<PAGE>   1


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

                                    FORM 10-Q

(Mark one)
              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended March 31, 1998

                                       or

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
            For the transition period from __________ to ___________


                         COMMISSION FILE NUMBER: 0-21541


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


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


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


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

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

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

    On May 11, 1998 there were 6,657,384 shares of Class A Common Stock, par
value $0.01 per share, and no shares of Class B Common Stock, par value $0.01
per share, outstanding.




<PAGE>   2

                                      INDEX


                                                                          PAGE
                                                                        NUMBERS
                                                                        -------
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

         CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE 
             MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 
             1997 (UNAUDITED)..............................................   4

         CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE 
             MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 
             1997 (UNAUDITED) ............................................    5

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

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

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS................................................   13

ITEM 2.  CHANGES IN SECURITIES............................................   13

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............   14

ITEM 5.  OTHER INFORMATION................................................   14

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.................................   14

               SIGNATURES.................................................   14



                                       2
<PAGE>   3

                         PART I -- FINANCIAL STATEMENTS


ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 
                         BITSTREAM INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                MARCH 31,         DECEMBER 31,
                                                                  1998              1997
                                                              ------------       ------------
                                                               (UNAUDITED)
<S>                                                           <C>                <C>         
                                ASSETS

Current assets:
   Cash and cash equivalents ...............................  $  5,334,000       $  6,364,000
   Accounts receivable, net ................................     3,562,000          3,694,000
   Current portion of long-term accounts receivable, net ...     1,321,000          1,855,000
   Deferred income tax asset ...............................       868,000            868,000
   Other current assets ....................................       726,000            684,000
                                                              ------------       ------------
       Total current assets ................................    11,811,000         13,465,000
                                                              ------------       ------------

Property and equipment, net ................................     1,392,000          1,399,000
                                                              ------------       ------------
Other assets:
   Long-term accounts receivable, net of current portion ...        26,000             39,000
   Goodwill, net ...........................................     1,833,000          1,948,000
   Investment in DiamondSoft ...............................       500,000               --
   Other assets ............................................       197,000            158,000
                                                              ------------       ------------
        Total other assets .................................     2,556,000          2,145,000
                                                              ------------       ------------

Total Assets ...............................................  $ 15,759,000       $ 17,009,000
                                                              ============       ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Capital lease obligations ...............................  $     27,000       $     28,000
   Accounts payable ........................................       666,000            753,000
   Accrued expenses ........................................     3,156,000          3,472,000
                                                              ------------       ------------
       Total current liabilities ...........................     3,849,000          4,253,000
                                                              ------------       ------------

Long-term liabilities:
   Capital lease obligations, net of current portion .......        46,000             54,000
                                                              ------------       ------------
   Other long-term liabilities .............................         7,000             19,000
                                                              ------------       ------------
       Total long term liabilities .........................        53,000             73,000
                                                              ------------       ------------

Stockholders' equity:
   Common stock ............................................        67,000             65,000
   Additional paid-in capital ..............................    30,208,000         29,940,000
   Accumulated deficit .....................................   (18,379,000)       (17,283,000)
   Cumulative translation adjustments ......................       (39,000)           (39,000)
                                                              ------------       ------------
       Total stockholders' equity ..........................    11,857,000         12,683,000
                                                              ------------       ------------

Total Liabilities and Stockholders' Equity .................  $ 15,759,000       $ 17,009,000
                                                              ============       ============

</TABLE>








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




                                       3
<PAGE>   4

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


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                 MARCH 31,
                                                        ----------------------------
                                                           1998              1997
                                                        -----------       ----------
<S>                                                  <C>               <C>       

Revenues .............................................  $ 2,841,000       $2,522,000
Cost of revenues .....................................      175,000          289,000
                                                        -----------       ----------

       Gross profit ..................................    2,666,000        2,233,000
                                                        -----------       ----------

OPERATING EXPENSES:
   Selling and marketing .............................    1,777,000        1,216,000
   Research and development ..........................    1,050,000          509,000
   General and administrative ........................      577,000          425,000
   Severance and other non-recurring charges .........      440,000             --
                                                        -----------       ----------

       Total operating expenses ......................    3,844,000        2,150,000
                                                        -----------       ----------

       Operating income (loss) .......................   (1,178,000)          83,000
                                                        -----------       ----------

Other income, net ....................................      106,000          172,000
                                                        -----------       ----------

   Income (loss) before provision for income taxes ...   (1,072,000)         255,000
                                                        -----------       ----------

Provision for income taxes ...........................       24,000           23,000
                                                        -----------       ----------

       Net income (loss) .............................  $(1,096,000)      $  232,000
                                                        ===========       ==========


Basic net income (loss) per share ....................  $     (0.17)      $     0.04
                                                        ===========       ==========

Basic weighted average shares outstanding ............    6,346,909        5,918,718
                                                        ===========       ==========

Diluted net income (loss) per share ..................  $     (0.17)      $     0.03
                                                        ===========       ==========

Weighted average common shares outstanding and
   dilutive potential common shares ..................    6,346,909        7,400,564
                                                        ===========       ==========


</TABLE>




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




                                       4
<PAGE>   5

                         BITSTREAM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                                           MARCH 31,
                                                                 ------------------------------
                                                                    1998              1997
                                                                 -----------       ------------
<S>                                                              <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) ............................................ $(1,096,000)      $    232,000
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization .............................     282,000             99,000
     Compensation on grant of stock options ....................     152,000                 --
     Changes in current assets and liabilities:
       Accounts receivable .....................................     132,000           (428,000)
       Long-term accounts receivable ...........................     547,000            (70,000)
       Other current assets ....................................     (41,000)           295,000
       Accounts payable ........................................     (86,000)          (100,000)
       Accrued expenses ........................................    (316,000)            83,000
                                                                 -----------       ------------
       Net cash provided by (used in) operating activities .....    (426,000)           111,000
                                                                 -----------       ------------


CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment ..........................    (162,000)           (47,000)
  Acquisition of businesses ....................................          --           (505,000)
  Investment in DiamondSoft, Inc. ..............................    (500,000)                --
  Change in other assets .......................................     (38,000)           (70,000)
  Change in other long-term liabilities ........................          --            (13,000)
                                                                 -----------       ------------
       Net cash used in investing activities ...................    (700,000)          (635,000)
                                                                 -----------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on capital lease obligations ........................      (9,000)           (16,000)
  Payments on IPO offering expenses ............................          --            (89,000)
  Change in other long term liabilities ........................     (12,000)                --
  Proceeds from the exercise of stock options and warrants .....     117,000             20,000
                                                                 -----------       ------------
        Net cash provided by (used in) financing activities ....      96,000            (85,000)
                                                                 -----------       ------------
Net decrease in cash and cash equivalents ......................  (1,030,000)          (609,000)
Cash and cash equivalents, beginning of period .................   6,364,000         11,718,000
                                                                 -----------       ------------
Cash and cash equivalents, end of period ....................... $ 5,334,000       $ 11,109,000
                                                                 -----------       ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash paid for interest ....................................... $     1,000       $      3,000
                                                                 ===========       ============

  Cash paid for income taxes ................................... $     1,000       $     23,000
                                                                 ===========       ============



</TABLE>













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


                                       5
<PAGE>   6

                         BITSTREAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998

(1) BASIS OF PRESENTATION

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

    The balance sheet as of March 31, 1998, the statements of operations for the
three months ended March 31, 1998 and 1997, the statements of cash flows for the
three months ended March 31, 1998 and 1997, and the notes to each thereof are
unaudited, but in the opinion of management include all adjustments necessary
for a fair presentation of the consolidated financial position, results of
operations, and cash flows of the Company and its subsidiaries for these interim
periods.

    The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending December 31, 1998.

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

(2) NET INCOME (LOSS) PER SHARE

    The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. SFAS No. 128 established standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. The Company has applied the provisions
of SFAS No. 128 and SEC Staff Accounting Bulletin (SAB) No. 98 retroactively to
all periods presented. Diluted net loss per share for the three months ended
March 31, 1998 is the same as basic net loss per share as the inclusion of the
potential common stock equivalents would be antidilutive.

The following is a reconciliation of shares outstanding for basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                                         THREE MONTHS
                                                                        ENDED MARCH 31,
                                                                 ---------------------------
                                                                   1998              1997
                                                                 ---------         ---------
<S>                                                              <C>               <C>      
    Shares outstanding for basic income (loss) per share:
        Weighted average shares outstanding...................   6,346,909         5,918,718
                                                                 ---------         ---------
    Shares outstanding for diluted income (loss) per share:
        Weighted average shares outstanding...................   6,346,909         5,918,718
        Dilutive effect of options issued to employees........          --         1,157,857
        Dilutive effect of warrants issued to employees.......          --           323,989
                                                                 ---------         ---------
                                                                 6,346,909         7,400,564
                                                                 =========         =========

    Options and warrants excluded as they are antidilutive....   2,822,063            95,998
                                                                 =========         =========

</TABLE>



                                       6
<PAGE>   7

(3) CONCENTRATION OF CREDIT RISK

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

    For the three months ended March 31, 1998, one customer represented 15% of
revenues. For the three months ended March 31, 1997, two customers represented
15% and 12% of revenues, respectively.

(4) COMPREHENSIVE INCOME (LOSS)

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

<TABLE>
<CAPTION>
                                                                         THREE MONTHS
                                                                        ENDED MARCH 31,
                                                                   ------------------------
                                                                      1998           1997
                                                                   -----------     --------
<S>                                                                <C>            <C>      

Net income (loss)...........................................       $(1,096,000)    $232,000
Cumulative translation adjustment, net of tax...............           (39,000)     (23,000)
                                                                   -----------     --------
Total comprehensive income (loss)...........................       $(1,135,000)    $209,000
                                                                   ===========     ========
</TABLE>


(5) RECENTLY ISSUED ACCOUNTING STANDARDS

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

     Effective October 1, 1997, the Company adopted Statement of Position 97-2
(SOP 97-2), Software Revenue Recognition. The adoption of SOP 97-2 did not have
a material effect on the Company's results of operations or financial position.


(6) ACQUISITIONS

     MAINSTREAM SOFTWARE SOLUTIONS, LTD.

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

     ARCHETYPE, INC.

     In April 1997, the Company acquired Archetype, Inc. ("Archetype"), a
Delaware corporation primarily engaged in the business of developing and
marketing server-based information management 



                                       7
<PAGE>   8

computer software for the graphic arts industry, pursuant to an Agreement and
Plan of Merger, dated March 27, 1997 among the Company, Archetype, and Archetype
Acquisition Corporation, a newly organized wholly owned subsidiary of the
Company. Archetype's products include: MediaBank(TM), a digital asset management
product that allows for the cataloging, archiving, and management of electronic
images, text and documents; InterSep(TM) OPI and InterSep Output Manager,
advanced open prepress interface and print management products for raster image
processors and servers; and NuDoc(TM), an advanced document composition
technology.

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

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

<TABLE>
<CAPTION>
            DESCRIPTION                                    AMOUNT
            -----------                                  ----------
             <S>                                         <C>       

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

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

<CAPTION>
            DESCRIPTION                                    AMOUNT
            -----------                                  ----------
            <S>                                          <C>

            Current assets.......................        $  431,000
            Property, plant and equipment........           207,000
            Other assets.........................            54,000
            In-process research and development..         4,930,000
            Other acquired intangible assets.....         1,832,000
                                                         ----------
            Total assets acquired................        $7,454,000
                                                         ==========

</TABLE>

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






                                       8
<PAGE>   9



Based on the unaudited data, the following table presents selected financial
information for Bitstream and Archetype on a pro forma basis for the three
months ended March 31, 1997, assuming the companies had been combined since the
beginning of 1997.

<TABLE>
<CAPTION>
                                                                THREE MONTHS
                                                               ENDED MARCH 31,
                                                                     1997
                                                               --------------
<S>                                                              <C>       
Revenues..................................................       $3,280,000
                                                                 ----------
Net income................................................           61,000
                                                                 ----------
Basic and diluted net income per share....................       $     0.01
                                                                 ==========
</TABLE>

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

(7)  INVESTMENTS

     On March 13, 1998, the Company made a $500,000 equity investment in
 DiamondSoft, Inc. ("DiamondSoft"), a California corporation primarily engaged
 in the business of developing, marketing and distributing software tools to a
 variety of professional markets. This equity investment involved the purchase
 of 250,000 shares of DiamondSoft's Series A Convertible Preferred Stock at a
 price of $2.00 per share representing a 25% ownership interest. In addition,
 pursuant to a letter agreement with DiamondSoft dated March 17, 1998, the
 Company will market DiamondSoft's FontReserve software to hardware and software
 developers and DiamondSoft will license the Company's Font Navigator software
 to retailers and corporate users. The results of operations from the date of
 the investment through March 31, 1998 were not material.

(8)  SEVERANCE AND OTHER NON-RECURRING CHARGES

     Included in operating expenses for the three months ended March 31, 1998
are $440,000 of severance and other non-recurring compensation expenses incurred
in connection with certain severance arrangements between the Company and
certain former employees and high-level executives.












                                       9
<PAGE>   10


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

OVERVIEW

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

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

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

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

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



                                       10
<PAGE>   11

users and distributors are the direct costs associated with the duplication,
packaging and shipping of products, and any royalty fees paid to third parties
for rights to license typefaces.

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

IMPACT OF YEAR 2000 ISSUE

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

RESULTS OF OPERATIONS

     REVENUES. Total revenues for the three months ended March 31, 1998
increased by $320,000 or 12.7%, to approximately $2.84 million, as compared to
approximately $2.52 million for the three months ended March 31, 1997. The net
increase is due to additional revenues from the inclusion of Archetype revenues
for the three months ended March 31, 1998 offset by a decrease in revenues due
to weaker than expected demand in OEM channels for the Company's traditional
type products and slower than anticipated growth in emerging markets for the
Company's type and technology products. Revenues from OEM and ISV customers for
the three months ended March 31, 1998 increased by $60,000, or 2.7%, to
approximately $2.28 million from approximately $2.22 million for the three
months ended March 31, 1997. Revenues from end users and distributors for the
three months ended March 31, 1998 increased by $257,000, or 84.5%, to
approximately $561,000 from approximately $302,000 for the three months ended
March 31, 1997 reflecting the inclusion of Archetype revenues for the three
months ended March 31, 1998.

     GROSS PROFIT. Gross profit for the three months ended March 31, 1998
increased by $440,000, or 19.7%, to approximately $2.67 million compared to
approximately $2.23 million for the three months ended March 31, 1997. Gross
profit as a percentage of revenues for the three months ended March 31, 1998
increased to 94.0% compared to 88.5% for the three months ended March 31, 1997.
The increase in gross profit and gross profit as a percentage of revenues
reflects the decrease in the cost of third party royalties for the mix of
products sold during the three months ended March 31, 1998. Gross profit and
gross profit as a percentage of revenues in the future may be affected by a
variety of factors including third party licensing fees and royalties, pricing
of the Company's products and changes in the product mix of the Company's
revenues.

     SELLING AND MARKETING. Selling and marketing expenses for the three months
ended March 31, 1998 increased by $560,000, or 45.9%, to approximately $1.78
million compared to approximately $1.22 million for the three months ended March
31, 1997. Selling and marketing expenses as a percentage of revenues for the
three months ended March 31, 1998 increased to 62.5% compared to 48.2% for the
three months ended March 31, 1997. This increase primarily reflects the
inclusion of Archetype operations.

     RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended March 31, 1998 increased by $541,000, or 106.3%, to approximately
$1.05 million compared to $509,000 for the three months ended March 31, 1997.
Research and development expenses as a percentage of revenues for the three
months ended March 31, 1998 increased to 36.9% compared to 20.2% for the three
months ended March 31, 1997, reflecting the addition of personnel to support
expanded development of the Company's enabling technologies, as well as the
addition of Archetype research and development expenses. Research and
development expenses consist primarily of personnel costs and fees paid for
outside software development and consulting fees. The Company expects to
continue to invest in research and development expenditures in future periods
to support development of current and future products and technologies.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended March 31, 1998 increased by $152,000, or 35.8%, to $577,000
compared to $425,000 for the three




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<PAGE>   12

months ended March 31, 1997 primarily due to goodwill amortization related to
the April, 1997 acquisition of Archetype, Inc. As a percentage of revenues,
general and administrative expenses represented 20.3% for the three months ended
March 31, 1998 compared to 16.9% for the three months ended March 31, 1997.

     Operating expenses for the three months ended March 31, 1998 include
$440,000 for severance and other non-recurring compensation expenses.

     The Company recorded a tax provision consisting of foreign tax liabilities,
relating to sales to customers in Japan, for the three months ended March 31,
1998 and March 31, 1997 of $24,000 and $23,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

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

    The Company's operating activities used cash of approximately $426,000 for
the three months ended March 31, 1998 and provided cash of approximately
$111,000 for the three months ended March 31, 1997. The cash used during the
three months ended March 31, 1998 was primarily due to the operating loss offset
by non-cash charges.

    The Company's investing activities used cash of approximately $700,000 for
the three months ended March 31, 1998 as compared to $635,000 for the three
months ended March 31, 1997. Investing activities for the three months ended
March 31, 1998 consist primarily of a $500,000 equity investment in Diamondsoft,
Inc., a California corporation primarily engaged in the business of developing,
marketing and distributing software tools to a variety of professional markets.

    The Company's financing activities provided cash of $96,000 for the three
months ended March 31, 1998 and used cash of $85,000 for the three months ended
March 31, 1997. The cash provided in the three months ended March 31, 1998 was
primarily due to proceeds from the exercise of stock options.

    The Company has a $2 million unsecured working capital line of credit from a
commercial lender. This line of credit bears interest at the bank's base lending
rate, and will expire in August 1998. There were no borrowings outstanding under
this line of credit at March 31, 1998.

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

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

    Except for the historical information contained herein, this Quarterly
Report on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, without limitation, market acceptance of the Company's products,
competition and the timely introduction of new products. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's final Prospectus, dated October 30, 1996, included as part of the
Company's Registration Statement on Form S-1 (Commission 



                                       12

<PAGE>   13
File No. 333-11519), in the section entitled "Risk Factors." The forward-looking
statements contained herein represent the Company's judgment as of the date of
this report, and the Company cautions readers not to place undue reliance on
such statements.


PART II -- OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

    Not applicable.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    (a) There were no unregistered securities sold by the Company during the
        three months ending March 31, 1998.

    (b) Use of Proceeds

    As of March 31, 1998, the net proceeds of the Company's initial public
    offering (IPO) of its Class A Common Stock pursuant to its Registration
    Statement on Form S-1, Commission File No. 333-11519, declared effective
    October 30, 1996, have been used as follows: (i) approximately $200,000 for
    the buildout of Bitstream's leased facilities in Cambridge, Massachusetts to
    accommodate the additional personnel that joined the Company as a result of
    the acquisition of Archetype; (ii) approximately $4,141,000 for the
    acquisition of Mainstream Software Solutions, Ltd. and Archetype, Inc.;
    (iii) approximately $1,500,000 for the repayment of indebtedness, of which
    approximately $548,000 was paid to officers, directors and 10% stockholders
    of the Company and approximately $762,000 of which was paid to third
    parties; (iv) approximately $404,000 for royalty payments to others; (v)
    $500,000 for the investment in DiamondSoft, Inc.; and (vi) approximately
    $450,000 for the purchase and installation of equipment. The remaining of
    the net proceeds from the IPO are invested in short-term, interest-bearing,
    investment-grade securities.
        
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    Not applicable.

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

    Not applicable.

ITEM 5. OTHER INFORMATION

    Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

        27.1   Financial Data Schedule For Three Months Ending March 31, 1998
        27.2   Amended Financial Data Schedule for Three Months Ending March 
               31, 1997

    (b) Reports on Form 8-K

        Not applicable.



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<PAGE>   14

                                   SIGNATURES

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



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




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


/s/ WENDY DARLAND          Vice President, Finance and             May 14, 1998
-----------------------    Administration, Chief Financial 
Wendy Darland              Officer, Treasurer and Assistant 
                           Secretary (Principal Financial Officer
                           and Principal Accounting Officer)






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