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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2002

OR

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

For the Transition Period from __________ to ____________ .

Commission File Number: 000-27687

BSQUARE CORPORATION
(Exact name of registrant as specified in its charter)

(425) 519-5900
(Registrant’s telephone number, including area code)

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

     As of November 1, 2002, there were 36,860,280 shares of the registrant’s common stock outstanding.

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BSQUARE CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2002

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

BSQUARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

See notes to condensed consolidated financial statements.

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BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

See notes to condensed consolidated financial statements.

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BSQUARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See notes to condensed consolidated financial statements.

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BSQUARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(unaudited)

1.

Summary of Significant Accounting Policies.

Basis of Presentation

     The condensed consolidated financial statements have been prepared by BSQUARE Corporation (the “Company” or “BSQUARE”) without audit pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting and include the accounts of the Company and its subsidiaries. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, as well as the accounting changes resulting from the adoption of Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets,” necessary for a fair presentation, in conformity with U.S. generally accepted accounting principles, of the Company’s financial position at September 30, 2002 and its operating results and cash flows for the three and nine months ended September 30, 2002 and 2001. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provision for bad debts, valuation of long-lived assets and deferred revenue. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission. Certain reclassifications have been made for consistent presentation.

2.

Consolidation of Excess Facilities and Restructuring Charge.

     Due to the economic slowdown in the U.S. and international business environment, as well as the reduction in our business with Microsoft, on January 8, 2002, the Company completed a company-wide reduction in workforce of approximately 100 employees, representing approximately 20% of the Company’s total employees at the time, including the closure of the Company’s 25-person professional service engineering facility in Eden Prairie, Minnesota. A restructuring charge of $2.2 million was recorded in the first quarter of 2002 relating to severance and other benefits costs associated with the headcount reduction, facility closure and consolidation costs, and fixed asset impairment, as well as payments for excess facilities under noncancelable leases.

     On July 17, 2002, to further reduce expenses, the Company announced a company-wide reduction in workforce of approximately 30% of the remaining workforce to be completed by December 31, 2002. Approximately 60 employees were involuntarily terminated in the third quarter of 2002, with 50 more to be involuntarily terminated in the fourth quarter of 2002. These reductions resulted in the curtailment of certain research and development initiatives and reductions in the Company’s engineering services, sales, general and administrative departments. In connection with the July 2002 reduction in force, the Company recorded a restructuring charge of $9.9 million during the third quarter of 2002, which included $1.5 million for severance and other benefits paid by the Company, $6.4 million for excess facilities primarily relating to noncancelable leases and early lease termination fees, and $2.0 million of property and equipment that was disposed of or abandoned.

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     The restructuring costs and other related charges are summarized as follows (in thousands):