**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

** **

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended September 30, 2002**

** **

**or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from           to          **

 

**COMMISSION FILE NUMBER: 0-21541**

 

**BITSTREAM INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                                        |   | **04-2744890**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or  organization)                    |   | (I.R.S. Employer  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) |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

On November 8, 2002 there were 8,475,125 shares ofClass A Common Stock, par value $0.01 per share, of which 125,809 weredesignated as treasury shares, and no shares of Class B Common Stock, par value$0.01 per share, outstanding.

 

 

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**BITSTREAM INC. AND SUBSIDIARIES**

 

**INDEX**

 

 
| **PART  I. FINANCIAL INFORMATION** |
|------------------------------------|
|                               |
| ITEM 1.                            | CONSOLIDATED FINANCIAL STATEMENTS |
|                               |
|                               | CONSOLIDATED BALANCE SHEETS AS OF  SEPTEMBER 30, 2002 AND   DECEMBER 31, 2001 |
|                               |
|                               | CONSOLIDATED STATEMENTS OF OPERATIONS FOR  THE THREE AND   NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 |
|                               |
|                               | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR  THE  NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 |
|                               |
|                               | NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS |
|                               |
| ITEM  2.                           | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION   AND RESULTS OF OPERATIONS |
|                               |
| ITEM  3.                           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|                               |
| ITEM  4.                           | CONTROLS  AND PROCEDURES |
|                               |
| **PART  II. OTHER INFORMATION**    |
|                               |
| ITEM 1.                            | LEGAL PROCEEDINGS |
|                               |
| ITEM  2.                           | CHANGES  IN SECURITIES AND USE OF PROCEEDS |
|                               |
| ITEM 3.                            | DEFAULTS UPON  SENIOR SECURITIES |
|                               |
| ITEM  4.                           | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|                               |
| ITEM 5.                            | OTHER INFORMATION |
|                               |
| ITEM 6.                            | EXHIBITS AND  REPORTS ON FORM 8-K |
|                               |
| SIGNATURES                         |
|                               |
| CERTIFICATIONS                     |
|                                    |  |  |  |  |  |  |  |  |  |

 

1

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**BITSTREAM INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(IN THOUSANDS, EXCEPT PER-SHAREAMOUNTS)**

 
|                                                                                                                                                    |   | **September  30,  2002** |       | **December  31,  2001** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                              |   |                     | ** ** |                    | ** ** |
| Current  assets:                                                                                                                                        |   |                     |       |                    |       |
| Cash  and cash equivalents                                                                                                                              |   | $                        | 4,979      |                    | $          | 5,716 |   |
| Accounts  receivable, net of allowance of $34 and $53 at September 30, 2002 and  December  31, 2001, respectively                                  |   | 536                      |       | 679                     |       |
| Prepaid  expenses and other current assets                                                                                                              |   | 107                      |       | 122                     |       |
| Total  current assets                                                                                                                                   |   | 5,622                    |       | 6,517                   |       |
|                                                                                                                                                    |   |                     |       |                    |       |
| Property  and equipment, net                                                                                                                            |   | 315                      |       | 473                     |       |
| Other  assets:                                                                                                                                          |   |                     |       |                    |       |
| Restricted  cash                                                                                                                                        |   | 300                      |       | 300                     |       |
| Goodwill                                                                                                                                                |   | 727                      |       | 727                     |       |
| Investment  in DiamondSoft, Inc.                                                                                                                        |   | 646                      |       | 599                     |       |
| Intangible  assets                                                                                                                                      |   | 243                      |       | 218                     |       |
| Other  assets                                                                                                                                           |   | 5                        |       | 5                       |       |
| Total  other assets                                                                                                                                     |   | 1,921                    |       | 1,849                   |       |
| Total  assets                                                                                                                                           |   | $                        | 7,858      |                    | $          | 8,839 |   |
|                                                                                                                                                    |   |                     |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                          |   |                     |       |                    |       |
| Current  liabilities:                                                                                                                                   |   |                     |       |                    |       |
| Accounts  payable                                                                                                                                       |   | $                        | 253        |                    | $          | 93 |   |
| Accrued  expenses                                                                                                                                       |   | 1,086                    |       | 1,126                   |       |
| Current  portion of deferred revenue                                                                                                                    |   | 580                      |       | 610                     |       |
| Total  current liabilities                                                                                                                              |   | 1,919                    |       | 1,829                   |       |
|                                                                                                                                                    |   |                     |       |                    |       |
| Long-term  deferred revenue                                                                                                                             |   | 10                       |       | 14                      |       |
| Total  liabilities                                                                                                                                      |   | 1,929                    |       | 1,843                   |       |
|                                                                                                                                                    |   |                     |       |                    |       |
| Stockholders’  equity :                                                                                                                            |   |                     |       |                    |       |
| Common  stock, $0.01 par value   Authorized - 30,500 shares   Issued and outstanding-  8,475 at  September 30, 2002 and 8,428 at December 31, 2001 |   | 85                       |       | 84                      |       |
| Additional  paid-in capital                                                                                                                             |   | 32,411                   |       | 32,383                  |       |
| Accumulated  deficit                                                                                                                                    |   | (26,207                  | )          | (25,111                 | )          |
| Treasury  stock, at cost; 126  shares as of  September 30, 2002 and December 31, 2001                                                         |   | (360                     | )          | (360                    | )          |
| Total  stockholders’ equity                                                                                                                        |   | 5,929                    |       | 6,996                   |       |
|                                                                                                                                                    |   |                     |       |                    |       |
| Total  liabilities and stockholders’ equity                                                                                                        |   | $                        | 7,858      |                    | $          | 8,839 |   |

 

**Theaccompanying notes are an integral part of these consolidated financialstatements.**

 

2

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**BITSTREAM INC. AND SUBSIDIARIES**

# **CONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)**

 
|                                                   |   | **For the  Three Months  Ended September 30,** |   | **For the  Nine Months  Ended September 30,** |   |
|--------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                   |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
| Revenue:                                               |   |                                           |   |                                          |   |   |   |   |   |
| Software  licenses                                     |   | $                                              | 1,588  |                                          | $      | 1,818 |   | $ | 5,373 |   | $ | 4,787 |   |
| Services                                               |   | 259                                            |   | 296                                           |   | 820 |   | 826 |   |
| Total  revenue                                         |   | 1,847                                          |   | 2,114                                         |   | 6,193 |   | 5,613 |   |
| Cost  of revenue:                                      |   |                                           |   |                                          |   |   |   |   |   |
| Software  licenses                                     |   | 430                                            |   | 348                                           |   | 1,238 |   | 816 |   |
| Services                                               |   | 104                                            |   | 124                                           |   | 298 |   | 300 |   |
| Cost  of revenue                                       |   | 534                                            |   | 472                                           |   | 1,536 |   | 1,116 |   |
| Gross  profit                                          |   | 1,313                                          |   | 1,642                                         |   | 4,657 |   | 4,497 |   |
| Operating  expenses:                                   |   |                                           |   |                                          |   |   |   |   |   |
| Marketing  and selling                                 |   | 572                                            |   | 645                                           |   | 1,699 |   | 2,201 |   |
| Research  and development                              |   | 1,077                                          |   | 1,191                                         |   | 3,027 |   | 3,784 |   |
| General  and administrative                            |   | 298                                            |   | 511                                           |   | 1,059 |   | 1,344 |   |
| Total  operating expenses                              |   | 1,947                                          |   | 2,347                                         |   | 5,785 |   | 7,329 |   |
| Operating  loss                                        |   | (634                                           | )      | (705                                          | )      | (1,128 | ) | (2,832 | ) |
|                                                   |   |                                           |   |                                          |   |   |   |   |   |
| Gain  (Loss) on investment in DiamondSoft, Inc.        |   | 5                                              |   | (68                                           | )      | 47 |   | (219 | ) |
| Interest  income, net                                  |   | 18                                             |   | 47                                            |   | 60 |   | 198 |   |
| Loss  before provision for income taxes                |   | (611                                           | )      | (726                                          | )      | (1,021 | ) | (2,853 | ) |
|                                                   |   |                                           |   |                                          |   |   |   |   |   |
| Provision  for income taxes                            |   | 5                                              |   | 59                                            |   | 75 |   | 139 |   |
| Net  loss                                              |   | $                                              | (616   | )                                             | $      | (785 | ) | $ | (1,096 | ) | $ | (2,992 | ) |
|                                                   |   |                                           |   |                                          |   |   |   |   |   |
| Basic  and diluted net loss per share                  |   | $                                              | (0.07  | )                                             | $      | (0.10 | ) | $ | (0.13 | ) | $ | (0.37 | ) |
|                                                   |   |                                           |   |                                          |   |   |   |   |   |
| Basic  and diluted weighted average shares outstanding |   | 8,335                                          |   | 8,075                                         |   | 8,318 |   | 8,019 |   |

 

**The accompanying notes are an integral part of theseconsolidated financial statements.**

 

3

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**BITSTREAM INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
|                                                                         |   | **For the  Nine Months Ended   September 30,** |   |
|------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                         |   | **2002**                                       |   | **2001** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                   |   |                                           |   |   |   |
| Net  loss                                                                    |   | $                                              | (1,096 | ) | $ | (2,992 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                           |   |   |   |
| Depreciation                                                                 |   | 240                                            |   | 280 |   |
| Amortization                                                                 |   | 53                                             |   | 391 |   |
| Stock based  compensation                                                    |   | (24                                            | )      | 5 |   |
| (Gain)  Loss on investment in DiamondSoft, Inc.                              |   | (47                                            | )      | 219 |   |
| Changes  in operating assets and liabilities:                                |   |                                           |   |   |   |
| Accounts  receivable                                                         |   | 143                                            |   | 975 |   |
| Prepaid  expenses and other assets                                           |   | 15                                             |   | 127 |   |
| Accounts  payable                                                            |   | 160                                            |   | 81 |   |
| Accrued  expenses                                                            |   | (40                                            | )      | (51 | ) |
| Deferred  revenue                                                            |   | (34                                            | )      | 164 |   |
| Net  cash used in operating activities                                       |   | (630                                           | )      | (801 | ) |
|                                                                         |   |                                           |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   |   |                                           |   |   |   |
| Purchases  of property and equipment, net                                    |   | (82                                            | )      | (180 | ) |
| Additions  to intangible assets                                              |   | (78                                            | )      | (146 | ) |
| Investment  in DiamondSoft, Inc.                                             |   | —                                         |   | (250 | ) |
| Net  cash used in investing activities                                       |   | (160                                           | )      | (576 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                   |   |                                           |   |   |   |
|                                                                         |   |                                           |   |   |   |
| Proceeds  from the exercise of stock options/warrants                        |   | 53                                             |   | 231 |   |
| Net  cash provided by  financing activities                             |   | 53                                             |   | 231 |   |
|                                                                         |   |                                           |   |   |   |
| Net  Decrease in Cash and Cash Equivalents                                   |   | (737                                           | )      | (1,146 | ) |
| Cash  and Cash Equivalents, beginning of period                              |   | 5,716                                          |   | 7,149 |   |
| Cash  and Cash Equivalents, end of period                                    |   | $                                              | 4,979  |   | $ | 6,003 |   |
|                                                                         |   |                                           |   |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:**                       |   |                                           |   |   |   |
| Cash  paid for income taxes                                                  |   | $                                              | 50     |   | $ | 188 |   |

 

**The accompanying notes are an integral part of these consolidatedfinancial statements.**

 

4

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**BITSTREAMINC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

# **SEPTEMBER 30, 2002**

 

**(1)****                SignificantAccounting Policies**

 

Bitstream Inc. (“Bitstream”) together with itssubsidiaries (collectively, the “Company”), headquartered in Cambridge,Massachusetts, is composed of three separate and distinct businesses:   (1) its type and technology (“Type”)business, which generates revenue primarily from the licensing of fontrendering software and fonts to the embedded, set-top box, wireless device andinformation appliance markets; (2) MyFonts.com, a wholly owned subsidiary thatwas formed in late 1999 as the first e-commerce site to aggregate fonts frommultiple vendors on one easy-to-use Web site (“MyFonts”); and (3) Pageflex,Inc., a wholly owned subsidiary that was formed in early 1999 to establish theCompany as a leader in dynamic page composition technologies (“Pageflex”).

 

**(a)****          Basisof Presentation**

The consolidated financial statements of the Companypresented herein, without audit, have been prepared pursuant to the rules ofthe Securities and Exchange Commission (the “SEC”) for quarterly reports onForm 10-Q and do not include all of the information and footnote disclosuresrequired by generally accepted accounting principles. The balance sheetinformation at December 31, 2001 has been derived from the Company’s auditedconsolidated financial statements. These statements should be read inconjunction with the consolidated financial statements and notes thereto forthe year ended December 31, 2001 included in the Company’s Annual Report onForm 10-K, which was filed by the Company with the SEC on March 29, 2002.

 

The balance sheet as of September 30, 2002, the statementsof operations for the three and nine months ended September 30, 2002 and 2001,the statements of cash flows for the nine months ended September 30, 2002 and2001, and the notes to each are unaudited, but in the opinion of managementinclude all adjustments necessary for a fair presentation of the consolidatedfinancial position, results of operations, and cash flows of the Company forthese interim periods.

 

The results of operations for the three and ninemonths ended September 30, 2002 may not necessarily be indicative of theresults to be expected for the year ending December 31, 2002.

 

**(b)  Off-Balance Sheet Risk and Concentration ofCredit Risk**

 

Financial instrumentsthat potentially expose the Company to concentrations of credit risk consistprimarily of cash and cash equivalents and trade accounts receivable.  The Company places a majority of its cashinvestments in one highly-rated financial institution.  The Company has not experienced significantlosses related to receivables from any individual customers or groups ofcustomers in any specific industry or by geographic area.  Due to these factors, no additional creditrisk beyond amounts provided for collection losses is believed by management tobe inherent in the Company’s accounts receivable.  At September 30, 2002, three customers accounted for 22%, 18% and11%, respectively, of the Company’s accounts receivable.   The Company does not have any off-balancesheet risks as of September 30, 2002. At December 31, 2001, two customers accounted for 18% and 17%,respectively, of the Company’s accounts receivable.

 

5

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For the three months and nine months ended September30, 2002 and 2001, no single customer accounted for 10% or more of theCompany’s consolidated revenue.  For thethree months ended September 30, 2002, three customers of the Company’s Typesegment accounted for 17%, 12% and 10%, respectively, of the revenue for thatsegment, one customer of the Pageflex segment accounted for 10% of the revenuefor that segment and no customers accounted for 10% or more of the MyFontssegment’s revenue.  For the three monthsended September 30, 2001, two customers of the Company’s Type segment accountedfor 24% and 10%, respectively, of the revenue for that segment, one customer ofthe Pageflex segment accounted for 13% of the revenue for that segment, and nocustomers accounted for 10% or more of the MyFonts segment.  For the nine months ended September 30,2002, two customers of the Company’s Type segment accounted for 10% each of therevenue for that segment, and no customers accounted for 10% or more of thePageflex or MyFonts segments’ revenue. For the nine months ended September 30, 2001, one customer of the Typesegment accounted for 10% of the revenue for that segment, and no customersaccounted for 10% or more of revenue for the Pageflex or MyFonts segments.

** **

**(c) Goodwill and other intangibleassets (in thousands, except per share amounts)**

 

Goodwill is statedat the unamortized cost as of December 31, 2001, less impairment adjustments ifapplicable, and consists of the following:

 
|                                                                    |   | **September  30,  2002** |   | **December  31,  2001** |   |
|-------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| Acquisition  of Type Solutions, Inc.                                    |   | $                        | 228    |                    | $      | 228 |   |
| Acquisition  of Alaras Corporation                                      |   | 499                      |   | 499                     |   |
|                                                                    |   |                     |   |                    |   |
| Goodwill                                                                |   | 727                      |   | 727                     |   |
| Embedded  goodwill from equity investment in DiamondSoft, Inc. (Note 3) |   | 557                      |   | 557                     |   |
|                                                                    |   |                     |   |                    |   |
| Total  Goodwill                                                         |   | $                        | 1,284  |                    | $      | 1,284 |   |

 

In June 2001, the FASB issued SFAS No. 142, *Goodwill andOther Intangible Assets*. The Company adopted SFAS No. 142, effectiveJanuary 1, 2002, which establishes new accounting and reporting requirementsfor goodwill and other intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets areno longer amortized, but are required to be reviewed annually for impairment,or more frequently if impairment indicators arise.  Separable intangible assets that have finite lives will continueto be amortized over their useful lives. In addition, under the new pronouncement, the Company is required toestablish reporting units and allocate goodwill to each of these reportingunits.  The Company has established thefollowing reporting units: Type, MyFonts, and Pageflex.

 

The Company ceased all goodwill amortization effectiveJanuary 1, 2002.  In addition, the Companytested recorded goodwill attributable to each reporting unit forimpairment.  Management completed theinitial impairment testing as of January 1, 2002 and determined that the fairvalue of its reporting units were greater than the carrying values for thoseunits.  The Company has recordedgoodwill embedded in its equity investment in DiamondSoft, Inc. of $557 as ofSeptember 30, 2002 and December 31, 2001, which is not attributable to areporting unit.

 

6

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The carrying amounts of goodwill attributable to eachreporting unit are as follows:

 
|     |   | **September 30,  2002** |   | **December 31,  2001** |   |
|----------|--------|-------------------------|--------|------------------------|--------|
| Type     |   | $                       | 228    |                   | $      | 228 |   |
| MyFonts  |   | —                  |   | —                 |   |
| Pageflex |   | 499                     |   | 499                    |   |
|     |   | $                       | 727    |                   | $      | 727 |   |
|          |        |                         |        |                        |        |  |  |  |  |

 

Had the Company applied the non-amortizationprovisions of SFAS No. 142 as of January 1, 2001, results of operations for thethree months and nine months ended September 30, 2002 and 2001, would have beenas follows (in thousands, except per share amounts):

 
|                                          |   | **For the  Three Months Ended  September 30,** |   | **For the  Nine Months Ended  September 30,** |   |
|-----------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                          |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
| Reported net  loss                            |   | $                                              | (616   | )                                             | $      | (785 | ) | $ | (1,096 | ) | $ | (2,992 | ) |
| Add:  Goodwill amortization, net of tax       |   | —                                         |   | 145                                           |   | — |   | 432 |   |
|                                          |   |                                           |   |                                          |   |   |   |   |   |
| Adjusted net  loss                            |   | $                                              | (616   | )                                             | $      | (640 | ) | $ | (1,096 | ) | $ | (2,560 | ) |
|                                          |   |                                           |   |                                          |   |   |   |   |   |
| Basic and  diluted loss per share as reported |   | $                                              | (0.07  | )                                             | $      | (0.10 | ) | $ | (0.13 | ) | $ | (0.37 | ) |
|                                          |   |                                           |   |                                          |   |   |   |   |   |
| Basic and  diluted pro forma loss per share   |   | $                                              | (0.07  | )                                             | $      | (0.08 | ) | $ | (0.13 | ) | $ | (0.32 | ) |

 

In connection with its adoption of SFAS 142, theCompany reassessed the useful lives and the classification of its identifiableintangible assets and determined that they continue to be appropriate.  The components of the Company’s amortizedintangible assets follow:

 
|              |   | **September  30, 2002**     |   | **December  31, 2001**       |   |
|-------------------|--------|-----------------------------|--------|------------------------------|--------|
|              |   | **Gross  Carrying  Amount** |   | **Accumulated Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated Amortization** |   |
|              |   |                        |   |                         |   |   |   |   |   |
| Marketing-related |   | $                           | 76     |                         | $      | (37 | ) | $ | 70 |   | $ | (27 | ) |
| Technology-based  |   | 361                         |   | (157                         | )      | 289 |   | (114 | ) |
| Total             |   | $                           | 437    |                         | $      | (194 | ) | $ | 359 |   | $ | (141 | ) |

 

7

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Amortization expense for intangible assets for thethree months and nine months ended September 30, 2002 was $19 and $53,respectively.  Amortization expense forfinite-lived intangibles for the year ended December 31, 2001 was $59.  Estimated amortization for the remainder of2002 and the five succeeding years follows:

 
|             |   | **Estimated  Amortization Expense** |   |
|------------------|--------|-------------------------------------|--------|
| 2002 (remainder) |   | $                                   | 19     |   |
| 2003             |   | 73                                  |   |
| 2004             |   | 67                                  |   |
| 2005             |   | 51                                  |   |
| 2006             |   | 27                                  |   |
| 2007             |   | 6                                   |   |
|             |   | $                                   | 243    |   |

 

**(d)  Recently Issued Accounting Standards**

 

In June 2002, the FASB issued SFAS No. 143, *Accountingfor Asset Retirement Obligations*. This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This Statement applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the asset.  SFAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002.  TheCompany does not expect SFAS No. 143 to have a material impact on its financialposition or results of operations upon its adoption on January 1, 2003.

 

In June 2002, the FASB issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*, whichsupercedes EITF 94-3,*Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*. The provisions of this Statement are required to be adopted for exit ordisposal activities that are initiated after December 31, 2002. Under thisstandard, a liability for a cost associated with an exit or disposal activityformerly recognized upon the entity’s commitment to an exit plan is nowrecognized when the liability is incurred. The Company does not expect SFAS No. 146 to have a material impact onits financial position or results of operations upon its adoption on January 1,2003.

 

8

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**(2)****                LossPer Share (in thousands)**

 

Basic earnings or loss per share is determined bydividing the net loss by the weighted average number of shares of common stockoutstanding during the period. Diluted earnings per share reflect the effect ofthe conversion of potentially dilutive securities, such as stock options, basedon the treasury stock method. In computing diluted earnings per share, commonstock equivalents are not considered in periods in which a net loss isreported, as the inclusion of the common stock equivalents would beantidilutive.  As a result there is nodifference between the Company’s basic and diluted loss per share for the threeand nine month periods ended September 30, 2002 and 2001.

 

If the Company had reported a profit for theseperiods, the potential common shares would have increased the weighted averageshares outstanding by 573 and 1,262 shares for the three months ended September30, 2002 and 2001, respectively, and by 1,120 and 993 for the nine months endedSeptember 30, 2002 and 2001, respectively. In addition, there were warrants and options outstanding to purchase1,082 and 884 shares for the three months and nine months ended September 30,2002, respectively, and 262 and 278 shares for the three months and nine monthsended September 30, 2001 that were not included in the potential common sharecomputations because their exercise prices were greater than the market priceof the Company’s common stock.  Thesecommon stock equivalents are antidilutive even when a profit is reported in thenumerator.

 

**(3)****                Investment(in thousands, except percentages)**

 

On March 13, 1998, the Company made a $500 or 25%equity investment, accounted for under the equity method, in DiamondSoft, Inc.(“DiamondSoft”), a California corporation primarily engaged in the business ofdeveloping, marketing and distributing software tools to a variety ofprofessional markets. During the year ended December 31, 2001 the Company madeadditional investments totaling $410 in DiamondSoft, resulting in an increasein Bitstream’s ownership percentage to 31.7% at December 31, 2001, whichremained unchanged as of September 30, 2002.

 

Gains (losses) for the three months and nine monthsended September 30, 2002, and 2001 related to the Company’s investment inDiamondSoft totaled approximately $5 and $47, and  $(68) and $(219), respectively, and are included in theaccompanying consolidated statements of operations.  The Company has recorded goodwill related to this investment equalto the difference between the amount paid for the investment and the Company’sshare of DiamondSoft’s underlying net assets at the time of eachinvestment.  Losses for the three monthsand nine months ended September 30, 2001 included $28 and $80, respectively,in amortization.  This goodwillamortization ceased in accordance with the Company’s adoption of SFAS No. 142on January 1, 2002. (See Note 1(c))

 

On June 19, 2000, the Company deposited $300 into amoney market account at Wells Fargo Bank to secure a $300 line of creditgranted DiamondSoft by that bank.  Thiscash, which continues to secure the line of credit, is presented on theCompany’s consolidated balance sheet as restricted cash.

 

9

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**(4)   AccruedExpenses, (in thousands)**

### ** **

Accrued expenses consist of the following:

 
|                                         |   | **September 30,  2002** |   | **December 31,  2001** |   |
|----------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| Accrued royalties                            |   | $                       | 208    |                   | $      | 226 |   |
| Payroll and other compensation               |   | 634                     |   | 510                    |   |
| Accrued professional and consulting services |   | 158                     |   | 197                    |   |
| Other                                        |   | 86                      |   | 193                    |   |
| Total                                        |   | $                       | 1,086  |                   | $      | 1,126 |   |

 

**(5)****               ****Segment Reporting (in thousands):**

 

The Company has determined it has three reportablesegments: (i) its Type segment; (ii) its Pageflex segment and (iii) its MyFontssegment.  The Company’s reportable segmentsare strategic business units that sell the Company’s products through distinctdistribution channels. They are managed separately as each business requiresdifferent marketing strategies.  TheCompany’s approach is based on the way that management organizes the segmentswithin the enterprise for making operating decisions and assessingperformance.  Revenue from the MyFontssegment includes revenue from products it purchases from the Type segment.  Inter-segment revenue of $82 and $249 forthe three months and nine months ended September 30, 2002, respectively, and$54 and $132 for the three months and nine months ended September 30, 2001,respectively, have been eliminated from MyFonts’ segmented revenue below, aswell as from the Company’s consolidated financial statements.  The Company evaluates performance based onprofit or loss from operations before income taxes, not including non-recurringgains and losses.

 

The following table sets forth the Company’s revenueand income (loss) from operations by segment:

 
|                                       |   | **For the  Three months ended  September 30,** |   | **For the  Nine months ended  September 30,** |   |
|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                       |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
| **Revenue (from external customers):**     |   |                                           |   |                                          |   |   |   |   |   |
| Type                                       |   | $                                              | 1,035  |                                          | $      | 1,414 |   | $ | 3,437 |   | $ | 3,767 |   |
| MyFonts                                    |   | 394                                            |   | 144                                           |   | 987 |   | 337 |   |
| Pageflex                                   |   | 418                                            |   | 556                                           |   | 1,769 |   | 1,509 |   |
| Consolidated  revenue                      |   | $                                              | 1,847  |                                          | $      | 2,114 |   | $ | 6,193 |   | $ | 5,613 |   |
|                                       |   |                                           |   |                                          |   |   |   |   |   |
| **Segment (loss) income from operations:** |   |                                           |   |                                          |   |   |   |   |   |
| Type                                       |   | $                                              | (76    | )                                             | $      | 248 |   | $ | 15 |   | $ | 64 |   |
| MyFonts                                    |   | (82                                            | )      | (690                                          | )      | (273 | ) | (584 | ) |
| Pageflex                                   |   | (476                                           | )      | (263                                          | )      | (870 | ) | (2,312 | ) |
| Consolidated  loss from operations         |   | $                                              | (634   | )                                             | $      | (705 | ) | $ | (1,128 | ) | $ | (2,832 | ) |

 

10

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**(6)****                GeographicalReporting (in thousands):**

 

The Company attributes revenues to different geographicalareas on the basis of the location of the customer. All of the Company’sproduct sales for the three months and nine months ended September 30, 2002 and2001 were shipped from its headquarters located in the United States or itsoffice located in Cheltenham, England. Revenues by geographic area are asfollows:

 
|                            |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                            |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Revenue:                        |   |                                   |   |                                  |   |   |   |   |   |
| United  States                  |   | $                                      | 992    |                                  | $      | 1,078 |   | $ | 3,866 |   | $ | 2,914 |   |
| Japan                           |   | 225                                    |   | 221                                   |   | 708 |   | 796 |   |
| United  Kingdom                 |   | 173                                    |   | 142                                   |   | 373 |   | 425 |   |
| Canada                          |   | 199                                    |   | —                                |   | 414 |   | 296 |   |
| Korea                           |   | —                                 |   | 374                                   |   | — |   | 432 |   |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Other  (Countries less than 5%) |   | 258                                    |   | 299                                   |   | 832 |   | 750 |   |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  revenue                  |   | $                                      | 1,847  |                                  | $      | 2,114 |   | $ | 6,193 |   | $ | 5,613 |   |

 

Long-lived tangible assets by geographic area are asfollows:

 
|          |   | **September  30,  2002** |   | **December  31,  2001** |   |
|---------------|--------|--------------------------|--------|-------------------------|--------|
| United States |   | $                        | 295    |                    | $      | 452 |   |
| England       |   | 20                       |   | 21                      |   |
| Total         |   | $                        | 315    |                    | $      | 473 |   |

 

11

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**ITEM 2.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

The following discussionshould be read in conjunction with the consolidated financial statements andnotes thereto.

 

## **OVERVIEW**

 

Bitstream Inc. (“Bitstream” or the “Company”),headquartered in Cambridge, Massachusetts, is composed of three separate anddistinct businesses: (1) its type and technology (“Type”) business, whichgenerates revenue primarily from the licensing of font rendering software andfonts to the embedded, set-top box, wireless device and information appliancemarkets; (2) MyFonts.com, a wholly owned subsidiary that was formed in late1999 as the first e-commerce site to aggregate fonts from multiple vendors onone easy-to-use Web site (“MyFonts”); and (3) Pageflex, Inc., a wholly ownedsubsidiary that was formed in early 1999 to establish the Company as a leaderin dynamic page composition technologies (“Pageflex”).

 

## **FORWARD LOOKINGSTATEMENTS**

 

Except for the historical information containedherein, this Quarterly Report on Form 10-Q may contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended.Investors are cautioned that forward-looking statements are inherentlyuncertain.  Actual performance andresults of operations may differ materially from those projected or suggestedin 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 informationconcerning certain risks and uncertainties that would cause actual results todiffer materially from those projected or suggested in the forward-looking statementsis contained in the Company’s filings with the Securities and ExchangeCommission, including those risks and uncertainties discussed in the Company’sfinal Prospectus, dated October 30, 1996, included as part of the Company’sRegistration Statement on Form S-1 (333-11519), in the section entitled “RiskFactors.” The forward-looking statements contained herein represent theCompany’s judgment as of the date of this report, and the Company cautionsreaders not to place undue reliance on such statements.  Management undertakes no obligation topublicly release any revisions to the forward-looking statements or reflectevents or circumstances after the date of this document.

 

12

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**RESULTSOF OPERATIONS****(in thousands, except percent amounts)**

 

**Consolidated Gross Profit:**

** **
|                   |   | **SEPTEMBER  30,** |       |
|------------------------|--------|--------------------|------------|
|                   |   | **2002**           |       | **% of  Revenue** |   | **2001** |   | **% of  Revenue** |   | **Change** |   |
| **Dollars**            |   | **Percent**        |
| **THREE MONTHS ENDED** |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Revenue**            |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses     |   | $                  | 1,588      |   | 86.0 | % | $ | 1,818 |   | 86.0 | % | $ | (230 | ) | (12.7 | )% |
| Services               |   | 259                |       | 14.0 |   | 296 |   | 14.0 |   | (37 | ) | (12.5 | ) |
| Total revenue          |   | 1,847              |       | 100.0 |   | 2,114 |   | 100.0 |   | (267 | ) | (12.6 | ) |
| **Cost  of Revenue**   |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses     |   | 430                |       | 23.3 |   | 348 |   | 16.5 |   | 82 |   | 23.6 |   |
| Services               |   | 104                |       | 5.6 |   | 124 |   | 5.9 |   | (20 | ) | (16.1 | ) |
| Total cost of  revenue |   | 534                |       | 28.9 |   | 472 |   | 22.3 |   | 62 |   | 13.1 |   |
|                   |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**      |   | $                  | 1,313      |   | 71.1 | % | $ | 1,642 |   | 77.7 | % | $ | (329 | ) | (20.0 | )% |
|                   |   |               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **NINE MONTHS ENDED**  |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Revenue**            |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses     |   | $                  | 5,373      |   | 86.8 | % | $ | 4,787 |   | 85.3 | % | $ | 586 |   | 12.2 | % |
| Services               |   | 820                |       | 13.2 |   | 826 |   | 14.7 |   | (6 | ) | (0.7 | ) |
| Total revenue          |   | 6,193              |       | 100.0 |   | 5,613 |   | 100.0 |   | 580 |   | 10.3 |   |
| **Cost  of Revenue**   |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses     |   | 1,238              |       | 20.0 |   | 816 |   | 14.5 |   | 422 |   | 51.7 |   |
| Services               |   | 298                |       | 4.8 |   | 300 |   | 5.3 |   | (2 | ) | (0.7 | ) |
| Total cost of  revenue |   | 1,536              |       | 24.8 |   | 1,116 |   | 19.9 |   | 420 |   | 37.6 |   |
|                   |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**      |   | $                  | 4,657      |   | 75.2 | % | $ | 4,497 |   | 80.1 | % | $ | 160 |   | 3.6 | % |

 

The decrease in revenue for the three months endedSeptember 30, 2002 as compared to the three months ended September 30, 2001 wasattributable to decreased revenue in the Company’s Type and Pageflex segmentsof $379 and $138, respectively, partially offset by an increase in MyFontsrevenue of $250.  The increase inrevenue for the nine months ended September 30, 2002 as compared to the ninemonths ended September 30, 2001 was attributable to an increase in revenue inthe Company’s MyFonts and Pageflex segments of $650 and $260, respectively,partially offset by a decrease in the Type segments revenue of $330.  The increase in cost of revenue for thethree months and nine months ended September 30, 2002 as compared to the threemonths and nine months ended September 30, 2001 was primarily due to increasedroyalty expense for the Company’s MyFonts segment resulting from increasedsales. Cost of revenue for the Company includes royalties and fees paid tothird parties for the development or license of rights to technology and/or uniquetypeface designs, costs incurred in the fulfillment of custom orders, and costsassociated with the duplication, packaging and shipping of product. Grossprofit generated by each segment is discussed in more detail below.

 

13

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**TypeGross Profit:**

** **
|                        |   | **SEPTEMBER  30,** |       |
|-----------------------------|--------|--------------------|------------|
|                        |   |               |       | **% of** |   |   |   | **% of** |   | **Change** |   |
|                        |   | **2002**           |       | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED**     |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Revenue**                 |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | $                  | 960        |   | 92.8 | % | $ | 1,308 |   | 92.5 | % | $ | (348 | ) | (26.6 | )% |
| Services                    |   | 75                 |       | 7.2 |   | 106 |   | 7.5 |   | (31 | ) | (29.2 | ) |
| Total revenue               |   | 1,035              |       | 100.0 |   | 1,414 |   | 100.0 |   | (379 | ) | (26.8 | ) |
| Percentage of total revenue |   | 56.1               | %          |   |   | 66.9 | % |   |   |   |   |   |   |
|                        |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost  of Revenue**        |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software licenses           |   | 94                 |       | 9.8 |   | 208 |   | 15.9 |   | (114 | ) | (54.8 | ) |
| Services                    |   | 40                 |       | 53.3 |   | 48 |   | 45.3 |   | (8 | ) | (16.7 | ) |
| Total cost of  revenue      |   | 134                |       | 12.9 |   | 256 |   | 18.1 |   | (122 | ) | (47.7 | ) |
|                        |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**           |   | $                  | 901        |   | 87.1 | % | $ | 1,158 |   | 81.9 | % | $ | (257 | ) | (22.2 | )% |
|                        |   |               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **NINE MONTHS ENDED**       |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Revenue**                 |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | $                  | 3,147      |   | 91.6 | % | $ | 3,410 |   | 90.5 | % | $ | (263 | ) | (7.7 | )% |
| Services                    |   | 290                |       | 8.4 |   | 357 |   | 9.5 |   | (67 | ) | (18.8 | ) |
| Total revenue               |   | 3,437              |       | 100.0 |   | 3,767 |   | 100.0 |   | (330 | ) | (8.8 | ) |
| Percentage of total revenue |   | 55.5               | %          |   |   | 67.1 | % |   |   |   |   |   |   |
|                        |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost  of Revenue**        |   |               |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | 361                |       | 11.5 |   | 437 |   | 12.8 |   | (76 | ) | (17.4 | ) |
| Services                    |   | 122                |       | 42.1 |   | 165 |   | 46.2 |   | (43 | ) | (26.1 | ) |
| Total cost of  revenue      |   | 483                |       | 14.1 |   | 602 |   | 16.0 |   | (119 | ) | (19.8 | ) |
|                        |   |               |       |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**           |   | $                  | 2,954      |   | 85.9 | % | $ | 3,165 |   | 84.0 | % | $ | (211 | ) | (6.7 | )% |

** **

The decrease in Type revenuefor the three months ended September 30, 2002 versus the three months endedSeptember 30, 2001 was the result of decreases in revenue from OEM sales andOEM custom design services of $367 and $29, respectively.  This decrease was partially offset by anincrease in revenue from direct sales of $19, which was primarily attributableto an increase in Internet sales. OEM revenue for the three months endedSeptember 30, 2001 included two licenses of the Company’s Font Fusion product,which generated substantial license fees, but were not replicated in the threemonths ended September 30, 2002. The Company’s management believes that licensefees and royalties from, the Company’s technology products for the three monthsended September 30, 2002 were lower than in the prior year because of concernsabout the economy.  The decrease inrevenue for the nine months ended September 30, 2002 as compared to the ninemonths ended September 30, 2001 was primarily the result of a decrease in OEMlicense revenue of $246, a decrease in retail product sales of $17 and adecrease in revenue from custom design services of $37.  Retail sales of the Company’s Type productsand custom design work have decreased during the past year because of consumerconcerns about the economy and decreases in spending.  Retail sales over the Internet have been increasing throughoutthe year and for the three months ended September 30, 2002 have been greaterthan the decrease in reseller and other direct sales.  Cost of revenue for the three and nine month periods endedSeptember 30, 2002 has decreased as compared to the same periods endedSeptember 30 2001 primarily because of the decrease in revenue.

 

14

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**MyFontsGross Profit:**

** **
|                        |   | **SEPTEMBER 30** |   |
|-----------------------------|--------|------------------|--------|
|                        |   |             |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                        |   | **2002**         |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED**     |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue**                 |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | $                | 394    |   | 100.0 | % | $ | 144 |   | 100.0 | % | $ | 250 |   | 173.6 | % |
| Total revenue               |   | 394              |   | 100.0 |   | 144 |   | 100.0 |   | 250 |   | 173.6 |   |
| Percentage of total revenue |   | 21.3             | %      |   |   | 6.8 | % |   |   |   |   |   |   |
|                        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **Cost  of Revenue**        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | 318              |   | 80.7 |   | 114 |   | 79.2 |   | 204 |   | 178.9 |   |
| Total cost of  revenue      |   | 318              |   | 80.7 |   | 114 |   | 79.2 |   | 204 |   | 178.9 |   |
|                        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**           |   | $                | 76     |   | 19.3 | % | $ | 30 |   | 20.8 | % | $ | 46 |   | 153.3 | % |
|                        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**       |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue**                 |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | $                | 987    |   | 100.0 | % | $ | 337 |   | 100.0 | % | $ | 650 |   | 192.9 | % |
| Total revenue               |   | 987              |   | 100.0 |   | 337 |   | 100.0 |   | 650 |   | 192.9 |   |
| Percentage of total revenue |   | 15.9             | %      |   |   | 6.0 | % |   |   |   |   |   |   |
|                        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **Cost  of Revenue**        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | 801              |   | 81.2 |   | 263 |   | 78.0 |   | 538 |   | 204.6 |   |
| Total cost of  revenue      |   | 801              |   | 81.2 |   | 263 |   | 78.0 |   | 538 |   | 204.6 |   |
|                        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Gross Profit                |   | $                | 186    |   | 18.8 | % | $ | 74 |   | 22.0 | % | $ | 112 |   | 151.4 | % |

** **

**Revenuefor MyFonts has increased as consumer purchases of the Company’s products hasincreased.  MyFonts has also beensuccessfully increasing the number of fonts available on its site and thenumber of foundries participating. In August 2002, MyFonts enhanced its websitemaking it easier for customers to navigate within the site and find the fontsin which they are interested. Myfonts has attracted new purchasers while alsoretaining existing customers.  Existingcustomers accounted for 25% to 30% of orders during the first nine months of2002.  Inter-company sales, whichMyFonts generated from the resale of Bitstream fonts, have been excluded.  Total MyFonts revenue, before theelimination of inter-company royalties resulting from the resale of Bitstreamproducts, for the three months ended September 30, 2002 increased $278 or140.4% to $476 from $198 for the three months ended September 30, 2001.  Cost of revenue increased primarily becausethe sales of fonts from non-affiliated foundries increased.  Royalties payable to non-affiliatedfoundries on sales of their fonts are approximately 80% of the revenuegenerated.**

** **

**15**

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** **

**PageflexGross Profit:**

** **
|                        |   | **September  30,** |   |
|-----------------------------|--------|--------------------|--------|
|                        |   |               |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                        |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED**     |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue**                 |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | $                  | 234    |   | 56.0 | % | $ | 366 |   | 65.8 | % | $ | (132 | ) | (36.1 | )% |
| Services                    |   | 184                |   | 44.0 |   | 190 |   | 34.2 |   | (6 | ) | (3.2 | ) |
| Total revenue               |   | 418                |   | 100.0 |   | 556 |   | 100.0 |   | (138 | ) | (24.8 | ) |
| Percentage of total revenue |   | 22.6               | %      |   |   | 26.3 | % |   |   |   |   |   |   |
|                        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **Cost  of Revenue**        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | 18                 |   | 7.7 |   | 26 |   | 7.1 |   | (8 | ) | (30.8 | ) |
| Services                    |   | 64                 |   | 34.8 |   | 76 |   | 40.0 |   | (12 | ) | (15.8 | ) |
| Total cost of  revenue      |   | 82                 |   | 19.6 |   | 102 |   | 18.3 |   | (20 | ) | (19.6 | ) |
|                        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**           |   | $                  | 336    |   | 80.4 | % | $ | 454 |   | 81.7 | % | $ | (118 | ) | (26.0 | )% |
|                        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**       |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **Revenue**                 |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | $                  | 1,239  |   | 70.0 | % | $ | 1,040 |   | 68.9 | % | $ | 199 |   | 19.1 | % |
| Services                    |   | 530                |   | 30.0 |   | 469 |   | 31.1 |   | 61 |   | 13.0 |   |
| Total revenue               |   | 1,769              |   | 100.0 |   | 1,509 |   | 100.0 |   | 260 |   | 17.2 |   |
| Percentage of total revenue |   | 28.6               | %      |   |   | 26.9 | % |   |   |   |   |   |   |
|                        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **Cost  of Revenue**        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses          |   | 76                 |   | 6.1 |   | 116 |   | 11.2 |   | (40 | ) | (34.5 | ) |
| Services                    |   | 176                |   | 33.2 |   | 135 |   | 28.8 |   | 41 |   | 30.4 |   |
| Total cost of  revenue      |   | 252                |   | 14.2 |   | 251 |   | 16.6 |   | 1 |   | 0.4 |   |
|                        |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **Gross  Profit**           |   | $                  | 1,517  |   | 85.8 | % | $ | 1,258 |   | 83.4 | % | $ | 259 |   | 20.6 | % |

 

**Thedecrease in Pageflex revenue for the three months ended September 30, 2002 ascompared to the three months ended September 30, 2001 was the result of adecrease in sales of Mpower, as well as, a decrease in related training andconsulting service revenue.  Concernsover the economy caused a delay in the closure of certain Mpower sales. Salesclosed in quarters prior to the quarter ended September 30, 2002 helpedincrease Pageflex revenue for the nine months ended September 30, 2002 ascompared to the nine months ended September 30, 2001.  The decrease in cost of revenue for the three months endedSeptember 30, 2002 as compared to the three months ended September 30, 2001 wasprimarily attributable to the decrease in Mpower sales.  For the nine months ended September 30, 2002this decrease was offset by increased payroll costs resulting from thereassignment of two employees to provide support and infrastructure to theCompany’s increased customer base during the first quarter of 2002.**

 

16

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**Marketingand Selling:**

 
|                                |   | **SEPTEMBER  30,** |   |
|-------------------------------------|--------|--------------------|--------|
|                                |   |               |   | **% of  Segment** |   |   |   | **% of  Segment** |   | **Change** |   |
|                                |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED**             |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Type                                |   | $                  | 303    |   | 29.3 | % | $ | 333 |   | 23.6 | % | $ | (30 | ) | (9.0 | )% |
| MyFonts                             |   | 6                  |   | 1.5 |   | 43 |   | 29.9 |   | (37 | ) | (86.0 | ) |
| Pageflex                            |   | 263                |   | 62.9 |   | 269 |   | 48.4 |   | (6 | ) | (2.2 | ) |
| Consolidated  marketing And selling |   | $                  | 572    |   | 31.0 | % | $ | 645 |   | 30.5 | % | $ | (73 | ) | (11.3 | )% |
|                                |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**               |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Type                                |   | $                  | 915    |   | 26.6 | % | $ | 1,111 |   | 29.5 | % | $ | (196 | ) | (17.6 | )% |
| MyFonts                             |   | 33                 |   | 3.3 |   | 58 |   | 17.2 |   | (25 | ) | (43.1 | ) |
| Pageflex                            |   | 751                |   | 42.5 |   | 1,032 |   | 68.4 |   | (281 | ) | (27.2 | ) |
| Consolidated  marketing And selling |   | $                  | 1,699  |   | 27.4 | % | $ | 2,201 |   | 39.2 | % | $ | (502 | ) | (22.8 | )% |

 

The decrease in marketing and selling expenses for thethree month and nine month periods ended September 30, 2002 as compared to thethree month and nine month periods ended September 30, 2001 reflects expensereductions implemented by management in the fourth quarter of 2001.  Type marketing and selling expenses for thethree months ended September 30, 2002 decreased primarily due to decreasedtrade shows costs of $35. The decrease for the nine months ended September 30,2002 was primarily attributable to a decrease in trade show expenses of $49, adecrease in print and production costs of $15, a decrease in outside consultingexpenses of $25, and employee related costs of $60, combined with a currencyexchange gain from the sales office in the UK of $36. Pageflex marketing andselling expenses decreased for the three months ended September 30, 2002 ascompared to the three months ended September 30, 2001 primarily as the resultof a decrease in employee related expenses of $5. The Pageflex decrease for thenine months ended September 30, 2002 as compared to the nine months endedSeptember 30, 2001 was primarily attributable to decreases in employeehead-count related expenses, outside consulting expenses, and trade showexpenses of $177, $36 and $44, respectively. Myfonts marketing and selling expenses decreased primarily due to adecrease in trade show and print advertising expenses of $30 and $26 for thethree and nine month periods ended September 30, 2002, respectively, ascompared to the same periods ended September 30, 2001.

 

17

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**Researchand Development (“R&D”)**:

** **
|                                   |   | **SEPTEMBER  30,** |   |
|----------------------------------------|--------|--------------------|--------|
|                                   |   |               |   | **% of  Segment** |   |   |   | **% of  Segment** |   | **Change** |   |
|                                   |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED**                |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Type                                   |   | $                  | 500    |   | 48.3 | % | $ | 381 |   | 26.9 | % | $ | 119 |   | 31.2 | % |
| MyFonts                                |   | 135                |   | 34.3 |   | 237 |   | 164.6 |   | (102 | ) | (43.0 | ) |
| Pageflex                               |   | 442                |   | 105.7 |   | 573 |   | 103.1 |   | (131 | ) | (22.9 | ) |
| Consolidated  research and development |   | $                  | 1,077  |   | 58.3 | % | $ | 1,191 |   | 56.3 | % | $ | (114 | ) | (9.6 | )% |
|                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**                  |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Type                                   |   | $                  | 1,411  |   | 41.1 | % | $ | 1,310 |   | 34.8 | % | $ | 101 |   | 7.7 | % |
| MyFonts                                |   | 360                |   | 36.5 |   | 553 |   | 164.1 |   | (193 | ) | (34.9 | ) |
| Pageflex                               |   | 1,256              |   | 71.0 |   | 1,921 |   | 127.3 |   | (665 | ) | (34.6 | ) |
| Consolidated  research and development |   | $                  | 3,027  |   | 48.9 | % | $ | 3,784 |   | 67.4 | % | $ | (757 | ) | (20.0 | )% |

 

The decrease in R&Dexpenses for the three and nine month periods ended September 30, 2002 ascompared to the same periods ended September 30, 2001 is primarily attributableto cost reductions adopted during the fourth quarter of 2001. This decrease waspartially offset by an increase in R&D expenses for the Type segment.  The increase in Type R&D expense wasprimarily due to an increase in internally allocated resources and outsideconsulting for product development, including the Company’s new ThunderHawkwireless browser, of $104, and increased facility charges of $41 and $81 forthe three and nine month periods, respectively.  This increase was partially offset by a decrease in goodwillamortization of technology associated with the acquisition of Type Solutions,Inc. of $30 and $89, respectively for the same periods, resulting from theCompany’s adoption of SFAS No. 142 effective January 1, 2002.  See Note 1(c) in the Notes to theConsolidated Financial Statements included herewith.  The decrease in MyFonts R&D expense for the three and ninemonth periods ended September 30, 2002 as compared to the same periods endedSeptember 30, 2001 was primarily the result of the decreased use of outsideconsultants and the absorption of that work by Company employees which resultedin savings of approximately $131 and $221, respectively.  This decrease was partially offset byincreased facility-related charges of $15 and $20, respectively, over the sameperiods.  The decrease in PageflexR&D expense for the three and nine month periods ended September 30, 2002as compared to the same periods ended September 30, 2001 was primarilyattributable to employee headcount reductions, which resulted in savings of $80and $389, respectively.  The Pageflexsegment reassigned two employees to customer support positions, which areincluded in cost of revenue, and decreased R&D expenses for the three andnine month periods ended September 30, 2002 as compared to the same periodsended September 30, 2001 by $51 and $150, respectively.  Pageflex also decreased the outsourcing ofengineering projects, which resulted in savings of $5 and $89 for the threemonth and nine month periods ended September 30, 2002 as compared to the sameperiods ended September 30, 2001, respectively.

 

18

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**Generaland Administrative (“G&A”)**:

** **
|                                     |   | **SEPTEMBER  30,** |   |
|------------------------------------------|--------|--------------------|--------|
|                                     |   |               |   | **% of  Segment** |   |   |   | **% of  Segment** |   | **Change** |   |
|                                     |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED**                  |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Type                                     |   | $                  | 174    |   | 16.8 | % | $ | 196 |   | 13.9 | % | $ | (22 | ) | (11.2 | )% |
| MyFonts                                  |   | 17                 |   | 4.3 |   | 13 |   | 9.0 |   | 4 |   | 30.8 |   |
| Pageflex                                 |   | 107                |   | 25.6 |   | 302 |   | 54.3 |   | (195 | ) | (64.6 | ) |
| Consolidated  general and administrative |   | $                  | 298    |   | 16.1 | % | $ | 511 |   | 24.2 | % | $ | (213 | ) | (41.7 | )% |
|                                     |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**                    |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Type                                     |   | $                  | 613    |   | 17.8 | % | $ | 680 |   | 18.1 | % | $ | (67 | ) | (9.9 | )% |
| MyFonts                                  |   | 66                 |   | 6.7 |   | 47 |   | 13.9 |   | 19 |   | 40.4 |   |
| Pageflex                                 |   | 380                |   | 21.5 |   | 617 |   | 40.9 |   | (237 | ) | (38.4 | ) |
| Consolidated  general and administrative |   | $                  | 1,059  |   | 17.1 | % | $ | 1,344 |   | 23.9 | % | $ | (285 | ) | (21.2 | )% |

 

The decrease in Type G&A expenses for the threemonths ended September 30, 2002 as compared to the three months ended September30, 2001 was primarily the result of a $118 change in an estimate associatedwith the Company’s sale of two product lines to Inso Corporation in August1998.  In addition, Type G&Aexpenses decreased for the three months ended September 30, 2002 as compared tothe three months ended September 30, 2001 by $22 in goodwill amortizationrelated to the acquisition of Mainstream Software Solutions, Ltd., which wasfully amortized as of December 31, 2001. These decreases were partially offset by increases in facility costs of$42, commercial and employee health insurance costs of $35, and a decrease inthe amount of administrative expense allocated to Pageflex of $56.  The decrease in Type G&A expenses forthe nine months ended September 30, 2002 versus the nine months ended September30, 2001 included the $118 change in the estimate and $67 in goodwillamortization discussed above, as well as, decreases in employee salaries andtravel expenses of $61, equipment costs of $25, and outside services related tothe Company’s annual report and proxy production of $50.  These decreases were partially offset byincreases in facility costs of $48, commercial and employee health insurancecosts of $83, and a decrease in the amount of administrative expense allocatedto Pageflex of $113.  MyFonts G&Aexpenses increased because of increased internally allocated expenses from theCompany’s Type segment.  PageflexG&A for the three and nine month periods ended September 30, 2002 versusthe same periods ended September 30, 2001 reflects decreased employee insurancecosts of $20 and $85, respectively, and administrative expense allocations of$56 and $113 respectively, attributable to the headcount reduction completed aspart of the Company’s restructuring in the fourth quarter of 2001.  Pageflex also benefited from decreasedgoodwill amortization in connection with the Alaras acquisition of $65 and $195for the three and nine month periods ended September 30, 2002 as compared tothe same periods ended September 30, 2001, respectively.  This goodwill amortization ceased inaccordance with the Company’s adoption of SFAS No. 142 on January 1, 2002. SeeNote 1(c) in the Notes to the Consolidated Financial Statements includedherewith for further information. Pageflex G&A expenses for the three months ended September 30, 2002also decreased due to a decrease in bad debt expense of $56 as compared to thethree months ended September 30, 2001. The Pageflex decreases for the ninemonths ended September 30, 2002 were partially offset by an increase in baddebt expense of $152 attributable to a net recovery of $(170) for the ninemonths ended September 30, 2001.

 

19

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**Gain(loss) on Investment in DiamondSoft, Inc.:**
|                                            |   | **SEPTEMBER  30,** |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   |               |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                                            |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE MONTHS ENDED**                          |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Gain (loss) on  investment in DiamondSoft, Inc. |   | $                  | 5      |   | 0.3 | % | $ | (68 | ) | (3.2 | )% | $ | 73 |   | 107.4 | % |
|                                            |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**                           |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Gain (loss) on  investment in DiamondSoft, Inc. |   | $                  | 47     |   | 0.8 | % | $ | (219 | ) | (3.9 | )% | $ | 266 |   | 121.5 | % |

 

In March 1998 the Company made a $500 equityinvestment in DiamondSoft, Inc. (“DiamondSoft”) representing a 25% ownershipinterest.  During the year endedDecember 31, 2001, the Company made additional investments totaling $410 in DiamondSoft,resulting in an increase in Bitstream’s ownership percentage to 31.7% atDecember 31, 2001 and September 30, 2002. The gain (loss) above represents the Company’s pro rata share ofDiamondSoft’s net income (loss). (See Note 3 in the Notes to the ConsolidatedFinancial Statements included herewith.)

 

**Interestincome, net:**
|                    |   | **SEPTEMBER  30,** |   |
|-------------------------|--------|--------------------|--------|
|                    |   |               |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                    |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED** |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Interest income, net    |   | $                  | 18     |   | 1.0 | % | $ | 47 |   | 2.2 | % | $ | (29 | ) | (61.7 | )% |
|                    |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Interest income, net    |   | $                  | 60     |   | 1.0 | % | $ | 198 |   | 3.5 | % | $ | (138 | ) | (69.7 | )% |

 

Interest income consists primarily of income earned oncash and money market instruments and has decreased as the Company has usedcash to fund operations and also as interest rates have decreased.

 

**Provisionfor income taxes:**
|                    |   | **SEPTEMBER  30,** |   |
|-------------------------|--------|--------------------|--------|
|                    |   |               |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                    |   | **2002**           |   | **Revenue** |   | **2001** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **THREE  MONTHS ENDED** |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Income Tax Expense      |   | $                  | 5      |   | 0.3 | % | $ | 59 |   | 2.8 | % | $ | (54 | ) | (91.5 | )% |
|                    |   |               |   |   |   |   |   |   |   |   |   |   |   |
| **NINE MONTHS ENDED**   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Income Tax Expense      |   | $                  | 75     |   | 1.2 | % | $ | 139 |   | 2.5 | % | $ | (64 | ) | (46.0 | )% |

 

The Company’s provision for income taxes for the threeand nine month periods ended September 30, 2002 and 2001 were attributableprimarily to foreign income taxes. Foreign taxes vary with Type OEM license royalties from customers incountries who have signed tax conventions with the United States includingJapan, Korea, and Poland, and also with the results of operations from theCompany’s location in the United Kingdom.

 

20

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**LIQUIDITY AND CAPITAL RESOURCES (inthousands)**

 

The Company has funded its operations primarilythrough the public sale of equity securities, cash flows from operations andcash received from the sale of the Company’s MediaBank and InterSep OPI productlines to Inso Providence Corporation in August of 1998.  As of September 30, 2002, the Company had networking capital of $3,703 versus $4,688 at December 31, 2001.

 

The Company used cash of approximately $630 and $801to fund its operations during the nine months ended September 30, 2002 and2001, respectively. The cash was used primarily to fund the Company’s netlosses. The net losses after adjustment for non-cash expenses resulted in theuse of $874 and $2,097 in cash during the nine months ended September 30, 2002and 2001, respectively.  Changes inoperating assets and liabilities resulted in cash savings of $244 and $1,296for the nine months ended September 30, 2002 and 2001, respectively.  During the nine months ended September 30,2002, the primary change in operating assets and liabilities was the increasein accounts payable and a decrease in accounts receivable of approximately $160and $143, respectively.  During the ninemonths ended September 30, 2001, the primary change in operating assets andliabilities was the collection of accounts receivable which resulted in a  $975 decrease in outstanding accountsreceivable.

 

The Company’s investing activities used cash of $160and $576 for the nine months ended September 30, 2002 and 2001,respectively.  Additions of property andequipment and intangible assets used $160 and $326 in cash for the nine monthsended September 30, 2002 and 2001, respectively.  During the nine months ended September 30, 2001 the Company alsoincreased its investment in DiamondSoft, Inc. by $250.

 

The Company’s financing activities provided cash of$53 and $231 for the nine months ended September 30, 2002 and 2001,respectively from the exercise of stock options.

 

The Company believes its current cash and cashequivalent balances will be sufficient to meet the Company’s operating andcapital requirements for at least the next 12 months.  There can be no assurance, however, that the Company will notrequire additional financing in the future. If the Company were required to obtain additional financing in thefuture, there can be no assurance that sources of capital will be available onterms favorable to the Company, if at all.

 

As of September 30, 2002, the Company had no materialcommitments for capital expenditures. From time to time, the Company evaluates potential acquisitions ofproducts, businesses and technologies that may complement or expand theCompany’s business.  Any suchtransactions consummated may use a portion of the Company’s working capital orrequire the issuance of equity or debt. As of September 30, 2002, the Company had future minimum annual leasepayments under the Company’s leased facilities of $100 for the remainder of2002 and $301 for the year ended December 31, 2003.

 

21

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# **NASDAQ LISTING REQUIREMENTS**

 

The Company’s Common Stock currently trades on the NASDAQ NationalMarket System.  Effective November 1,2002, the NASDAQ has changed its National Market System continued listingstandard from a minimum $4,000,000 net tangible asset requirement to a minimum$10,000,000 stockholders’ equity requirement. Based on its financial position as of September 30, 2002, the Companywould not meet the continued listing requirements for the National MarketSystem that will apply to it as of November 1, 2002.  Although the Company is currently pursuing options to meet thisnew National Market System standard, if the Company is unable to qualify forcontinued listing, the Company’s Common Stock is likely to be delisted from theNASDAQ National Market System.  In suchevent, the Company intends to apply for continued listing on the NASDAQ SmallCap Market.  Delisting from the NationalMarket System or changing to the NASDAQ Small Cap Market may materiallyadversely affect the ability of the Company’s stockholders to sell their sharesand may make it more difficult for the Company to raise additional funding throughthe sale of its equity securities.

 

# **RECENT ACCOUNTING PRONOUNCEMENTS**

 

In June 2002, the FASB issued SFAS No. 143, *Accountingfor Asset Retirement Obligations*. This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This Statement applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development, or normal use of the asset.  SFAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002.  TheCompany does not expect SFAS No. 143 to have a material impact on its financialposition or results of operations upon its adoption on January 1, 2003.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” whichsupercedes EITF 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  The provisions ofthis Statement are required to be adopted for exit or disposal activities thatare initiated after December 31, 2002. Under this standard, a liability for acost associated with an exit or disposal activity formerly recognized upon theentity’s commitment to an exit plan are now recognized when the liability isincurred.  The Company does not expectSFAS No. 146 to have a material impact on its financial position or results ofoperations upon its adoption on January 1, 2003.

 

22

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**PART I, ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**DerivativeFinancial Instruments, Other Financial Instruments and Derivative CommodityInstruments.**

 

As of September 30, 2002, the Company did notparticipate in any derivative financial instruments or other financial andcommodity instruments for which fair value disclosure would be required underSFAS No. 107. All of the Company’s investments are short-term, investment-gradecommercial paper, and money market accounts that are carried on the Company’sbooks at amortized cost, which approximates fair market value. Accordingly, theCompany has no quantitative information concerning the market risk of participatingin such investments.

 

**Primary Market Risk Exposures**

 

The Company’s primary market risk exposures are in theareas of interest rate risk and foreign currency exchange rate risk. TheCompany’s investment portfolio of cash equivalent and short-term investments issubject to interest rate fluctuations, but the Company believes this risk isimmaterial due to the short-term nature of these investments.  The Company’s exposure to currency exchangerate fluctuations has been, and is expected to continue to be, modest due tothe fact that the operations of its international subsidiaries are almostexclusively conducted in their respective local currencies. Internationalsubsidiary operating results are translated into U.S. dollars and consolidatedfor reporting purposes. The impact of currency exchange rate movements oninter-company transactions was immaterial for the nine months ended September30, 2002.  Currently the Company doesnot engage in foreign currency hedging activities.

 

**PART I, ITEM 4. CONTROLS AND PROCEDURES**

 

Based on the evaluation of the Company’s disclosurecontrols and procedures as of a date within 90 days of the filing date of thisquarterly report, each of Charles Ying, the Chief Executive Officer of theCompany, and Anna Chagnon, the Chief Financial Officer of the Company, haveconcluded that the Company’s disclosure controls and procedures are effectivein ensuring that information required to be disclosed by the Company in thereports that it files or submits under the Securities and Exchange Act of 1934,as amended, is recorded, processed, summarized and reported, within the timeperiod specified by the Securities and Exchange Commission’s rules and forms.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

23

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**PART II****— OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

The Company is not a party to any material litigation.

 

**ITEM2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

(a)        Instruments defining therights of the holders of any class of registered securities of the Company havenot been materially modified during the three months ended September 30, 2002.

 

(b)       Rights evidenced by anyclass of registered securities of the Company have not been materially limitedor qualified by the issuance or modification of any other class of securitiesduring the three months ended September 30, 2002.

 

(c)        There were no unregisteredsecurities sold by the Company during the three months ended September 30,2002.

 

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of securityholders during the three months ended

September 30, 2002.

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM6. EXHIBITS AND REPORTS ON FORM 8-K**

 
| (a)    |   | Exhibits            |
|--------|--------|---------------------|
|   |   | 99                  | Additional Exhibits |
|   |   | 99.1                | Certification pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                |
| (b)    |   | Reports on Form 8-K |
|   |   | None                |

 

 

24

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# **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

**BITSTREAM INC.**

(Registrant)

 

 
| **SIGNATURE**       |   | **TITLE**                                                                                                       |   | **DATE**          | ** ** |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                |   |                                                                                                            |   |              | ** ** |
| /s/ Anna M. Chagnon |   | President, Chief Operating Officer,  Chief Financial Officer and General Counsel  (Principal Financial Officer) |   | November 12, 2002 |       |
| Anna M. Chagnon     |   |                                                                                                            |   |              |
|                |   |                                                                                                            |   |              |       |
|                |   |                                                                                                            |   |              |       |
| /s/ James P. Dore   |   | Corporate Controller  (Principal Accounting Officer)                                                            |   | November 12, 2002 |       |
| James P. Dore       |   |                                                                                                            |   |              |

 

25

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**CERTIFICATION**

 

I, Charles Ying, ChiefExecutive Officer of Bitstream Inc., certify that:

 

1.     I havereviewed this quarterly report on Form 10-Q of Bitstream Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements are made, not misleading with respectto the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)             designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)            evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s Board of Directors:

 

a)             all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| **SIGNATURE**                |   | **TITLE**               |   | **DATE**           |   |
|------------------------------|--------|-------------------------|--------|--------------------|--------|
|                         |   |                    |   |               |   |
| /s/  Charles  Ying |   | Chief Executive Officer |   | November 12,  2002 |   |
|   Charles  Ying    |   |                    |   |               |   |

 

26

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**CERTIFICATION**

 

I, Anna Chagnon,President and Chief Financial Officer of Bitstream Inc., certify that:

 

2.   I have reviewed this quarterly report on Form 10-Qof Bitstream Inc.;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements are made, notmisleading with respect to the period covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

d)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

e)              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

f)                presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.  Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s Board of Directors:

 

c)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

d)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| **SIGNATURE**            |   | **TITLE**                                                                                                              |   | **DATE**          |   |
|--------------------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                     |   |                                                                                                                   |   |              |   |
| /s/ Anna M. Chagnon |   | President, Chief Operating Officer,  Chief  Financial Officer and General  Counsel  (Principal Financial Officer) |   | November 12, 2002 |   |
| Anna M. Chagnon          |   |                                                                                                                   |   |              |
|                     |   |                                                                                                                   |   |              |

 

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