##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
 Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission file number
    000-27687
 BSQUARE CORPORATION
 (Exact name of registrant as
    specified in its charter)
  Washington(State or other jurisdiction
    of
    incorporation or organization)

91-1650880(I.R.S. Employer
    Identification No.)   110
    110th
    Avenue NE, Suite 200, Bellevue, Washington 98004
 (Address of principal executive
    offices)
  (425) 519-5900
 (Registrants telephone
    number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, no par value

The NASDAQ Stock Market LLC (NASDAQ Global Market)   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large
    accelerated
    filer  o
    Accelerated
    filer  o
    Non-accelerated
    filer  o
    Smaller
    reporting company
    þ (Do
    not check if a smaller reporting company)
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





BSQUARE
    CORPORATION
  FORM 10-K
 TABLE OF
    CONTENTS
   
 PagePART IItem 1


Business


3Item 1A


Risk Factors


14Item 2


Properties


24Item 3


Legal Proceedings


24Item 4


Submission of Matters to a Vote of Security
    Holders


25PART IIItem 5


Market for Registrants Common Equity and
    Related Stockholder Matters


26Item 6


Selected Financial Data


27Item 7


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


28Item 8


Financial Statements and Supplementary Data


36Item 9


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


59Item 9A(T)


Controls and Procedures


59PART IIIItem 10


Directors, Executive Officers and Corporate
    Governance


60Item 11


Executive Compensation


60Item 12


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


60Item 13


Certain Relationships and Related Transactions,
    and Director Independence


60Item 14


Principal Accountant Fees and Services


60PART IVItem 15


Exhibits and Financial Statement Schedules


61Signatures


62EXHIBIT 10.1EXHIBIT 10.1(F)EXHIBIT 10.1(G)EXHIBIT 10.26EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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PART I  Item 1.
    Business.  FORWARD-LOOKING
    STATEMENTS
  Form 10-K Form 10-K
  
    The development of the smart device market and our ability to
    address its opportunities and challenges;
    The adoption of Windows CE, Windows XP Embedded, Pocket PC and
    Smartphone as operating systems of choice for many smart device
    hardware and software applications vendors;
    Our business plan and our strategy for implementing our plan;
    Our ability to expand our strategic relationships with hardware
    and software vendors;
    Our ability to maintain our relationship with Microsoft
    Corporation (Microsoft);
    Our ability to address challenges and opportunities in the
    international marketplace;
    Our ability to develop our technology and expand our proprietary
    software and service offerings; and
    Our anticipated working capital needs and capital expenditure
    requirements, including our ability to meet our anticipated cash
    needs.   3




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BUSINESS
  Overview
  Form 10-K, ® ® tm
    (425) 519-5900.
  Industry
    Background
          
    Growing demand by business professionals and high-end consumers
    for converged mobile devices that combine telephony, data (such
    as email and internet browsing), multimedia and location
    awareness is driving new sophisticated smart device designs by
    our OEM and ODM customers;
    The ubiquity of cellular and WLAN wireless networks is driving
    rapid adoption of smart devices that leverage broadband and
    high-speed wireless data networks, including Internet Protocol
    (IP) set-top boxes, 4




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voice-over-IP (VoIP) phones, residential gateways, and home
    networking solutions linking smart devices with PCs;  
    The baseline expectation for device functionality continues to
    grow. Users of smart devices expect to be able to access email
    and the Internet and synchronize their devices with corporate
    data sources. Microsoft embedded operating systems are already
    well positioned to leverage this trend with built-in
    synchronization capabilities, access to Exchange email servers,
    and similar functionality;
    Security is becoming an increasingly important concern as
    devices are able to access networks and store sensitive
    information locally such as email, spreadsheets and other
    documents. Users are demanding that these types of information
    be protected in the same ways they are protected on the desktop;
    Higher bandwidth networks coupled with the larger displays and
    increased processing power found on new devices means that more
    multi-media content will be available to devices 
    increasing demand for digital rights management, content
    management and related technologies; and
    Increases in device complexity driven by rising user
    expectations of functionality, complex device interactions with
    wireless networks and updated versions of the Microsoft
    operating systems, all of which are driving OEMs and ODMs to
    continually refresh and update their device designs.  Software
    and Service Solutions for Smart Device Makers
    
    A large North American OEM continued to engage us to assist in
    the development and testing of mobile office phones;
    Palm, Inc. continued to engage us to provide engineering
    services for its series of Windows Mobile Smartphone devices;
    An SV engaged us to assist in the development of a series of
    board support packages (BSPs) in support of various processors;
    Several large Asian ODMs engaged us to assist in the development
    of new lines of Windows Mobile-based handheld devices;
    A large North American retail vendor engaged us to assist in
    creating a next-generation kiosk and point-of-sale device;
    A large North American SV engaged us to assist in developing
    several Windows Mobile BSPs in support of its new line of
    processors focused on the handset market; and
    We licensed our SDIO, DevKit, Schema and Productivity+
    technology to many North American and Asian OEMs and ODMs for
    inclusion in their smart devices.    Third-Party
    Software Products
   5




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
    We are a Microsoft authorized Value-Added Provider (VAP) of
    Windows Embedded operating systems and toolkits for Windows CE,
    Windows XP/NT Embedded, Windows XP Professional with Embedded
    Restrictions, Windows Server with Embedded Restrictions, Windows
    XP Embedded for Point of Sale and Microsoft Classic
    operating systems with Embedded restrictions, including DOS and
    Windows 98/2000/ME/NT. The majority of our revenue in 2007 was
    earned through the resale of Microsoft Embedded operating
    systems;
    In December 2007, we acquired the Adobe Flash consulting and
    distribution business from NECAM. Included with this acquisition
    is the right to distribute Adobe Flash licenses to OEMs and ODMs
    and other smart device manufacturers world-wide;
    In December 2007, we entered into a reseller agreement with
    Solidcore Systems, Inc. (Solidcore) to be the exclusive
    distributor of Solidcores S3 Control
    Embeddedtm
    software to OEMs in North America; and
    We sub-license and resell other third-party software such as the
    Esmertec Jeode Java Virtual Machine (JVM) under our
    JEM-CEtm
    brand name and Datalight Inc.s FlashFX and Reliance
    products.  Proprietary
    Software Products
    
    SDIO Hx  SDIO (Secure Digital Input Output) is an
    industry standard format that allows very small form-factor
    peripheral and memory cards to be used with smart devices. Our
    SDIO solutions have become the industry standard software
    development kit used by OEMs, ODMs and peripheral vendors who
    are creating SDIO solutions for smart devices utilizing
    Microsoft Windows CE and Windows Mobile operating systems. There
    are currently over 100 licensees of our SDIO technology. During
    2007, we released several new versions of our SDIO Hx technology
    that enhanced performance, supported new versions of the SD and
    MMC associations specifications and supported new silicon
    architectures. We expect to continue to update our SDIO Hx
    technology into the forseeable future. Microsoft has
    incorporated our SDIO Now! v1.1 technology into its CE 5.0 and
    Windows Mobile 5.0 operating systems. While the SDIO Hx versions
    of software have functionality and performance enhancements not
    found in the SDIO Now! v2.0, there can be no assurance that the
    inclusion of the SDIO Now! v2.0 software in the base Microsoft
    operating systems will not have a detrimental effect on sales of
    the SDIO Hx software.
    Productivity+  Productivity+ is a middleware stack
    that provides Personal Information Management (PIM)
    functionality on Windows CE-based devices such as email,
    calendar and contacts. Our Productivity+ product is derived from
    technology originally developed for our discontinued Power
    Handheld product.
    Media+ Portable Media Player  Media+ is a digital
    media-management and player software solution based on
    Microsoft®
    Windows®
    CE 5.0 that enables OEMs to quickly enter the growing market for
    PMP players, a new product category that enables consumers to
    enjoy movies and video clips, view family photos, and listen to
    music on a single mobile device.
    DevkitIDP Development Platforms  Our DevkitIDP line
    of Marvell
    XScale o
    Technology-based development platforms accelerate time to market
    for OEMs, ODMs and enterprises building Windows CE 5.0, Windows
    CE 6.0 and Windows Mobile 5.0 embedded devices. We currently
    ship Devkit 255, DevKit 270, and DevKit 3XX (the DevKit 3XX
    family includes support for the PXA300, PXA310 and PXA320
    application processors.) We intend to introduce additional
    development platforms in the future which may be based on other
    silicon vendors processor families. Our Devkit products uniquely
    offer a wide variety of peripheral chips and multiple expansion
    slots, which provides developers valuable flexibility in the
    early stages of development when device functionality is being
    validated.
    SchemaBSP  Our SchemaBSP tool reduces customer
    development efforts. SchemaBSP offers a revolutionary three-step
    process that, when used in conjunction with Microsoft Platform
    Builder, reduces Windows CE board bring up time by up to 40%.
    Once a BSP is created with SchemaBSP, the architecture of the
    tool enables code reuse across multiple product lines, easy BSP
    updates when new hardware features are added to a design, and
    quick migration to new OS versions of Windows CE. 6




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Year Ended December 31,2007


2006Software revenue:Third-party software

$
34,157


$
30,317Proprietary software


4,241



2,617Total software revenue

$
38,398


$
32,934Software revenue as a percentage of total revenue


65
%


66
%Third-party software revenue as a percentage of total software
    revenue


89
%


92
%     Engineering
    Service Offerings
    
    Device solution strategy consulting;
    Software and hardware design and development services;
    Platform development systems integration;
    Radio Interface Layer (RIL) development and testing
    Application, middleware and multimedia software development;
    Quality assurance and testing services;
    Hardware design, prototype and product development services;
    Mechanical and ID design services;
    Customer technical support; and
    Platform development and quality assurance training.      Year Ended December 31,2007

2006Total service revenue

$
20,956


$
16,881Service revenue as a percentage of total revenue


35
%


34
%  7




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Strategy
    
    Enhance our proprietary software product portfolio to generate
    additional revenue, particularly higher margin revenue, through
    which will have the added benefit of increasing opportunities to
    sell engineering services and third-party software products to
    our customers. During 2007, we increased our level of research
    and development in conjunction with the our DevKitIDP product
    family. During the year we actively invested in new versions of
    our DevKit designs to support new PXA3XX family application
    processors from Marvell. We also invested in a new line of
    DevKit designs for a new family of application processors from
    Texas Instruments. We are continuing to execute and evolve our
    product strategy and during 2008, we expect to continue to focus
    on developing new DevKit offerings as well as more specific
    verticalized reference design offerings. A key element of our
    strategy is the expansion of our proprietary products that we
    license to our smart device customers. We believe that the
    continuing complexity and demands of device development will
    require our customers to seek out partners that are able to
    provide more complete device software solutions that can be
    quickly customized and brought to market;
    Provide our North American customers of Windows Embedded
    operating systems with additional product offerings as they
    become available from Microsoft. For example, in 2007, Microsoft
    made available to its authorized distributors the Window
    Embedded CE 6.0 R2 operating system, which is targeted at the
    general device market;
    Expand our engineering service offerings by adding new packaged
    engineering services, engineering capabilities, training and
    custom consulting offerings. For example, during 2007 we focused
    on developing new multi-media and radio service offerings. We
    also developed and began offering to our customers a new Device
    Validation Test suite;
    Leverage the significant number of customers gained through our
    resale of Microsoft Embedded operating systems by selling these
    customers additional software and service offerings. In each
    year, we typically sell Microsoft Embedded operating systems to
    over 800 unique customers. During 2007, our revenue from
    customers that also purchased our service offerings increased
    approximately 34% from 2006;
    Increase revenue as a result of our purchase of assets from
    NECAM and our distribution agreement with Solidcore, which
    occurred in December 2007, which will allow us to provide a
    greater suite of value-added solutions to OEMs; and
    Increase revenue derived from our international customers,
    particularly by focusing on growing sales in the Asia-Pacific
    region.  Relationship
    with Microsoft and Impact on our Smart Device Solutions
    Business
    
    We are one of Microsofts largest distributors of embedded
    operating systems worldwide;
    We are a Windows Embedded Gold-level Systems Integrator;
    During 2007, we became a Microsoft Gold Certified Partner in
    Microsofts general partner program;
    We were the Microsoft Systems Integrator of the Year for 2006;
    We are a developer and provider of Microsoft Official Curriculum
    Training for Windows CE and Windows XP Embedded;
    We are a leading systems integrator for Microsofts Windows
    Mobile device development projects;
    We are a Preferred Provider of Visual Tools for Microsoft; 8




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
    We are a Gold-level member of Microsofts Third-Party Tools
    Provider Program;
    We are an authorized Microsoft Windows CE-for-Automotive
    Solutions Integrator; and
    We have been engaged by Microsoft on various service engagements.    
    We gain early access to new Microsoft embedded software and
    other technologies;
    We are able to leverage co-marketing resources from Microsoft,
    including market development funds, to support our own marketing
    and sales efforts;
    We participate in Microsoft-sponsored trade shows, seminars, and
    other events;
    We receive sales leads from Microsoft that enable us to sell our
    software and service offerings to more customers;
    We receive rebates based upon predefined objectives and our
    Microsoft Embedded operating systems sales volume; and
    We participate in Windows Embedded and Windows Mobile design
    reviews, enabling early access to product roadmap information
    wherein we provide important technical and customer feedback.    Customers
    Sales and
    Marketing
      Research
    and Development
   9




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Competition
  :
  
    Our current and potential customers internal research and
    development departments, which may seek to develop their own
    proprietary products and solutions that compete with our
    proprietary software products and engineering services;
    Engineering service firms, including off-shore development
    companies, such as Intrinsyc, Vanteon, Teleca and Wipro;
    ODMs, particularly those in Taiwan, which have or are adding
    software development capabilities to their offerings;
    Contract manufacturers, which are adding software development
    capabilities to their offerings; and
    Microsoft Embedded operating system distributors such as Arrow
    and Avnet. Larger customers of Microsoft Embedded operating
    systems are typically knowledgeable of the competing
    distributors in the North American market and,
    consequently, will often put large orders out to bid amongst the
    distributors, which can create margin pressure and make it
    difficult to maintain long-term relationships with these
    customers. The gross profit margin on sales of Microsoft
    Embedded Windows licenses is relatively low, historically about
    14% on average. There can be no assurance that gross profit on
    future sales will not decline given these competitive pressures.    International
    Operations
     10




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Personnel
    December 31,2007


2006Professional Engineering Services


103



109Research and Product Development


15



12Sales, Marketing and Administrative


57



49Total


175



170     Intellectual
    Property and Other Proprietary Rights
          Available
    Information
  1-800-SEC-0330. http://www.sec.gov
  www.bsquare.com Form 10-K, Form 10-Q Form 8-K
 11




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Directors
    and Executive Officers
    Name

Age

PositionsDonald B. Bibeault


66


Chairman of the BoardBrian T. Crowley


47


President and Chief Executive Officer, DirectorElwood D. Howse, Jr.


68


DirectorElliott H. Jurgensen, Jr.


63


DirectorScot E. Land


53


DirectorWilliam D. Savoy


43


DirectorKendra A. VanderMeulen


56


DirectorCarey E. Butler


53


Vice President, Professional Engineering ServicesRajesh Khera


38


Vice President, ProductsScott C. Mahan


43


Vice President, Finance; Chief Financial Officer; Secretary and
    TreasurerLarry C. Stapleton


45


Vice President, North American Sales        12




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13




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Item 1A.
    Risk
    Factors.  Form 10-K
 14




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Microsoft-Related
    Risk Factors
    If we
    do not maintain our OEM Distribution Agreement with Microsoft,
    our revenue would decrease and our business would be adversely
    affected.
    Microsoft
    has audited our records under our OEM Distribution Agreement in
    the past and will likely do so again in the future, and any
    negative audit results could result in additional charges and/or
    the termination of the ODA.
    If we
    do not maintain our favorable relationship with Microsoft, we
    will have difficulty marketing and selling our software and
    services and may not receive developer releases of Windows
    Embedded operating systems and Windows Mobile targeted
    platforms. As a result, our revenue and operating results could
    suffer.
  and/or
 15




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Unexpected
    delays or announcement of delays by Microsoft of Windows
    Embedded operating systems and Windows Mobile targeted platforms
    product releases could adversely affect our revenue and
    operating results.
  and/or
  If
    Microsoft adds features to its Windows operating system or
    develops products that directly compete with products and
    services we provide, our revenue and operating results could be
    negatively impacted.
      If the
    market for Windows Embedded operating systems and Windows Mobile
    targeted platforms fails to develop further, develops more
    slowly than expected, or declines, our business and operating
    results may be materially harmed.
    
    Microsofts development and support of the Windows Embedded
    and Windows Mobile markets. As the developer and primary
    promoter of Windows CE, Windows XP Embedded and Windows Mobile,
    if Microsoft were to decide to discontinue or lessen its support
    of these operating systems and platforms, potential customers
    could select competing operating systems, which could reduce the
    demand for our Windows Embedded and Windows Mobile software
    products and engineering services which is our primary focus
    today;
    The ability of the Microsoft Windows Embedded operating systems
    and Windows Mobile software to compete against existing and
    emerging operating systems for the smart device market,
    including: VxWorks and Linux from WindRiver Systems Inc.;
    Symbian and Palm OS from PalmSource, Inc.; JavaOS from 16




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Sun Microsystems, Inc.; Android from Google Inc.; and other
    proprietary operating systems. In particular, in the market for
    handheld devices, Windows Mobile faces intense competition from
    the Linux operating system. In the market for converged devices,
    Windows Embedded faces intense competition from the Symbian
    operating system. Windows Embedded operating systems and the
    Windows Mobile targeted platforms may be unsuccessful in
    capturing a significant share of these two segments of the smart
    device market, or in maintaining its market share therein;  
    The acceptance by OEMs and consumers of the mix of features and
    functions offered by Windows Embedded operating systems and
    Windows Mobile targeted platforms; and
    The willingness of software developers to continue to develop
    and expand the applications that run on Windows Embedded
    operating systems and Windows Mobile targeted platforms. To the
    extent that software developers write applications for competing
    operating systems that are more attractive to smart device users
    than those available on Windows Embedded operating systems and
    Windows Mobile targeted platforms, potential purchasers could
    select competing operating systems over Windows Embedded
    operating systems and Windows Mobile targeted platforms.  General
    Business-Related Risk Factors
  Our
    marketplace is extremely competitive, which may result in price
    reductions, lower gross profit margins and loss of market
    share.
    
    Our current and potential customers internal research and
    development departments, which may seek to develop their own
    proprietary products and solutions that compete with our
    proprietary software products and engineering services;
    Engineering service firms, including off-shore development
    companies, such as Intrinsyc, Vanteon, Teleca and Wipro;
    ODMs, particularly those in Taiwan, which have or are adding
    software development capabilities to their offerings;
    Contract manufacturers, which are adding software development
    capabilities to their offerings; and
    Microsoft Embedded operating system distributors such as Arrow
    and Avnet. Larger customers of Microsoft Embedded operating
    systems are typically knowledgeable of the competing
    distributors in the North American market and,
    consequently, will often put large orders out to bid amongst the
    distributors, which can create margin pressure and make it
    difficult to maintain long-term relationships with these
    customers. The gross profit margin on sales of Microsoft
    Embedded Windows licenses is relatively low, historically about
    14% on average. There can be no assurance that gross profit on
    future sales will not decline given these competitive pressures.   17




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Our
    ability to maintain or grow the portion of our software revenue
    attributable to our own proprietary software products is
    contingent on our ability to bring to market competitive, unique
    offerings that keep pace with technological changes and needs.
    If we are not successful in doing so, our business would be
    harmed.
    We may
    experience delays in our efforts to develop new products and
    services, and these delays could cause us to miss market
    opportunities which could negatively impact our revenue and
    operating results.
  and/or and/or
  Our
    success depends upon our customers ability to successfully
    sell their products incorporating our technology.
    If the
    market for smart devices develops more slowly than we expect, or
    declines, our revenue may not develop as anticipated, if at all,
    and our business would be harmed.
    
    The development of content and applications for smart devices;
    The willingness of large numbers of businesses and consumers to
    use devices such as smartphones, PDAs and handheld industrial
    data collectors to perform functions historically carried out
    manually, or by traditional PCs, including inputting and sharing
    data, communicating among users and connecting to the
    Internet; and
    The evolution of industry standards or the necessary
    infrastructure that facilitate the distribution of content over
    the Internet to these devices via wired and wireless
    telecommunications systems, satellite or cable. 18




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The
    success and profitability of our service offerings are
    contingent on our ability to differentiate these offerings
    adequately in the marketplace, which is, in turn, contingent on
    our ability to retain our engineering personnel and defend our
    billing rate structure against those of our competitors,
    including those using lower-cost offshore resources. If we are
    unable to do so successfully, our business could be
    harmed.
  and/or
  The
    success and profitability of our service engagements are
    contingent upon our ability to scope and bid engagements and
    deliver our services profitably. If we are unable to do so, our
    service revenue service gross profit margin and operating
    results could be negatively impacted.
    We
    have entered into engineering service agreements in which we
    have agreed to perform our engineering service work at
    relatively low rates per hour in exchange for future royalties.
    There is no guarantee that these arrangements will culminate as
    anticipated.
    Cooperation
    and support from SVs is critical for the success of our hardware
    reference designs. Such cooperation cannot be
    assured.
    The
    long sales cycle of our products and services makes our revenue
    susceptible to fluctuations.
    
    Customers budgetary constraints and internal acceptance
    review procedures;
    The timing of budget cycles; and 19




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
    The timing of customers competitive evaluation processes.    Erosion
    of the financial condition of our customers could adversely
    affect our business.
  and/or
  We may
    be subject to product liability claims that could result in
    significant costs.
    Past
    acquisitions have proven difficult to integrate, and future
    acquisitions, if any, could disrupt our business, dilute
    shareholder value and adversely affect our operating
    results.
  and/or
  Intellectual Property-Related Risk Factors
  Our
    software and service offerings could infringe the intellectual
    property rights of third parties, which could expose us to
    additional costs and litigation and could adversely affect our
    ability to sell our products and services or cause shipment
    delays or stoppages.
   20




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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.
    and/or
 21




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Our
    software or hardware products or the third-party hardware or
    software integrated with our products or delivered as part of
    our service offerings may suffer from defects or errors that
    could impair our ability to sell our products and
    services.
    If we
    are unable to license key software from third parties, our
    business could be harmed.
    Governance
    and Contract-Related Risk Factors
  It
    might be difficult for a third-party to acquire us even if doing
    so would be beneficial to our shareholders.
   22




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We
    have incurred and will continue to incur substantial costs to
    comply with the requirements of the Sarbanes-Oxley Act of
    2002.
  Form 10-K
    Non-compliance
    with our lease agreement could have a material adverse impact on
    our financial position.
    Decreased
    effectiveness of equity compensation could adversely affect our
    ability to attract and retain employees, and required changes in
    accounting for equity compensation could adversely affect
    earnings.
    International
    Operations-Related Risk Factors
  Our
    international operations expose us to greater intellectual
    property, management, collections, regulatory and other
    risks.
    
    Greater difficulty in protecting intellectual property due to
    less stringent foreign intellectual property laws and
    enforcement policies;
    Longer collection cycles than we typically experience in the
    North America;
    Unfavorable changes in regulatory practices and tariffs; 23




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
    Complex
    and/or
    adverse tax laws
    and/or
    changes thereto. Additionally, we may be subject to income,
    withholding and other taxes for which we may realize no current
    benefit despite the existence of significant net operating
    losses and tax credits in the U.S.;
    Loss or reduction of withholding tax exemptions;
    The impact of fluctuating exchange rates between the
    U.S. dollar and foreign currencies; and
    General economic and political conditions in international
    markets which may differ from those in the U.S.    As we
    increase the amount of software development conducted in
    non-U.S.
    locations, potential delays and quality issues may impact our
    ability to timely deliver our software and services, potentially
    impacting our revenue and profitability.
  non-U.S. locations, non-U.S. locations non-U.S. locations.
  As our
    customers seek more cost-effective locations to develop and
    manufacture their smart devices, particularly overseas
    locations, our ability to continue to sell these customers our
    products and services could be limited, which could negatively
    impact our revenue and operating results.
    Item 2.
    Properties.      Item 3.
    Legal
    Proceedings.  IPO
    Litigation
   24




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Item 4.
    Submission
    of Matters to a Vote of Security Holders.   25




---



##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information
    High


LowYear Ended December 31, 2007:First Quarter

$
5.10


$
2.78Second Quarter

$
7.05


$
4.20Third Quarter

$
7.08


$
4.86Fourth Quarter

$
7.48


$
5.65Year Ended December 31, 2006:First Quarter

$
3.99


$
2.77Second Quarter

$
3.04


$
1.87Third Quarter

$
2.50


$
1.93Fourth Quarter

$
3.00


$
1.93   Holders
    Dividends
   26




---



##### Table of Contents



Item 6.
    Selected
    Financial Data.    Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except per share data)Consolidated Statements of Operations Data:Revenue

$
59,354


$
49,815


$
42,923


$
38,920


$
37,542Cost of revenue(1)


43,453



37,828



33,039



29,870



31,141Gross profit


15,901



11,987



9,884



9,050



6,401Operating expenses:Selling, general and administrative(1)


11,254



10,046



9,504



9,176



12,609Research and development(1)


2,365



2,820



1,950



855



1,768Amortization of intangible assets


















50Impairment of goodwill and other intangible assets


















453Restructuring and other related charges (credits)














40



(2,960
)Total operating expenses


13,619



12,866



11,454



10,071



11,920Income (loss) from operations


2,282



(879
)


(1,570
)


(1,021
)


(5,519
)Interest and other income


890



442



287



237



1,059Income (loss) from continuing operations before income taxes


3,172



(437
)


(1,283
)


(784
)


(4,460
)Income tax provision


(393
)


(29
)


(14
)


(11
)


(75
)Income (loss) from continuing operations


2,779



(466
)


(1,297
)


(795
)


(4,535
)Loss from discontinued operations














(6,256
)


(9,449
)Net income (loss)

$
2,779


$
(466
)

$
(1,297
)

$
(7,051
)

$
(13,984
)Diluted net income (loss) per share:Income (loss) from continuing operations

$
0.27


$
(0.05
)

$
(0.14
)

$
(0.08
)

$
(0.49
)Loss from discontinued operations














(0.66
)


(1.01
)Diluted net income (loss) per share

$
0.27


$
(0.05
)

$
(0.14
)

$
(0.74
)

$
(1.50
)(1) Stock-based compensation expense included above:Cost of revenue  service

$
280


$
190


$



$



$
Selling, general and administrative


678



445



17







Research and development


75



80











Total stock-based compensation expense

$
1,033


$
715


$
17


$



$
   27




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##### Table of Contents



December 31,2007


2006


2005


2004


2003(In thousands)Consolidated Balance Sheet Data:Cash, cash equivalents, short-term investments and restricted
    cash

$
15,002


$
11,109


$
10,694


$
12,943


$
17,745Working capital

$
14,686


$
10,252


$
9,502


$
11,125


$
16,490Total assets

$
24,762


$
19,676


$
19,570


$
18,944


$
30,113Long-term obligations, net of current portion

$
331


$
355


$
379


$
375


$
Shareholders equity

$
16,515


$
12,076


$
11,463


$
12,734


$
19,338   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.    Overview
  ® ® tm
    Critical
    Accounting Judgments
   28




---



##### Table of Contents



Revenue
    Recognition
  and/or
  SOP 81-1, SOP 97-2. SOP 81-1, SOP 81-1,
       29




---



##### Table of Contents



Allowance
    for Doubtful Accounts
    Stock-Based
    Compensation
  Share-Based
    Payment,
        Taxes
     30




---



##### Table of Contents



Results
    of Operations
    As a Percentage of Total Revenue Year Ended
    December 31,2007


2006Consolidated Statements of Operations Data:Revenue:Software


65
%


66
%Service


35



34Total revenue


100



100Cost of revenue:Software


48



52Service


25



24Total cost of revenue


73



76Gross profit


27



24Operating expenses:Selling, general and administrative


19



20Research and development


4



6Total operating expenses


23



26Income (loss) from operations


4



(2
)Interest and other income


2



1Income (loss) before income taxes


6



(1
)Income tax expense


(1
)


Net income (loss)


5
%


(1
)%   Comparison
    of the Years Ended December 31, 2007 and 2006
  Revenue
       31




---



##### Table of Contents



Software
    revenue
    Year Ended December 31,2007


2006Software revenue:Third-party software

$
34,157


$
30,317BSQUARE proprietary software


4,241



2,617Total software revenue

$
38,398


$
32,934Software revenue as a percentage of total revenue


65
%


66
%Third-party software revenue as a percentage of total software
    revenue


89
%


92
%             Service
    revenue
    Year Ended December 31,2007

2006Total service revenue

$
20,956


$
16,881Service revenue as a percentage of total revenue


35
%


34
%    32




---



##### Table of Contents



Gross
    profit and Gross Margin
      Year Ended December 31,2007


2006Software gross profit

$
9,772


$
6,817As a percentage of software revenue


25
%


21
%Service gross profit

$
6,129


$
5,170As a percentage of service revenue


29
%


31
%Total gross profit

$
15,901


$
11,987As a percentage of total revenue


27
%


24
%   Software
    gross profit and gross margin
      Service
    gross profit and gross margin
   33




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##### Table of Contents



Operating
    expenses
  Selling,
    general and administrative
      Research
    and development
        Interest
    and other income
    Income
    Tax Expense
    Liquidity
    and Capital Resources
   34




---



##### Table of Contents



Potential
    Cash Commitments
    
    In February 2004, we signed an amendment to the lease for our
    former corporate headquarters and simultaneously entered into a
    ten-year lease for a new corporate headquarters, also located in
    Bellevue, Washington. The amendment of the former headquarters
    lease, which was scheduled to terminate on December 31,
    2004, provided that no cash lease payments were to be made for
    the remainder of 2004. Similarly, the current corporate
    headquarters lease also provided that no cash lease payments
    were to be made during 2004. However, if we default under our
    new corporate headquarters lease, the landlord has the ability
    to demand payment for cash payments forgiven in 2004 under the
    former headquarters lease. The amount of the forgiven payments
    for which the landlord can demand repayment was
    $1.6 million at December 31, 2007. The amount of the
    forgiven payments for which the landlord has the ability to
    demand repayment decreases on the straight-line basis over the
    length of our ten-year headquarters lease.
    In December 2007, we entered into a reseller agreement with
    Solidcore to be the exclusive distributor of Solidcores S3
    Control
    Embeddedtm
    software to OEMs in North America. This agreement commits us to
    pay a minimum license fee of $800,000 to Solidcore by
    December 31, 2008, regardless of our sales of that software. 35




---



##### 



Item 8.
    Financial
    Statements and Supplementary Data.  BSQUARE
    CORPORATION
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
   
 Report of Independent Registered Public
    Accounting Firm


37Consolidated Balance Sheets


38Consolidated Statements of Operations


39Consolidated Statements of Shareholders
    Equity


40Consolidated Statements of Cash Flows


41Notes to Consolidated Financial Statements


42   36




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           
    37




---



##### Table of Contents



BSQUARE
    CORPORATION
 CONSOLIDATED
    BALANCE SHEETS  December 31,2007


2006(In thousands, exceptshare amounts)ASSETSCurrent assets:Cash and cash equivalents

$
4,377


$
2,483Short-term investments


9,575



7,426Accounts receivable, net of allowance for doubtful accounts of
    $199 at December 31, 2007 and $198 at December 31, 2006


8,273



7,167Prepaid expenses and other current assets


377



421Total current assets


22,602



17,497Equipment, furniture and leasehold improvements, net


824



821Intangible assets, net


230



101Restricted cash


1,050



1,200Other non-current assets


56



57Total assets

$
24,762


$
19,676LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,619


$
2,634Other accrued expenses


2,877



2,877Accrued compensation


1,393



1,046Accrued legal fees


534



534Deferred revenue


493



154Total current liabilities


7,916



7,245Deferred rent


331



355Commitments and contingencies (Note 7)Shareholders equity:Preferred stock, no par value: 10,000,000 shares
    authorized; no shares issued and outstanding






Common stock, no par value: 37,500,000 shares authorized;
    9,967,618 shares issued and outstanding at
    December 31, 2007 and 9,617,755 shares issued and
    outstanding at December 31, 2006


121,118



119,229Accumulated other comprehensive loss


(409
)


(180
)Accumulated deficit


(104,194
)


(106,973
)Total shareholders equity


16,515



12,076Total liabilities and shareholders equity

$
24,762


$
19,676    38




---



##### Table of Contents



BSQUARE
    CORPORATION
 CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year Ended December 31,2007


2006(In thousands, exceptper share amounts)Revenue:Software

$
38,398


$
32,934Service


20,956



16,881Total revenue


59,354



49,815Cost of revenue:Software


28,626



26,117Service(1)


14,827



11,711Total cost of revenue


43,453



37,828Gross profit


15,901



11,987Operating expenses:Selling, general and administrative(1)


11,254



10,046Research and development(1)


2,365



2,820Total operating expenses


13,619



12,866Income (loss) from operations


2,282



(879
)Interest and other income


890



442Income (loss) from operations before income taxes


3,172



(437
)Income tax provision


(393
)


(29
)Net income (loss)

$
2,779


$
(466
)Basic income (loss) per share

$
0.28


$
(0.05
)Diluted income (loss) per share

$
0.27


$
(0.05
)Shares used in calculation of income (loss) per share:Basic


9,839



9,586Diluted loss per share


10,239



9,586(1) Includes the following amounts related to stock-based
    compensation expense:Cost of revenue  service

$
280


$
190Selling, general and administrative


678



445Research and development


75



80Total stock-based compensation expense

$
1,033


$
715    39




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##### Table of Contents



BSQUARE
    CORPORATION
 CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY  AccumulatedOther





TotalPreferred Stock


Common Stock


Comprehensive


Accumulated


ShareholdersShares


Amount


Shares


Amount


Loss


Deficit


Equity(In thousands, except share amounts)Balance, December 31, 2005










9,553,566


$
118,393


$
(423
)

$
(106,507
)

$
11,463Net loss






















(466
)


(466
)Foreign currency translation adjustment


















17







17Unrealized gain on available-for-sale securities


















226







226Comprehensive loss


























(223
)Exercise of stock options










64,189



121











121Stock-based compensation














715











715Balance, December 31, 2006










9,617,755



119,229



(180
)


(106,973
)


12,076Net income






















2,779



2,779Foreign currency translation adjustment


















(3
)






(3
)Unrealized gain on securities, net of reclassification adjustment


















(226
)






(226
)Comprehensive income


























2,550Exercise of stock options










349,863



856











856Stock-based compensation














1,033











1,033Balance, December 31, 2007





$




9,967,618


$
121,118


$
(409
)

$
(104,194
)

$
16,515    40




---



##### Table of Contents



BSQUARE
    CORPORATION
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2007


2006(In thousands)Cash flows from operating activities:Net income (loss)

$
2,779


$
(466
)Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:Realized gain on sale of marketable securities


(287
)


Depreciation and amortization


491



532Stock-based compensation


1,033



715Changes in operating assets and liabilities:Accounts receivable, net


(1,100
)


133Prepaid expenses and other assets


76



7Accounts payable and accrued expenses


307



(367
)Deferred revenue


338



(117
)Deferred rent


(24
)


(24
)Net cash provided by operating activities


3,613



413Cash flows from investing activities:Purchases of furniture, equipment and leasehold improvements


(393
)


(357
)Purchases of short-term investments


(10,976
)


(5,400
)Maturities of short-term investments


8,601



Proceeds from reduction of restricted cash


150



Proceeds from sale of marketable securities


287



Acquisition of NECAM assets


(250
)


Net cash used in investing activities


(2,566
)


(5,757
)Cash flows from financing activities:Proceeds from exercise of stock options


856



121Net cash provided by financing activities


856



121Effect of exchange rate changes on cash


(9
)


12Net increase (decrease) in cash and cash equivalents


1,894



(5,211
)Cash and cash equivalents, beginning of year


2,483



7,694Cash and cash equivalents, end of year

$
4,377


$
2,483    41




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Description
    of Business and Accounting Policies  Description
    of Business
  ® ® tm
  Principles
    of Consolidation
    Use of
    Estimates
    Earnings
    Per Share
    Cash
    and Cash Equivalents
    Restricted
    Cash
   42




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Short-term
    Investments
    Financial
    Instruments and Concentrations of Risk
  The Company has the following financial
    instruments:
  Allowance
    for Doubtful Accounts
    Furniture,
    Equipment and Leasehold Improvements
    Computer equipment and system software


3 yearsOffice furniture and equipment


3-5 years     Acquired
    Intangible Assets
    Software
    Development Costs
  Accounting for
    the Costs of Computer Software to Be Sold, Leased, or Otherwise
    Marketed,
 43




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Research
    and Development
    Advertising
    Costs
    Stock-Based
    Compensation
  Share-Based Payment,
  Comprehensive
    Income (Loss)
      December 31,2007


2006Net unrealized gain on available-for-sale securities

$



$
226Foreign currency translation


(409
)


(406
)Other comprehensive loss

$
(409
)

$
(180
)   Income
    Taxes
   44




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Foreign
    Currency Translation
    Revenue
    Recognition
  and/or
  SOP 81-1, SOP 97-2. SOP 81-1, SOP 81-1,
     45




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
        Recently
    Issued Accounting Pronouncements
  Statements
    of Financial Accounting Standards
  SFAS No. 123, Share-Based Payment (Revised
    2004).
  SFAS No. 141, Business Combinations (Revised
    2007).
  Accounting for Certain Hybrid
    Financial Instruments.
 46




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Fair Value Measurements.
  The Fair Value Option for
    Financial Assets and Financial Liabilities  Including
    an amendment of FASB Statement No. 115.
  SFAS No. 160, Noncontrolling Interest in
    Consolidated Financial Statements, an amendment of ARB Statement
    No. 51.
  Financial
    Accounting Standards Board Staff Positions and
    Interpretations
  FASB Interpretation No. 48, Accounting for
    Uncertainty in Income Taxes, an interpretation of FASB Statement
    109.
  FSP
    No. 48-1
    Definition of Settlement in FASB Interpretation
    No. 48. FSP 48-1 FSP 48-1
 47




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  2.
    Cash,
    Cash Equivalents, Short-Term Investments and Restricted
    Cash    December 31,2007


2006Cash and cash equivalents:Money market funds

$
3,070


$
1,504Deposits


1,307



979$
4,377


$
2,483Short-term investments:Municipal securities

$
9,575


$
7,200Equity securities, available-for-sale






226$
9,575


$
7,426Restricted cash:Commercial time deposits

$
1,050


$
1,200   2007


2006Unrealized gain on available for sales securities

$
61


$
226Reclassification adjustment for gain realized in net income


(287
)


Unrealized gain on securities, net of reclassification adjustment

$
(226
)

$
226   3.
    Equipment,
    Furniture and Leasehold Improvements    December 31,2007


2006Computer equipment and software

$
2,947


$
2,660Office furniture and equipment


1,173



1,079Leasehold improvements


542



5294,662



4,268Less: accumulated depreciation and amortization


(3,838
)


(3,447
)$
824


$
821     4.
    Asset
    Purchase   48




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    PurchasePriceAllocationPrepaid assets

$
30Equipment


15Acquired technology


230Total assets acquired


275Accrued transaction expenses


(12
)Accrued compensation


(13
)Net assets acquired

$
250     5.
    Intangible
    Assets      6.
    Income
    Taxes    December 31,2007


2006Deferred income tax assets:Depreciation and amortization

$
1,475


$
1,594Accrued expenses and reserves


518



500Net operating loss carryforwards


23,222



23,912Capital loss carryforward


2,465



2,898Research and development credit carryforward


2,074



2,048Stock-based compensation


125



118Other


42



2Gross deferred tax assets


29,921



31,072Less: valuation allowance


(29,921
)


(31,072
)Total deferred tax asset

$



$
  49




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  :
  2007


2006Taxes at the U.S. statutory rate


34.0
%


34.0
%Increase (decrease) resulting from:Valuation allowance


(22.6
)


(41.9
)International operations


(3.3
)


(6.7
)State income tax


1.7



1.5Other, net


2.7



6.412.4
%


(6.7
)%             7.
    Commitments
    and Contingencies  Contractual
    Commitments
   50




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
        tm
      Operating leases:2008

$
1,0352009


9062010


9262011


9752012


1,030Thereafter


1,859Total commitments

$
6,731   Legal
    Proceedings
  IPO
    Litigation
     51




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
        8.
    Shareholders
    Equity  Stock
    Options
     52




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Restricted
    Stock Awards
    Stock-Based
    Compensation
  Share-Based Payment,
    Year Ended December 31,2007


2006Cost of revenue  service

$
280


$
190Selling, general and administrative


678



445Research and development


75



80Total stock-compensation expense

$
1,033


$
715           Key
    Assumptions
    Year Ended December 31,2007

2006Dividend yield

0%

0%Expected life

4 years

4 yearsExpected volatility

84%

92%Risk-free interest rate

4.3%

4.8%Estimated forfeitures

31%

36%  53




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Expected Dividend:
  Expected Life:
  Expected Volatility:
  Risk-Free Interest Rate:
  Estimated Forfeitures:
  Stock
    Option Activity
    Weighted AverageWeighted


Remaining


AggregateNumber


Average


Contractual


IntrinsicStock Options

of Shares


Exercise Price


Life (in years)


ValueOutstanding at January 1, 2006


1,761,618


$
4.75Granted at fair value


558,400


$
2.38Exercised


(64,189
)


1.94Forfeited


(137,047
)


2.91Expired


(125,251
)


10.17Outstanding at December 31, 2006


1,993,531



3.96



7.25


$
727,000Granted at fair value


330,200



4.88Exercised


(328,863
)


2.60Forfeited


(83,820
)


3.12Expired


(24,331
)


3.95Outstanding at December 31, 2007


1,886,717


$
4.36



7.27


$
6,051,000Vested and expected to vest at December 31, 2007


1,517,617


$
4.60



6.97


$
4,794,000Exercisable at December 31, 2007


1,157,272


$
4.94



6.52


$
3,612,000  54




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    2007


2006Weighted-average grant-date fair value

$
3.52


$
1.73Options in-the-money at December 31


1,080,110



416,979Aggregate intrinsic value of options exercised

$
808,875


$
58,939   Restricted
    Stock Activity
    WeightedAverageNumber


Grant Dateof Shares


Fair ValueNonvested at January 1, 2007






Granted


21,000


$
6.32Vested






Forfeited






Nonvested at December 31, 2007


21,000


$
6.32     WeightedAverageWeighted


RemainingNumber


Average


Contractual


Aggregateof Shares


Exercise Price


Life (in years)


Intrinsic ValueOutstanding at January 1, 2007





$
Awarded


94,728


$
Released





$
Forfeited





$
Outstanding at December 31, 2007


94,728


$




2.09


$
643,000Vested and expected to vest at December 31, 2007


51,791


$




1.69


$
352,000Exercisable at December 31, 2007





$







$
    55




---



##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Common
    Stock Reserved for Future Issuance
    December 31,2007


2006Stock options outstanding


1,886,717



1,969,530Restricted stock awards outstanding


94,728



Stock options available for future grant


186,043



516,572Warrants outstanding


100,000



100,000Common stock reserved for future issuance


2,267,488



2,586,102   Warrants
    9.
    Employee
    Benefit Plan  Profit
    Sharing and Deferred Compensation Plan
    10.
    Supplemental
    Disclosure of Cash Flow Information (in thousands)  Year Ended December 31,2007


2006Cash paid for income taxes

$



$
38     11.
    Significant
    Risk Concentrations  Significant
    Customer
    Significant
    Supplier
   56




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##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    12.
    Geographic
    and Segment Information  Disclosures About Segments of an Enterprise and Related
    Information.
    Year EndedDecember 31,2007


2006Total revenue:North America

$
55,624


$
47,108Asia


3,658



2,561Other foreign


72



146Total revenue(1)

$
59,354


$
49,815   At December 31,2007


2006Long-lived assets:North America

$
1,017


$
877Asia


37



45Total long-lived assets

$
1,054


$
922     (1)
    
    Revenue is attributed to countries based on location of customer
    invoiced. 57




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##### Table of Contents



BSQUARE
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   13.
    Quarterly
    Financial Information (Unaudited)    2007 Quarter Ended

March 31


June 30


September 30


December 31Revenue

$
15,096


$
15,094


$
13,604


$
15,560Gross profit


3,997



3,507



3,483



4,914Income from operations(1)


555



206



296



1,225Net income

$
638


$
542


$
359


$
1,240Diluted income per share

$
0.06


$
0.05


$
0.03


$
0.12Shares used in calculation of income per share:Basic


9,677



9,823



9,908



9,946Diluted


10,061



10,150



10,289



10,351(1) Stock-based compensation expense included in cost of revenue
    and operating expenses

$
189


$
242


$
357


$
245   2006 Quarter Ended

March 31


June 30


September 30


December 31Revenue

$
11,584


$
12,645


$
11,495


$
14,091Gross profit


2,317



3,007



2,827



3,836Income (loss) from operations(1)


(936
)


(177
)


(355
)


589Net income (loss)

$
(849
)

$
(88
)

$
(235
)

$
706Basic and diluted income (loss) per share

$
(0.09
)

$
(0.01
)

$
(0.02
)

$
0.07Shares used in calculation of income (loss) per share:Basic


9,564



9,586



9,589



9,604Diluted


9,564



9,586



9,589



9,651(1) Stock-based compensation expense included in cost of revenue
    and operating expenses

$
154


$
175


$
185


$
201  58




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A(T).
    Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Managements
    Report On Internal Control Over Financial Reporting
  Rule 13a-15(f)
      Changes
    in Internal Control Over Financial Reporting
   59




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##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance.        investorrelations@bsquare.com, 425-519-5998.
  Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.      Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accountant Fees and Services.   60




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##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules.  (a)
    Financial
    Statements and Schedules  Financial Statements.
            Financial Statement Schedules.
        (b)
    Exhibits  Form 10-K.
 61




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##### Table of Contents



SIGNATURES      By:
    /s/  Brian
    T. Crowley 
 President and Chief Executive Officer
    By:
    /s/  Scott
    C. Mahan   Vice President, Finance and
 Chief Financial Officer
    POWER OF
    ATTORNEY
      Signature

Title/s/  Brian
    T. CrowleyBrian
    T. Crowley

President and Chief Executive Officer
    (Principal Executive Officer)/s/  Scott
    C. MahanScott
    C. Mahan

Vice President, Finance and Chief Financial Officer
    (Principal Financial and Accounting Officer)/s/  Donald
    B. BibeaultDonald
    B. Bibeault

Chairman of the Board/s/  Scot
    E. LandScot
    E. Land

Director 62




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##### Table of Contents



Signature

Title/s/  Elwood
    D. Howse, Jr.Elwood
    D. Howse, Jr.

Director/s/  Elliott
    H. Jurgensen, Jr.Elliott
    H. Jurgensen, Jr.

Director/s/  William
    D. SavoyWilliam
    D. Savoy

Director/s/  Kendra
    VanderMeulenKendra
    VanderMeulen

Director  63




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##### Table of Contents



BSQUARE
    CORPORATION
  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
  Allowance
    for doubtful accounts
  Balance at


Charged to


Charged toBeginning


Costs and


Other


Amounts


Balance atYear Ended

of Period


Expenses


Accounts


Written Off


End of Period(In thousands)December 31, 2007

$
198


$
18


$



$
(17
)

$
199December 31, 2006(1)

$
687


$



$



$
(489
)

$
198     (1)
    
    In the fourth quarter of 2006, the Company settled an ongoing
    dispute with a former customer, which resulted in a write off of
    $475,000. 64




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##### Table of Contents



BSQUARE
    CORPORATION
  INDEX TO
    EXHIBITS
  ExhibitNumber

Description3
.1

Amended and Restated Articles of Incorporation(1)3
.1(a)

Articles of Amendment to Amended and Restated Articles of
    Incorporation(2)3
.1(b)

Articles of Amendment to Amended and Restated Articles of
    Incorporation(20)3
.2

Bylaws and all amendments thereto(14)4
.1

See Exhibits 3.1, 3.1(a), 3.1(b) and 3.2 for provisions
    defining the rights of the holders of common stock4
.2

Form of Warrant to purchase common stock(16)10
.1++

Third Amended and Restated Stock Plan10
.1(a)

1998 Mainbrace Stock Option Plan(3)10
.1(b)

2000 Non-Qualified Stock Option Plan(4)10
.1(c)

Infogation Corporation 1996 Stock Option Plan(12)10
.1(d)

Infogation Corporation 2001 Stock Options/Stock Issuance Plan(12)10
.1(e)

Form of Stock Option Agreement(24)10
.1(f)

Form of Restricted Stock Grant Agreement10
.1(g)

Form of Restricted Stock Unit Agreement10
.2

Employee Stock Purchase Plan(1)10
.2(a)

Amendment No. 1 to the Employee Stock Purchase Plan(13)10
.3

401(k) Plan(1)10
.4

Form of Indemnification Agreement(1)10
.6

Office Lease Agreement between Seattle Office Associates, LLC
    and BSQUARE Corporation dated March 24, 1997 (for
    Suite 100)(1)10
.7

Sunset North Corporate Campus Lease Agreement between WRC Sunset
    North and BSQUARE Corporation(1)10
.8

First Amendment to Office Lease Agreement between WRC Sunset
    North LLC and BSQUARE(5)10
.9*

Master Development & License Agreement between
    Microsoft Corporation and BSQUARE Corporation dated effective as
    of October 1, 1998(1)10
.9(a)*

Amendment No. 1 to the Master Development and License
    Agreement between BSQUARE Corporation and Microsoft Corporation
    dated December 23, 1999(6)10
.9(b)*

Amendment No. 2 to the Master Development and License
    Agreement between BSQUARE Corporation and Microsoft Corporation
    dated July 26, 2001(6)10
.10

Stock Purchase and Shareholders Agreement dated as of
    January 30, 1998(1)10
.11

Stock Purchase Agreement dated August 18, 1999 by and
    between BSQUARE Corporation and Vulcan Ventures Incorporated(1)10
.12

Agreement and Plan of Merger among BSQUARE, BlueWater Systems,
    Inc. and H2O Merger Corporation dated as of January 5,
    2000(7)10
.13

Agreement and Plan of Merger among BSQUARE Corporation,
    Mainbrace Corporation and Mainbrace Acquisition Inc. dated as of
    May 10, 2000(8)10
.14

Single-Tenant Commercial Space Lease among One South Park
    Investors, Paul Enterprises and FKLM as Landlord and BSQUARE as
    Tenant(9)10
.14(a)

Lease cancellation, termination, and release agreement among One
    South Park Investors, Partnership as Landlord and BSQUARE as
    Tenant(16)10
.15

Single-Tenant Commercial Space Lease (NNN), dated as of
    August 30, 2000, by and between One South Park Investors,
    Partnership and BSQUARE Corporation(10)10
.16

Fourth Amendment to Office Lease Agreement between WRC Sunset
    North LLC and BSQUARE Corporation(11)10
.16(a)

Fifth Amendment to Office Lease Agreement between WA 
    Sunset North Bellevue LLC and BSQUARE Corporation(18) 65




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##### Table of Contents



ExhibitNumber

Description10
.16(b)

Rent Deferral Agreement between WA  Sunset North
    Bellevue, L.L.C and BSQUARE Corporation(18)10
.17

Agreement and Plan of Merger among BSQUARE, BSQUARE
    San Diego Corporation and Infogation Corporation dated as
    of March 10, 2002(14)10
.18*

OEM Distribution Agreement for Software Products for Embedded
    Systems between BSQUARE Corporation and Microsoft Licensing, GP
    dated September 16, 2003(17)10
.18(a)*

OEM Distribution Agreement for Software Products for Embedded
    Systems between BSQUARE Corporation and Microsoft Licensing, GP
    dated effective as of October 1, 2004(19)10
.18(b)*

OEM Distribution Agreement for Software Products for Embedded
    Systems between BSQUARE Corporation and Microsoft Licensing, GP
    dated effective as of October 1, 2005(21)10
.18(c)+

OEM Distribution Agreement for Software Products for Embedded
    Systems between BSQUARE Corporation and Microsoft Licensing, GP
    dated effective as of October 1, 2006(26)10
.19

Office lease Agreement between WA 110 Atrium Place, LLC and
    BSQUARE Corporation(18)10
.20

Employment Agreement between Scott C. Mahan and BSQUARE
    Corporation(18)10
.21

Employment Agreement between Carey E. Butler and BSQUARE
    Corporation(18)10
.22

Employment Offer Letter Agreement between Pawan Gupta and
    BSQUARE Corporation(24)10
.22(a)

Separation and Release Agreement between Pawan Gupta and BSQUARE
    Corporation dated effective as of October 30, 2006(27)10
.23

Employment Agreement between Brian T. Crowley and BSQUARE
    Corporation(22)10
.24

Asset Purchase Agreement between Vibren Technologies, Inc. and
    BSQUARE Corporation dated effective June 30, 2005(23)10
.25

Employment offer letters, as amended, between Larry Stapleton
    and BSQUARE Corporation(25)10
.26

Employment offer letter between Rajesh Khera and BSQUARE
    Corporation21
.1

Subsidiaries of the registrant23
.1

Consent of Independent Registered Public Accounting Firm24
.1

Power of Attorney (included on signature page hereof)31
.1

Certification of Chief Executive Officer pursuant to Exchange
    Act
    Rule 13a-14(a)
    under the Securities and Exchange Act of 193431
.2

Certification of Chief Financial Officer pursuant to Exchange
    Act
    Rule 13a-14(a)
    under the Securities and Exchange Act of 193432
.1

Certification of Chief Executive Officer Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200232
.2

Certification of Chief Financial Officer Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002     *
    
    Subject to confidential treatment.+
    
    Confidential treatment requested.++
    
    Replaces previously filed exhibit.(1)
    
    Incorporated by reference to the registrants registration
    statement on
    Form S-1
    (File
    No. 333-85351)
    filed with the Securities and Exchange Commission on
    October 19, 1999.(2)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on August 7,
    2000.(3)
    
    Incorporated by reference to the registrants registration
    statement on
    Form S-8
    (File
    No. 333-44306)
    filed with the Securities and Exchange Commission on
    August 23, 2000.(4)
    
    Incorporated by reference to the registrants registration
    statement on
    Form S-8
    (File
    No. 333-70290)
    filed with the Securities and Exchange Commission on
    September 27, 2001.(5)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 2, 2000. 66




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##### Table of Contents



(6)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on November 9,
    2001.(7)
    
    Incorporated by reference to the registrants Current
    Report on
    Form 8-K
    filed with the Securities and Exchange Commission on
    January 18, 2000.(8)
    
    Incorporated by reference to the registrants Current
    Report on
    Form 8-K
    filed with the Securities and Exchange Commission on
    May 23, 2000.(9)
    
    Incorporated by reference to the registrants registration
    statement on
    Form S-1
    (File
    No. 333-45506)
    filed with the Securities and Exchange Commission on
    September 14, 2000.(10)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 26, 2001.(11)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on November 14,
    2002.(12)
    
    Incorporated by reference to the registrants statement on
    Form S-8
    (File
    No. 333-85340)
    filed with the Securities and Exchange Commission on
    April 2, 2002.(13)
    
    Incorporated by reference to the registrants statement on
    Form S-8
    (File
    No. 333-90848)
    filed with the Securities and Exchange Commission on
    June 20, 2002.(14)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 19, 2003.(15)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on May 8, 2003.(16)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on August 14,
    2003.(17)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on November 14,
    2003.(18)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 30, 2004.(19)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on November 5,
    2004.(20)
    
    Incorporated by reference to the registrants Current
    Report on
    Form 8-K
    filed with the Securities and Exchange Commission on
    October 11, 2005.(21)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on November 8,
    2005.(22)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on May 12, 2005.(23)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on August 12,
    2005.(24)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 11, 2005.(25)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 10, 2006.(26)
    
    Incorporated by reference to the registrants quarterly
    report on Form
    10-Q filed
    with the Securities and Exchange Commission on November 9,
    2006.(27)
    
    Incorporated by reference to the registrants annual report
    on
    Form 10-K
    filed with the Securities and Exchange Commission on
    February 16, 2007. 67