1054721--2/19/2008--BSQUARE_CORP

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{property, intellectual, protect}

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{system, service, information}

{financial, litigation, operation}

{provision, law, control}

{operation, international, foreign}

{tax, income, asset}

{acquisition, growth, future}

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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. 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. 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. Our marketplace is extremely competitive, which may result in price reductions, lower gross profit margins and loss of market share. 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. 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 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. 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. Erosion of the financial condition of our customers could adversely affect our business. 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. 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. If we fail to adequately protect our intellectual property rights, competitors may be able to use our technology or trademarks, which could weaken our competitive position, reduce our revenue and increase our costs. Our 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. We have incurred and will continue to incur substantial costs to comply with the requirements of the Sarbanes-Oxley Act of 2002. 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. Our international operations expose us to greater intellectual property, management, collections, regulatory and other risks.

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1054721--2/19/2008--BSQUARE_CORP_/WA