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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

**FORM10-Q**

**(Mark one)**
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

**For thequarterly period ended June 30, 2001**

**or**
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**For thetransition period from __________ to ___________**

**COMMISSION FILE NUMBER: 0-21541**

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

 

| **Delaware**                                                                              | **04-2744890**                        |   |
|-------------------------------------------------------------------------------------------|---------------------------------------|--------|
| ****                                                                                      | ****                                  |   |
| (State or other  jurisdiction of incorporation 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

             OnAugust 9, 2001 there were 8,201,188 shares of Class A Common Stock, par value$0.01 per share, and no shares of Class B Common Stock, par value $0.01 pershare, outstanding.

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**BITSTREAM INC. AND SUBSIDIARIES**

**INDEX**

|                                                                                            |
|-------------------------------------------------------------------------------------------------|
|                                                                                            |
| **PART I. FINANCIAL INFORMATION**                                                               |
|                                                                                            |
| ITEM  1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                            |
|                                                                                            |
|                                                                                            | CONSOLIDATED BALANCE SHEETS  AS OF JUNE 30, 2001 AND DECEMBER 31, 2000 |
|                                                                                            |
|                                                                                            | CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE THREE AND SIX  MONTHS ENDED JUNE 30, 2001 AND 2000 |
|                                                                                            |
|                                                                                            | CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001  AND 2000 |
|                                                                                            |
|                                                                                            | NOTES  TO CONDENSED 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                             |
|                                                                                            |
| **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                                                                                      |

**ITEM 1. FINANCIAL STATEMENTS**

**BITSTREAM INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands)(Unaudited)**

|                                          | **June 30,**                                                                                                                             |       | **December 31,** |       |
|-----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
|                                          | **2001**                                                                                                                                 |       | **2000**         |       |
|                                          | ****                                                                                                                                     |       | ****             |       |
| **ASSETS**                                    |                                                                                                                                     | ** ** |             | ** ** |
| Current  assets:                              |                                                                                                                                     |       |             |       |
|                                          | Cash  and cash equivalents                                                                                                               | $          | 6,554            |       | $ | 7,149 |   |
|                                          | Accounts  receivable, net of allowance of $78 and $663 at June 30, 2001 and December  31, 2000, respectively                             | 931        |             | 2,043      |   |
|                                          | Prepaid  expenses and other current assets                                                                                               | 141        |             | 198        |   |
|                                          |                                                                                                                                     |            |             |            |   |
|                                          | Total  current assets                                                                                                                    | 7,626      |             | 9,390      |   |
|                                          |                                                                                                                                          |       |                  |       |
| Property  and equipment, net                  | 544                                                                                                                                      |       | 636              |       |
|                                          |                                                                                                                                          |       |                  |       |
| Other  assets:                                |                                                                                                                                     |       |             |       |
|                                          | Restricted  cash                                                                                                                         | 300        |             | 300        |   |
|                                          | Goodwill,  net of amortization of $1,384 and $1,149 at June 30, 2001 and December 31,  2000, respectively                                | 961        |             | 1,196      |   |
|                                          | Investment  in DiamondSoft, Inc.                                                                                                         | 548        |             | 449        |   |
|                                          | Other                                                                                                                                    | 243        |             | 136        |   |
|                                          |                                                                                                                                     |            |             |            |   |
|                                          | Total  other assets                                                                                                                      | 2,052      |             | 2,081      |   |
|                                          |                                                                                                                                          |       |                  |       |
|                                          | Total  assets                                                                                                                            | $          | 10,222           |       | $ | 12,107 |   |
|                                          |                                                                                                                                     |            |             |            |   |
|                                          |                                                                                                                                     |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |                                                                                                                                     |       |             |       |
| Current  liabilities:                         |                                                                                                                                     |       |             |       |
|                                          | Accounts  payable                                                                                                                        | $          | 348              |       | $ | 261 |   |
|                                          | Accrued  expenses                                                                                                                        | 1,091      |             | 1,287      |   |
|                                          | Deferred  revenue                                                                                                                        | 775        |             | 471        |   |
|                                          |                                                                                                                                          |       |                  |       |
|                                          | Total  current liabilities                                                                                                               | 2,214      |             | 2,019      |   |
|                                          |                                                                                                                                          |       |                  |       |
| Long-term  deferred revenue                   | 13                                                                                                                                       |       | 39               |       |
|                                          |                                                                                                                                          |       |                  |       |
|                                          | Total  liabilities                                                                                                                       | 2,227      |             | 2,058      |   |
|                                          |                                                                                                                                          |       |                  |       |
| Stockholders’  equity :                  |                                                                                                                                     |       |             |       |
|                                          | Common  stock, $.01 par value: Authorized - 30,500 shares. Issued: 8,181 and 7,903 at  June 30, 2001 and December 31, 2000, respectively | 82         |             | 79         |   |
|                                          | Additional  paid-in capital                                                                                                              | 32,110     |             | 31,960     |   |
|                                          | Accumulated  deficit                                                                                                                     | (23,837    | )                | (21,630    | ) |
|                                          | Treasury  stock, at cost; 126 shares                                                                                                     | (360       | )                | (360       | ) |
|                                          |                                                                                                                                     |            |             |            |   |
|                                          | Total  stockholders’ equity                                                                                                         | 7,995      |             | 10,049     |   |
|                                          |                                                                                                                                     |            |             |            |   |
|                                          | Total  liabilities and stockholders’ equity                                                                                         | $          | 10,222           |       | $ | 12,107 |   |
|                                          |                                                                                                                                     |            |             |            |   |
|                                               |                                                                                                                                          |            |                  |            |  |  |  |  |

**The accompanying notes are an integral part of thesecondensed consolidated financial statements.**
**BITSTREAM INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS****(Inthousands, except per share data)(Unaudited)**
 **For the Three Months**** Ended June 30,** **For the Six**** Months**** Ended  June 30,**  **** ****           **2001** **2000** **2001** **2000**      Revenues:         Software  licenses$1,673 $2,043 $2,969 $3,786  Services198 427 530 866        Total  revenues1,871 2,470 3,499 4,652          Cost  of revenues:         Software  licenses268 222 468 367  Services92 210 176 467        Total  cost of revenues360 432 644 834       Gross  profit1,511 2,038 2,855 3,818       Operating  expenses:         Selling  and marketing731 951 1,556 1,931  Research  and development1,265 1,207 2,593 2,495  General  and administrative421 538 833 1,137        Total  operating expenses2,417 2,696 4,982 5,563        Loss  from operations(906)(658)(2,127)(1,745)         Other  income:         (Loss)  income on investment in DiamondSoft, Inc.(76)3 (151)11  Interest  income, net64 123 151 238       Loss  before provision for income taxes(918)(532)(2,127)(1,496)          Provision  for income taxes31 112 80 132       Net  loss$(949)$(644)$(2,207)$(1,628)     Basic  and diluted net loss per share$(0.12)$(0.08)$(0.28)$(0.21)     Basic  and diluted weighted average shares outstanding8,030 7,777 7,990 7,671      
**The accompanying notes are an integral part of thesecondensed consolidated financial statements.**

**BITSTREAM INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**
 **For the Six Months ended June 30,**  **2001** **2000**    **CASH  FLOWS FROM OPERATING ACTIVITIES:**         Net  loss$(2,207)$(1,628)Adjustments  to reconcile net loss to net cash used in operating activities:     Depreciation189 232  Amortization258 261  Compensation on grant  of stock options5 19  Loss  (income) on investment in DiamondSoft, Inc.151 (11) Changes  in assets and liabilities —     Accounts  receivable 1,112 (141) Prepaid  expenses and other current assets57 118  Accounts  payable88 (80) Accrued  expenses(196)141  Deferred  revenue303 (153) Long-term  deferred revenue(26)34      Net  cash used in operating activities(266)(1,208)   **CASH  FLOWS FROM INVESTING ACTIVITIES:**     Purchases  of property and equipment(97)(160) Increase  in Restricted cash- (300) Investment  in DiamondSoft(250)-  Change  in other assets(130)30      Net  cash used in investing activities(477)(430)   **CASH  FLOWS FROM FINANCING ACTIVITIES:**          Proceeds  from the exercise of stock options/warrants148 453    Net  decrease in cash and cash equivalents(595)(1,185)Cash  and cash equivalents, beginning of period7,149 9,037    Cash  and cash equivalents, end of period$6,554 $7,852    Cash  paid for Interest$2 $1 Cash  paid for Income Taxes$126 $81      
**The accompanying notes are anintegral part of these condensed consolidated financial statements.**

**BITSTREAM INC. AND SUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2001(Unaudited)**

**(1) Significant AccountingPolicies**

**BASIS OF PRESENTATION**             The consolidated financialstatements of Bitstream Inc. (the "Company" or “Bitstream”) presentedherein, without audit, have been prepared pursuant to the rules of theSecurities and Exchange Commission (the “SEC”) for quarterly reports on Form10-Q and do not include all of the information and footnote disclosuresrequired by generally accepted accounting principles. The balance sheetinformation at December 31, 2000 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 period ended December 31, 2000 included in the Company's Annual Report onForm 10-K, which was filed by the Company with the SEC on April 2, 2001.

             Thebalance sheet as of June 30, 2001, the statements of operations for the threeand six months ended June 30, 2001 and 2000, the statements of cash flows forthe six months ended June 30, 2001 and 2000, and the notes to each thereof areunaudited, but in the opinion of management include all adjustments necessaryfor a fair presentation of the consolidated financial position, results ofoperations, and cash flows of the Company and its subsidiaries for theseinterim periods.

             Theresults of operations for the three and six months ended June 30, 2001 may notnecessarily be indicative of the results to be expected for any future interimperiod or for the year ending December 31, 2001.

**PRINCIPLES OF CONSOLIDATION**             The accompanying consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries: Bitstream World Trade, Inc. (a Delaware corporation), a holdingcompany for Bitstream, B.V. (a Dutch corporation); Mainstream SoftwareSolutions Ltd. (an English corporation); Type Solutions, Inc. (a New HampshireCorporation); Archetype, Inc. (a Delaware corporation); Pageflex, Inc. (aDelaware corporation) and MyFonts.com, Inc. (a Delaware corporation). Allmaterial inter-company transactions and balances have been eliminated inconsolidation.

**RECLASSIFICATIONS****            **Certain prior yearaccount balances have been reclassified to be consistent with the currentyear’s presentation.**RECENTLY ISSUED ACCOUNTING STANDARDS             In September 2000, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*.  SFAS No. 140provides accounting and reporting standards for transfers and servicing offinancial assets and extinguishments of liabilities.  Under SFAS No. 140, after a transfer of financial assets, anentity recognizes the financial and servicing assets it controls and theliabilities it has incurred, derecognizes financial assets when control hasbeen surrendered, and derecognizes liabilities when extinguished.  SFAS No. 140 also provides standards fordistinguishing transfers of financial assets that are sales from transfers thatare secured borrowings.  SFAS No. 140 iseffective for certain transactions occurring after March 31, 2001 and certaindisclosures for the year ending December 31, 2001.  The Company has adopted SFAS No. 140, which did not have amaterial impact on the Company’s financial position or results of operations.
             InJune 1998, the FASB issued SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities. *This statementestablishes accounting and reporting standards for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities.  It requires that anentity recognize all derivatives as either assets or liabilities in thestatement of financial position and measure those instruments at fairvalue.  This statement, as amended bySFAS No. 137 and SFAS No. 138, is effective for fiscal years ending December 31,2001.  The Company has adopted SFAS No.133 as amended, which did not have a material impact on the Company’s financialposition or results of operations.

             OnJune 29, 2001, the FASB issued SFAS No. 141, *BusinessCombinations,* and SFAS No. 142, *Goodwilland Other Intangible Assets*. These statements establish newstandards for accounting for business combinations, goodwill, and intangibleassets.  Statement 141 eliminates thepooling-of-interests method of accounting for business combinations except for qualifyingbusiness combinations that were initiated prior to July 1, 2001 and changes thecriteria to recognize intangible assets apart from goodwill.  The requirements of Statement 141 areeffective for any business combination accounted for by the purchase methodthat is completed after June 30, 2001. Statement 142 supersedes APB Opinion No. 17, *Intangible Assets* (which required that goodwill andintangible assets be amortized over a life not to exceed 40 years), and carriesforward its provisions related to internally developed intangible assetswithout the FASB’s reconsideration. Under Statement 142, goodwill and indefinite-lived intangible assets areno longer amortized but are reviewed annually for impairment, or morefrequently if impairment indicators arise. Goodwill is required to be tested for impairment between the annualtests if an event occurs or circumstances change that more-likely-than-notreduce the fair value of a reporting unit below its carrying value.  An indefinite-lived intangible asset isrequired to be tested for impairment between the annual tests if an eventoccurs or circumstances change indicating that the asset might beimpaired.  Separable intangible assetsthat have finite lives will continue to be amortized over their useful lives,for which Statement 142 does not impose a limit.  Any required goodwill impairment charges would be presented as aseparate line item within the operating section of the income statement.  The Company has adopted Statement 141, whichdid not have a material impact on the Company’s financial position or resultsof operations.  The Company is requiredto adopt Statement 142 on January 1, 2002 and is currently evaluating theimpact on the Company’s financial position and results of operations.

**(2) Property and Equipment(in thousands)**

             Property and equipment are statedat cost, less accumulated depreciation and amortization. Property and equipmentconsists of the following:
 **June 30,** **December 31,**  **2001** **2000**  ****** ******** **Office  and computer equipment$2,321 $2,069 Purchased  software347 347 Equipment  under capital lease--- 167 Furniture  and fixtures372 366 Leasehold  improvements659 659     3,699 3,608      Less  — Accumulated depreciation and amortization3,155 2,972    Property and equipment, net544 $636    
**(3) Concentration of CreditRisk**

             SFAS No. 105. *Disclosure of Information AboutFinancial Instruments with Off-Balance Sheet Risk and Financial Instrumentswith Concentration of Credit Risk,*requires disclosure of any significantoff-balance sheet and credit risk concentrations.  Financial instruments that potentially expose the Company toconcentrations of credit risk consist primarily of cash and cash equivalentsand trade accounts receivable.  TheCompany places a majority of its cash investments in one financialinstitution.  The Company has notexperienced significant losses related to receivables from any individualcustomers or groups of customers in any specific industry or by geographicarea.  Due to these factors, noadditional credit risk beyond amounts provided for collection losses isbelieved by management to be inherent in the Company’s accounts receivable. AtJune 30, 2001, three customers accounted for 10% each of the Company’s accountsreceivable.  At December 31, 2000, onecustomer accounted for 18% of the Company’s accounts receivable.  The Company does not have any financialinstruments with off-balance sheet risk as of June 30, 2001.  For the three months and six months endedJune 30, 2001, no customers accounted for more than 10% of the Company’srevenue.  For the three months endedJune 30, 2000, two customers accounted for 21% and 12%, respectively, of theCompany’s revenue. For the six months ended June 30, 2000, one customeraccounted for 14% of the Company’s revenue.

             Forthe three months ended June 30, 2001, one customer of the Company’s type andtechnology segment accounted for 10% of that segment’s revenue, and onecustomer of the Pageflex segment accounted for 19% of that segment’s revenue.  For the six months ended June 30, 2001 nocustomers of the Company’s type and technology segment accounted for 10% ormore of that segment’s revenue, and three customers of the Pageflex segmentaccounted for 11%, 11% and 10%, respectively, of that segment’s revenue.   For the three months ended June 30, 2000,two customers of the Company’s type and technology segment accounted for 20%and 10%, respectively, of the revenue for that segment, and three customers ofthe Pageflex segment accounted for 58%, 12% and 11%, respectively, of thatsegment’s revenue.   For the six monthsended June 30, 2000, one customer of the Company’s type and technology segmentaccounted for 11% of the revenue for that segment, and two customers of thePageflex segment accounted for 47% and 16%, respectively, of that segment’srevenue.

**            **TheCompany’s MyFonts.com segment had no customers responsible for 10% or more ofits accounts receivable balance as of June 30, 2001 or December 31, 2000, andhad no customers that accounted for 10% or more of its revenue for the threeand six months ended June 30, 2001 or 2000.

** (4)       Accrued Expenses (in thousands)**

             Accrued expenses consist of thefollowing:
 **June 30,** **December 31,**  **** ****  **2001** **2000**  **** **** Accrued  royalties$213 $210 Payroll  and other compensation496 648 Accrued  professional and consulting services137 169 Other245 260     Total$1,091 $1,287    
**(5)**        **Loss Per Share (in thousands)**

             In accordance with SFAS No. 128, *Earnings PerShare*, basic earnings per share was determined by dividing net lossby the weighted average shares of common stock outstanding during theapplicable period. Diluted earnings per share reflect dilution from potentiallydilutive securities, primarily stock options based on the treasury stockmethod.  In computing diluted earningsper share, common stock equivalents are not considered in periods in which anet loss is reported as the inclusion of the potential common stock equivalentswould be antidilutive.  Thus potentialcommon shares were not included for the three or six months ended June 30, 2001or 2000.  Had the numerator been aprofit, the potential common shares would have increased the weighted averageshares outstanding by 696 and 2,005 shares for the three months ended June 30,2001 and 2000, respectively, and by 792 and 2,162 for the six months ended June30, 2001 and 2000, respectively.  Inaddition, there were warrants and options to purchase 449 and 116 shares forthe three and six months ended June 30, 2001 and 2000, respectively, that werenot included in the potential common share computations because their exerciseprices were greater than the market price of the Company’s common stock.  These common stock equivalents are antidilutiveeven when a profit is reported in the numerator.

**(6)        Segment Reporting (in thousands)**

             TheCompany has three reportable business segments: (1) its type and technologysegment; (2) its Pageflex segment and (3) its MyFonts.com segment.  The Company’s reportable segments arestrategic 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.  MyFonts.com’s revenuesinclude revenue from products it purchases from the type and technologysegment.  The inter-segment revenuescreated by these transactions have been eliminated from MyFonts.com’s revenuebelow, as well 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.
 **Three  months ended June 30,** **Six  months ended June 30,**  **2001** **2000** **2001** **2000**  **** **** **** **** **Revenue (from external customers):**                  Type and technology$1,234 $1,551 $2,353 $3,259  MyFonts.com113 2 193 2  Pageflex524 917 953 1,391        Consolidated revenue$1,871 $2,470 $3,499 $4,652      **Segment (loss) income from operations:**         Type and technology$(37)$193 $(184)$483  MyFonts.com(170)(104)(321)(213) Pageflex(699)(747)(1,622)(2,015)       Consolidated loss from  operation$(906)$(658)$(2,127)$(1,745)     
**(7)        Geographical Reporting (in thousands)**

             TheCompany attributes revenues to different geographical areas on the basis of thelocation of the customer. All of the Company's product sales for the three andsix months ended June 30, 2001 and 2000 were shipped from its headquarterslocated in the United States or its office located in Cheltenham, England.  Revenues by geographic area are as follows:
 **THREE  MONTHS** **SIX  MONTHS**  **ENDED  JUNE 30,** **ENDED  JUNE 30,**  **** ****  **2001** **2000** **2001** **2000**  **** **** **** **** Revenue:         United States$1,045 $1,424 $1,833 $3,058  Canada144 168 202 187  Japan232 359 570 525  United Kingdom204 268 263 356           Other (countries less  than 5% individually, by region):         Europe, excluding UK194 163 514 405  Asia, excluding Japan45 88 106 121  Other7 --- 11 ---       Total revenue$1,871 $2,470 $3,499 $4,652      
Long-lived tangible assets by geographicarea are as follows:
 **June  30,** **December  31,**  **2001** **2000**  **** **** United States$529 $628 England15 8     Total$544 $636    
** **
**ITEM  2.****MANAGEMENT'S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
The following discussion should be readin conjunction with the consolidated financial statements and notes thereto.

**OVERVIEW**

             BitstreamInc. (“Bitstream” or the “Company”), headquartered in Cambridge, Massachusetts,is composed of three separate and distinct businesses: (1) type and technologyin which Bitstream develops and licenses font technology and custom fontdesigns to manufacturers of Internet appliances, wireless devices, set-topboxes, embedded systems, printers, and personal digital assistants; (2)MyFonts.com, a showcase of the world’s fonts in one easy-to-use e-commerce website operated by Bitstream’s wholly-owned subsidiary, MyFonts.com, Inc.(“MyFonts.com”); and (3) Pageflex, formerly referred to as the Company’son-demand marketing segment, in which the Company’s wholly-owned subsidiaryPageflex, Inc. (“Pageflex”) develops, markets and supports on-demand documentcomposition solutions which automatically produce customized one-to-onemarketing collateral such as datasheets and brochures directly from XML textand graphics data stored in web servers and/or databases.

**FORWARD LOOKING STATEMENTS**

             Exceptfor the historical information contained herein, this Quarterly Report on Form10-Q may contain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Investors are cautioned that forward-lookingstatements are inherently uncertain. Actual performance and results ofoperations may differ materially from those projected or suggested in theforward-looking statements due to certain risks and uncertainties, including,without limitation, market acceptance of the Company's products, competitionand the timely introduction of new products. Additional information concerningcertain risks and uncertainties that would cause actual results to differmaterially 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"Risk Factors", the Company’s 2000 Annual Report on Form 10-K filedon April 2, 2001, and Quarterly Reports to be filed in 2001.  The forward-looking statements containedherein represent the Company's judgment as of the date of this report, and theCompany cautions readers not to place undue reliance on such statements.  Management undertakes no obligation to publiclyrelease any revisions to the forward-looking statements or reflect events orcircumstances after the date of this document.

**Consolidated Revenues:**
 **JUNE  30,** %  of **JUNE  30,** %  of Change  **2001** Revenue **2000** Revenue Dollars Percent  ****  ****    Three  months ended:             Software licenses$1,673 89.4%$2,043 82.7%$(370)(18.1%) Services198 10.6%427 17.3%(229)(53.6%)        Total revenues$1,871 100.0%$2,470 100.0%$(599)(24.3%)       Six  months ended:             Software licenses$2,969 84.9%$3,786 81.4%$(817)(21.6%) Services530 15.1%866 18.6%(336)(38.8%)        Total revenues$3,499 100.0%$4,652 100.0%$(1,153)(24.8%)       
             Thedecrease in revenue for the three months ended June 30, 2001 as compared to thethree months ended June 30, 2000 was attributable to decreases in revenue forthe type and technology segment of $317 and the Pageflex segment of $393,partially offset by an increase in MyFonts.com revenues of $111.  The decrease in revenue for the six monthsended June 30, 2001 as compared to the six months ended June 30, 2000 wasattributable to decreases in revenue for the type and technology segment of$906 and the Pageflex segment of $438, partially offset by an increase inMyFonts.com revenues of $191.  Thesesegments are discussed in more detail below.

**Type and Technology Revenues:**
 **JUNE  30,** %  of **JUNE  30,** %  of Change  **2001** Revenue **2000** Revenue Dollars Percent  ****  ****    Three  months ended:             Software licenses$1,135 92.0%$1,493 96.3%$(358)(24.0)% Services99 8.0%58 3.7%41 (70.7)%         Type and technology  revenues$1,234 100.0%$1,551 100.0%$(317)(20.4)%         Percentage of total  revenues66.0%  62.8%                   Six  months ended:             Software licenses$2,102 89.3%$3,048 93.5%$(946)(31.0)% Services251 10.7%211 6.5%40 (19.0)%         Type and technology  revenues$2,353 100.0%$3,259 100.0%$(906)(27.8)%         Percentage of total  revenues67.3%  70.1                    
             Thedecrease in type and technology license revenues for the three months and sixmonths ended June 30, 2001 versus the three and six months ended June 30, 2000was due to decreases in OEM technology licensing of $268 and $705, respectively,decreases in reseller sales of $28 and $11, respectively, and decreases inretail sales of $62 and $230, respectively. These decreases were primarilydue to the softening of the market for high technology productsin general and increased concern over future economic conditions.  Servicerevenue increased $41 and $40, respectively, for the three and six monthperiods ended June 30, 2001.****MyFonts.com Revenues:**
 **JUNE  30,** %  of **JUNE  30,** %  of Change   **2001** Revenue **2000** Revenue Dollars Percent   ****  ****     Three  months ended:              Software licenses$113 100.0%$2 100.0%$111 5,550% Services--- --- --- --- --- ---            MyFonts.com revenues$113 100.0%$2 100.0%$111 5,550%          Percentage of total  revenues6.0%  0.1%                     Six  months ended:              Software licenses$193 100.0%$2 100.0%$191 9,550% Services--- --- --- --- --- ---            MyFonts.com revenues$193 100.0%$2 100.0%$191 9,550%          Percentage of total  revenues5.5%  0.0%       
             MyFonts.com’srevenue, prior to the elimination of inter-company royalties paid to Bitstream’stype and technology segment, increased by $160 to $168 for the three monthsended June 30, 2001 as compared to $8 for the three months ended June 30, 2000,and by $263 to $271 for the six months ended June 30, 2001 as compared to $8for the six months ended June 30, 2000. MyFonts.com began selling through its web site at the end of the firstquarter of 2000.  Revenue from theMyFonts.com web site and revenue that it earns from managing the e-commerceportion of Bitstream’s web site have increased each month since its inception.

**Pageflex Revenues:**
 **JUNE  30,** %  of **JUNE  30,** %  of Change  **2001** Revenue **2000** Revenue Dollars Percent  ****  ****    Three  months ended:             Software licenses$425 81.1%$548 59.8%$(123)(22.4)% Services99 18.9%369 40.2%(270)(73.2)%         Pageflex revenues$524 100.0%$917 100.0%$(393)(42.9)%         Percentage of total  revenues28.0%  37.1%                   Six  months ended:             Software licenses$674 70.7%$736 52.9%$(62)(8.4)%Services279 29.3%655 47.1%(375)(57.4)%         Pageflex revenues$953 100.0%$1,391 100.0%$(438)(31.5)%         Percentage of total  revenues27.2%  29.9%                   
             Thedecrease in license revenue for the Pageflex segment for the three and sixmonths ended June 30, 2001 as compared to the three and six months ended June30, 2000 was attributable to non-recurring OEM licensing fees from an existinglong-term contract with Atex Media Solutions, Inc. (“Atex”) of $252 and $336,respectively, during the three and six months ended June 30, 2000.  Pageflex license revenues increased $129 and$274, respectively, for the three months and six months ended June 30, 2001 ascompared to the three months and six months ended June 30, 2000, excludingthese license fees, primarily due to increases in direct sales andsubscriptions of the Company’s Mpower product. Revenues from services decreased as a result of a decreased emphasis onconsulting, and specifically due to the completion of certain non-recurringconsulting projects during the six months ended June 30, 2000.

**Consolidated Gross Profit:**
 **JUNE 30,** Change  ****    **2001** **2000** Dollars Percent  **** ****   Three  months ended:         Gross  profit$1,511 $2,038 $(527)(25.9)%       Percentage  of total revenue80.8%82.5%             Six  months ended:         Gross  profit$2,855 $3,818 $(963)(25.2)%       Percentage  of total revenue81.6%82.1%             
             Thedecrease in the gross profit for the three months and six months ended June 30,2001 as compared to the three months and six months ended June 30, 2000 isprimarily attributable to decreases in revenues discussed above totaling $599and $1,153, respectively, partially offset by a decrease in cost of revenuestotaling $72 and $190, respectively. Type and technology’s cost of revenues for the three and six monthsended June 30, 2001 as compared to the three and six months ended June 30, 2000decreased $70 and $147, respectively, primarily because of the elimination ofoutside subcontractors whose services were utilized during 2000 and a reductionin time spent by type engineers on customer specific projects.  Pageflex’s cost of revenues for the threeand six months ended June 30, 2001 as compared to the three and six monthsended June 30, 2000 decreased $87 and $191, respectively, as a result of adecreased emphasis on consulting which has a higher cost than licensing revenueand included $67 of non-recurring development costs associated with Atexconsulting revenue during the three and six months ended June 30, 2000.  These decreases were partially offset byincreases for the three and six months ended June 30, 2001 as compared to thethree and six months ended June 30, 2000 of $85 and $148, respectively, inMyFonts.com cost of revenues related to royalties paid to outside fontfoundries for the sale of their fonts.

             Costof revenue is composed of direct costs of licenses, as well as direct costs ofproduct sales to end-users. Included in the cost of licenses are fees paid tothird parties for the development or license of rights to technology and/orunique typeface designs and costs incurred in the fulfillment of custom ordersfrom OEM and ISV customers.  Included incost of product sales to end users and distributors are the direct costsassociated with the duplication, packaging and shipping of product.
**Consolidated Selling and Marketing:**
 **June 30,** Change  ****    **2001** **2000** Dollars Percent  **** ****   Three months ended:         Selling  and marketing$731 $951 $(220)(23.1)%       Percentage  of total revenue39.1%38.5%             Six months ended:         Selling  and marketing$1,556 $1,931 $(375)(19.4)%       Percentage  of total revenue44.5%41.5%    
**            **Sellingand marketing expenses for the type and technology segment increased $18 or4.7% to $404 and decreased $25 or 3.1% to $778, respectively, for the threemonths and six months ended June 30, 2001 as compared to the three and sixmonths ended June 30, 2000.  Selling andmarketing expenses for the MyFonts.com segment remained unchanged at $6 for thethree months ended June 30, 2001 and June 30, 2000, and increased $15 for thesix months ended June 30, 2001 as compared to the six months ended June 30,2000.  Selling and marketing costs associatedwith the Pageflex segment decreased $238 or 42.6% to $321 and $359 or 32.0% to763, respectively, for the three months and six months ended June 30, 2001 ascompared to the three months and six months ended June 30, 2000.  These reductions resulted from management’sdecision to reduce marketing expenses including our trade show expenses andfrom non-recurring costs related to new product introductions and brandingwhich took place on a limited basis during the first two quarters of 2000.  Specifically, trade show and print andproduction expenses decreased $108 and $203, respectively, and marketingconsultant use decreased $24 and $45, respectively.

**Consolidated Research and Development (“R&D”)**:
 **JUNE, 30** Change  ****    **2001** **2000** Dollars Percent  **** ****   Three  months ended:         Research  and development$1,265 $1,207 $58 4.8%       Percentage  of total revenue67.6%48.9%             Six  months ended:         Research  and development$2,593 $2,495 $98 3.9%       Percentage  of total revenue74.1%53.6%             
             R&Dcosts associated with the type and technology segment decreased $17 or 3.7% andincreased $26 or 2.9%, respectively, from $460 and $903 for the three monthsand six months ended June 30, 2000 to $443 and $929 for the three months andsix months ended June 30, 2001.  R&Dcosts associated with the Myfonts.com segment increased $83 or 92.2% from $90for the three months ended June 30, 2000 to $173 for the three months endedJune 30, 2001, and $118 or 59.6% from $198 for the six months ended June 30,2000 to $316 for the six months ended June 30, 2001.  These MyFonts.com expenses relate to employee and subcontractorcosts for the continued enhancement of the MyFonts.com web site.  R&D costs associated with the Pageflexsegment decreased $8 or 1.2% and $46 or 3.3%, respectively, from $657 and$1,394 for the three months and six months ended June 30, 2000 to $649 and$1,348 for the three months and six months ended June 30, 2001.

**Consolidated General and Administrative (“G&A”)**:
 **JUNE 30,** Change  ****    **2001** **2000** Dollars Percent  **** ****   Three  months ended:         General  and administrative$421 $538 $(117)(21.8)%       Percentage  of total revenue22.5%21.8%             Six  months ended:         General  and administrative$833 $1,137 $(304)(26.7)%       Percentage  of total revenue23.8%24.4%             
             G&Acosts associated with the type and technology segment decreased $18 or 7.9% and$93 or 16.1%, respectively, from $257 and $577 for the three months and sixmonths ended June 30, 2000 to $239 and $484 for the three months and six monthsended June 30, 2001, respectively. Bad debt expense decreased $126 and $288,respectively, for the three months and six months ended June 30, 2001 ascompared to the three months and six months ended June 30, 2000.  G&A expenses, excluding bad debtactivity, increased $108 and $195 for the three months and six months endedJune 30, 2001 as compared to the three months and six months ended June 30,2000, respectively.  These increases areprimarily attributable to increases in professional service fees of $52 and$101 and facilities related costs of $46 and $74, for the three and six monthsended June 30, 2001 as compared to the three and six months ended June 30,2000, respectively.  G&A costsassociated with the Pageflex segment decreased $108 or 39.7% and $235 or 42.7%,respectively, from $272 and $550 for the three months and six months ended June30, 2000 to $164 and $315 for the three months and six months ended June 30,2001.  Bad debt expense decreased $120and $252, respectively, for the three months and six months ended June 30, 2001as compared to the three months and six months ended June 30, 2000.  G&A expenses, excluding bad debtactivity, increased $12 and $17 for the three months and six months ended June30, 2001 as compared to the three months and six months ended June 30, 2000,respectively.  G&A costs associatedwith the MyFonts.com segment increased $9 and $24, respectively, to $18 and $34for the three months and six months ended June 30, 2001 from $9 and $10 for thethree and six months ended June 30, 2000. Bad debt expense decreases resulted from the net decrease in reservesfor doubtful accounts during the first six months of 2001 resulting from thecollection of several accounts receivable balances which had been reserved forduring the year ended December 31, 2000.

             Asignificant portion of the Company’s operating expenses are fixed, and plannedexpenditures in any given quarter are based on sales and revenueforecasts.  Accordingly, if products arenot completed and/or shipped on schedule and revenues do not meet the Company’sexpectations in any given quarter, the Company’s operating results andfinancial condition could be adversely affected.****(Loss) Income on Investment in DiamondSoft, Inc.:**

**            **TheCompany made a $500 equity investment in DiamondSoft, Inc. in March of 1998 andmade additional investments totaling $150 during the three months ended March31, 2001 and $100 during the three months ended June 30, 2001.  As of June 30, 2001 the Company’s ownershippercentage in DiamondSoft, Inc. is 28%. DiamondSoft, Inc. is a California corporation primarily engaged in thebusiness of developing, marketing and distributing software tools to a varietyof professional markets.  The Companyrecognizes its share of DiamondSoft’s income or loss during each quarter andrecorded a loss of $(76) and income of $3 for the three months ended June 30,2001 and 2000, respectively, and a loss of $(151) and income of $11 for the sixmonths ended June 30, 2001 and 2000, respectively.

**Interest income, net:**

Interest income consists primarily ofinterest income earned on the Company’s cash equivalents.

**Provision for income taxes:**

**            **TheCompany’s income tax expense for the three and six months ended June 30, 2001and June 30, 2000 primarily represents foreign income taxes.

**LIQUIDITY AND CAPITAL RESOURCES****(inthousands)**

             TheCompany has funded its operations primarily through the public sale of equitysecurities, cash flows from operations and cash received from the sale of theCompany’s MediaBank and InterSep OPI product lines to Inso ProvidenceCorporation in August of 1998.  As ofJune 30, 2001, the Company had net working capital of $5,412 versus $7,371 atDecember 31, 2000.

             TheCompany’s operating activities used cash of $266 during the six months endedJune 30, 2001 as compared to $1,208 during the six months ended June 30,2000.  The cash used during the sixmonths ended June 30, 2001 was primarily due to losses in all three businesssegments offset by the collection of $1,112 in receivables during theperiod.  The cash used during the six monthsended June 30, 2000 was primarily due to the net losses from the Pageflex andMyFonts.com businesses, partially offset by the income from the type andtechnology business. The net lossadjusted for non-cash expenses resulted in a use of $1,604 and $1,127 in cashduring the six months ended June 30, 2001 and June 30, 2000, respectively.

             TheCompany’s investing activities used cash of $477 during the six months endedJune 30, 2001 as compared to using $430 during the six months ended June 30,2000.  The purchase of property andequipment used $97 and $160 of cash during the six months ended June 30, 2001and June 30, 2000, respectively.  Duringthe six months ended June 30, 2001, the Company made additional investments inDiamondSoft, Inc. totaling $250. For the six months ended June 30, 2000 theCompany also used $300 to secure a$300 line of credit granted by Wells Fargo Bank to DiamondSoft, Inc.  This cash is presented on the Company’sconsolidated balance sheet as restricted cash.

             TheCompany’s financing activities provided cash of $148 and $453 during the sixmonths ended June 30, 2001 and 2000, respectively, from the exercise of stockoptions.

             TheCompany believes its current cash and cash equivalent balances will besufficient to meet the Company's operating and capital requirements for atleast the next 12 months.  There can beno assurance, however, that the Company will not require additional financingin the future.  If the Company wererequired to obtain additional financing in the future, there can be noassurance that sources of capital will be available on terms favorable to theCompany, if at all.  As of June 30,2001, the Company had no material commitments for capital expenditures.  From time to time, the Company evaluatespotential acquisitions of products, businesses and technologies that maycomplement or expand the Company's business. Any such transactions consummated may use a portion of the Company'sworking capital or require the issuance of equity or debt.

             InNovember 1996, the Company completed an initial public offering("IPO") of 2,415 shares of its Class A Common Stock. Net proceedsfrom the IPO were approximately $12,200, of which approximately $1,500 was usedto repay outstanding indebtedness.
**RECENT ACCOUNTING PRONOUNCEMENTS**

             In September 2000, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*.  SFAS No. 140 provides accounting and reporting standards for transfersand servicing of financial assets and extinguishments of liabilities.  Under SFAS No. 140, after a transfer offinancial assets, an entity recognizes the financial and servicing assets itcontrols and the liabilities it has incurred, derecognizes financial assetswhen control has been surrendered, and derecognizes liabilities whenextinguished.  SFAS No. 140 alsoprovides standards for distinguishing transfers of financial assets that aresales from transfers that are secured borrowings.  SFAS No. 140 is effective for certain transactions occurringafter March 31, 2001 and certain disclosures for the year ending December 31,2001.  The Company has adopted SFAS No.140, which did not have a material impact on the Company’s financial positionor results of operations.

             InJune 1998, the FASB issued SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities. *This statementestablishes accounting and reporting standards for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities.  It requires that anentity recognize all derivatives as either assets or liabilities in thestatement of financial position and measure those instruments at fairvalue.  This statement, as amended bySFAS No. 137 and SFAS No. 138, is effective for fiscal years ending December31, 2001.  The Company has adopted SFASNo. 133 as amended, which did not have a material impact on the Company’sfinancial position or results of operations.

             OnJune 29, 2001, the FASB issued SFAS No. 141, *BusinessCombinations,* and SFAS No. 142, *Goodwilland Other Intangible Assets*. These statements establish newstandards for accounting for business combinations, goodwill, and intangibleassets.  Statement 141 eliminates the pooling-of-interestsmethod of accounting for business combinations except for qualifying businesscombinations that were initiated prior to July 1, 2001 and changes the criteriato recognize intangible assets apart from goodwill.  The requirements of Statement 141 are effective for any businesscombination accounted for by the purchase method that is completed after June30, 2001.  Statement 142 supersedes APBOpinion No. 17, *Intangible Assets*(which required that goodwill and intangible assets be amortized over a lifenot to exceed 40 years), and carries forward its provisions related tointernally developed intangible assets without the FASB’s reconsideration.  Under Statement 142, goodwill andindefinite-lived intangible assets are no longer amortized but are reviewedannually for impairment, or more frequently if impairment indicatorsarise.  Goodwill is required to betested for impairment between the annual tests if an event occurs orcircumstances change that more-likely-than-not reduce the fair value of areporting unit below its carrying value. An indefinite-lived intangible asset is required to be tested forimpairment between the annual tests if an event occurs or circumstances changeindicating that the asset might be impaired. Separable intangible assets that have finite lives will continue to beamortized over their useful lives, for which Statement 142 does not impose alimit.  Any required goodwill impairmentcharges would be presented as a separate line item within the operating sectionof the income statement.  The Companyhas adopted Statement 141, which did not have a material impact on theCompany’s financial position or results of operations.  The Company is required to adopt Statement142 on January 1, 2002 and is currently evaluating the impact on the Company’sfinancial position or results of operations.

**PART 1, ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

**Derivative Financial Instruments, Other Financial Instrumentsand Derivative Commodity Instruments.**

             Asof June 30, 2001, the Company did not participate in any derivative financialinstruments or other financial and commodity instruments for which fair valuedisclosure would be required under SFAS No. 107. All of the Company'sinvestments are short-term, investment-grade commercial paper, and money marketaccounts that are carried on the Company's books at amortized cost, whichapproximates fair market value. Accordingly, the Company has no quantitativeinformation concerning the market risk of participating in such investments.

**Primary Market Risk Exposures**

             TheCompany's primary market risk exposures are in the areas of interest rate riskand foreign currency exchange rate risk. The Company's investment portfolio ofcash equivalent and short-term investments is subject to interest ratefluctuations, but the Company believes this risk is immaterial due to theshort-term nature of these investments. The Company's exposure to currency exchange rate fluctuations has beenand is expected to continue to be modest due to the fact that the operations ofits international subsidiaries are almost exclusively conducted in theirrespective local currencies. International subsidiary operating results aretranslated into U.S. dollars and consolidated for reporting purposes. Theimpact of currency exchange rate movements on inter-company transactions wasimmaterial for the three and six months ended June 30, 2001.  Currently the Company does not engage inforeign currency hedging activities.
**PART II — OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

The Company is not a party to anylitigation.

**ITEM 2.CHANGES IN SECURITIES AND USE OFPROCEEDS**
(a)Instruments defining the rights of the holders  of any class of registered securities of the Company have not been materially  modified during the three months ended June 30, 2001.  (b)Rights  evidenced by any class of registered securities of the Company have not been  materially limited or qualified by the issuance or modification of any other  class of securities during the three months ended June 30, 2001.  (c)There  were no unregistered securities sold by the Company during the three months  ended June 30, 2001.  (d)  Use  of Proceeds
             Asof June 30, 2001, the approximately $12,200,000 of net proceeds from theCompany's initial public offering (IPO) of its Class A Common Stock pursuant toits Registration Statement on Form S-1, Commission File No. 333-11519, declaredeffective October 30, 1996, have been used as follows: (1) approximately$200,000 for the buildout of Bitstream's leased facilities in Cambridge,Massachusetts to accommodate the additional personnel that joined the Companyas a result of the acquisition of Archetype, Inc.; (2) approximately $6,041,000for the acquisitions of Mainstream Software Solutions, Ltd., Archetype, Inc.,Type Solutions, Inc., and certain assets of Alaras Corporation; (3)approximately $1,500,000 for the repayment of indebtedness, of whichapproximately $548,000 was paid to officers, directors and 10% stockholders ofthe Company and approximately $762,000 of which was paid to third parties; (4)approximately $1,761,000 for royalty payments to others; (5) $750,000 for theinvestment in DiamondSoft, Inc.; and (6) approximately $1,678,000 for thepurchase and installation of equipment. The remaining net proceeds from the IPO are invested in short-term,interest-bearing, investment-grade securities.

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

Notapplicable.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

             None.

**ITEM 5. OTHER INFORMATION**

             Notapplicable.

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

             
(a)Exhibits None  (b)Reports  on Form 8-K No  reports on Form 8-K were filed during the three months ended June 30, 2001.
 

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
  **BITSTREAM  INC.**   ****   (Registrant)    **SIGNATURE****TITLE****DATE**************   /s/  Anna M. ChagnonPresident,  Chief Operating Officer, Chief Financial Officer and General Counsel  (Principal Financial Officer)August  13, 2001/s/  Anna M. Chagnon     /s/  James P. DoreCorporate  Controller (Principal Accounting Officer)August  13, 2001  James  P. Dore  
 ******