Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
100).
10.11 Sunset North Corporate Campus Lease Agreement between WRC
Sunset North and BSQUARE Corporation
10.12* Microsoft Software For Dedicated Systems Distributor
Agreement between Microsoft Corporation and BSQUARE
Corporation dated November 1, 1997, as amended by Amendment
No.1, Amendment No.2, Amendment No. 3, Amendment No. 4 and
Amendment No. 5.
10.13* Master Development & License Agreement between Microsoft
Corporation and BSQUARE Corporation dated effective as of
October 1, 1998.
10.14 Stock Purchase and Shareholders Agreement dated as of
January 30, 1998.
10.15++ Stock Purchase Agreement dated August 18, 1999 by and
between BSQUARE Corporation and Vulcan Ventures
Incorporated.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1 Power of Attorney (See Page II-4).
27.1 Financial Data Schedule.
</TABLE>

- ---------------
* Confidential Treatment Requested

+ To be filed by amendment

++ Filed Herewith

<PAGE> 1
EXHIBIT 10.15

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this
18th day of August, 1999, by and between BSQUARE Corporation, a Washington
corporation (the "Company"), and Vulcan Ventures Incorporated, a Washington
corporation ("Investor").

WHEREAS, the Company desires to sell shares of its common stock, no par
value ("Common Stock"), to Investor and Investor desires to purchase such
shares;

NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:

SECTION 1. PURCHASE AND SALE OF SHARES

1.1 Sale and Purchase. Upon the terms and subject to the conditions
contained herein, and in reliance on the representations and warranties set
forth in Sections 2 and 3 below, at the Closing (as defined below) Investor
shall purchase from the Company, and the Company shall issue and sell to
Investor, One Million Five Hundred Eighteen Thousand Three Hundred Seventy-Eight
(1,518,378) shares of Common Stock (the "Shares") at a purchase price of
$12.31728084 per share for an aggregate purchase price of $18,702,288.25 (the
"Purchase Price").

1.2 Closing. The closing of the purchase and sale of the Shares (the
"Closing") shall take place at 3:00 p.m. on the fifth business day following the
termination or expiration of any applicable waiting periods under the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended (the "HSR
Act") (the "Closing Date").

SECTION 2. REPRESENTATIONS AND WARRANTIES OF COMPANY

In order to induce the Investor to enter into this Agreement, the
Company represents and warrants to Investor:

2.1 Organization and Corporate Power. The Company is a corporation duly
organized and validly existing under the laws of the State of Washington. The
Company has all required corporate power and authority to carry on its business
as presently conducted and as described in the Registration Statement (as
defined below), to enter into and perform this Agreement and each agreement,
document and instrument to be executed and delivered by or on behalf of the
Company pursuant to or as contemplated by this Agreement and to carry out the
transactions contemplated hereby and thereby, including the issuance and sale of
the Shares.

1
<PAGE> 2

2.2 Authorization and Non-Contravention. The execution, delivery and
performance by the Company of this Agreement and each agreement, document and
instrument to be executed and delivered by or on behalf of the Company pursuant
to or as contemplated by this Agreement and the issuance and sale of the Shares,
have been duly authorized by all necessary corporate action of the Company. This
Agreement and each agreement, document and instrument to be executed and
delivered by or on behalf of the Company pursuant to or as contemplated by this
Agreement constitutes a valid and binding obligation of the Company, enforceable
in accordance with its terms. The execution and delivery by the Company of this
Agreement and each agreement, document and instrument to be executed and
delivered by or on behalf of the Company pursuant to or as contemplated by this
Agreement and the performance by the Company of the transactions contemplated
hereby and thereby, including the issuance and delivery of the Shares, do not
and will not: (A) violate, conflict with or result in a default (whether after
the giving of notice, lapse of time or both) under any material contract or
obligation to which the Company is a party or by which it or its assets are
bound and which have not been waived, or any provision of the articles of
incorporation or bylaws of the Company; (B) to the Company's knowledge, violate
or result in a violation of, or constitute a default under, any provision of any
material law, regulation or rule, or any order of, or any restriction imposed
by, any court or governmental agency applicable to the Company; (C) require from
the Company any notice to, declaration or filing with, or consent or approval of
any governmental authority or third party other than as may be required (x) to
secure an exemption from qualification of the offer and sale of the Shares under
the Securities Act of 1933, as amended (the "Securities Act"), and applicable
state securities and blue sky laws, or (y) under the HSR Act; or (D) accelerate
any obligation under, or give rise to a right of termination of, any material
agreement, permit, license or authorization to which the Company is a party or
by which the Company is bound.

2.3 Capitalization. As of July 31, 1999, the authorized capital stock
of the Company consisted of 50,000,000 shares of Common Stock and 10,000,000
shares of preferred stock, of which 18,266,399 shares of Common Stock and
8,333,333 shares of Series A Preferred Stock were outstanding. The Company has
reserved a total of 5,625,000 shares of Common Stock for issuance under its
stock option plan. As of July 31, 1999, there were outstanding options to
purchase 2,995,749 shares of Common Stock and 224,726 shares had been issued
upon exercise of options granted under the plan. The Company has authorized the
issuance of 1,500,000 shares of Common Stock under an Employee Stock Purchase
Plan that will be implemented upon effectiveness of the Registration Statement
referred to in Section 2.4 below. As of the Closing, and after giving effect to
the transactions contemplated hereby, all of the outstanding shares of capital
stock of the Company (including, without limitation, the Shares) will have been
validly issued, fully paid and non-assessable.

2.4 No Material Misstatements. The written materials provided to
Investor by the Company in a disclosure schedule on the date hereof do not, as
of the date hereof, contain any untrue statement of a material fact or omit to
state a material fact required to be stated or necessary in order to make the
statements, in light of the circumstances under which they were made, not
misleading.

2.5 No Other Representations. Other than as set forth in this Section
2, the Company makes no other representations and warranties to Investor,
written or oral, including without limitation, any representation with respect
to the valuation of the Company.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF INVESTOR

2
<PAGE> 3

In order to induce the Company to enter into this Agreement, Investor
represents and warrants to the Company:

3.1 Suitability of Investment. Investor represents to the Company that
it: (i) is a "qualified institutional buyer" as such term is defined in Rule
144A promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), (ii) has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the investment
contemplated by this Agreement and making an informed investment decision with
respect thereto; (iii) is able to bear the economic risk of an investment in the
Shares and can afford to sustain a substantial loss on such investment; (iv) has
made an independent investigation of the Company and relied upon its own due
diligence, valuation analysis and other analyses in determining to purchase the
Shares; and (v) is purchasing the Shares for its own account, for investment
only and not with a view to, or any present intention of, effecting a
distribution of such securities or any part thereof except pursuant to a
registration or an available exemption under applicable law.

3.2. Shares Not Registered. Investor acknowledges that the Shares have
not been registered under the Securities Act or the securities laws of any state
or other jurisdiction and cannot be disposed of unless the Shares are
subsequently registered under the Securities Act and any applicable state laws
or an exemption from such registration is available. Investor understands that
there is no public market for the Shares and that it must bear the economic risk
of investment in the Company for an indefinite period of time.

3.3. Authority to Purchase. Investor has the full right, authority and
power under its governing charter documents to enter into this Agreement and
each agreement, document and instrument to be executed and delivered by or on
behalf of Investor pursuant to or as contemplated by this Agreement and to carry
out the transactions contemplated hereby and thereby, and the execution,
delivery and performance by Investor of this Agreement and each such other
agreement, document and instrument have been duly authorized by all necessary
action under Investor's governing charter documents. This Agreement and each
agreement, document and instrument executed and delivered by Investor pursuant
to or as contemplated by this Agreement constitute, or when executed and
delivered will constitute, valid and binding obligations of Investor enforceable
in accordance with their respective terms. The execution, delivery and
performance by Investor of this Agreement and each such other agreement,
document and instrument, and the performance of the transactions contemplated
hereby and thereby, do not and will not: (i) to Investor's knowledge, violate,
conflict with or result in a default (whether after the giving of notice, lapse
of time, or both) under any material contract or obligation to which Investor is
a party or by which it or its assets are bound; (ii) violate or result in a
violation of, or constitute a default under, any provision of any material law,
regulation or rule, or any order of, or any restriction imposed by, any court or
other governmental agency applicable to Investor, or (iii) require from Investor
any notice to, declaration or filing with, or consent or approval of any
governmental authority or other third party, other than as may be required under
the HSR Act.

3.4. Legend. Investor acknowledges and agrees that the following legend
shall be placed on each certificate evidencing the Shares:

3
<PAGE> 4

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONS
AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT
TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES AND
BLUE SKY LAWS, PROVIDED THAT AN OPINION OF COUNSEL TO SUCH EFFECT IS
PROVIDED TO THE COMPANY IN CONNECTION THEREWITH.

SECTION 4. CONDITIONS OF PURCHASE

Investor's obligation to purchase and pay for the Shares is subject to
the satisfaction at or prior to the Closing Date of the following conditions:

4.1 Representations and Warranties; Performance of Obligations. The
representations and warranties of the Company made in Section 2 hereof shall be
true and correct as of the Closing Date with the same force and effect as if
they had been made as of the Closing Date, and the Company shall have performed
all obligations and conditions herein required to be performed or observed by it
on or prior to the Closing.

4.2 Opinion of Counsel. Investor shall have received from Summit Law
Group, PLLC an opinion addressed to it, dated as of the Closing Date, in a form
agreed to by the parties.

4.3 HSR Act. The waiting period (and any extension thereof) under the
HSR Act with respect to the transaction shall have been terminated or expired.

4.4 Registration Rights Agreement. A Registration Rights Agreement in
substantially the form attached as Exhibit A hereto shall have been executed and
delivered by the parties hereto.

SECTION 5. COVENANTS OF COMPANY

5.1 Redemption Right.

4
<PAGE> 5

(a) If a registration statement registering shares of the Company's
common stock for sale in an initial public offering (an "IPO") and pursuant to
which the Company's Series A Preferred Stock is converted to Common Stock, is
not declared effective by the Securities and Exchange Commission on or before
December 15, 1999, then beginning on December 15, 1999 and ending on December
29,1999 (the "Redemption Period") Investor may demand that up to 100% of the
Shares be redeemed by the Company. Such redemption right shall be exercised by
giving written notice (the "Notice") to the Company during the Redemption
Period, stating in such Notice the number of Shares to be redeemed and
delivering the certificates for the Shares to be so redeemed to the Company.
Upon its receipt of the Notice and share certificates, the Company shall have
until the close of business on January 12, 2000, to redeem all Shares as to
which it received Notice for redemption of in accordance with the foregoing to
the extent that the Company's shareholders' equity is sufficient for such
purpose under Washington law. Any redemption hereunder shall be at a redemption
price equal to the per share price paid by Investor (adjusted appropriately for
stock splits, stock dividends and the like) (the "Redemption Price").

(b) This redemption right shall terminate in all cases, immediately
upon the effectiveness of a registration statement in an IPO on or before
December 15, 1999 and pursuant to which the Company's Series A Preferred Stock
is converted to Common Stock.

(c) If the Company does not, under Washington law, have sufficient
shareholders' equity to redeem all the Shares for which redemption is requested,
then it shall redeem all remaining Shares as soon as it may legally do so. In
the event that the Company fails to timely redeem Shares for which redemption is
requested, then the Redemption Price for such Shares shall bear interest at a
per annum rate equal to the Prime Rate (as reported by the Wall Street Journal
from time to time) plus five (5) percent.

(d) The Company agrees and covenants that it shall set up a
separate account for the funds to be received from Investor in payment of the
Purchase Price and agrees and covenants that it will not use any of such funds
for any purposes whatsoever prior to the closing of an IPO without the express
written permission of Investor.

5.2 Antitrust Notification. The Company shall within ten business days
of the date hereof file with the United States Federal Trade Commission and the
United States Department of Justice the notification and report form required
for the transactions contemplated hereby and any supplemental or additional
information which may reasonably be requested in connection therewith pursuant
to the HSR Act and will comply in all material respects with the requirements of
the HSR Act.

5.3 Board Representation. At Investor's request, the Company agrees
that it shall use its best efforts to cause David Moore, or another
representative of Investor reasonably acceptable to Company, to be elected to
the Company's board of directors.

5
<PAGE> 6

SECTION 6. COVENANTS OF INVESTOR

6.1 Board Representation. As promptly as practicable after an IPO,
Investor shall make available David Moore, or another representative reasonably
acceptable to the Company, to serve on the Company's Board of Directors.

6.2 Lock-up Agreement. Investor covenants and agrees that in connection
with an IPO it will execute and deliver to the underwriters selected by the
Company a "lock-up" agreement in such form as is requested of other Company
shareholders and pursuant to which Investor will agree that for a period not to
exceed 180 days it will not directly or indirectly offer, transfer, donate,
sell, assign, pledge, hypothecate or otherwise dispose of all or any portion of
the Shares.

6.3 Antitrust Notification. Investor will use its best efforts within
ten business days of the date hereof file with the United States Federal Trade
Commission and the United States Department of Justice the notification and
report form required for the transactions contemplated hereby and any
supplemental or additional information which may reasonably be requested in
connection therewith pursuant to the HSR Act and will comply in all material
respects with the requirements of the HSR Act.

6.4 Strategic Relationships. Investor shall exercise reasonably
commercial efforts to facilitate strategic relationships and customer
introductions for the Company within the set-top box market segment.

SECTION 7. GENERAL

7.1 Governing Law. This Agreement shall be deemed to be a contract made
under, and shall be construed in accordance with, the laws of the State of
Washington, without giving effect to conflict of laws principles thereof.

7.2 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original, but such counterparts shall together constitute but one
and the same instrument.

7.3 Notices and Demands. Any notice or demand which is required or
provided to be given under this Agreement shall be deemed to have been
sufficiently given and received for all purposes when delivered by hand,
facsimile, or two (2) days after being sent by overnight delivery providing
receipt of delivery, to the following addresses:

if to the Company: BSQUARE Corporation
3633 136th Place SE, Suite 100
Bellevue, Washington 98006
Attn: President
Fax: (206) 519-5994

6
<PAGE> 7

copy to: Summit Law Group, P.L.L.C.
1505 Westlake Avenue North, Suite 300
Seattle, Washington 98109
Attn: Michael J. Erickson
Fax: (206) 281-9882

if to Investor: Vulcan Ventures Incorporated
110 110th Avenue N.E., Suite 550
Bellevue, Washington 98004-5862
Attn: William D. Savoy
Fax: 425-453-1985

copy to: Cooley Godward LLP
5200 Carillon Point
Kirkland, WA 98033
Attn: Christopher Wright
Fax: 425-893-7777

7.4 Integration. This Agreement, including the exhibits, documents and
instruments referred to herein or therein, constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.

<PAGE> 8

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.

COMPANY:

BSQUARE CORPORATION

By: /s/ WILLIAM T. BAXTER
----------------------------------
Name:
Title:

INVESTOR:

VULCAN VENTURES INCORPORATED.

By: /s/ WILLIAM D. SAVOY
----------------------------------
Name: William D. Savoy
Title: Vice President

<PAGE> 9

EXHIBIT A

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
this 18th day of August, 1999, by and between BSQUARE Corporation, a Washington
corporation (the "Company"), and Vulcan Ventures Incorporated, a Washington
corporation ("Holder").

WHEREAS, the Company has entered into a Stock Purchase Agreement with
Holder dated as of the date hereof for the issuance and sale to Holder of
1,518,378 shares of Company Common Stock (the "Shares"); and

WHEREAS, in connection with the purchase of the Shares, the Company has
agreed to offer Holder certain rights with respect to the registration of such
Shares under the Securities Act of 1933, as amended (the "Securities Act").

NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:

1. Piggy-Back Registration.

(a) If at any time or times after the Company has had a registration
statement with respect to an initial public offering of shares of its Common
Stock declared effective by the Securities and Exchange Commission (the "SEC"),
the Company shall seek to register any shares of its Common Stock under the
Securities Act, whether in connection with a public offering of securities by
the Company (a "primary offering"), a public offering of securities by
shareholders of the Company (a "secondary offering"), or both, the Company will
promptly, but in any event at least 30 days prior to the filing of the
applicable registration statement, give written notice thereof to Holder holding
Registrable Securities (as such term is hereinafter defined). If, prior to the
filing of the applicable registration statement, Holder requests in a writing
delivered to the Company the inclusion of some or all of the Registrable
Securities owned by it in such registration, the Company will use its best
efforts to effect the registration under the Securities Act of all Registrable
Securities requested to be so included.

(b) In the case of the registration of shares of capital stock by the
Company in connection with any underwritten public offering, if the
underwriter(s) determines that marketing factors require a limitation on the
number of Registrable Securities to be offered, the Company shall not be
required to register Registrable Securities of Holder in excess of the amount,
if any, of shares of the capital stock which the principal underwriter of such
underwritten offering shall reasonably and in good faith agree to include in
such offering in excess of any amount to be registered for the Company. If any
limitation of the number of shares ("secondary shares") to be sold by selling
shareholders, including Holder, is required, then the number of secondary shares
that may be included in the registration statement shall be allocated among all
selling shareholders

1
<PAGE> 10

who have been granted registration rights by the Company in proportion, as
nearly as practicable, to the respective holdings of all such selling
shareholders.

(c) The provisions of this Section 1 will not apply to a registration
effected solely to implement (i) an employee benefit plan or similar
registration on Form S-8, or (ii) a merger or similar registration on Form S-4,
or (iii) a transaction to which Rule 145 or any other similar rule of the SEC
under the Securities Act is applicable.

2. Registrable Securities. For the purposes of this Agreement, the
term "Registrable Securities" shall mean any shares of Common Stock held by
Holder, including any shares issued by way of a stock dividend or stock split or
in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization, and provided, further, that any Common
Stock that is sold in a registered sale pursuant to an effective registration
statement under the Securities Act or pursuant to Rule 144 thereunder, or that
may be sold without restriction as to volume or otherwise pursuant to Rule 144
under the Securities Act (as confirmed by an unqualified opinion of counsel to
the Company), shall not be deemed Registrable Securities.

3. Further Obligations of the Company. Whenever the Company is
required hereunder to register any Registrable Securities, it agrees that it
shall also do the following:

(a) Pay all expenses of such registrations and offerings (exclusive
of underwriting discounts and commissions);

(b) Furnish to Holder such copies of each preliminary and final
prospectus and such other documents as Holder may reasonably request to
facilitate the public offering of its Registrable Securities;

(c) Use its best efforts (with due regard to management of the
ongoing business of the Company and the allocation of managerial resources) to
register or qualify the securities covered by said registration statement under
the securities or "blue sky" laws of such jurisdictions as Holder may reasonably
request, provided that the Company shall not be required to register or qualify
the securities in any jurisdictions which require it to qualify to do business
therein;

(d) Immediately notify Holder, at any time when a prospectus
relating to Holder's Registrable Securities is required to be delivered under
the Securities Act, of the happening of any event as a result of which such
registration statement or such prospectus contains an untrue statement of a
material fact or omits any material fact necessary to make the statements
therein not misleading, and, at the request of Holder, promptly prepare an
amendment to such registration statement or supplement to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading;

2
<PAGE> 11

(e) Cause all such Registrable Securities to be listed on each
securities exchange or quotation system on which similar securities issued by
the Company are then listed or quoted;

(f) Otherwise use its best efforts to comply with the securities
laws of the United States and other applicable jurisdictions and all applicable
rules and regulations of the SEC and comparable governmental agencies in other
applicable jurisdictions and make generally available to its holders, in each
case as soon as practicable, but not later than 45 days after the close of the
period covered thereby, an earnings statement of the Company which will satisfy
the provisions of Section 11(a) of the Securities Act; and

(g) Otherwise cooperate with the underwriter or underwriters, the
SEC and other regulatory agencies and take all actions and execute and deliver
or cause to be executed and delivered all documents necessary to effect the
registration of any Registrable Securities under this Agreement.

4. Indemnification; Contribution.

(a) Incident to any registration statement filed hereunder, the
Company will indemnify and hold harmless Holder, including its partners,
directors, officers, employees and agents, and each person who controls any of
them (a "Controlling Person") within the meaning of Section 15 of the Securities
Act or Section 20 of the Securities Exchange Act of 1934,a s amended (the
"Exchange Act"), from and against any and all losses, claims, damages, expenses
and liabilities, joint or several (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted, as the same are incurred), to
which they, or any of them, may become subject under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities arise
out of or are based on (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement (including any related
preliminary or definitive prospectus, or any amendment or supplement to such
registration statement or prospectus), (ii) any omission or alleged omission to
state in such document a material fact required to be stated in it or necessary
to make the statements in it not misleading, or (iii) any violation by the
Company of the Securities Act, any state securities or "blue sky" laws or any
rule or regulation thereunder in connection with such registration; provided,
however, that the Company will not be liable to the extent that such loss,
claim, damage, expense or liability arises from and is based on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information furnished in writing to the Company by
such Holder or Controlling Person expressly for use in such registration
statement. With respect to such untrue statement or omission or alleged untrue
statement or omission in the information furnished in writing to the Company by
Holder or a Controlling Person expressly for use in such registration statement,
Holder will indemnify and hold harmless each underwriter, the Company (including
its directors, officers, employees and agents), each

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other holder of other registration rights who registered securities, including
its partners (including partners of partners and shareholders of such partners),
directors, officers, employees and agents of any of them, and each person who
controls any of them within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, expenses and liabilities, joint or several, to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise to the
same extent provided in the immediately preceding sentence. In no event,
however, shall Holder be liable for indemnification under this Section 4(a) for
an amount in excess of the proceeds (net of the applicable underwriting
discount) received by Holder from its sale of Registrable Securities under such
registration statement.

(b) If the indemnification provided for in Section 4(a) above for
any reason is held by a court of competent jurisdiction to be unavailable to an
indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
4, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, Holder and
the underwriters from the offering of the Registrable Securities, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company,
Holder and the underwriters in connection with the statements or omissions which
resulted in such losses, claims, damages, expenses or liabilities, as well as
any other relevant equitable considerations. The relative benefits received by
the Company, the Holder and the underwriters shall be deemed to be in the same
respective proportions that the net proceeds from the offering (before deducting
expenses) received by the Company and Holder and the underwriting discount
received by the underwriters, in each case as set forth in the table on the
cover page of the applicable prospectus, bear to the aggregate public offering
price of the Registrable Securities. The relative fault of the Company, Holder
and the underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, Holder or the underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

The Company, Holder, and the underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 4(b) were
determined by pro rata or per capita allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. In no event, however, shall Holder be
required to contribute any amount under this Section 4(b) in excess of the
proceeds (net of the applicable underwriting discount) received by Holder from
its sale of Registrable Securities under such registration statement. No person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f)

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of the Securities Act) shall be entitled to contribution from any person who was
not found guilty of such fraudulent misrepresentation.

(c) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in this Section 4 shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim, payable as the same are incurred. The indemnification and
contribution provided for in this Section 4 will remain in full force and effect
regardless of any investigation made by or on behalf of the indemnified parties
or any officer, director, employee, agent or controlling person of the
indemnified parties.

(d) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in an underwriting
agreement entered into in connection with an underwritten public offering are in
conflict with the foregoing provisions, the provisions of such underwriting
agreement shall control.

5. Rule 144 and Rule 144A Requirements. In the event that the Company
becomes subject to Section 13 or Section 15(d) of the Exchange Act, the Company
shall use its best efforts to take all action as may be required as a condition
to the availability of Rule 144 or Rule 144A under the Securities Act (or any
successor or similar exemptive rules hereafter in effect). The Company shall
furnish to Holder, within 15 days of a written request, a written statement
executed by the Company as to the steps it has taken to comply with the current
public information requirements of Rule 144 or Rule 144A or such successor
rules.

6. "Market Stand-Off" Agreement. In connection with any underwritten
public offering by the Company, Holder, if requested in good faith by the
Company and the managing underwriter of the Company's securities and all
executive officers and directors of the Company have entered into similar
agreements, shall agree not to sell or otherwise transfer or dispose of any
securities of the Company held by them (except for any securities sold pursuant
to such registration statement) for a period following the effective date of the
applicable registration statement that in no event shall exceed 180 days. In
order to enforce the foregoing, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of Holder (and the
securities of every other person subject to the foregoing restriction) until the
end of such period.

7. General.

(a) This Agreement shall be deemed to be a contract made under, and
shall be construed in accordance with, the laws of the State of Washington,
without giving effect to conflict of laws principles thereof.

(b) This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original, but such counterparts shall together constitute but one and the
same instrument.

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(c) Any notice or demand which is required or provided to be given
under this Agreement shall be deemed to have been sufficiently given and
received for all purposes when delivered by hand, facsimile, or two (2) days
after being sent by overnight delivery providing receipt of delivery, to the
following addresses:

if to the Company: BSQUARE Corporation
3633 136th Place SE, Suite 100
Bellevue, Washington 98006
Attn: President
Fax: (206) 519-5994

copy to: Summit Law Group P.L.L.C.
1505 Westlake Avenue North, Suite 300
Seattle, Washington 98109
Attn: Michael J. Erickson, Esq.
Fax: (206) 281-9882

if to Holder: Vulcan Ventures Incorporated
110 110th Avenue NE, Suite 550
Bellevue, Washington 98004-5862
Attn: William D. Savoy
Fax: 425-453-1985

copy to: Cooley Godward LLP
5200 Carillon Point
Kirkland, WA 98033
Attn: Christopher Wright
Fax: 425-893-7777

(d) This Agreement constitutes the entire agreement, and supersedes all
other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.

BSQUARE CORPORATION

By:
Name:
Title:

VULCAN VENTURES INCORPORATED

By:
Name: William D. Savoy
Title: Vice President