**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-Q**

 

**(Markone)**

**ý****   QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2003**

 

**or**

 

**o****   TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom                 to                 **

 

**COMMISSION FILE NUMBER: 0-21541**

 

**BITSTREAMINC.**

(Exact name ofregistrant 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 02142-1270**       |
| (Address of  principal executive offices)                        |

 

Registrant’s telephone number, including area code: ** (617) 497-6222**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12B-2 of theExchange Act).  Yes o  No ý

 

On May 12, 2003, therewere 8,475,125 shares of Class A Common Stock, par value $0.01 per shareissued, including 125,809 issued and designated as treasury shares, and noshares of Class B Common Stock, par value $0.01 per share, issued or outstanding.

 

 

----

 

**INDEX**

 
| **PART  I. FINANCIAL INFORMATION**                                                                             | **Page  Numbers** |
|----------------------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                           |              |
| ITEM 1.      CONSOLIDATED FINANCIAL STATEMENTS                                        |              |
|                                                                                                           |              |
| CONSOLIDATED BALANCE  SHEETS AS OF MARCH 31, 2003 AND DECEMBER 31, 2002                                        | 2                 |
|                                                                                                           |              |
| CONSOLIDATED STATEMENTS  OF OPERATIONS FOR THE THREE MONTHS ENDED  MARCH 31, 2003 and 2002 | 3                 |
|                                                                                                           |              |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED  MARCH 31, 2003 AND 2002 | 4                 |
|                                                                                                           |              |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                                    | 5-11              |
|                                                                                                           |              |
| ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS | 12-19             |
|                                                                                                           |              |
| ITEM 3. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                            | 20                |
|                                                                                                           |              |
| ITEM  4. CONTROLS AND PROCEDURES                                                                               | 20                |
|                                                                                                           |              |
| **PART II. OTHER INFORMATION**                                                                                 |              |
|                                                                                                           |              |
| ITEM 1. LEGAL PROCEEDINGS                                                                                      | 21                |
|                                                                                                           |              |
| ITEM 2. CHANGES IN SECURITIES AND USE OF  PROCEEDS                                                             | 21                |
|                                                                                                           |              |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                        | 21                |
|                                                                                                           |              |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                                   | 21                |
|                                                                                                           |              |
| ITEM 5. OTHER INFORMATION                                                                                      | 21                |
|                                                                                                           |              |
| ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                                       | 21                |
|                                                                                                           |              |
| SIGNATURES                                                                                                     | 22                |
|                                                                                                           |              |
| CERTIFICATIONS                                                                                                 | 23-25             |
|                                                                                                           |              |

 

1

----

 

**BITSTREAM INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

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

** **
|                                                                                                                                            |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                                                                                      |   |                |   |                    |   |
| Current  assets:                                                                                                                                |   |                |   |                    |   |
| Cash  and cash equivalents                                                                                                                      |   | $                   | 3,986  |                    | $      | 4,828 |   |
| Accounts  receivable, net of allowance of $50 at March 31, 2003 and $15 at December 31,  2002                                                   |   | 557                 |   | 602                     |   |
| Income  tax receivable                                                                                                                          |   | —              |   | 134                     |   |
| Prepaid  expenses and other current assets                                                                                                      |   | 155                 |   | 112                     |   |
| Total  current assets                                                                                                                           |   | 4,698               |   | 5,676                   |   |
|                                                                                                                                            |   |                |   |                    |   |
| Property  and equipment, net                                                                                                                    |   | 240                 |   | 271                     |   |
| Other  assets:                                                                                                                                  |   |                |   |                    |   |
| Restricted  cash                                                                                                                                |   | 300                 |   | 300                     |   |
| Goodwill                                                                                                                                        |   | 727                 |   | 727                     |   |
| Investment  in DiamondSoft, Inc.                                                                                                                |   | 841                 |   | 748                     |   |
| Intangible  assets                                                                                                                              |   | 230                 |   | 236                     |   |
| Other  assets                                                                                                                                   |   | 1                   |   | 6                       |   |
| Total  other assets                                                                                                                             |   | 2,099               |   | 2,017                   |   |
|                                                                                                                                            |   |                |   |                    |   |
| Total  assets                                                                                                                                   |   | $                   | 7,037  |                    | $      | 7,964 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                  |   |                |   |                    |   |
| Current  liabilities:                                                                                                                           |   |                |   |                    |   |
| Accounts  payable                                                                                                                               |   | $                   | 421    |                    | $      | 245 |   |
| Accrued  expenses                                                                                                                               |   | 966                 |   | 1,046                   |   |
| Current  portion of deferred revenue                                                                                                            |   | 567                 |   | 667                     |   |
| Total  current liabilities                                                                                                                      |   | 1,954               |   | 1,958                   |   |
|                                                                                                                                            |   |                |   |                    |   |
| Long-term  deferred revenue                                                                                                                     |   | —              |   | 6                       |   |
| Total  liabilities                                                                                                                              |   | 1,954               |   | 1,964                   |   |
|                                                                                                                                            |   |                |   |                    |   |
| Stockholders’  equity :                                                                                                                    |   |                |   |                    |   |
| Preferred  stock, $0.01 par value   Authorized – 6,000 shares   Issued and outstanding-  0 at March  31, 2003 and   December 31, 2002 |   | —              |   | —                  |   |
| Common  stock, $0.01 par value   Authorized – 30,500 shares   Issued and outstanding-  8,475 at  March 31, 2003 and December 31, 2002 |   | 85                  |   | 85                      |   |
| Additional  paid-in capital                                                                                                                     |   | 32,408              |   | 32,408                  |   |
| Accumulated  deficit                                                                                                                            |   | (27,050             | )      | (26,133                 | )      |
| Treasury  stock, at cost; 126  shares as of  March 31, 2003 and  December 31, 2002                                                         |   | (360                | )      | (360                    | )      |
| Total  stockholders’ equity                                                                                                                |   | 5,083               |   | 6,000                   |   |
|                                                                                                                                            |   |                |   |                    |   |
| Total  liabilities and stockholders’ equity                                                                                                |   | $                   | 7,037  |                    | $      | 7,964 |   |

 

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

 

2

----

 

**BITSTREAM INC. AND SUBSIDIARIES**

# **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                                   |   | **For the  Three Months Ended  March 31,** |   |
|--------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                   |   | **2003**                                   |   | **2002** |   |
| Revenue:                                               |   |                                       |   |   |   |
| Software  licenses                                     |   | $                                          | 1,744  |   | $ | 1,836 |   |
| Services                                               |   | 288                                        |   | 297 |   |
| Total  revenue                                         |   | 2,032                                      |   | 2,133 |   |
|                                                   |   |                                       |   |   |   |
| Cost  of revenue:                                      |   |                                       |   |   |   |
| Software  licenses                                     |   | 539                                        |   | 312 |   |
| Services                                               |   | 137                                        |   | 103 |   |
| Cost  of revenue                                       |   | 676                                        |   | 415 |   |
|                                                   |   |                                       |   |   |   |
| Gross  profit                                          |   | 1,356                                      |   | 1,718 |   |
| Operating  expenses:                                   |   |                                       |   |   |   |
| Marketing  and selling                                 |   | 720                                        |   | 595 |   |
| Research  and development                              |   | 1,043                                      |   | 959 |   |
| General  and administrative                            |   | 572                                        |   | 342 |   |
| Total  operating expenses                              |   | 2,335                                      |   | 1,896 |   |
|                                                   |   |                                       |   |   |   |
| Operating  loss                                        |   | (979                                       | )      | (178 | ) |
|                                                   |   |                                       |   |   |   |
| Gain  (Loss) on investment in DiamondSoft, Inc.        |   | 93                                         |   | (1 | ) |
| Other  (Expense) income, net                           |   | (10                                        | )      | 23 |   |
|                                                   |   |                                       |   |   |   |
| Loss  before provision for income taxes                |   | (896                                       | )      | (156 | ) |
|                                                   |   |                                       |   |   |   |
| Provision  for income taxes                            |   | 21                                         |   | 31 |   |
|                                                   |   |                                       |   |   |   |
| Net  loss                                              |   | $                                          | (917   | ) | $ | (187 | ) |
|                                                   |   |                                       |   |   |   |
| Basic  and diluted net loss per share                  |   | $                                          | (0.11  | ) | $ | (0.02 | ) |
|                                                   |   |                                       |   |   |   |
| Basic  and diluted weighted average shares outstanding |   | 8,349                                      |   | 8,305 |   |

 

**The accompanying notes are anintegral part of these consolidated financial statements.**

 

3

----

 

**BITSTREAM INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
|                                                                         |   | **For the  Three Months** |   |
|------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                         |   | **Ended  March 31,**      |   |
|                                                                         |   | **2003**                  |   | **2002** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                    |   |                      |   |   |   |
| Net  loss                                                                    |   | $                         | (917   | ) | $ | (187 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                      |   |   |   |
| Depreciation                                                                 |   | 55                        |   | 86 |   |
| Amortization                                                                 |   | 19                        |   | 17 |   |
| Loss  on disposal of property and equipment                                  |   | 20                        |   | — |   |
| Stock  based compensation                                                    |   | —                    |   | (15 | ) |
| (Gain)  Loss on investment in DiamondSoft, Inc.                              |   | (93                       | )      | 1 |   |
| Changes  in operating assets and liabilities:                                |   |                      |   |   |   |
| Accounts  receivable                                                         |   | 45                        |   | (26 | ) |
| Income  tax receivable                                                       |   | 134                       |   |   |   |
| Prepaid  expenses and other assets                                           |   | (38                       | )      | (99 | ) |
| Accounts  payable                                                            |   | 176                       |   | 35 |   |
| Accrued  expenses                                                            |   | (80                       | )      | 33 |   |
| Deferred  revenue                                                            |   | (106                      | )      | 134 |   |
|                                                                         |   |                      |   |   |   |
| Net  cash used in operating activities                                       |   | (785                      | )      | (21 | ) |
|                                                                         |   |                      |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   |   |                      |   |   |   |
| Purchases  of property and equipment, net                                    |   | (44                       | )      | (9 | ) |
| Additions  to intangible assets                                              |   | (13                       | )      | (13 | ) |
|                                                                         |   |                      |   |   |   |
| Net  cash used in investing activities                                       |   | (57                       | )      | (22 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                   |   |                      |   |   |   |
|                                                                         |   |                      |   |   |   |
| Proceeds  from exercise of stock options/warrants                            |   | —                    |   | 7 |   |
| Net  cash provided by financing activities                                   |   | —                    |   | 7 |   |
|                                                                         |   |                      |   |   |   |
| Net  Decrease in Cash and Cash Equivalents                                   |   | (842                      | )      | (36 | ) |
| Cash  and Cash Equivalents, beginning of period                              |   | 4,828                     |   | 5,716 |   |
| Cash  and Cash Equivalents, end of period                                    |   | $                         | 3,986  |   | $ | 5,680 |   |
|                                                                         |   |                      |   |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:**                       |   |                      |   |   |   |
| Cash  paid for interest                                                      |   | $                         | 1      |   | $ | — |   |
| Cash  paid (received) for income taxes                                       |   | $                         | (120   | ) | $ | 43 |   |

 

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

** **

**4**

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**BITSTREAM INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

# **MARCH31, 2003**

 

 

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

 

Bitstream Inc. (“Bitstream”) together with itssubsidiaries (collectively, the “Company”), headquartered in Cambridge,Massachusetts is composed of three different businesses: (1) its type and typetechnology business, which currently generates revenue primarily from thelicensing of font rendering software and fonts to the embedded, set-top box,wireless device and information appliance markets, but is more recentlyfocusing product development on a leading-edge browser for handheld devicesnamed ThunderHawkTM (“Type”); (2) its MyFonts.com business, which generatesrevenue from its Web site, Myfonts.com as well as from providing the databasetechnology for other sites including Bitstream.com. Myfonts.com was the firste-commerce site to aggregate fonts from multiple vendors on one easy-to-use Website (“MyFonts”); and (3) its Pageflex business, which generates revenue fromon-demand marketing and composition solutions such as MpowerTM, an enterprisesolution that allows companies to dynamically create customized businessdocuments, PersonaTM, a variable data desktop publishing application designed toproduce personalized documents, and .EDIT, a java-browser-based interactiveWYSIWYG composition software that presents the user with templates that can becustomized (“Pageflex”).  The performanceof each business segment is discussed in greater detail below.

 

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

 

The consolidatedfinancial statements of the Company presented herein, without audit, have beenprepared pursuant to the rules of the Securities and Exchange Commission (the“SEC”) for quarterly reports on Form 10-Q and do not include all of theinformation and footnote disclosures required by generally accepted accountingprinciples. The balance sheet information at December 31, 2002 has been derivedfrom the Company’s audited consolidated financial statements. These statementsshould be read in conjunction with the consolidated financial statements andnotes thereto for the year ended December 31, 2002 included in the Company’sAnnual Report on Form 10-K, which was filed by the Company with the SEC onMarch 31, 2003.

** **

The balance sheet as ofMarch 31, 2003, the statements of operations for the three months ended March31, 2003 and 2002, the statements of cash flows for the three months endedMarch 31, 2003 and 2002, and the notes to each are unaudited, but in theopinion of management include all adjustments necessary for a fair presentationof the consolidated financial position, results of operations, and cash flowsof the Company for these interim periods.

** **

The results of operationsfor the three months ended March 31, 2003 may not necessarily be indicative ofthe results to be expected for the year ending December 31, 2003.

 

**(b) Off-Balance Sheet Risk and Concentration of Credit Risk**

 

Financial instruments thatpotentially 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 March 31, 2003, two customers accounted for 21% and 11%,respectively, of the Company’s accounts receivable.  At December 31, 2002, two customers accounted for 16% and 10%,respectively, of the Company’s accounts receivable.

 

5

----

 

For the three monthsended March 31, 2003 and 2002, no single customer accounted for 10% or more ofthe Company’s consolidated revenue.  Forthe three months ended March 31, 2003, one customer of the Company’s Typesegment accounted for 15% of the revenue for that segment, one customer of thePageflex segment accounted for 20% of the revenue for that segment and nocustomers accounted for 10% or more of the MyFonts segment’s revenue.  For the three months ended March 31, 2002,one customer of the Company’s Type segment accounted for 12% of the revenue forthat segment, two customers of the Pageflex segment accounted for 21% and 15%,respectively, of the revenue for that segment, and no customers accounted for10% or more of the MyFonts segment.

 

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

 

Goodwill consists of thefollowing:

 
|                                                                    |   | **March 31,  2003** |       | **December  31,  2002** |       |
|-------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                    |   |                | ** ** |                    | ** ** |
| 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 |   |

 

The Company follows theaccounting and reporting requirements for goodwill and other intangible assetsas required by Statement of Financial Accounting Standards ("SFAS")No. 142, *Goodwilland Other Intangible Assets*. Under SFAS No. 142, goodwill and indefinite-lived intangible assets arenot amortized, but are required to be reviewed annually for impairment, or morefrequently if impairment indicators arise. Separable intangible assets that have finite lives are amortized overtheir useful lives.  The Company hasestablished and allocated goodwill to each of the following reporting units:Type, MyFonts, and Pageflex.  TheCompany has recorded goodwill embedded in its equity investment in DiamondSoft,Inc. of $557 as of March 31, 2003 and December 31, 2002, which is notattributable to a reporting unit.

 

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

 
|     |   | **March 31,  2003** |   | **December 31,  2002** |   |
|----------|--------|---------------------|--------|------------------------|--------|
|     |   |                |   |                   |   |
| Type     |   | $                   | 228    |                   | $      | 228 |   |
| MyFonts  |   | —              |   | —                 |   |
| Pageflex |   | 499                 |   | 499                    |   |
|     |   | $                   | 727    |                   | $      | 727 |   |

 

6

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Amortization expense forintangible assets for the three months ended March 31, 2003 and 2002 was $19and $17, respectively.  Estimatedamortization for the remainder of 2003 and the five succeeding years follows:

 
|              |   | **Estimated  Amortization  Expense** |   |
|-------------------|--------|--------------------------------------|--------|
|              |   |                                 |   |
| 2003  (remainder) |   | $                                    | 58     |   |
| 2004              |   | 72                                   |   |
| 2005              |   | 56                                   |   |
| 2006              |   | 32                                   |   |
| 2007              |   | 11                                   |   |
| 2008              |   | 1                                    |   |
|              |   | $                                    | 230    |   |

 

**(d) Accounting For Stock BasedCompensation**

** **

The Company accounts for its employee stock plans using theintrinsic value method. The SFAS 123 “AccountingFor Stock-Based Compensation”, disclosures include pro forma net income andearnings per share as if the fair value-based method of accounting had beenused. Stock issued to non-employees is accounted for in accordance with SFAS123 and related interpretations.   Thefollowing table sets forth the pro forma amounts of net loss and net loss pershare for the three months ending March 31, 2003 and 2002 that would haveresulted if the Company accounted for its employee stock plans under the fairvalue recognition provisions of SFAS 123, “*Accounting for Stock-Based Compensation*” (in thousands,except per share amounts):

 
|                                                                                        |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                        |   | **2003**                           |   | **2002** |   |
| Net  loss:                                                                                  |   |                               |   |   |   |
| As reported                                                                                 |   | $                                  | (917   | ) | $ | (187 | ) |
| Less:  Stock compensation costs, net of tax had option expense been measures at fair  value |   | (278                               | )      | (306 | ) |
| Pro  forma                                                                                  |   | $                                  | (1,195 | ) | $ | (493 | ) |
| Basic  and diluted net loss per share:                                                      |   |                               |   |   |   |
| As  reported                                                                                |   | $                                  | (0.11  | ) | $ | (0.02 | ) |
| Pro  forma                                                                                  |   | $                                  | (0.14  | ) | $ | (0.06 | ) |

 

For purposes of computingpro forma net loss, the Company estimates the fair value of all option orwarrant grants granted to employees as of March 31, 2003 and March 31, 2002using the Black Scholes option pricing model prescribed by SFAS No. 123.   Assumptions used and weighted averageinformation are as follows:

 
|                                                                |   | **Three  Months Ended  March 31,** |       |
|---------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                |   | **2003**                           |       | **2002** |   |
|                                                                |   |                               |       |   |   |
| Risk-free  interest rates                                           |   | 2.94                               | %          | 4.92 | % |
| Expected  dividend yield                                            |   | **—**                         | ** ** | **—** | ** ** |
| Expected  lives                                                     |   | 5 Years                            |       | 5 Years |   |
| Expected  volatility                                                |   | 120.5                              | %          | 99.6 | % |
| Weighted  average exercise price                                    |   | $                                  | 1.79       |   | $ | 4.75 |   |
| Weighted  average remaining contractual life of options outstanding |   | 6.10                               |       | 6.80 |   |
| Weighted  average fair value per share of options granted           |   | $                                  | 1.37       |   | $ | 3.60 |   |

 

Additional awards infuture years are anticipated. 

 

7

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**(e)  Recently IssuedAccounting Standards**

 

In June 2002, the FASBissued SFAS No. 143, *Accounting for Asset Retirement Obligations*.This Statement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This Statementapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, or normaluse of the asset. The Company’s adoption of SFAS No. 143 on January 1, 2003 didnot have a material impact on its financial position or results of operations.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*, which supercedes EITF 94-3,*Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)*.  The provisions of this Statement arerequired to be adopted for exit or disposal activities that are initiated afterDecember 31, 2002. Under this standard, a liability for a cost associated withan exit or disposal activity formerly recognized upon the entity’s commitmentto an exit plan is now recognized when the liability is incurred.  The Company’s adoption of SFAS No. 146 onJanuary 1, 2003 did not have a material impact on its financial position orresults of operations.

 

In November 2002, the FASB issued Interpretation No. 45,*Guarantor’sAccounting and Disclosure Requirements for Guarantees, including IndirectGuarantees of Indebtedness of Other* (FIN No.45). FIN No. 45 requiresthat a guarantor is required to recognize, at the inception of the guarantee, aliability for the fair value of the obligation undertaken by issuing theguarantee. The interpretation also requires additional disclosure to bemade by a guarantor in its financial statements about its obligations undercertain guarantees it has issued. The accounting requirements for the initialrecognition of guarantees are applicable on a prospective basis for guaranteesissued or modified after December 31, 2002. The disclosure requirements areeffective for all guarantees outstanding, regardless of when they were issuedor modified, for financial statement periods that end after December 15, 2002.The adoption of FIN 45 did not have a material effect on the Company’sconsolidated financial statements. The following is a summary of agreementsthat are within the scope of FIN No. 45.

 

As permitted under Delaware law, the Company has agreements whereby itindemnifies its officers and directors for certain events or occurrences whilethe officer or director is, or was serving, at the Company’s request in suchcapacity.  The term of theindemnification period runs until the expiration of the applicable statute oflimitations with respect to any claims against such directors or officersarising out of such acts or omissions. The maximum potential amount of future payments the Company could berequired to make under these indemnification agreements is unlimited; however,the Company has a director and officer insurance policy that limits itsexposure and enables it to recover a portion of any future amounts paid.  As a result of insurance policy coverage,the Company believes the estimated fair value of these indemnificationagreements is minimal.

 

The Company enters into standard indemnification agreements in theordinary course of business.  Pursuantto these agreements, the Company indemnifies, holds harmless, and agrees toreimburse the indemnified party for losses suffered or incurred by theindemnified party, generally business partners or customers, in connection withany U.S. patent, or any copyright or other Intellectual property infringementclaim by any third party with respect to the Company’s products.  The term of these indemnification agreementsis generally perpetual any time after execution of the agreement.  The maximum potential amount of futurepayments the Company could be required to make under these Indemnificationagreements is unlimited.  The Companyhas never incurred costs to defend lawsuits or settle claims related to theseindemnification agreements.  As aresult, the Company believes the estimated fair value of these agreements isminimal.

 

In December 2002, theFASB issued SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure – an amendment of FAS 123*.  This Statementamends SFAS No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation.  It also amends the disclosure provisions of SFAS No. 123 torequire prominent disclosure about the effects on reported net income of anentity’s accounting policy decisions with respect to stock-based employeecompensation.  This Statement also amends Accounting Principles BoardOpinion No. 28, *Interim Financial Reporting* (“APB No. 28”), to requiredisclosure about those effects in interim financial statements.  Theamendments to SFAS No. 123 are generally effective for financial statements forfiscal years ending after December 15, 2002.  The amendment to APB No. 28is effective for financial reports containing condensed financial statementsfor interim periods beginning after December 15, 2002.  The Company’sadoption of SFAS No. 148 has not had, and is not expected to have, asignificant effect on its financial position or its results of operations.

 

8

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In January 2003, the FASBissued FIN No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB 51*. The primary objectives of FIN No. 46 areto provide guidance on the identification of entities for which control isachieved through means other than through voting rights (“variable interestentities” or “VIEs”) and how to determine when and which business enterpriseshould consolidate the VIE. This new model for consolidation applies to anentity for which either: (a) the equity investors (if any) do not have acontrolling financial interest; or (b) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties. In addition, FIN No. 46requires that both the primary beneficiary and all other enterprises with asignificant variable interest in a VIE make additional disclosures. The Companyis required to apply FIN No. 46 to all new variable interest entities createdor acquired after January 31, 2003. For variable interest entities created oracquired prior to February 1, 2003, the Company is required to apply FIN No. 46on July 1, 2003. The Company is evaluating the impact that the adoption of FINNo. 46 may have on the Company’s financial position or its results ofoperations.

 

 

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

 

Basic earnings or lossper share is determined by dividing the net loss by the weighted average numberof shares of common stock outstanding during the period. Diluted earnings pershare reflect the effect of the conversion of potentially dilutive securities,such as stock options and warrants based on the treasury stock method. In computingdiluted earnings per share, common stock equivalents are not considered inperiods in which a net loss is reported, as the inclusion of the common stockequivalents would be antidilutive.  As aresult there is no difference between the Company’s basic and diluted loss pershare for the three month periods ended March 31, 2003 and 2002.

 

If the Company hadreported a profit for these periods, the potential common shares would haveincreased the weighted average shares outstanding by 252 and 1,429 shares forthe three months ended March 31, 2003 and 2002, respectively.  In addition, there were warrants and optionsoutstanding to purchase 1,828 and 556 shares at March 31, 2003 and 2002,respectively, that were not included in the potential common share computationsbecause their exercise prices were greater than the market price of theCompany’s common stock.  These commonstock 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 theequity method, in DiamondSoft, Inc. (“DiamondSoft”), a California corporationprimarily engaged in the business of developing, marketing and distributingsoftware tools to a variety of professional markets. During the year endedDecember 31, 2001 the Company made additional investments totaling $410 inDiamondSoft, resulting in an increase in Bitstream’s ownership percentage to31.7% at December 31, 2001, which remained unchanged as of March 31, 2003.

 

Gains (losses) forthe three months ended March 31, 2003, and 2002 related to the Company’sinvestment in DiamondSoft totaled approximately $93 and $(1), respectively, andare included in the accompanying consolidated statements of operations.  The Company has recorded goodwill related tothis investment equal to the difference between the amount paid for theinvestment and the Company’s share of DiamondSoft’s underlying net assets atthe time of each investment.  This goodwillamortization ceased in accordance with the Company’s adoption of SFAS No. 142on January 1, 2002. (See Note 1(c))

 

9

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On June 19, 2000, theCompany deposited $300 into a money market account at Wells Fargo Bank tosecure a $300 line of credit granted DiamondSoft by that bank.  This cash, which continues to secure theline of credit, is presented on the Company’s consolidated balance sheet asrestricted cash.

 

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

 

Accruedexpenses consist of thefollowing:

### ** **

|                                          |   | **March 31,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                          |   |                |   |                    |   |
| Accrued  royalties                            |   | $                   | 260    |                    | $      | 210 |   |
| Payroll  and other compensation               |   | 471                 |   | 597                     |   |
| Accrued  professional and consulting services |   | 159                 |   | 165                     |   |
| Other                                         |   | 76                  |   | 74                      |   |
| Total                                         |   | $                   | 966    |                    | $      | 1,046 |   |

 

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

 

The Company’s reportablesegments are strategic business units that sell the Company’s products throughdistinct distribution channels. They are managed separately as each businessrequires different marketing strategies. The Company’s approach is based on the way that management organizes thesegments within the enterprise for making operating decisions and assessingperformance.  The e-commerce segment’srevenues include revenue from products it purchases from the Type segment.  The inter-segment revenues created by thesetransactions have been eliminated from the e-commerce segmented revenue below,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.

 

The following table setsforth the Company’s revenue and income (loss) from operations by segment:

 
|                                       |   | **For the  Three Months  Ended  March 31,** |   |
|--------------------------------------------|--------|---------------------------------------------|--------|
|                                       |   | **2003**                                    |   | **2002** |   |
| **Revenue:**                               |   |                                        |   |   |   |
|                                       |   |                                        |   |   |   |
| Type                                       |   | $                                           | 856    |   | $ | 1,213 |   |
| MyFonts                                    |   | 518                                         |   | 262 |   |
| Pageflex                                   |   | 658                                         |   | 658 |   |
| Consolidated  revenue                      |   | $                                           | 2,032  |   | $ | 2,133 |   |
|                                       |   |                                        |   |   |   |
| **Segment (loss) income from operations:** |   |                                        |   |   |   |
| Type                                       |   | $                                           | (508   | ) | $ | 131 |   |
| MyFonts                                    |   | (82                                         | )      | (102 | ) |
| Pageflex                                   |   | (389                                        | )      | (207 | ) |
| Consolidated  loss from operations         |   | $                                           | (979   | ) | $ | (178 | ) |

 

10

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

 

The Company attributesrevenues to different geographical areas on the basis of the location of thecustomer. All of the Company’s product sales for the three months ended March31, 2003 and 2002 were shipped from its headquarters located in the UnitedStates or its office located in Cheltenham, England.  The Cheltenham sales office was closed on March 31, 2003.

 

Revenue by geographicarea is as follows:

 
|                                                    |   | **For the Three Months Ended  March 31,** |   |
|---------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                    |   | **2003**                                  |   | **2002** |   |
| **Revenue:**                                            |   |                                      |   |   |   |
| United States                                           |   | $                                         | 1,531  |   | $ | 1,536 |   |
| Japan                                                   |   | 210                                       |   | 190 |   |
| United Kingdom                                          |   | 110                                       |   | — |   |
| Korea                                                   |   | —                                    |   | 120 |   |
|                                                    |   |                                      |   |   |   |
| Other (Countries less than 5% individually, by  Region) |   |                                      |   |   |   |
| Europe, excluding specific countries listed above       |   | 131                                       |   | 231 |   |
| Asia, excluding specific countries listed above         |   | 2                                         |   | — |   |
| Other                                                   |   | 48                                        |   | 56 |   |
|                                                    |   |                                      |   |   |   |
| Total revenue                                           |   | $                                         | 2,032  |   | $ | 2,133 |   |

 

Long-lived tangible assetsby geographic area are as follows (Note: The Cheltenham sales office was closedon March 31, 2003.):

 
|           |   | **March 31,  2003** |   | **December  31,  2002** |   |
|----------------|--------|---------------------|--------|-------------------------|--------|
| United  States |   | $                   | 240    |                    | $      | 250 |   |
| England        |   | —              |   | 21                      |   |
| Total          |   | $                   | 240    |                    | $      | 271 |   |

 

11

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**PART 1, ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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, iscomposed of three separate and distinct businesses: (1) its type and typetechnology business, which currently generates revenue primarily from thelicensing of font rendering software and fonts to the embedded, set-top box,wireless device and information appliance markets, but has more recentlyfocused its product development efforts on a leading-edge browser for handhelddevices named ThunderHawkTM (“Type”); (2) its MyFonts.com business, whichgenerates revenue from its Web site, Myfonts.com, as well as from providing itsdatabase technology for other sites including Bitstream.com. Myfonts.com wasthe first e-commerce site to aggregate fonts from multiple vendors on oneeasy-to-use Web site (“MyFonts”); and (3) its Pageflex business, whichgenerates revenue from on-demand marketing and composition solutions such asMpowerTM, an enterprise solution that allows companies to dynamically createcustomized business documents, PersonaTM, a variable data desktop publishingapplication designed to produce personalized documents, and .EDIT, ajava-browser-based interactive WYSIWYG composition software that presents theuser with templates that can be customized (“Pageflex”).  The performance of each business segment isdiscussed in greater detail below.

 

#### **FORWARDLOOKING STATEMENTS**

 

Except for the historicalinformation contained herein, this Quarterly Report on Form 10-Q may containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. Investors are cautioned that forward-looking statements areinherently uncertain.  Actualperformance and results of operations may differ materially from thoseprojected or suggested in the forward-looking statements due to certain risksand uncertainties, including, without limitation, market acceptance of theCompany’s products, competition and the timely introduction of new products.Additional information concerning certain risks and uncertainties that wouldcause actual results to differ materially from those projected or suggested inthe forward-looking statements is contained in the Company’s filings with theSecurities and Exchange Commission, including those risks and uncertaintiesdiscussed in the Company’s final Prospectus, dated October 30, 1996, includedas part of the Company’s Registration Statement on Form S-1 (333-11519), in thesection entitled “Risk Factors.” 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 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:**

** **
|                   |   | **For the  Three Months Ended MARCH 31,** |   |
|------------------------|--------|-------------------------------------------|--------|
|                   |   |                                      |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                   |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **Revenue**            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Software licenses      |   | $                                         | 1,744  |   | 85.8 | % | $ | 1,836 |   | 86.1 | % | $ | (92 | ) | (5.0 | )% |
| Services               |   | 288                                       |   | 14.2 |   | 297 |   | 13.9 |   | (9 | ) | (3.0 | ) |
| Total  revenue         |   | 2,032                                     |   | 100.0 |   | 2,133 |   | 100.0 |   | (101 | ) | (4.7 | ) |
|                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| **Cost of Revenue**    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
|                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses     |   | 539                                       |   | 30.9 |   | 312 |   | 17.0 |   | 227 |   | 72.8 |   |
| Services               |   | 137                                       |   | 47.6 |   | 103 |   | 34.7 |   | 34 |   | 33.0 |   |
| Total  cost of revenue |   | 676                                       |   | 33.3 |   | 415 |   | 19.5 |   | 261 |   | 62.9 |   |
|                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| **Gross Profit**       |   | $                                         | 1,356  |   | 66.7 | % | $ | 1,718 |   | 80.5 | % | $ | (362 | ) | (21.1 | )% |

 

The decrease in revenuefor the three months ended March 31, 2003 as compared to the three months endedMarch 31, 2002 was attributable to a decrease in revenue in the Company’s Typesegment of $357 partially offset by an increase in revenue in the MyFontssegment of $256, while the Pageflex segment’s revenue was constant.  The increase in cost of license revenue forthe same periods was primarily due to increased royalty expense for theCompany’s MyFonts segment resulting from increased sales. The increase in costof service revenue was primarily the result of costs incurred during thequarter for support of the Company’s new ThunderHawk product.  Cost of revenue for the Company includesroyalties and fees paid to third parties for the development or license ofrights to technology and/or unique typeface designs, costs incurred in thefulfillment of custom orders, costs incurred in providing customer support,maintenance and training, and costs associated with the duplication, packagingand shipping of product. Gross profit generated by each segment is discussed inmore detail below.

 

**Type Gross Profit:**

** **
|                         |   | **For the  Three Months Ended MARCH 31,** |   |
|------------------------------|--------|-------------------------------------------|--------|
|                         |   |                                      |   | **% of** |   |   |   | **% of** |   |   |   |   |   |
|                         |   |                                      |   | **Segment** |   |   |   | **Segment** |   | **Change** |   |
|                         |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **Revenue**                  |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Software licenses            |   | $                                         | 757    |   | 88.4 | % | $ | 1,084 |   | 89.4 | % | $ | (327 | ) | (30.2 | )% |
| Services                     |   | 99                                        |   | 11.6 |   | 129 |   | 10.6 |   | (30 | ) | (23.3 | ) |
| Total  revenue               |   | 856                                       |   | 100.0 |   | 1,213 |   | 100.0 |   | (357 | ) | (29.4 | ) |
| Percentage  of total revenue |   | 42.1                                      | %      |   |   | 56.9 | % |   |   |   |   |   |   |
|                         |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| **Cost of Revenue**          |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
|                         |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Software  licenses           |   | 95                                        |   | 12.5 |   | 70 |   | 6.5 |   | 25 |   | 35.7 |   |
| Services                     |   | 79                                        |   | 79.8 |   | 46 |   | 35.7 |   | 33 |   | 71.7 |   |
| Total  cost of revenue       |   | 174                                       |   | 20.3 |   | 116 |   | 9.6 |   | 58 |   | 50.0 |   |
|                         |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| **Gross Profit**             |   | $                                         | 682    |   | 79.7 | % | $ | 1,097 |   | 90.4 | % | $ | (415 | ) | (37.8 | )% |

 

13

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**The decrease in revenue for thethree months ended March 31, 2003 as compared to the three months ended March31, 2002 was the result of decreases in OEM license revenue, retail productsales and revenue from custom design services of $299, $28, and $30,respectively.  Sales of the Company’sType products and custom design work have decreased due to consumer concernsabout the economy and decreases in spending on development efforts byhigh-technology customers.  Cost oflicense revenue for the same periods increased primarily because of a higherproportion of sales of third party typeface products in relation to sales ofthe Company’s internally developed typeface and technology products. Cost ofservices increased primarily due to $46,000 of costs incurred upon theestablishment of a service and support structure for the Company’s ThunderHawkproduct during the three months ended March 31. 2003.  This increase was partially offset by decreases in type designand consulting service expenses during the same period due to decreased salesof those services.**

** **

**MyFonts Gross Profit:**

** **
|                         |   | **For the  Three Months Ended MARCH 31,** |       |
|------------------------------|--------|-------------------------------------------|------------|
|                         |   |                                      |       | **% of** |   |   |   | **% of** |   |   |   |   |   |
|                         |   |                                      |       | **Segment** |   |   |   | **Segment** |   | **Change** |   |
|                         |   | **2003**                                  |       | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **Revenue**                  |   |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Software licenses            |   | $                                         | 518        |   | 100.0 | % | $ | 262 |   | 100.0 | % | $ | 256 |   | 97.7 | % |
| Total  revenue               |   | 518                                       |       | 100.0 |   | 262 |   | 100.0 |   | 256 |   | 97.7 |   |
| Percentage  of total revenue |   | 25.5                                      | %          |   |   | 12.3 | % |   |   |   |   |   |   |
|                         |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Cost of Revenue**          |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
|                         |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses           |   | 415                                       |       | 80.1 |   | 213 |   | 81.3 |   | 202 |   | 94.8 |   |
| Total  cost of revenue       |   | 415                                       |       | 80.1 |   | 213 |   | 81.3 |   | 202 |   | 94.8 |   |
|                         |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Gross Profit**             |   | $                                         | 103        |   | 19.9 | % | $ | 49 |   | 18.7 | % | $ | 54 |   | 110.2 | % |

** **

**MyFonts continued to be successful in increasing the numberof fonts available on its site, the number of foundries participating, and thenumber of consumer accounts. Inter-company sales, which MyFonts generated from the resale ofBitstream fonts, have been excluded. Cost of revenue increased primarily due to an increase in royalties andreferrer fees due to increased revenue, and an increase in shipping, packagingand handling costs due to the increase in products sold that must be physicallyshipped.**

** **

**14**

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** **

**Pageflex Gross Profit:**

 
|                         |   | **For the  Three Months Ended MARCH 31,** |       |
|------------------------------|--------|-------------------------------------------|------------|
|                         |   |                                      |       | **% of** |   |   |   | **% of** |   |   |   |   |   |
|                         |   |                                      |       | **Segment** |   |   |   | **Segment** |   | **Change** |   |
|                         |   | **2003**                                  |       | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
| **Revenue**                  |   |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Software licenses            |   | $                                         | 469        |   | 71.3 | % | $ | 491 |   | 74.6 | % | $ | (22 | ) | (4.5 | )% |
| Services                     |   | 189                                       |       | 28.7 |   | 167 |   | 25.4 |   | 22 |   | 13.2 |   |
| Total  revenue               |   | 658                                       |       | 100.0 |   | 658 |   | 100.0 |   | — |   | — |   |
| Percentage  of total revenue |   | 32.4                                      | %          |   |   | 30.8 | % |   |   |   |   |   |   |
|                         |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Cost of Revenue**          |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
|                         |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Software  licenses           |   | 30                                        |       | 6.4 |   | 30 |   | 6.1 |   | — |   | — |   |
| Services                     |   | 57                                        |       | 30.2 |   | 56 |   | 33.5 |   | 1 |   | 1.8 |   |
| Total  cost of revenue       |   | 87                                        |       | 13.2 |   | 86 |   | 13.1 |   | 1 |   | 1.2 |   |
|                         |   |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Gross Profit**             |   | $                                         | 571        |   | 86.8 | % | $ | 572 |   | 86.9 | % | $ | (1 | ) | (0.2 | )% |

 

**Pageflex revenue for the three months ended March 31, 2003remained unchanged from the $658 for the three months ended March 31,2002.  Direct sales and service revenuefor the three months ended March 31, 2003 increased $63 and 22, respectively,as compared to the three months ended March 31, 2002.  These increases were offset by decreases in reseller licenserevenue of $85. Cost of revenue increased slightly but is consistent as apercentage  of revenue.**

** **

**Marketing and Selling:**

** **
|                                |   | **For the  Three Months Ended MARCH 31,** |   |
|-------------------------------------|--------|-------------------------------------------|--------|
|                                |   |                                      |   | **% of** |   |   |   | **% of** |   |   |   |   |   |
|                                |   |                                      |   | **Segment** |   |   |   | **Segment** |   | **Change** |   |
|                                |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
|                                |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Type                                |   | $                                         | 435    |   | 50.8 | % | $ | 332 |   | 27.4 | % | $ | 103 |   | 31.0 | % |
| MyFonts                             |   | 11                                        |   | 2.1 |   | 15 |   | 5.7 |   | (4 | ) | (26.7 | ) |
| Pageflex                            |   | 274                                       |   | 41.6 |   | 248 |   | 37.7 |   | 26 |   | 10.5 |   |
| Consolidated  marketing And selling |   | $                                         | 720    |   | 35.4 | % | $ | 595 |   | 27.9 | % | $ | 125 |   | 21.0 | % |

 

Type marketing andselling expenses increased by approximately $42 due to the hiring of asalesperson dedicated to selling ThunderHawk and participation in a wirelesstradeshow and print advertising for ThunderHawk.  Type also incurred costs related to the closing of the Company’ssales office in the UK of $25, and realized (a) increased salary expense due tobonuses paid of $7, (b) increased non-ThunderHawk type trade show expenses of$11; and (c) increased facility-related costs of $13. Pageflex marketing andselling expenses for the three months ended March 31, 2003 as compared to thethree months ended March 31, 2002 increased primarily due to $15 of costsassociated with the hiring of three independent sales representatives, anincrease in trade show expenses of $10, and a $28 increase in travel relatedexpenses. These increases were partially offset by a temporary decrease inemployee head-count which reduced salary and benefit costs by $31. Myfontsmarketing and selling expenses decreased primarily due to a decrease in its useof marketing personnel from the Type segment and related charges during thethree months ended March 31, 2003 as compared to the three months ended March31, 2002.

 

15

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**Research and Development (“R&D”)**:

** **
|                                   |   | **For the  Three Months Ended MARCH 31,** |   |
|----------------------------------------|--------|-------------------------------------------|--------|
|                                   |   |                                      |   | **% of  Segment** |   |   |   | **% of  Segment** |   | **Change** |   |
|                                   |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
|                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Type                                   |   | $                                         | 443    |   | 51.8 | % | $ | 439 |   | 36.2 | % | $ | 4 |   | 0.9 | % |
| MyFonts                                |   | 141                                       |   | 27.2 |   | 112 |   | 42.8 |   | 29 |   | 25.9 |   |
| Pageflex                               |   | 459                                       |   | 69.8 |   | 408 |   | 62.0 |   | 51 |   | 12.5 |   |
| Consolidated  research and development |   | $                                         | 1,043  |   | 51.3 | % | $ | 959 |   | 45.0 | % | $ | 84 |   | 8.8 | % |

 

Type R&D expenses for ThunderHawk increasedapproximately $30 for the three months ended March 31, 2003 as compared to thethree months ended March 31, 2002.  Thisincrease was partially offset by decreases in resources utilized for productdevelopment on other Type products.  Theincrease in MyFonts R&D expense for the three months ended March 31, 2003as compared to the three months ended March 31, 2002 was primarily due to a $12increase in employee related costs resulting from a higher utilization of Typepersonnel during the three months ended March 31, 2003 combined with thenon-recurrence of and a credit of $15 realized in the three months ended March31,2002 for variable accounting treatment of stock options granted tonon-employee consultants.  The increasein Pageflex R&D expense over the same periods was primarily attributable to$23 in outside consulting fees for Mpower development, and $32 in salary andbenefit costs related to .Edit development.

 

**General and Administrative(“G&A”)**:

** **
|                                     |   | **For the  Three Months Ended MARCH 31,** |   |
|------------------------------------------|--------|-------------------------------------------|--------|
|                                     |   |                                      |   | **% of  Segment** |   |   |   | **% of  Segment** |   | **Change** |   |
|                                     |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
|                                     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Type                                     |   | $                                         | 312    |   | 36.4 | % | $ | 195 |   | 16.1 | % | $ | 117 |   | 60.0 | % |
| MyFonts                                  |   | 33                                        |   | 6.4 |   | 24 |   | 9.2 |   | 9 |   | 37.5 |   |
| Pageflex                                 |   | 227                                       |   | 34.5 |   | 123 |   | 18.7 |   | 104 |   | 84.6 |   |
| Consolidated  general and administrative |   | $                                         | 572    |   | 28.1 | % | $ | 342 |   | 16.0 | % | $ | 230 |   | 67.3 | % |

 

The increase in G&Aexpenses for the three months ended March 31, 2003 as compared to the threemonths ended March 31, 2002 is primarily attributable to bonuses expensed andpaid during the three months ended March 31, 2003, fees associated with thetransfer of the Company’s stock from the NASDAQ/NM to the NASDAQ SmallCapMarket, costs related to the closing of the Company’s UK sales office, andlegal fees related to ThunderHawk. These expenses are allocated to the businesssegments based on headcount.  Inaddition, the Type segment increased its bad debt reserves by $21 for the threemonths ended March 31, 2003, and Pageflex bad debt expense increased $23primarily due to a recovery of $18, which had decreased its expense for thethree months ended March 31, 2002.

 

16

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**Gain (loss) on Investment in DiamondSoft, Inc.:**

** **
|                                            |   | **For the  Three Months Ended MARCH 31,** |   |
|-------------------------------------------------|--------|-------------------------------------------|--------|
|                                            |   |                                      |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                                            |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
|                                            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Gain (loss) on  investment in DiamondSoft, Inc. |   | $                                         | 93     |   | 4.6 | % | $ | (1 | ) | (0.1 | )% | $ | 94 |   | 9400.0 | % |
|                                                 |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In March 1998 the Companymade a $500 equity investment in DiamondSoft, Inc. (“DiamondSoft”) representinga 25% ownership interest.  During theyear ended December 31, 2001, the Company made additional investments totaling$410 in DiamondSoft, resulting in an increase in Bitstream’s ownershippercentage to 31.7%.  This ownershippercentage has remained at 31.7% through March 31, 2003.  The gain (loss) above represents theCompany’s pro rata share of DiamondSoft’s net income (loss). Further discussioncan be found in Note 3 in the Notes to the Consolidated Financial Statementsincluded herewith.

 

**Other income (expense), net:**

 
|                        |   | **For the  Three Months Ended MARCH 31,** |   |
|-----------------------------|--------|-------------------------------------------|--------|
|                        |   |                                      |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                        |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
|                        |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense), net |   | $                                         | (10    | ) | (0.5 | )% | $ | 23 |   | 1.1 | % | $ | (33 | ) | (143.5 | )% |
|                             |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Other expense, net forthe three months ended March 31, 2003 consists of a loss on the disposition ofassets related to the closure of the UK sales office of $(20) partially offsetby interest income earned on cash and money market instruments of $10.  Other income, net for the three months endedMarch 31, 2002 is primarily interest income earned on cash and money marketinstruments.  Interest income hasdecreased during each of the two periods due to a combination of a lowerinvestment balance and lower interest rates.

 

**Provision for income taxes:**

** **
|                       |   | **For the  Three Months Ended MARCH 31,** |   |
|----------------------------|--------|-------------------------------------------|--------|
|                       |   |                                      |   | **% of** |   |   |   | **% of** |   | **Change** |   |
|                       |   | **2003**                                  |   | **Revenue** |   | **2002** |   | **Revenue** |   | **Dollars** |   | **Percent** |   |
|                       |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Income Taxes |   | $                                         | 21     |   | 1.0 | % | $ | 31 |   | 1.5 | % | $ | (10 | ) | 32.3 | % |
|                            |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The provision forincome taxes consists primarily of foreign income taxes.  Foreign taxes vary with Type OEM licenseroyalties from customers in countries who have signed tax conventions with theUnited States including Japan, Korea, and Poland, and also with the results ofoperations from the Company’s location in the United Kingdom.

 

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**LIQUIDITYAND CAPITAL RESOURCES (in thousands, except share amounts)**

 

The Company has fundedits operations primarily through the public sale of equity securities, cashflows from operations and cash received from the sale of the Company’sMediaBank and InterSep OPI product lines to Inso Providence Corporation inAugust of 1998.  As of March 31, 2003,the Company had net working capital of $2,744 versus $3,718 at December 31,2002.

 

The Company used cash ofapproximately $785 and $21 to fund its operations during the three months endedMarch 31, 2003 and 2002, respectively. The cash was used primarily to fund theCompany’s net losses. The net losses after adjustment for non-cash expenses resultedin the use of $916 and $98 in cash during the three months ended March 31, 2003and 2002, respectively.  Changes inoperating assets and liabilities resulted in cash savings of $131 and $77 forthe three months ended March 31, 2003 and 2002, respectively.  The Company’s investing activities used cashof $57 and $22 for the three months ended March 31, 2003 and 2002,respectively, to acquire additional property and equipment and intangibleassets.  The Company’s financingactivities provided cash of $0 and $7 for the three months ended March 31, 2003and 2002, respectively, from the exercise of stock options.

 

The Company believes itscurrent cash and cash equivalent balances will be sufficient to meet theCompany’s operating and capital requirements for at least the next 12months.  There can be no assurance,however, that the Company will not require additional financing in thefuture.  If the Company were required toobtain additional financing in the future, there can be no assurance thatsources of capital will be available on terms favorable to the Company, if atall.

 

As of March 31, 2003, theCompany 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.  As of March 31, 2003, the Company had futureminimum annual lease payments under the Company’s leased facilities of $201 forthe year ended December 31, 2003.

 

# **RECENTACCOUNTING PRONOUNCEMENTS**

 

In June 2002, the FASBissued SFAS No. 143, *Accounting for Asset Retirement Obligations*.This Statement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This Statementapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, or normaluse of the asset. The Company’s adoption of SFAS No. 143 on January 1, 2003 didnot have a material impact on its financial position or results of operations.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*, which supercedes EITF 94-3,*Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)*.  The provisions of this Statement arerequired to be adopted for exit or disposal activities that are initiated afterDecember 31, 2002. Under this standard, a liability for a cost associated withan exit or disposal activity formerly recognized upon the entity’s commitmentto an exit plan is now recognized when the liability is incurred.  The Company’s adoption of SFAS No. 146 onJanuary 1, 2003 did not have a material impact on its financial position orresults of operations.

 

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In November 2002, the FASB issued Interpretation No. 45,*Guarantor’sAccounting and Disclosure Requirements for*Guarantees*, includingIndirect Guarantees of Indebtedness of Other* (FIN No.45). FIN No. 45requires that a guarantor is required to recognize, at the inception of theguarantee, a liability for the fair value of the obligation undertaken byissuing the guarantee. The interpretation also requires additional disclosure tobe made by a guarantor in its financial statements about its obligations undercertain guarantees it has issued. The accounting requirements for the initialrecognition of guarantees are applicable on a prospective basis for guaranteesissued or modified after December 31, 2002. The disclosure requirements areeffective for all guarantees outstanding, regardless of when they were issuedor modified, for financial statement periods that end after December 15, 2002.The adoption of FIN 45 did not have a material effect on the Company’sconsolidated financial statements. The following is a summary of agreementsthat are within the scope of FIN No. 45.

 

As permitted under Delaware law, the Company has agreements whereby itindemnifies its officers and directors for certain events or occurrences whilethe officer or director is, or was serving, at the Company’s request in suchcapacity.  The term of theindemnification period runs until the expiration of the applicable statute oflimitations with respect to any claims against such directors or officersarising out of such acts or omissions. The maximum potential amount of future payments the Company could berequired to make under these indemnification agreements is unlimited; however,the Company has a director and officer insurance policy that limits itsexposure and enables it to recover a portion of any future amounts paid.  As a result of insurance policy coverage,the Company believes the estimated fair value of these indemnificationagreements is minimal.

 

The Company enters into standard indemnification agreements in theordinary course of business.  Pursuantto these agreements, the Company indemnifies, holds harmless, and agrees toreimburse the indemnified party for losses suffered or incurred by theindemnified party, generally business partners or customers, in connection withany U.S. patent, or any copyright or other Intellectual property infringementclaim by any third party with respect to the Company’s products.  The term of these indemnification agreementsis generally perpetual any time after execution of the agreement.  The maximum potential amount of futurepayments the Company could be required to make under these Indemnificationagreements is unlimited.  The Company hasnever incurred costs to defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated fair value of these agreements is minimal.

 

In December 2002, theFASB issued SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure – an amendment of FAS 123*.  This Statementamends SFAS No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation.  It also amends the disclosure provisions of SFAS No. 123 torequire prominent disclosure about the effects on reported net income of anentity’s accounting policy decisions with respect to stock-based employeecompensation.  This Statement also amends Accounting Principles BoardOpinion No. 28, *Interim Financial Reporting* (“APB No. 28”), to requiredisclosure about those effects in interim financial statements.  Theamendments to SFAS No. 123 are generally effective for financial statements forfiscal years ending after December 15, 2002.  The amendment to APB No. 28is effective for financial reports containing condensed financial statementsfor interim periods beginning after December 15, 2002.  The Company’sadoption of SFAS No. 148 has not had, and is not expected to have, a significanteffect on its financial position or its results of operations.

 

In January 2003, the FASBissued FIN No. 46, *Consolidation of Variable Interest Entities, anInterpretation of ARB 51*. The primary objectives of FIN No. 46 are toprovide guidance on the identification of entities for which control isachieved through means other than through voting rights (“variable interestentities” or “VIEs”) and how to determine when and which business enterpriseshould consolidate the VIE. This new model for consolidation applies to anentity for which either: (a) the equity investors (if any) do not have acontrolling financial interest; or (b) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties. In addition, FIN No. 46requires that both the primary beneficiary and all other enterprises with asignificant variable interest in a VIE make additional disclosures. The Companyis required to apply FIN No. 46 to all new variable interest entities createdor acquired after January 31, 2003. For variable interest entities created oracquired prior to February 1, 2003, the Company is required to apply FIN No. 46on July 1, 2003. The Company is evaluating the impact that the adoption of FINNo. 46 may have on the Company’s financial position or its results ofoperations.

 

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**PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

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

 

As of March 31, 2003, theCompany did not participate in any derivative financial instruments or otherfinancial and commodity instruments for which fair value disclosure would berequired under SFAS No. 107. All of the Company’s investments are short-term,investment-grade commercial paper, and money market accounts that are carriedon the Company’s books at amortized cost, which approximates fair market value.Accordingly, the Company has no quantitative information concerning the marketrisk of participating in such investments.

 

**Primary Market Risk Exposures**

 

The Company’s primarymarket risk exposures are in the areas of interest rate risk and foreigncurrency exchange rate risk. The Company’s investment portfolio of cashequivalent and short-term investments is subject to interest rate fluctuations,but the Company believes this risk is immaterial due to the short-term natureof these investments.  The Company’sexposure to currency exchange rate fluctuations has been, and is expected tocontinue to be, modest due to the fact that the operations of its internationalsubsidiaries are almost exclusively conducted in their respective localcurrencies. International subsidiary operating results are translated into U.S.dollars and consolidated for reporting purposes. The impact of currencyexchange rate movements on inter-company transactions was immaterial for thethree months ended March 31, 2003. Currently the Company does not engage in foreign currency hedgingactivities.

 

**PART 1, ITEM 4. CONTROLS AND PROCEDURES**

 

Based on the evaluationof the Company’s disclosure controls and procedures as of a date within 90 daysof the filing date of this quarterly report, each of Charles Ying, the ChiefExecutive Officer of the Company, Anna Chagnon, President and Chief OperatingOfficer, and James Dore, the Chief Financial Officer of the Company as of March2003, have concluded that the Company’s disclosure controls and procedures areeffective in ensuring that information required to be disclosed by the Companyin the reports that it files or submits under the Securities and Exchange Actof 1934, as amended, is recorded, processed, summarized and reported, within thetime period specified by the Securities and Exchange Commission’s rules andforms.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

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**PART II— OTHER INFORMATION**

** **

**ITEM 1****. LEGALPROCEEDINGS**

 

The Company is not aparty to any material litigation.

 

 

**ITEM 2****. CHANGES INSECURITIES 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 March 31, 2003.

 

(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 March 31, 2003.

 

(c)        There were no unregisteredsecurities sold by the Company during the three months ended March 31, 2003.

 

**ITEM 3****. DEFAULTSUPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM 4****. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the three months ended

March 31,2003.

 

**ITEM 5****. OTHERINFORMATION**

 

Not applicable.

 

**ITEM 6****. EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)     Exhibits

99 Additional Exhibits

99.1Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002

 

(b)     Reports on Form 8-K

 

On March 7, 2003 theCompany filed a Current Report on Form 8-K reporting that its request totransfer from the Nasdaq National Market to the Nasdaq SmallCap market had beenapproved, effective at the opening of business on Friday, February 28, 2003.

 

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**PART II - SIGNATURES**

 

# **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | **BITSTREAM INC.** |   |
|--------|--------------------|--------|
|   | (Registrant)       |

 
| **SIGNATURE**              |   | **TITLE**                                   |   | **DATE**     |
|----------------------------|--------|---------------------------------------------|--------|--------------|
|                       |   |                                        |   |         |
|  /s/ Anna M.  Chagnon |   | President and Chief  Operating Officer      |   | May 14, 2003 |
| Anna  M. Chagnon           |   | (Principal Executive  Officer)              |   |         |
|                       |   |                                        |   |         |
|  /s/ James P. Dore    |   | Vice President and  Chief Financial Officer |   | May 14, 2003 |
| James  P. Dore             |   | (Principal Accounting  Officer)             |   |         |

 

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**CERTIFICATION**

 

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

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Bitstream Inc.;

 

2.  Based on my knowledge, this annual 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 annual 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 officersand 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)              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;

 

b)             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

 

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

 

5.  The registrant’s other certifying officersand 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)              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

 

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

 

6.  The registrant’s other certifying officersand 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 |   | May 14, 2003 |
| Charles Ying                  |   |                    |   |         |

 

23

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**CERTIFICATION**

 

I, Anna Chagnon,President, Chief Operating Officer, and General Counsel of Bitstream Inc.,certify that:

 

 

2.               Ihave reviewed this quarterly report on Form 10-Q of Bitstream Inc.;

 

2.  Based on my knowledge, this annual 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 annual 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 officersand 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:

 

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.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’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.  The registrant’s other certifying officersand 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/ Anna M. Chagnon |   | President, Chief Operating Officer, and General  Counsel |   | May 14, 2003 |

 

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**CERTIFICATION**

 

I, James Dore, ChiefFinancial Officer of Bitstream Inc., certify that:

 

3.               Ihave reviewed this quarterly report on Form 10-Q of Bitstream Inc.;

 

2.  Based on my knowledge, this annual 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 annual 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 officersand 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:

 

g)             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;

 

h)             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

 

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

 

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

 

e)              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

 

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

 

6.  The registrant’s other certifying officersand 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/ James  P. Dore                     |   | Chief Financial Officer |   | May 14, 2003 |
|       James  P. Dore |   |                    |   |         |

 

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