<PAGE>   1


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

                                    FORM 10-Q

(Mark one)

                  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                         OF THE SECURITIES EXCHANGE ACT OF 1934 
                      For the quarterly period ended June 30, 1998

                                           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: 0-21541

                                 BITSTREAM INC.
             -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

                   DELAWARE                                      04-2744890
   --------------------------------------------               ----------------
  (State or other jurisdiction of incorporation               (I.R.S. Employer 
              or organization)                               Identification No.)


                    215 FIRST STREET
                CAMBRIDGE, MASSACHUSETTS                             02142
        ----------------------------------------                  ----------
        (Address of principal executive offices)                  (Zip Code)



                                 (617) 497-6222
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                                 NOT APPLICABLE
 ----------------------------------------------------------------------------
    (Former name, former address and former fiscal year, if changed since 
                               last report)

   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 [ ]

   On August 10, 1998 there were 6,721,072 shares of Class A Common Stock, par
value $0.01 per share, and no shares of Class B Common Stock, par value $0.01
per share, outstanding.


                                      -1-

<PAGE>   2

<TABLE>
<CAPTION>

                                          INDEX

                                                                                   PAGE
                                                                                 NUMBERS
                                                                                 -------
<S>                                                                             <C>      
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

        CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 (UNAUDITED) AND
            DECEMBER 31, 1997 (AUDITED).........................................    3

        CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
            AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1997 (UNAUDITED).    4

        CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
            JUNE 30, 1998 (UNAUDITED) AND 1997 (UNAUDITED) .....................    5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................................    6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS...................................................   10

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.......................................................   14

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...............................   14

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.........................................   14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS......................   14

ITEM 5. OTHER INFORMATION.......................................................   15

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................   15

               SIGNATURES.......................................................   16

</TABLE>

                                      -2-
<PAGE>   3


                         PART I -- FINANCIAL STATEMENTS

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                         BITSTREAM INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                      JUNE 30,      DECEMBER 31,
                                                                        1998           1997
                                                                   -------------  ---------------
                                                                    (UNAUDITED)     (AUDITED)
                        ASSETS
<S>                                                                <C>            <C>
Current assets
   Cash and cash equivalents                                       $  5,843,000   $  6,364,000
   Accounts receivable, net of allowance for doubtful                 3,114,000      3,694,000
     accounts
   Current portion of long-term accounts receivable
     and extended plan accounts receivable, net of
allowance for doubtful accounts                                        769,000       1,855,000
   Deferred income taxes                                               868,000         868,000
   Other current assets                                                446,000         684,000
                                                                   -----------    ------------
       Total current assets                                         11,040,000      13,465,000
                                                                   -----------    ------------
Property and equipment, net                                          1,299,000       1,399,000
                                                                   -----------    ------------
Other assets

   Long-term accounts receivable, net of current portion                49,000          39,000
   Goodwill, net of amortization                                     1,719,000       1,948,000
   Investment in DiamondSoft, Inc.                                     450,000              --
   Other assets                                                        186,000         158,000
                                                                   -----------    ------------
        Total other assets                                           2,404,000       2,145,000
                                                                   ------------   ------------
        Total assets                                               $14,743,000    $ 17,009,000
                                                                   ===========    ============

         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Current maturities of capital lease obligations                 $    27,000    $     28,000
   Accounts payable                                                    713,000         753,000
   Accrued expenses                                                  3,569,000       3,472,000
                                                                   -----------    ------------
       Total current liabilities                                     4,309,000       4,253,000
                                                                   ------------   ------------
Capital lease obligations, less current maturities                      42,000          54,000
                                                                   ------------   ------------
Other long-term liabilities                                              1,000          19,000
                                                                   ------------   ------------
       Total long-term liabilities                                      43,000          73,000
                                                                   ------------   ------------
Stockholders' equity
   Common stock                                                         67,000          65,000
   Additional paid-in capital                                       30,402,000      29,940,000
   Accumulated deficit                                             (20,039,000)    (17,283,000)
Cumulative translation adjustment                                      (39,000)        (39,000)
                                                                   -----------    ------------
       Total stockholders' equity                                   10,391,000      12,683,000
                                                                   -----------    ------------
       Total liabilities and stockholders' equity                  $14,743,000    $ 17,009,000
                                                                   ===========    ============

</TABLE>


            THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED 
                             FINANCIAL STATEMENTS.

                                      -3-
<PAGE>   4

<TABLE>
<CAPTION>

                                        BITSTREAM INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                                  (UNAUDITED)

                                                THREE MONTHS ENDED               SIX MONTHS ENDED
                                                     JUNE 30,                        JUNE 30,
                                          -------------------------------  ---------------------------    
                                               1998             1997            1998          1997
                                          --------------   --------------  -------------- ------------
<S>                                         <C>              <C>             <C>            <C>        
   Revenues                                 $ 3,304,000      $ 3,163,000     $ 6,145,000    $ 5,685,000
   Cost of revenues                             691,000          485,000         884,000        774,000
                                            -----------      -----------     -----------    -----------

       Gross Profit                           2,613,000        2,678,000       5,261,000      4,911,000
                                            -----------      -----------     -----------    -----------

OPERATING EXPENSES:
   Selling and marketing                      1,980,000        1,603,000       3,871,000      2,819,000
   Research and development                   1,304,000          649,000       2,625,000      1,157,000
   General and administrative                   437,000          564,000         613,000        989,000
   Acquired in-process                                                    
     research and development                        --        4,930,000       4,930,000             --
   Severance and other    
     non-recurring compensation                 520,000        1,371,000         960,000      1,371,000
                                            -----------      -----------     -----------    -----------

       Total operating expenses               4,241,000        9,117,000       8,069,000     11,266,000
                                            -----------      -----------     -----------    -----------

       Loss from operations                  (1,628,000)      (6,439,000)     (2,808,000)    (6,355,000)
                                            -----------      -----------     -----------    -----------
OTHER INCOME (EXPENSE):
   Equity in loss of investment 
     in DiamondSoft, Inc.                      (50,000)              --        (50,000)             --
   Other income, net                            64,000          171,000         170,000        342,000
                                            -----------      -----------     -----------    -----------

       Total other income                        14,000          171,000         120,000        342,000
                                            -----------      -----------     -----------    -----------

       Loss before provision for income      (1,614,000)      (6,268,000)     (2,688,000)    (6,013,000)
         taxes                              -----------      -----------     -----------    -----------

       Provision for income taxes                45,000          118,000          69,000        141,000
                                            -----------      -----------     -----------    -----------

       Net loss                             $(1,659,000)     $(6,386,000)    $(2,757,000)   $(6,154,000)
                                            ===========      ===========     ===========    ===========

Basic and diluted net loss                  $     (0.25)     $     (1.02)    $     (0.42)   $     (1.01)
                                            ===========      ===========     ===========    ===========
per share Shares used in computing basic 
and diluted net loss  per common share        6,701,002        6,285,567       6,650,360      6,108,613
                                            ===========      ===========     ===========    ===========
   

</TABLE>

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.

                                      -4-
<PAGE>   5


                             BITSTREAM INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       (UNAUDITED)
<TABLE>
<CAPTION>

                                                                         SIX MONTHS ENDED
                                                                              JUNE 30,
                                                                  -----------------------------
                                                                      1998              1997
                                                                  -----------      ------------
<S>                                                                <C>               <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ..................................................      (2,757,000)       (6,154,000)
  Adjustments to reconcile net loss to net cash provided
   by operating activities:
     Acquired In-process research and development ...........              --         4,930,000
     Depreciation and amortization ..........................         575,000           201,000
     Compensation on grant of stock options .................         322,000                --
     Equity in loss of DiamondSoft, Inc. ....................          50,000                --
     Changes in current assets and liabilities:
       Accounts receivable ..................................         579,000          (180,000)
       Long-term accounts receivable ........................       1,087,000           104,000
       Other current assets .................................         228,000           278,000
       Accounts payable .....................................         (39,000)         (297,000)
       Accrued expenses .....................................          96,000         1,852,000
                                                                  -----------      ------------
       Net cash provided by operating activities.............         141,000           734,000
                                                                  -----------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment .......................        (246,000)         (130,000)
  Acquisition of businesses .................................              --        (4,141,000)
  Investment in DiamondSoft, Inc. ...........................        (500,000)               --
  Change in other assets ....................................         (27,000)           81,000
  Change in other long term liabilities .....................              --            18,000
                                                                  -----------      ------------
       Net cash used in investing activities ................        (773,000)       (4,172,000)
                                                                  -----------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on capital lease obligations .....................         (13,000)          (23,000)
  Payments on IPO offering expenses .........................              --           (68,000)
  Change in other long term liabilities .....................         (18,000)               --
  Proceeds from the exercise of stock options and warrants ..         142,000            49,000
                                                                  -----------      ------------
        Net cash provided by (used in) financing activities .         111,000           (42,000)
                                                                  -----------      ------------

Net decrease in cash and cash equivalents ...................        (521,000)       (3,480,000)
Cash and cash equivalents, beginning of period ..............       6,364,000        11,718,000
                                                                  -----------      ------------
Cash and cash equivalents, end of period ....................     $ 5,843,000      $  8,238,000
                                                                  -----------      ------------


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest ....................................     $     4,000      $      2,000
                                                                  ===========      ============
  Cash paid for income taxes ................................     $        --      $    118,000
                                                                  ===========      ============

IN CONNECTION WITH THE ACQUISITION OF BUSINESSES (SEE NOTE 6)
  THE FOLLOWING NON-CASH TRANSACTIONS OCCURRED:
  Fair value of assets acquired .............................              --      $  7,959,000
  Liabilities assumed .......................................              --          (914,000)

  Issuance of common stock ..................................              --        (1,608,000)
  Issuance of options to purchase common stock ..............              --        (1,296,000)
                                                                  -----------      ------------
  Cash paid for acquisition and acquisition costs ...........              --      $  4,141,000
                                                                  ===========      ============
</TABLE>



        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                             FINANCIAL STATEMENTS.


                                      -5-


<PAGE>   6
                         BITSTREAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

(1) BASIS OF PRESENTATION

   The consolidated financial statements of Bitstream Inc. (the "Company" or
"Bitstream") presented herein, without audit, have been prepared pursuant to the
rules of the Securities and Exchange Commission (the "SEC") for quarterly
reports on Form 10-Q and do not include all of the information and footnote
disclosures required by generally accepted accounting principles. The balance
sheet information at December 31, 1997 has been derived from the Company's
audited consolidated financial statements. These statements should be read in
conjunction with the financial statements and notes thereto for the period ended
December 31, 1997 included in the Company's Annual Report on Form 10-K which was
filed by the Company with the SEC on March 31, 1998.

   The balance sheet as of June 30, 1998, the statements of operations for the
three and six months ended June 30, 1998 and 1997, the statements of cash flows
for the six months ended June 30, 1998 and 1997, and the notes to each thereof
are unaudited, but in the opinion of management include all adjustments
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows of the Company and its subsidiaries for
these interim periods.

   The results of operations for the three and six months ended June 30, 1998
may not necessarily be indicative of the results to be expected for any future
interim period or for the year ending December 31, 1998.

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Bitstream World Trade, Inc. (a
Delaware corporation), a holding company for Bitstream, BV (a Dutch
corporation); Bitstream S.A.R.L. (a French corporation); Bitstream BV France (a
French corporation); Mainstream Software Solutions (an English corporation) and
Archetype, Inc. (a Delaware corporation). All material intercompany transactions
and balances have been eliminated in consolidation.

(2) NET LOSS PER SHARE

   The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. SFAS No. 128 established standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The Company has applied the provisions
of SFAS No. 128 and SEC Staff Accounting Bulletin (SAB) No. 98 retroactively to
all periods presented.

   Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share for the three and six month periods ended June 30, 1998 are the same
as basic net loss per share as the inclusion of the potential common stock
equivalents would be antidilutive. Antidilutive securities which consist of
options and warrants that are not included in diluted net loss per common share
are 2,903,084 for the three and six month periods ended June 30, 1998 and
2,891,127 for the three and six month periods ended June 30, 1997.

(3) CONCENTRATION OF CREDIT RISK

   The Company has no significant off-balance-sheet concentration of credit risk
such as foreign exchange contracts, option contracts or other foreign hedging
arrangements.


                                      -6-


<PAGE>   7
   For the three months ended June 30, 1998, no customer represented greater
than 10% of revenues. For the three months ended June 30, 1997, two customers
represented 11.8% and 13.5% of revenues, respectively.

   For the six months ended June 30, 1998 and 1997, no customer represented
greater than 10% of revenues.

(4) COMPREHENSIVE LOSS

   The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The components of the Company's comprehensive
income are as follows:


<TABLE>
<CAPTION>

                                         THREE MONTHS ENDED JUNE 30,   SIX MONTHS ENDED JUNE 30,
                                           1998           1997           1998           1997
                                        ------------  ------------   ------------   ------------
<S>                                     <C>           <C>            <C>            <C>         
Net loss...........................     $(1,659,000)  $(6,386,000)   $(2,757,000)   $(6,154,000)
Cumulative translation adjustment,
 net of tax........................         (39,000)      (41,000)       (39,000)       (41,000)
                                        -----------   -----------    -----------    -----------
Total comprehensive loss...........     $(1,698,000)  $(6,427,000)   $(2,796,000)   $(6,195,000)
                                        ===========   ===========    ===========    ===========
</TABLE>


(5) RECENTLY ISSUED ACCOUNTING STANDARDS

    In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 131 requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable segment of an
enterprise. Reportable segments, as defined by this statement, correspond to the
way management organizes units and evaluates performance internally, and may be
based upon products, geography, legal entity, management structure or a
combination of these methods. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997, and interim period reporting is not required
until interim periods beginning after December 15, 1998. The Company believes
that the adoption of SFAS No. 131 will not have a material impact on its
financial results or financial position.

(6) ACQUISITIONS

    MAINSTREAM SOFTWARE SOLUTIONS, LTD.

    In January 1997, the Company purchased substantially all of the assets of
Mainstream Software Solutions Ltd., a corporation organized under the laws of
England primarily engaged in the business of marketing, selling, distributing
and supporting the Company's type products in the United Kingdom, for
approximately $505,000. As a result, the Company directly distributes its own
products in the United Kingdom. The acquisition was accounted for as a purchase
and resulted in approximately $450,000 of goodwill.

    ARCHETYPE, INC.

    In April 1997, the Company acquired Archetype, Inc. ("Archetype"), a
Delaware corporation primarily engaged in the business of developing and
marketing server-based information management computer software for the graphic
arts industry, pursuant to an Agreement and Plan of Merger, dated March 27, 1997
among the Company, Archetype, and Archetype Acquisition Corporation, a newly
organized wholly owned subsidiary of the Company. Archetype's products include:
MediaBank(TM), a digital asset management product that allows for the
cataloging, archiving, and management of electronic images, text and documents;
InterSep(TM) OPI and InterSep 



                                      -7-
<PAGE>   8


Output Manager, advanced open prepress interfaCE and print management products
for raster image processors and servers; and NuDoc(TM), AN advanced document
composition technology.

    In connection with the Merger, Archetype stockholders received an aggregate
of approximately $1.3 million in cash and 510,000 shares of the Company's Class
A Common Stock in exchange for their shares of Archetype capital stock. In
addition, the Company satisfied approximately $1.8 million of obligations and
indebtedness owed by Archetype, and issued options and warrants (the "Options")
to purchase approximately 605,000 shares of the Company's Class A Common Stock,
in order to induce the former Archetype employees and other persons receiving
such Options to become employees of, or perform certain services for, the
Company and/or to replace certain outstanding options and warrants issued by
Archetype. Of these options, 405,000 have an exercise price of $.90 per share
and were issued under the Company's 1996 Stock Plan and the remaining 200,000
have an exercise price of $3.94 per share and were issued under the Company's
1997 Stock Plan.

    The Merger was accounted for as a purchase, and accordingly, the initial
purchase price and acquisition costs aggregating approximately $7.5 million has
been allocated to the assets acquired as described below. The aggregate purchase
price of $7,454,000 consisted of the following:

<TABLE>
<CAPTION>

          DESCRIPTION                                     AMOUNT
          -----------                                   ----------
<S>                                                     <C>       
          Common stock and stock options..........      $2,904,000
          Cash paid to shareholders and for the
            retirement of certain obligations.....       3,056,000
          Assumed liabilities.....................       1,094,000
          Acquisition costs.......................         400,000
                                                        ----------
          Total purchase price....................      $7,454,000
                                                        ==========
</TABLE>

    The purchase price allocations represent the fair values of assets acquired
determined by an independent appraisal. The appraisal incorporated established
valuation procedures and techniques in determining the fair value of each asset.
The purchase price has been allocated as follows:

<TABLE>
<CAPTION>

          DESCRIPTION                                   AMOUNT
          ------------                                ----------
<S>                                                   <C>       
          Current assets.........................     $  431,000
          Property, plant and equipment..........        207,000
          Other assets...........................         54,000
          In-process research and development....      4,930,000
          Other acquired intangible assets.......      1,832,000
                                                      ----------
          Total assets acquired..................     $7,454,000
                                                      ==========
</TABLE>

    The amount allocated to in-process research and development related to
projects that had not yet reached technological feasibility and that, until
completion of the development, had no alternative future use. These projects
will require substantial high risk development and testing by the Company prior
to reaching technological feasibility. Accordingly, the Company charged the
purchase price to operations in the year ended December 31, 1997.

    Based on the unaudited data, the following table presents selected financial
information for Bitstream and Archetype on a pro forma basis for the three and
six month periods ended June 30, 1997, assuming the companies had been combined
since the beginning of 1997.



                                      -8-
<PAGE>   9

<TABLE>
<CAPTION>

                                                 THREE MONTHS     SIX MONTHS
                                                 ENDED JUNE 30,  ENDED JUNE 30,
                                                     1997             1997
                                                 ------------------------------
  <S>                                            <C>              <C>        
  Revenues ...................................   $ 3,467,000      $ 6,747,000
                                                 -----------      -----------
  Net loss ...................................    (6,858,000)      (6,797,000)
                                                 -----------      -----------
  Basic and diluted net loss per share........   $     (1.02)     $     (1.03)
                                                 ===========      ===========
</TABLE>

    The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition been made on
January 1, 1997.

(7) INVESTMENTS

     On March 13, 1998, the Company made a $500,000 equity investment in
DiamondSoft, Inc. ("DiamondSoft"), a California corporation primarily engaged in
the business of developing, marketing and distributing software tools to a
variety of professional markets. This equity investment involved the purchase of
250,000 shares of DiamondSoft's Series A Convertible Preferred Stock at a price
of $2.00 per share representing a 25% ownership interest. In addition, pursuant
to a letter agreement with DiamondSoft dated March 17, 1998, the Company will
market DiamondSoft's FontReserve software to hardware and software developers
and DiamondSoft will license the Company's Font Navigator software to retailers
and corporate users.

(8) SEVERANCE AND OTHER NON-RECURRING CHARGES

    Included in operating expenses for the three and six month periods ended
June 30, 1998 are $520,000 and $960,000, respectively, of severance and other
non-recurring compensation expenses incurred in connection with certain
severance arrangements between the Company and certain former employees and
executives. Operating expenses for the three and six months ended June 30, 1997
reflect $1.4 million for severance and other non-recurring compensation expenses
incurred in connection with the acquisition of Archetype and certain
arrangements between the Company and certain former executives.


                                      -9-
<PAGE>   10



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

       Bitstream Inc. develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
documents. The Company is organized into two operating divisions. The Type and
Technology division primarily licenses its products, including text imaging and
page layout technologies, to original equipment manufacturers ("OEMs") and
independent software vendors ("ISVs") for inclusion in their output devices,
embedded systems, applications, Internet authoring tools, World Wide Web
browsers and other products. The Archetype Applications division develops
server-based publishing applications that are sold to publishers, advertising
agencies, and other major corporations.

       The Company's products and technologies consist of: (i) MediaBank, a
digital asset management product that allows for the cataloging, archiving, and
management of electronic images, text and documents; (ii) InterSep OPI and
InterSep Output Manager, advanced open prepress interface and print management
for clients working with raster image processors and servers; (iii) NuDoc, an
advanced document composition technology; (iv) type products, such as libraries
of type designs (fonts) and custom type products; (v) enabling technologies,
which deliver typographic capabilities to hardware output devices and software
applications; and (vi) TrueDoc(R), a portable type technologY providing for the
efficient distribution of text, with fidelity, in a highly compact format.

       Bitstream was founded in 1981 as a digital type supplier to computer
hardware and software developers. The Company's library of type products is used
by OEMs, ISVs and end users around the world in the creation of electronic
documents. The Company was also an early developer of typographic enabling
software for hardware and software developers. Its font processor products are
used to provide type scaling functionality to operating systems, network servers
and a wide variety of computer printers and other output devices. The Company
has focused its product development and marketing efforts on technology
solutions that address the font-related issues of document creation and
portability in the Internet and corporate intranets.

       The Company derives revenues principally from the following sources: (i)
licensing fees and royalty payments paid by OEM and ISV customers for text
imaging and page layout technologies; (ii) direct and indirect sales of software
publishing applications for the creation, enhancement, management, transport,
viewing and printing of electronic information; (iii) direct sales of custom and
other type products to end users such as graphic artists, desktop publishers and
corporations; and (iv) sales of type products to foreign customers primarily
through distributors. Royalty payments due from OEM and ISV customers, who
generally pay specified minimums or fixed fees for the right to include the
Company's products as a component of a larger product for a specified time
period or volume limit, are generally recognized as revenue at the time the
software is delivered to the OEM or ISV customer. If the royalty payments are to
be received over a period of time greater than one year, the amount recognized
is discounted to the present value of the future minimum payments. Certain OEM
and ISV customers pay royalties only upon the sublicensing of the Company's
products to end users. Royalties due from these OEM and ISV customers are
recognized when such sublicenses are reported to the Company by the OEM or ISV
customer. Revenues from sales to end users and foreign distributors are
generally recognized at the time the software products are delivered to the
customer.

       Cost of revenues is comprised of direct costs of licenses and royalties,
as well as direct costs of product sales to end users. Included in cost of
licenses and royalties are fees paid to third parties for the development or
license of rights to technology and/or unique typeface designs and the costs
incurred in the fulfillment of custom orders from OEM and ISV customers.
Included in cost of product sales to end users and distributors are the direct
costs associated with the duplication, packaging and shipping of products, and
any royalty fees paid to third parties for rights to license typefaces.

       Operating expenses consist primarily of sales and marketing expenses
(principally compensation and marketing programs), research and development
expenses and general and administrative expenses.


                                      -10-
<PAGE>   11


IMPACT OF YEAR 2000 ISSUE

       The Year 2000 issue results from computer programs that do not
differentiate between the year 1900 and the year 2000 because they are written
using two digits rather than four to define the applicable year. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. The Company is in the process of updating its accounting
and information systems, where applicable, to ensure that its computer systems
are Year 2000 compliant. In addition, the Company maintains a Year 2000 expert
on its staff. The financial impact to the Company of its Year 2000 compliance
programs has not been and is not anticipated to be material to its financial
position or results of operations in any given year. While the Company does not
believe it will suffer any major effects from the Year 2000 issue, it is
possible that such effects could materially impact future financial results, or
cause reported financial information not to be necessarily indicative of future
operating results or future financial condition.

RESULTS OF OPERATIONS

       REVENUES. Total revenues for the three months ended June 30, 1998
increased by $140,000 or 4.4%, to approximately $3.30 million, as compared to
approximately $3.16 million for the three months ended June 30, 1997.

       Total revenues for the six months ended June 30, 1998 increased by
$460,000 or 8.1%, to approximately $6.15 million, as compared to approximately
$5.69 million for the six months ended June 30, 1997.

       The increase in revenues for the three and six months ended June 30, 1998
as compared to the three and six months ended June 30, 1997, respectively, is
due to additional revenues from the inclusion of Archetype revenues for entire
periods ended June 30, 1998 versus inclusion of Archetype revenues from April
28, 1997 in the periods ended June 30, 1997 offset by a decrease in revenues due
to a decrease in demand in OEM channels for the Company's traditional type
products and slower than anticipated growth in emerging markets for the
Company's type and technology products.

       GROSS PROFIT. Gross profit for the three months ended June 30, 1998
decreased by $70,000, or 2.6%, to approximately $2.61 million compared to
approximately $2.68 million for the three months ended June 30, 1997. Gross
profit as a percentage of revenues for the three months ended June 30, 1998
decreased to 79.1% compared to 84.7% for the three months ended June 30, 1997.

       Gross profit for the six months ended June 30, 1998 increased by
$350,000, or 7.1%, to approximately $5.26 million compared to approximately
$4.91 million for the six months ended June 30, 1997. Gross profit as a
percentage of revenues for the six months ended June 30, 1998 decreased to 85.6%
compared to 86.4% for the six months ended June 30, 1997. The decrease in gross
profit, as a percentage of revenues, reflects the increase in the cost of third
party royalties for the mix of products sold during the three and six months
ended June 30, 1998.

       SELLING AND MARKETING. Selling and marketing expenses for the three
months ended June 30, 1998 increased by $380,000, or 23.8%, to approximately
$1.98 million compared to approximately $1.60 million for the three months ended
June 30, 1997. Selling and marketing expenses as a percentage of revenues for
the three months ended June 30, 1998 increased to 59.9% from 50.7% for the three
months ended June 30, 1997.

       Selling and marketing expenses for the six months ended June 30, 1998
increased by $1.05 million, or 37.2%, to approximately $3.87 million compared to
approximately $2.82 million for the six months ended June 30, 1997. Selling and
marketing expenses as a percentage of revenues for the six months ended June 30,
1998 increased to 63.0% from 49.5% for the six months ended June 30, 1997.



                                      -11-
<PAGE>   12

       The increase in selling and marketing expenses in dollars, and as a
percentage of revenues, for the three and six months ended June 30, 1998 as
compared to the three and six months ended June 30, 1997, respectively, reflect
the addition of travel, trade show and other marketing program expenses from
Archetype operations for the entire three and six months ended June 30, 1998
compared to the inclusion of Archetype operations only from April 28, 1997 in
the three and six months ended June 30, 1997

       RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended June 30, 1998 increased by $651,000, or 100.3%, to $1.30 million
compared to $649,000 for the three months ended June 30, 1997. Research and
development expenses as a percentage of revenues for the three months ended June
30, 1998 increased to 39.5% from 20.5% for the three months ended June 30, 1997.

       Research and development expenses for the six months ended June 30, 1998
increased by $1.47 million, or 126.7%, to $2.63 million compared to $1.16
million for the six months ended June 30, 1997. Research and development
expenses as a percentage of revenues for the six months ended June 30, 1998
increased to 42.7% compared to 20.4% for the six months ended June 30, 1997.

       The increase in research and development expenses in dollars, and as a
percentage of sales, for the three and six months ended June 30, 1998 as
compared to the three and six months ended June 30, 1997, respectively, reflect
the ongoing investment in additional research and development personnel to
support expanded development of the Company's enabling technologies, as well as
the addition of Archetype research and development expenses for the entire three
and six months ended June 30, 1998 compared to the inclusion of Archetype
operations only from April 28, 1997 in the three and six months ended June 30,
1997. Research and development expenses consist primarily of personnel costs and
fees paid for outside software development and consulting fees.

       GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended June 30, 1998 decreased by $127,000, or 22.5%, to $437,000
compared to $564,000 for the three months ended June 30, 1997. As a percentage
of revenues, general and administrative expenses represented 13.2% for the three
months ended June 30, 1998 as compared to 17.8% for the three months ended June
30, 1997.

       General and administrative expenses for the six months ended June 30,
1998 decreased by $376,000, or 38.0%, to $613,000 compared to $989,000 for the
six months ended June 30, 1997. General and administrative expenses represented
9.9% of revenues for the six months ended June 30, 1998 compared to 17.4% for
the six months ended June 30, 1997.

       The decreases in general and administrative expenses in dollars, and as a
percentage of sales, for the three and six months ended June 30, 1998 as
compared to the three and six months ended June 30, 1997, respectively, are
primarily due to the elimination of duplicative general and administrative
functions and administrative costs, including rent, utilities and other costs
associated with Archetype's Burlington, Massachusetts office.

       Operating expenses for the three and six months ended June 30, 1998
include $520,000 and $960,000, respectively, for severance and other
non-recurring compensation expenses. Operating expenses for the three and six
months ended June 30, 1997 reflect $1.4 million for severance and other
non-recurring compensation expenses incurred in connection with the acquisition
of Archetype and certain arrangements between the Company and certain former
high-level executives.

       The Company recorded a tax provision consisting of foreign tax
liabilities, relating mainly to sales to customers in Japan, for the three and
six months ended June 30, 1998 of $45,000 and $69,000, respectively, as compared
to $118,000 and $141,000 for the three and six months ended June 30, 1997,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

       The Company has funded its operations primarily through the public sale
of equity securities and cash flow from operations.




                                      -12-
<PAGE>   13

       The Company's operating activities provided cash of approximately
$141,000 for the six months ended June 30, 1998 as compared to $734,000 for the
six months ended June 30, 1997. The cash provided during the six months ended
June 30, 1998 was primarily due to the operating loss of $2.76 million offset by
non-cash charges of $947,000 as well as cash provided by the net change in
accounts receivable balances of approximately $1.1 million.

       The Company's investing activities used cash of approximately $773,000
for the six months ended June 30, 1998 as compared to $4.17 million for the six
months ended June 30, 1997. Investing activities for the six months ended June
30, 1998 consisted primarily of an equity investment of $500,000 in DiamondSoft,
Inc., a California corporation primarily engaged in the business of developing,
marketing and distributing software tools to a variety of professional markets
and the purchase of property and equipment of $246,000. For the six months ended
June 30, 1997, investing activities consisted primarily of the purchase of
Archetype, as well as the purchase of substantially all of the assets of
Mainstream Software Solutions, Ltd.

       The Company's financing activities provided cash of $111,000 for the six
months ended June 30, 1998 and used cash of $42,000 for the six months ended
June 30, 1997. The cash provided in the six months ended June 30, 1998 was
primarily due to proceeds from the exercise of stock options.

       In August, the Company obtained a three-month $1 million revolving line
of credit from a commercial lender. This line bears interest at the bank's base
rate and is secured by all of the Company's investment property. This line
replaces the Company's $2 million unsecured working capital line of credit which
expired on July 15, 1998. There were no borrowings outstanding under this line
of credit at June 30, 1998.

       The Company believes its current cash balances and the availability of
its revolving line of credit will be sufficient to meet the Company's operating
and capital requirements for at least the next 12 months. There can be no
assurance, however, that the Company will not require additional financing in
the future. If the Company were required to obtain additional financing in the
future, there can be no assurance that sources of capital will be available on
terms favorable to the Company, if at all.

       From time to time, the Company evaluates potential acquisitions of
products, businesses and technologies that may complement or expand the
Company's business. Any such transactions consummated may use a portion of the
Company's working capital or require the issuance of equity or debt.

       Except for the historical information contained herein, this Quarterly
Report on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
competition and the timely introduction of new products. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's final Prospectus, dated October 30, 1996, included as part of the
Company's Registration Statement on Form S-1 (Commission File No. 333-11519), in
the section entitled "Risk Factors." The forward-looking statements contained
herein represent the Company's judgment as of the date of this report, and the
Company cautions readers not to place undue reliance on such statements.



                                      -13-
<PAGE>   14

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   Not applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)   There were no unregistered securities sold by the Company during the six
      months ended June 30, 1998.

(b)   Use of Proceeds

       As of June 30, 1998, the net proceeds of the Company's initial public
offering (IPO) of its Class A Common Stock pursuant to its Registration
Statement on Form S-1, Commission File No. 333-11519, declared effective October
30, 1996, have been used as follows: (i) approximately $200,000 for the buildout
of Bitstream's leased facilities in Cambridge, Massachusetts to accommodate the
additional personnel that joined the Company as a result of the acquisition of
Archetype; (ii) approximately $4,141,000 for the acquisition of Mainstream
Software Solutions, Ltd. and Archetype, Inc.; (iii) approximately $1,500,000 for
the repayment of indebtedness, of which approximately $548,000 was paid to
officers, directors and 10% stockholders of the Company and approximately
$762,000 of which was paid to third parties; (iv) approximately $404,000 for
royalty payments to others; (v) $500,000 for the investment in DiamondSoft,
Inc.; and (vi) approximately $700,000 for the purchase and installation of
equipment. The remaining of the net proceeds from the IPO are invested in
short-term, interest-bearing, investment-grade securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    (a) On June 9, 1998, the Annual Meeting of Stockholders of the Company was
held at the Royal Sonesta Hotel, 5 Cambridge Parkway, Cambridge, Massachusetts
02142.

    (b) George B. Beitzel, Charles Ying, Amos Kaminski and David G. Lubrano
were elected at the Annual Meeting to serve as directors of the Company.

    (c) At the Annual Meeting, the Stockholders also voted to approve and ratify
the adoption of an amendment to the Company's 1997 Stock Plan to increase the
number of shares of Class A Common Stock reserved under such Plan by 500,000
shares and to ratify the action of the Board of Directors in appointing Arthur
Andersen LLP as auditors for the Company for the fiscal year ending December 31,
1998.


                                      -14-
<PAGE>   15

The following votes were tabulated on the aforementioned proposals:

1. To elect a board of four (4) directors to serve until the next Annual Meeting
of Stockholders or until their respective successors are elected and qualified.

         Nominee                         For                Withheld Authority
         -------                         ---                ------------------

     George B. Beitzel                 5,351,699                   53,500
     Charles Ying                      5,351,699                   53,500
     Amos Kaminski                     5,350,699                   53,400
     David G. Lubrano                  5,350,699                   53,500


2. To approve and ratify the adoption of an amendment to the Company's 1997
Stock Plan to increase the number of shares of Class A Common Stock reserved
under such Plan by 500,000 shares.

          For               Against             Abstain         Broker Non-vote
          ---               -------             -------         ---------------

       1,650,291            101,302             980,990            2,672,616

3. To ratify the action of the Board of Directors in appointing Arthur Andersen
LLP as auditors for the Company for the fiscal year ending December 31, 1998.

          For               Against             Abstain         Broker Non-vote
          ---               -------             -------         ---------------

       5,346,079             47,930              11,190                0

       (d)  Not applicable.


ITEM 5. OTHER INFORMATION

   Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   (a) Exhibits

      10.4.9  Fourth Amendment to Amended and Restated Credit Agreement dated 
              as of July 15, 1998 between BankBoston, N.A. and Company.

      10.4.10 Commercial Demand Note dated August 10, 1998 between BankBoston,
              N.A. and the Company.

      10.4.11 Pledge Agreement dated August 10, 1998 between BankBoston, N.A. 
              and the Company.

      27.1    Financial Data Schedule


   (b) Reports on Form 8-K

      Not applicable.



                                      -15-
<PAGE>   16



                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                               BITSTREAM INC.
                                               ---------------------
                                               (Registrant)

       SIGNATURE                      TITLE                         DATE
       ---------                      -----                         ----

/s/ Anna M. Chagnon      Vice President, Finance and            August 14, 1998
-------------------      Administration, Chief Financial
Anna M. Chagnon          Officer and General Counsel 
                         (Principal Financial Officer)

/s/ Keith J. Maffiore    Director of Finance and Corporate      August 14, 1998
---------------------    Controller (Principal Accounting
Keith J. Maffiore        Officer)


                                      -16-