Item 1. Business

FORWARD-LOOKING STATEMENTS

This Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 based on current expectations, estimates and projections about our industry and our management’s beliefs and assumptions. When used in this Form 10-K and elsewhere, the words “believes,” “plans,” “estimates,” “intends,” “anticipates,” “seeks” and “expects” and similar expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements that are not historical facts. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those set forth below under “Risk Factors.” Such forward-looking statements include, but are not limited to, statements with respect to the following:

	•		the growth in number of Internet users and market for business to business Internet transactions;
	•		the development of the smart device market and our ability to address its challenges;
	•		the emergence of Windows CE, Windows NT Embedded and Windows XP Embedded as operating systems of choice for many hardware and software applications vendors;
	•		our business plan, its advantages and our strategy for implementing our plan;
	•		our ability to expand our strategic relationships with hardware and software vendors and continue to build on our relationship with Microsoft;
	•		our ability to expand our international presence;
	•		our ability to increase our revenue through product sales and revenue growth attributable to original equipment manufacturers and semiconductor vendors;
	•		our ability to develop our technology and expand our product and service offerings; and
	•		our anticipated working capital and capital expenditure requirements, including our ability to meet our anticipated cash needs.

Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Readers, however, should carefully review the factors set forth in this and other reports or documents that we file from time to time with the Securities and Exchange Commission (SEC).

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RISK FACTORS

In addition to other information in this Form 10-K report, investors evaluating our business should carefully consider the following risk factors. These risks may impair our operating results and business prospects and the market price of our stock. The risks set forth below and elsewhere in this Form 10-K report could cause actual results to differ materially from those projected.

Unanticipated fluctuations in our operating results 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 have in the past and may continue in the future to cause our operating results to fluctuate include:

	•		Uncertainties associated with retaining business with Microsoft and other key third-party partners, including:
			•		adverse changes in our relationship with Microsoft, from which a substantial portion of our revenue was generated and on which we rely to continue to develop and promote Windows CE and other Windows-based operating systems and applications;
			•		the failure or perceived failure of Windows Embedded operating systems upon which demand for the majority of our products and services is dependent, to achieve widespread market acceptance;
			•		unanticipated delays, or announcement of delays, by Microsoft of Windows product releases, which could cause us to delay our product introductions or delay commencement of service contracts and adversely affect our customer relationships;
	•		Managing operations and risks, including:
			•		the failure of the smart device market to develop;
			•		our inability to develop, market and sell new and enhanced products and services on a timely basis;
			•		changes in the mix of our services and product revenue, which have different gross margins;
			•		changes in demand for our products and services, including the early termination of customer contracts;
			•		increased competition and changes in our pricing as a result of increased competitive pressure;
			•		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.
			•		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 are delayed, curtailed or discontinued;

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 we do not maintain a good relationship with Microsoft, our revenue could decrease and our business would be adversely affected.

For the years ended December 31, 2002, 2001 and 2000, approximately 16%, 40% and 58% of our revenue, respectively, was generated under our Master Agreement with Microsoft. We expect that service revenue from Microsoft will not be as significant as our historical experience because work plans under our Master Agreement have ended.

We also have entered into distribution agreements with Microsoft, which enable us to distribute certain Microsoft licenses to our customers and generate product revenue. For the years ended December 31, 2002, 2001 and 2000, approximately 43%, 4% and 2% of our revenue, respectively, was generated under these distribution agreements. If these distribution agreements with Microsoft are terminated, our product revenue would decrease. Moreover, if these distribution agreements with Microsoft are not renewed on terms as favorable as current terms, our revenue could decrease, and our gross

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margins from these transactions, which are already low, would further decline. Microsoft is a publicly traded company that files financial reports and information with the Securities and Exchange Commission. These reports are publicly available under Microsoft’s Exchange Act filing number, 000-14278.

If we do not maintain our favorable relationship with Microsoft, we will have difficulty marketing our software products and services and may not receive developer releases of Windows CE, and our revenue and operating margins will suffer.

We also maintain a strategic relationship with Microsoft. In the event that our relationship with Microsoft were to deteriorate, our efforts to market and sell our software products and services to original equipment manufacturers and network operators could be adversely affected and our business would be harmed. Microsoft has great influence over the development plans and buying decisions of original equipment manufacturers utilizing Windows CE for smart devices. Microsoft refers many of our original equipment manufacturer customers to us. Moreover, Microsoft controls the marketing campaigns related to its operating systems, including Windows CE. Microsoft’s marketing activities, including trade shows, direct mail campaigns and print advertising, are important to the continued promotion and market acceptance of Windows CE and, consequently, of our Windows CE-based software products and services. We must maintain a successful relationship with Microsoft so that we may continue to participate in joint marketing activities with Microsoft, including participating in “partner pavilions” at trade shows and listing our services on Microsoft’s website, and to receive referrals from Microsoft. In the event that we are unable to continue our joint marketing efforts with Microsoft or fail to receive referrals from Microsoft, we would be required to devote significant additional resources and incur additional expenses to market our software products and services directly to potential customers. In addition, we depend on receiving from Microsoft developer releases of new versions of and upgrades to Windows CE and related Microsoft software in order to timely develop and ship our products and provide services. If we are unable to receive these developer releases, our revenue and operating margins would suffer.

If we are unable to license key software from third parties our business could be harmed.

We often integrate third-party software with our internally developed software to provide products and services for our original equipment manufacturer customers. If our relationships with our third-party vendors were to deteriorate, we might be unable to obtain licenses on commercially reasonable terms, if at all, for newer versions of their software required to maintain compatibility. In the event that we are unable to 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 or hardware products or the third-party hardware or software integrated with our software products and services may suffer from defects or errors that could impair our ability to sell our software products and services.

Software and hardware components as complex as those needed for smart devices 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 products until 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, to the extent that we provide increasingly comprehensive products and rely on third-party manufacturers to manufacture our and our customers’ products, we will be dependent on the ability of third-party manufacturers to correct, identify and prevent manufacturing errors. Errors that 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.

If Microsoft adds features to its Windows operating system or develops products that directly compete with products and services we provide, our revenue could be reduced and our profit margins could suffer.

As the developer of Windows, Microsoft could add features to its operating system or could develop products that directly compete with the products and services we provide to our customers. Such features could include, for example, faxing, hardware-support packages and quality-assurance tools. The ability of our customers or potential customers to obtain products and services directly from Microsoft that compete with our products and services 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.

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If the market for Windows Embedded operating systems fails to develop further, or develops more slowly than we expect, or declines, our business and operating results will be materially harmed.

Because a significant portion of our revenue to date has been generated by software products and services dependent on the Windows Embedded operating systems, if the market for such operating systems fails to develop further, develops more slowly than we expect, or declines, our business and operating results will be significantly harmed. Market acceptance of Windows Embedded will depend on many factors, including:

	•		Microsoft’s development and support of the Windows Embedded market. As the developer and primary promoter of Windows CE, if Microsoft were to decide to discontinue or lessen its support of the Windows CE operating system, potential customers could select competing operating systems, which would reduce the demand for our Windows CE-based software products and services;
	•		the ability of the Windows Embedded operating systems to compete against existing and emerging operating systems for the smart device market including: VxWorks and pSOS from WindRiver Systems Inc., VRTX from Mentor Graphics Corporation, JavaOS from Sun Microsystems, Inc. and Linux. In particular, in the market for palm-size devices, Windows Embedded operating system faces intense competition from PalmOS from Palm Incorporated, and to date has had limited success in this market. In the market for cellular phones, Windows Embedded operating systems faces competition from the EPOC operating system from Symbian, a joint venture among several of the largest manufacturers of cellular phones. Windows Embedded operating systems may be unsuccessful in capturing a significant share of these two segments of the smart device market, or in maintaining its market share in those other segments of the smart device market on which our business currently focuses, including the markets for Internet-enabled television set-top boxes, handheld industrial devices, consumer Internet appliances such as kiosk terminals and vehicle navigational devices, and Windows-based terminals;
	•		the acceptance by original equipment manufacturers and consumers of the mix of features and functions offered by Windows Embedded operating systems; and
	•		the willingness of software developers to continue to develop and expand the applications that run on Windows Embedded operating systems. To the extent that software developers write applications for competing operating systems that are more attractive to smart device end users than those available on Windows Embedded operating systems, potential purchasers could select competing operating systems over Windows Embedded operating systems.

Unanticipated delays, or announcement of delays, by Microsoft of Windows Embedded operating systems product releases could adversely affect our sales.

Unanticipated delays, or announcement of delays, in Microsoft’s delivery schedule for new versions of its Windows Embedded operating systems 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 of delays 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 operating results to fluctuate.

Erosion of the financial condition of our customers could adversely affect our business.

     Our business could be adversely affected in the event that the financial condition of our customers erodes because such erosion could cause these customers to reduce their demand for our products or even terminate their relationship with us, and also could result in these customers being greater credit risks. As the global information technology market weakens, the likelihood of the erosion of the financial condition of our customers increases, which could adversely affect the demand for our products and services. While we believe that our allowance for doubtful accounts is adequate, these allowances may not cover actual losses, which could adversely affect our business. Moreover, our distribution of Microsoft licenses is a relatively low-margin business, and we face increased credit risk with the accounts receivable from certain customers.

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Recent efforts to reduce expenses, including reductions in work force, may not achieve the results we intend and may
harm our business.

Beginning in 2001, we initiated a number of measures to streamline operations and reduce expenses, including cuts in discretionary spending, reductions in capital expenditures, reductions in our work force and consolidation of certain office locations, as well as other steps to reduce expenses. In connection with our cost reduction efforts, we were required to make certain product and product development decisions with limited information regarding the future demand. There can be no assurance that we decided to pursue the correct product offerings to take advantage of future market opportunities. Furthermore, the implementation of such measures has placed, and may continue to place, a significant strain on our managerial, operational, financial, employee and other resources. Additionally, the restructuring may negatively affect our recruiting and retention of important employees. It is possible that these reductions could impair our marketing, sales and customer support efforts or alter our product development plans. If we experience difficulties in carrying out such measures, our expenses could increase more quickly than we expect. If we find that our planned reductions do not achieve our objectives, it may be necessary to implement further streamlining of our expenses, to perform additional reductions in our work force, or to undertake additional cost-cutting measures.

Our revenue may continue to decline or we may not be able to return to profitability in accordance with our plans.

Our revenue declined 39% from 2001 to 2002 and 3% from 2000 to 2001. The decline in our revenue may continue in the future. In addition, the slowdown in the U.S. economy generally has added economic and consumer uncertainty that could adversely affect our revenue growth. We expect that our expenses will continue to be substantial in the foreseeable future as we continue to develop our technology and refocus 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 our expenses.

If we fail to develop products successfully and in a timely manner, we will not be able to compete effectively and our ability to generate revenue will suffer.

The market for Windows-based embedded products and services is competitive, 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 that are appealing to our customers with acceptable features, prices and terms. 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 we fail to accurately anticipate our customers’ needs or technical trends and are unable to introduce new products into the market successfully. 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 and our ability to generate product revenue will suffer.

If the market for smart devices fails to develop further, or develops more slowly than we expect or declines, our revenue will not develop as anticipated, if at all.

The market for smart devices 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 develop as anticipated, if at all. We are dependent upon the broad acceptance by businesses and consumers of a wide variety of Windows-based smart devices, which will depend on many factors, including:

	•		the development of content and applications for smart devices;
	•		the willingness of large numbers of businesses and consumers to use devices such as handheld and palm-size PCs and handheld industrial data collectors to perform functions currently 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.

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Our market is extremely competitive, which may result in price reductions, lower gross margins and loss of market share.

The market for Windows-based software products and services is extremely competitive. In addition, competition is intense for the business of the limited number of original equipment manufacturer customers that are capable of building and shipping large quantities of smart devices. Moreover, foreign competitors may be able to offer similar services to our customers at prices that are below our costs. 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;
	•		professional engineering services firms, domestic and foreign;
	•		established smart device software and tools vendors; and
	•		software and component distributors.

As we develop new products, particularly products 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. Microsoft has not agreed to any exclusive arrangement with us nor has it agreed not to compete with us. In fact, we believe that Microsoft has decided to bring more of the core development services and expertise that we provide in-house to Microsoft resulting in reduced opportunities for service revenue for us. The barrier to entering the market as a provider of Windows-based smart device software and services is low. In addition, Microsoft has created a marketing program to encourage systems integrators to work on Windows. These systems integrators are given the same access by Microsoft to the Windows technology as we are. New competitors may have lower overhead than us and may therefore be able to offer advantageous pricing. We expect that competition will increase as other established and emerging companies enter the Windows-based smart device market and as new products and technologies are introduced.

Our reputation and revenue could be adversely affected if third-party manufacturers and suppliers were to fail in meeting their performance obligations.

We intend to leverage and rely upon third-party manufacturers to manufacture products for us and our customers to the extent we develop increasingly comprehensive, customized turnkey solutions for our customers. As a result, we would depend on third-party manufacturers to produce a sufficient volume of products in a timely fashion and at satisfactory quality levels. If these third-party manufacturers were to fail in producing quality products on time and in sufficient quantities, our reputation and results of operations could suffer. In addition, we would rely on these third-party manufacturers to place orders with suppliers for the components they need to manufacture our technology in customers’ products. If they were to fail in placing timely and sufficient orders with suppliers, our revenue could suffer. Moreover, if alternative sources for components and elements of our technology were unavailable or financially prohibitive, the ability to maintain timely and cost-effective production of our customers’ products could be seriously harmed and our revenues and reputation could suffer as a result.

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.

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 a number of 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, these 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

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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 our 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 software products and services infringe their intellectual property rights, which could expose us to additional costs and litigation.

Third parties may claim that our current or future software products and services 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 software products and services infringe third-party intellectual property 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 software products 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 software product. Moreover, any indemnification we obtain against claims that the technology we license from third parties infringes the proprietary rights of others may not always be 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 software products and services we provide or arising from the incorporation by us 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.

Our international operations expose us to greater intellectual property, management, collections, regulatory and other risks.

Foreign customers generated approximately 21% of our total revenue in 2002. Our international operations expose us to a number of risks, including the following:

	•		greater difficulty in protecting intellectual property due to less stringent foreign intellectual property laws and enforcement policies;
	•		greater difficulty in managing foreign operations due to the lack of proximity between our home office and our foreign operations;
	•		longer collection cycles than we typically experience in the U.S.;
	•		unfavorable changes in regulatory practices and tariffs;
	•		adverse changes in tax laws;
	•		greater difficulty in managing foreign third-party manufacturing;
	•		the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies; and

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•

general economic and political conditions in Asian and European 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.

Recent acquisitions have proven difficult to integrate, and future acquisitions, if any, could disrupt our business, dilute shareholder value and adversely affect our operating results.

We have acquired the technologies and/or operations of other companies in the past and may acquire or make investments in complementary companies, services and technologies in the future. If we fail to properly evaluate, integrate and execute acquisitions and investments, including these recent acquisitions, our business and prospects may be seriously harmed. In some cases, we have been required to implement reductions in force and office closures in connections with an acquired business, which has resulted in significant costs to us. 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 and impair relationships with our employees, customers and strategic partners, and our management may be distracted from our day-to-day operations. We also may be unable to maintain uniform standards, controls, procedures and policies, and significant demands may be placed on our management and our operations, information services and financial, legal and marketing resources. Finally, acquired businesses sometimes result in unexpected liabilities and contingencies, which could be significant. In addition, acquisitions using debt or equity securities dilute the ownership of existing shareholders, which could affect the market price of our stock.

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 products and services entail the risk of such claims and we may be subject to such claims in the future. There is a risk that any such claims or liabilities may exceed or fall outside the scope of our insurance coverage, and we may be unable to retain adequate liability insurance 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 and services makes our revenue susceptible to fluctuations.

Our sales cycle is typically three to nine months because the expense and complexity of our products and services generally require a lengthy customer approval process, 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.

The volatility of the stock markets could adversely affect our stock price.

Stock markets are subject to significant price and volume fluctuations which may be unrelated to the operating performance of particular companies, and the market price of our common stock may therefore frequently change. The market price of our common stock could also fluctuate substantially due to a variety of other factors, including quarterly fluctuations in our results of operations, our ability to meet analysts’ expectations, adverse circumstances affecting the introduction and market acceptance of new products and services offered by us, announcements of new products and services by competitors, changes in the information technology environment, changes in earnings estimates by analysts, changes in accounting principles, sales of our common stock by existing holders and the loss of key personnel. In the past, following periods of volatility in the market price of a company’s stock, class action securities litigation has often been instituted against such companies. Such litigation, if

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instituted, could result in substantial costs and diversion of management’s attention and resources which would materially adversely affect our business, financial condition and operating results.

A continued decline in our stock price could cause us ultimately to be delisted from the NASDAQ National Market.

During 2002 to date, the market price for our common stock has traded at times near or below the $1.00 Nasdaq National Market minimum bid price. If our stock price declines and remains below $1.00 for a period of thirty consecutive trading days, we face the possibility of receiving notification from the Listing Qualifications Department of The Nasdaq Stock Market, Inc. indicating that our common stock has not maintained the required minimum bid price for continued quotation on the Nasdaq National Market and is subject to delisting. If our common stock is delisted from trading on the NASDAQ National Market as a result of listing requirement violations and is neither relisted thereon nor listed for trading on the NASDAQ SmallCap Market, trading in our common stock may continue to be conducted on the OTC Bulletin Board or in a non-NASDAQ over-the-counter market, such as the “pink sheets.” Delisting of our common stock from trading on the NASDAQ National Market would adversely affect the price and liquidity of our common stock and could adversely affect our ability to issue additional securities or to secure additional financing. In that event our common stock could also be deemed to be a “penny stock” under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in the common stock, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could further adversely affect the liquidity of our common stock.

A small number of our existing shareholders can exert control over us.

Our executive officers, directors and principal shareholders holding more than 5% of our common stock together control a majority of our outstanding common stock. As a result, these shareholders, if they act together, could 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. Our board of directors 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 with terms calculated to delay or prevent a change in control of our company or make removal of our management more difficult. In addition, our board of directors is divided into three classes. The directors in each class serve for three-year terms, one class being elected each year by our shareholders. 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 our company because it generally makes it more difficult for shareholders to replace a majority of our directors.

In addition, Chapter 19 of the Washington Business Corporation Act generally prohibits a “target corporation” from engaging in certain significant business transactions with a defined “acquiring person” 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. This provision may have the effect of delaying, deterring or preventing a change in control of our company. The existence of these anti-takeover provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

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BUSINESS

We provide products and services for the development and deployment of wireless and wireline smart devices that use Microsoft Windows Embedded operating systems, such as handheld data collection, digital entertainment, and mobile communication devices. We are one of the leading system integrators for the Microsoft Windows Embedded operating systems and technologies and are the leading distributor of Microsoft Windows Embedded operating systems and tools. Our customers include original equipment manufacturers (OEMs), original design manufacturers (ODMs), software developers and network operators. We believe customers are attracted to our products and services because we apply our more than nine years of Microsoft Windows Embedded device development experience to help bring customized smart devices and applications to market quickly and cost-effectively.

Leveraging our Microsoft Windows Embedded experience, we generate revenue in three distinct ways. First, we offer a wide range of services, including:

	•		Hardware and software development services;
	•		Systems integration;
	•		Quality assurance;
	•		Customer technical support; and
	•		Platform development training.

Second, we license to OEMs, ODMs and network operators a wide range of our proprietary products, including:

	•		Complete, customizable reference designs utilized to create smart devices such as smart phones, pocket PCs, portable data collection terminals, and kiosks;
	•		Software applications that enhance the feature sets and usability of smart devices, including personal information managers, faxing capabilities, secure file systems, and backup and restore applications;
	•		Software technologies that extend the features of smart devices, such as new universal serial bus (USB) and secure digital input/output (SDIO) peripherals;
	•		Software enabling the low-level management and updating and synchronization of deployed smart devices; and
	•		Software development and testing tools that facilitate the development of smart devices.

Third, we sublicense and distribute licenses for a wide range of third-party products, including:

	•		Microsoft Windows CE.NET;
	•		Microsoft Windows XP Embedded;
	•		Microsoft Windows Server Appliance Kit; and
	•		Insignia Geode Java Virtual Machine (under the BSQUARE JEM-CE brand).

We were incorporated in the State of Washington in July 1994. Our principal executive office is located at 3150 139th Avenue SE, Suite 500, Bellevue, Washington 98005, and our telephone number is (425) 519-5900.

Strategy

BSQUARE’s goal is to continue to enhance our position as a leading provider of complete smart device solutions. By leveraging the breadth and depth of our intellectual property and development capabilities, we believe we provide our customers with comprehensive and feature-rich device solutions in a reliable and cost-effective manner.

     Key elements to our strategy include:

•

Leveraging our expertise and product portfolio to provide “turnkey” solutions : We intend to leverage our product and service offerings to provide more comprehensive customized (turnkey) solutions to our customers. Using our substantial institutional knowledge about Microsoft Embedded operating systems and related technologies and our extensive portfolio of existing products and intellectual property, we are able to provide our customers with hardware and software solutions, which can be used for various applications. While we focus on the design and development of their products, our customers can be free to focus on their market and product requirements, getting their products to market more quickly. In addition, products can be manufactured for our customers by a contract manufacturer. The BSQUARE® Power Handheld Reference Design demonstrates the wide range of capabilities we have to provide turnkey solutions, and we intend to leverage our experience with the Power Handheld to increase these business opportunities.

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	•		Leveraging our Microsoft Windows Embedded licensing business to create additional sales opportunities : BSQUARE is currently the largest distributor of Microsoft Windows Embedded products in North America. The customers of our licensing business generally have well-defined needs and spending patterns. Not only is this business a source of direct revenue, but it also represents a significant opportunity for us to generate additional forms of revenue. By offering these existing customers additional BSQUARE products and services, we potentially increase margin contributions on a per customer basis.
	•		Leveraging our existing strategic relationships to expand opportunities : As a result of the growth in our Microsoft Windows Embedded licensing business, we have reinvigorated our relationship with Microsoft, which we believe should help drive more business to BSQUARE in the future. We are expanding our co-marketing activities with Microsoft, which will not only help fortify our position in the industry but should also serve to expand the market available to BSQUARE. We also continue to strengthen our relationships with other key companies in our industry, such as Intel, Texas Instruments and Advanced Micro Devices. By aligning our strategies more carefully with these key companies, we believe we become a natural solutions provider for their customers.

Industry Background

As more businesses and consumers access the Internet, new ways of conducting business are emerging. Examples of users who are taking advantage of opportunities to communicate electronically include:

	•		Businesses that use mobile computing devices to permit their employees to access server-based network applications and the Internet from remote sites;
	•		Retail businesses that use point-of-sale terminals which connect to back office systems to provide real-time inventory tracking, automate their procurement processes and publish information instantly to both internal and external users via the Internet;
	•		Healthcare professionals who use mobile computing devices to record and access patient information that can then be shared via internal networks and the Internet among a broader group of professionals; and
	•		Consumers who use Internet-enabled television set-top boxes, smart cellular phones, gaming systems and other devices to access Internet content, communicate and conduct transactions online.

The increasing need for connectivity among both business and consumer users is driving demand for easy-to-use, cost-effective and customizable methods of electronic communication. Although the PC has been the traditional means of electronically connecting suppliers, partners and customers, smart devices is a new class of powerful technology. This includes smart phones, handheld and palm-size PCs, handheld industrial data collectors, consumer “Internet appliances” such as kiosk and point of sale terminals, Internet-enabled television “set-top boxes,” logistical and navigation devices, and Webpads. These smart devices are particularly attractive to business and consumer users because they are often less expensive than desktop and laptop computers; have adaptable configurations, including size, weight and shape; and are able to support a variety of customized applications and user interfaces that can be designed for particular tasks. In addition, these devices are typically compatible with existing business information systems.

The smart device industry is characterized by a wide variety of hardware configurations and end-user applications, each often designed for a specific market. To accommodate these diverse characteristics in a cost-effective manner, OEMs and ODMs require operating systems that can be integrated with a number of different smart devices and can support an expanding range of industry-specific functionality, content and applications. The Microsoft Windows family of operating systems, specifically Windows CE, Windows NT Embedded and Windows XP Embedded, helps satisfy these requirements because it leverages the existing industry-wide base of Microsoft Windows developers and technology standards; can be customized to operate across a variety of smart devices and integrate with existing information systems; offers Internet connectivity; and reduces systems requirements compared to traditional PC operating systems.

Services

We provide professional engineering services, such as custom development, product adaptations, and system quality assurance, to a diverse customer base. We focus on providing integration and support services to OEMs

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developing smart devices based on the Windows CE, Windows NT Embedded and Windows XP Embedded operating systems. For example, we have provided services to companies developing Internet-enabled television set-top boxes, handheld industrial devices, consumer Internet appliances, kiosk terminals, navigational devices in cars and trucks, and Windows-based terminals. Our software engineering projects require the use of our products, and we often retain a license or other proprietary rights in the resulting work product. In addition, we often provide support services and training with our software products and engineering services in an effort to complete smart device development and reduce the customer’s time-to-market.

During our first seven years that we were in business, the majority of our business was providing software development tools and related engineering services to Microsoft and numerous semiconductor vendors to support and enhance the development of the Windows CE operating system and the Microsoft Visual Tools series, a set of software development tools for use with the Windows CE operating system. These tools include compilers, linkers, runtime libraries, debuggers, and customizations to Platform Builder for Windows CE and integration of Windows CE with multiple microprocessors. Since July 2001 these service engagements have curtailed to an immaterial level - approximately 9 of our 135 engineers were involved in the development of the Windows CE operating system and accompanying tools for Microsoft at the end of 2002.

Products

We offer three categories of products that are used by our customers for the development and deployment of smart devices:

	•		Smart device design packages and software applications . Our SmartBuild™ design packages provide complete “turn-key” hardware design and software solutions for developing Windows CE-based products in various form factors, including smart phones, Pocket PCs, webpads, data collection tablets, and portable data terminals. One example of a product based on our SmartBuild solution is the BSQUARE® Power Handheld, which is based on this comprehensive software solution kit complete with iWin graphic user interface, remote device administrator and customized engineering services with a hardware reference platform. In addition to the software stack and hardware design, we provide a wide range of commercially available personal productivity, utility and communications software to enhance the functionality and usefulness of Windows CE-based smart devices. SmartBuild design packages include BSQUARE software applications for faxing, printing, spreadsheet and utility functionality.
	•		Development products. We provide software products that facilitate the integration of new hardware and peripherals into Windows operating systems including the CEValidator™ family of testing and verification tools for quality assurance; licensing and integration of wired and wireless connectivity technologies, or stacks for wireless connectivity and universal serial bus (USB); and user interface design, secure digital input and output (SDIO) capability and development tools.
	•		Third-party software products . To augment our own software products and services, we have license and distribution agreements with third-party software vendors to provide our customers with additional features and functionality. Our ability to provide these third-party software products to OEMs in conjunction with our own software products and services, provides our original equipment manufacturer customers with a single source for software products and services for smart devices. We are currently a licensed distributor of operating systems and software applications developed by Microsoft, Insignia, Citrix, Socket, Communication Intelligence Corporation, Datalight, M-Systems, and RealNetworks.

Customers

Microsoft has been our largest customer to date, representing approximately 16%, 40%, and 58% of our total revenue in 2002, 2001 and 2000, respectively.

Other customers include OEMs, ODMs, network operators, and semiconductor vendors seeking to leverage the benefits of Windows-based operating systems to develop high quality, full-feature products that meet the requirements of numerous end-markets.

We maintain other strategic relationships with Microsoft to promote and license its Windows-based operating systems across a broad range of industries and applications. Our offerings to customers developing devices with Microsoft technology extends to the following:

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	•		Windows Embedded distributor. We are a licensed distributor of the Windows CE, Windows NT Embedded and Windows XP Embedded operating systems. As a result, we provide our customers with the opportunity to bundle the Windows Embedded operating systems in their smart devices.
	•		Windows CE independent software vendor. We develop software applications for a wide variety of Windows CE-based smart devices, which we market under our brand names, including bFAX and bPRINT.
	•		Development partner. Since our inception, we have been a “preferred Microsoft vendor” and have worked on a number of Windows CE-based projects for Microsoft and on the development of Windows CE-related software tools.
	•		Systems integrator. We are one of a limited number of “Gold-level” members of the Microsoft Windows Embedded Partner program, as designated by Microsoft, helping customers such as OEMs bring smart devices to market quickly and cost effectively. We were named Windows Embedded Partner of the Year in the category of Systems Integrator by Microsoft in December 2001.
	•		Windows CE training partner. BSQUARE is one of the few companies authorized by Microsoft to provide Windows CE training.

Sales and Marketing

We market our products and services in a variety of ways;

	•		We market our services to OEMs, ODMs, network operators and semiconductor vendors through our direct sales force and various resellers;
	•		We market our products and related services through our direct sales force, as well as through third-party representatives and distributors; and
	•		We market our software applications bundled by OEMs onto particular smart devices or integrated with our smart device designs.

We have direct sales offices in the United States, Japan, and Taiwan. As of February 28, 2003, we had 39 employees in our sales and marketing departments. Key elements of our sales and marketing strategy include direct marketing, advertising, event marketing, an active public relations program, customer and strategic alliance partner co-marketing programs and a comprehensive website.

Research and Development

As of February 28, 2003, we had 73 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 departments, as well as with our customers and potential customers, to better understand market needs and requirements.

Competition

We face competition from:

	•		Our current and potential customers’ internal research and development departments that may seek to develop their own proprietary products and solutions;
	•		Professional engineering services firms;
	•		Established smart device software and tools manufacturers; and

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•

Software and component distributors.

As we develop new products, particularly products focused on specific industries, we may begin competing with companies with which we have not previously competed. We compete principally on the basis of the breadth of products and services offered, the experience of the providers, the quality of the products and services, the time-to-market and price. We believe we compete favorably in each of these areas.

Intellectual Property and Other Proprietary Rights

Our intellectual property is critical to our success. In general, we attempt to protect our intellectual property rights through patent, copyright, trademark and trade secret laws and contractual arrangements. There can, however, be no assurance that our efforts 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 currently have a number of pending U.S. patent applications. We have five issued patents and a number of registered trademarks. We will continue to pursue registration of these and other marks. This report also contains other company and product names, which may be the trademarks of their respective owners.

Acquisitions

Infogation Corporation

On March 13, 2002, we acquired all of the issued and outstanding shares of Infogation Corporation, a developer of on-board and handheld vehicle navigation systems (telematics), for total consideration of $8.7 million, including 1.2 million shares of our common stock. We assumed Infogation’s outstanding vested and unvested employee stock options, which were converted into options to acquire approximately 200,000 shares of our common stock. In addition, $300,000 of cash and 129,762 shares of common stock were held in escrow subject to terms and conditions of the merger agreement. The agreement contained a provision for the payment of up to $3.0 million of additional consideration in cash and/or common stock based upon the attainment of certain revenue targets, as defined in the merger agreement.

Due to weaker-than-expected demand for telematics products and services, we reduced the number of telematics personnel to four at the end of 2002 and plan to eliminate the remaining positions in early 2003. In addition, we no longer expect to actively pursue telematics work.

Mainbrace Corporation

On May 24, 2000, we acquired all of the issued and outstanding shares of Mainbrace Corporation, an intellectual property licensing and enabling software firm. We paid an aggregate of $10.8 million cash and issued 627,334 shares of our common stock and options to purchase an additional 172,629 shares of our common stock in exchange for all of the outstanding shares and options to purchase shares of Mainbrace. The acquisition was accounted for under the purchase method of accounting.

BlueWater Systems, Inc.

On January 5, 2000, we acquired all of the issued and outstanding shares of BlueWater Systems, Inc., a privately held designer of software development tools for the creation of Windows-based smart devices. The transaction was effected through the exchange of 261,391 shares of our common stock and options to purchase an additional 21,793 shares of our common stock for all of the issued and outstanding shares and options to purchase shares of BlueWater. The acquisition was accounted for as a pooling of interests.

Internet Website

Our Internet website can be found at www.bsquare.com. We make available free of charge through our investor relations website at www.bsquare.com/ir , under “Financial Releases,” our annual reports on Form 10-K and quarterly reports on Form 10-Q, filed pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is filed with, or furnished to, the SEC.

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Employees

As of February 28, 2003, we had 204 employees, excluding independent contractors and other temporary employees, including 135 employees in software engineering services and research and product development, 39 employees in sales and marketing and 30 employees in general and administrative services (including executive officers). Of these employees, 176 are located in the United States, 19 are located in Japan and 9 are located in Taiwan. In addition, from time to time, we employ temporary employees and consultants.

Directors and Executive Officers

The following table sets forth certain information with respect to our directors and executive officers as of February 28, 2003.

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 (with the exception of the period of April 2001 to September 2001, during which time he served as Chief Executive Officer and Chairman of the Board). 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.

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 private equity firm, prior to our initial public offering. 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. Mr. Chambers holds a B.A. from Harvard University and a M.B.A. from Stanford University.

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, prior to our initial public offering. 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 1995 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 & Young LLP, a public accounting firm, from April 1984 to October 1988. Mr. Land serves as a director of Radiant Communications Corp. and several privately held companies.

William L. Larson has been a director of BSQUARE since September 1998. Mr. Larson is currently a private investor. From September 1993 to January 2001, Mr. Larson served as the Chief Executive Officer of Network Associates, Inc., a software company, where he also served as President and a director from October 1993 to January 2001 and as Chairman of the Board from April 1995 to January 2001. Mr. Larson also served as Chairman of the Board of McAfee.com Corporation a software company, from October 1998 to January 2001. 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. Prior to that, Mr. Larson held various executive positions at Apple Computer, Inc. and Spinnaker Software and was a

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consultant with Bain & Company. Mr. Larson holds degrees from Stanford Law School and the Wharton School of Finance and Commerce at the University of Pennsylvania. Mr. Larson is a member of the California Bar Association and serves on the boards of several technology companies, including Backweb Technologies Ltd.

Elwood D. Howse, Jr. has been a director at BSQUARE since November 2002. Mr. Howse is currently President of Cable & Howse, LLC, a Northwest venture capital management firm, a position he has held since 1981. Mr. Howse has also served as a director of ImageX, a provider of online solutions for distribution, management and production of sales and marketing materials, since December 1996, of OrthoLogic Corporation, a provider of orthopedic rehabilitation products, since September 1987, and of Applied Microsystems Corporation, an embedded systems solutions provider to the electronics industry, since February 1992. In addition, he also serves as a director of several private companies and charitable institutions. Mr. Howse received both a B.S. in engineering and a M.B.A. from Stanford University.

Elliott H. Jurgensen, Jr . has been a director at BSQUARE since January 2003. Mr. Jurgensen recently retired from KPMG LLP after 32 years, including 23 years as a partner. During his career he has held a number of leadership roles, including National Partner in Charge of KPMG’s Hospitality Industry Practice from 1981 to 1993, Managing Partner of the Bellevue, Washington office from 1982 to 1991 and Managing Partner of the Seattle, Washington office from 1993 to 2002. His professional experience focused on providing business advisory and audit services to clients ranging from emerging businesses to large multinational public companies. His industry experience includes software, e-commerce, life sciences, hospitality, long-term care and manufacturing. He has been actively involved in a number of business, civic and charitable organizations and is currently Treasurer of WSA (formerly the Washington Software Alliance). Mr. Jurgensen has a B.S. in accounting from San Jose State University and is a Certified Public Accountant.

James R. Ladd has been our Senior Vice President, Finance & Operations, Chief Financial Officer, Secretary and Treasurer since April 2002. From 1997 to 2001 Mr. Ladd served as President and Chief Executive Officer of EnCompass Globalization Inc., which provided services to convert U.S. software and websites for foreign markets. Mr. Ladd has also served as an international business consultant, and for 16 years was a partner in Deloitte & Touche, an international accounting and consulting firm in which he was Managing Partner of the Tokyo and Seattle offices and held other management roles. Mr. Ladd is currently chairman of the University of Washington’s Global Business Advisory Board and a trustee of the United Way of King County Endowment Fund. Mr. Ladd holds a B.A. in Accounting from Duke University and is a Certified Public Accountant.

Kent A. Hellebust has been our Senior Vice President, Marketing and Product Management since May 2002. From January 2002 to April 2002 Mr. Hellebust served as the head of the 802.11 initiative at Starbucks Corporation, a provider of coffee and coffee-related products, where he led the market targeting and deployment of the world’s largest wireless broadband network. From August 1999 to May 2001, Mr. Hellebust served as the Executive Vice President of Wireless Services at Infospace, Inc., a provider of internet-related content and services. Mr. Hellebust also served as Vice President of Innovation Services at AT&T Wireless Services, Inc., a telecommunications company, from August 1995 to July 1999. Mr. Hellebust holds an M.B.A. from the Wharton School of the University of Pennsylvania and a B.A. from Wesleyan University.

Scott E. Bufkin has been our Vice President, Professional Engineering Services since November 2001, and from January 1997 to November 2001, Mr. Bufkin held various other positions with us. From January 1992 to January 1997, Mr. Bufkin was an engineering manager and program manager at Intermec Corporation, an automated identification company, and from September 1988 to January 1992, he served in management positions at ESCA Corporation, a developer of control systems for electric utilities. Mr. Bufkin holds a B.S. in Computer Science from Texas A&M University.

Brian T. Crowley has been our Vice President, Product Development since April 2002. From December 1999 to April 2002, Mr. Crowley held various positions at DataChannel, a market leader in enterprise portals, including Vice President of Engineering and Vice President of Marketing. From April 1999 to December 1999, Mr. Crowley was Vice President, Operations of Consortio, a software company. From December 1997 to April 1999, Mr. Crowley was Director of Development at Sequel Technology, a network solutions provider. From 1986 to December 1997, Mr. Crowley held various positions at Applied Microsystems Corporation, including Vice President and General Manager of the Motorola products and quality assurance divisions. Mr. Crowley holds a B.S. in Electrical Engineering from Arizona State University.

Brian M. Deutsch has been our Vice President, Wireless Services since July 2002, and from May 2001 to July 2002, Mr. Deutsch served as our Vice President, General Manager of Device Solutions. From May 1999 to May 2001, Mr. Deutsch was the Chief Executive Officer and a founder of Sageport, Inc., a provider of Internet technology. From April 1997 to January 1999, he was interim Chief Executive Officer of another company he co-founded, TeamVision, Inc., a provider of advanced adaptive knowledge networks and applications for companies such as Boeing and NASA. From September 1989 to May 1999, Mr. Deutsch served as Chief Executive Officer of Foursum International, a designer and manufacturer of public telephony products

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and services. From 1992 to 1996, Mr. Deutsch was Chief Executive Officer of American Wireless Corp., a wireless technology start-up, which he co-founded. Mr. Deutsch holds a B.S. in Electrical Engineering from the University of Miami.

Tracy A. Rees has been our Vice President, Sales since February 2003. From May 2002 to February 2003 Mr. Rees served as our Director, Microsoft Licensing. From August 2001 to May 2002, Mr. Rees served as President and Director and from August 1999 to August 2001 as Vice President, Sales and Marketing at Anna Technology, a provider of system design and integration services, education services, and software for manufacturers of smart devices. Mr. Rees served as Director, Electronic Products at PG Design Electronics, a manufacturer of industrial PCs, memory modules, and other computer devices, from October 1998 to August 1999. From October 1995 to July 1998, Mr. Rees served as Vice President, Sales and Marketing at Magnetec Corporation, a division of Transact Technology, a company which designs, develops, manufactures and markets transaction-based printers. Mr. Rees holds a B.S. from the State University of New York.