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 September 30, 1997

                                       or

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


                         COMMISSION FILE NUMBER: 0-21541

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


          DELAWARE                                        04-2744890
        ------------                                    --------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
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 November 11, 1997 there were  6,398,255  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.








                                      INDEX

<TABLE>
<CAPTION>

                                                                                                                  PAGE
                                                                                                                 NUMBERS
                                                                                                                 -------

<S>                                                                                                               <C>    
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

              CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND
                   SEPTEMBER 30, 1997...................................................................           3

              CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
                  AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997.....................................           4

              CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
                  SEPTEMBER 30, 1996 AND 1997...........................................................           5

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                                            9
              RESULTS OF OPERATIONS.....................................................................

PART II. OTHER INFORMATION                                                                                        12

ITEM 1. LEGAL PROCEEDINGS...............................................................................          12

ITEM 2. CHANGES IN SECURITIES...........................................................................          12

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................          13

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS..............................................          13

ITEM 5. OTHER INFORMATION...............................................................................          13

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................          13

               SIGNATURES...............................................................................          14
</TABLE>

                                       2






                         PART I -- FINANCIAL STATEMENTS

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                         BITSTREAM INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,        SEPTEMBER 30,
                                                                                 1996               1997
                                                                         -------------------  -----------------
                                                                                                 (Unaudited)
                                ASSETS
<S>                                                                     <C>                  <C>
Current assets:
   Cash and cash equivalents                                             $        11,718,000  $       6,395,000
   Accounts receivable, net of allowance for doubtful accounts                     1,552,000          2,408,000
   Current portion of long-term accounts receivable and extended
      plan accounts receivable, net of allowance for doubtful accounts             1,667,000          2,695,000
   Deferred income taxes                                                             868,000            868,000
   Other current assets                                                              434,000            477,000
                                                                         -------------------  -----------------
       Total current assets:                                                      16,239,000         12,843,000
                                                                         -------------------  -----------------
Property and equipment, net:                                                         924,000          1,355,000
                                                                         -------------------  -----------------
Other assets:                                                                             --                 --
   Long-term accounts receivable, net of current portion                             123,000             62,000
   Goodwill                                                                               --          2,058,000
   Other assets                                                                      191,000            172,000
                                                                         -------------------  -----------------
        Total other assets                                                           314,000          2,292,000
                                                                         -------------------  -----------------
        Total assets                                                     $        17,477,000  $      16,490,000
                                                                         ===================  =================

            LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Current maturities of capital lease obligations                                    36,000             30,000
   Accounts payable                                                                  513,000            583,000
   Accrued expenses                                                                1,470,000          3,284,000
                                                                         -------------------  -----------------
       Total current liabilities                                                   2,019,000          3,897,000
                                                                         -------------------  -----------------
Capital lease obligations, less current maturities:                                   79,000             60,000

Other long-term liabilities                                                           20,000             38,000
                                                                         -------------------  -----------------
       Total long-term liabilities                                                    99,000             98,000
                                                                         -------------------  -----------------
Stockholders' equity:
   Common stock                                                                       59,000             65,000
   Additional paid-in capital                                                     26,637,000         29,871,000
   Accumulated deficit                                                           (11,293,000)       (17,401,000)
   Cumulative translation adjustment                                                 (44,000)           (40,000)
                                                                         -------------------- ------------------
       Total stockholders' equity                                                15,359,000           12,495,000
                                                                         -------------------  ------------------
       Total liabilities and stockholders' equity                        $       17,477,000   $       16,490,000
                                                                         ==================   ==================
</TABLE>



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


                                       3






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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                     SEPTEMBER 30,
                                                        --------------------------------- ---------------------------------
                                                              1996            1997             1996              1997
                                                        --------------  ---------------   --------------    ---------------
<S>                                                     <C>            <C>               <C>               <C>
REVENUES:
   Revenues                                             $    2,628,000  $     3,659,000   $    8,039,000    $    9,344,000
   Cost of revenues                                            644,000          275,000        1,452,000         1,049,000
                                                        --------------  ---------------   --------------    --------------

       Gross Profit                                          1,984,000        3,384,000        6,587,000         8,295,000
                                                        --------------  ---------------   --------------    --------------

OPERATING EXPENSES:
   Marketing and selling                                     1,117,000        2,061,000        3,262,000         4,880,000
   Research and development                                    334,000          841,000        1,014,000         1,998,000
   General and administrative                                  388,000          495,000        1,164,000         1,484,000
   In-process research and development                              --              --               --          4,930,000
   Severance and other non-recurring compensation                   --               --              --          1,371,000
                                                        --------------  ---------------   --------------    --------------
       Total operating expenses                              1,839,000        3,397,000        5,440,000        14,663,000
                                                        --------------  ---------------   --------------    --------------

       Operating income (loss)                                 145,000             (13)        1,147,000       (6,368,000)
                                                        --------------  ---------------   --------------    --------------

Other income (expense), net                                   (18,000)          116,000         (63,000)           458,000
                                                        --------------  ---------------   --------------    --------------

   Income (loss) before provision for (benefit from)           127,000          103,000        1,084,000       (5,910,000)
     income taxes                                       --------------  ---------------   --------------    --------------
       

Provision for (benefit from) income taxes                     (11,000)           57,000         (96,000)           198,000
                                                        --------------  ---------------   --------------    --------------

       Net income (loss)                                $      138,000  $        46,000   $    1,180,000    $  (6,108,000)
                                                        ==============  ===============   ==============    ==============

Net income (loss) per common and
  common equivalent share                               $         0.03  $          0.01   $         0.26    $       (0.98)
                                                        --------------  ---------------   --------------    --------------

Weighted average common and
  common equivalent shares outstanding                       4,734,455        7,773,690        4,731,721         6,254,063
                                                        ==============  ===============   ==============    ==============
</TABLE>

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


                                       4











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

                                                                                            NINE MONTHS ENDED
                                                                                              SEPTEMBER 30,
                                                                                        1996                 1997
                                                                                   -------------       --------------
<S>                                                                               <C>                 <C>  
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income (loss)                                                                $    1,180,000      $   (6,108,000)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities-
     In-process research and development                                                      ---           4,930,000
     Depreciation and amortization                                                        199,000             452,000
     Deferred income tax benefit                                                         (238,000)                ---
     Net loss (gain) on disposal of property and equipment                                 (5,000)                ---
     Changes in assets and liabilities-
       Accounts receivable                                                               (927,000)         (1,566,000)
       Long-term and extended plan accounts receivable                                   (109,000)             61,000
       Other current assets                                                              (387,000)            169,000
       Accounts payable                                                                    21,000            (170,000)
       Accrued expenses                                                                   485,000           1,527,000
                                                                                   --------------      --------------
       Net cash provided by (used in) operating activities                         $      219,000      $     (705,000)
                                                                                   --------------      --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment, net                                               (592,000)           (538,000)
  Acquisition of business                                                                     ---          (4,141,000)
  Change in other assets                                                                      ---              81,000
  Change in other long term liabilities                                                       ---              18,000
                                                                                   --------------      --------------
       Net cash provided by (used in) investing activities                         $     (592,000)      $  (4,580,000)
                                                                                   --------------      --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from capital lease obligations                                                 324,000                 ---
  Proceeds from debt to stockholders                                                      600,000                 ---
  Payments on capital lease obligations                                                  (109,000)            (31,000)
  Payments on line of credit                                                             (150,000)                ---
  Payments on IPO offering expenses                                                           ---             (68,000)
  Change in other long term liabilities                                                   (11,000)                ---
  Proceeds from line of credit                                                            100,000                 ---
  Proceeds from the exercise of stock options and warrants                                  6,000              61,000
                                                                                   --------------      --------------
        Net cash used in financing activities                                      $      760,000      $      (38,000)
                                                                                   --------------      --------------
Net Increase (Decrease) in Cash and Cash Equivalents                                      387,000          (5,323,000)
Cash and Cash Equivalents, beginning of period                                            390,000          11,718,000
                                                                                   --------------      --------------
Cash and Cash Equivalents, end of period                                           $      777,000      $    6,395,000
                                                                                   --------------      --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                                           $       90,000      $        7,000
  Cash paid for income taxes                                                       $      142,000      $       30,000
</TABLE>


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



                                       5






                         BITSTREAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997
                                   (UNAUDITED)

(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, 1996 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, 1996
included  in the  Company's  Report on Form 10-K which was filed by the  Company
with the SEC on March 31, 1997.

    The balance sheet as of September 30, 1997, the statements of operations for
the nine months ended  September 30, 1996 and 1997, the statements of cash flows
for the nine  months  ended  September  30,  1996 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 nine months ended  September 30, 1997 are
not necessarily  indicative of the results to be expected for any future interim
period or for the year ending December 31, 1997.

(2) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

    Net income per common and common equivalent share for the three months ended
September 30, 1997 have been determined in accordance with the modified treasury
stock  method by  dividing  (i) net  income  increased  by the effect of reduced
interest expense  associated with the assumed repayment of certain  indebtedness
as of the beginning of the period and by the effect of increased interest income
associated with the assumed investment in U.S.  Government  securities as of the
beginning  of the  period  with  the  assumed  proceeds  from  the  exercise  of
outstanding  options and warrants by (ii) the weighted  average number of common
and common  equivalent  shares  outstanding,  including  the dilutive  effect of
options and warrants.

(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  September  30,  1997,  one customer  represented
13.7% of revenues,  respectively. For the three months ended September 30, 1996,
three customers represented 12.9%, 15.7% and 16.7% of revenues, respectively.


(4) RECENTLY ISSUED ACCOUNTING STANDARDS

    In February 1997, the Financial  Accounting Standards Board issued Statement
of Financial  Accounting  Standards  No. 128,  Earnings Per Share.  SFAS No. 128
establishes  standards  for  computing  and  presenting  earnings  per share and
applies to entities with  publicly held common stock or potential  common stock.
This  statement is effective for the fiscal years ending after December 15, 1997
and early  adoption is not permitted.  When adopted,  the statement will require
restatement  of prior  years'  earnings  per share.  The Company will adopt this
statement  for its fiscal year ended  December  31,  1997.  The adoption of this
statement  will not have a material  impact on earnings  per share for the three
and nine months ended 




                                       6






September 30, 1997.  Pro forma  calculations  of basic and diluted  earnings per
share for the nine months ended September 30, 1997 are as follows:



<TABLE>
<CAPTION>

                                                         THREE MONTHS ENDED       NINE MONTHS ENDED
                                                         SEPTEMBER 30, 1997       SEPTEMBER 30, 1997
                                                         ------------------       ------------------

<S>                                                           <C>                   <C>          
Basic EPS Net Income                                          $ 46,000              $ (6,108,000)
Weighted average common shares outstanding                   6,478,075                  6,254,063
Basic EPS                                                        $0.01                   $ (0.98)

Diluted EPS Net Income                                        $ 46,000              $ (6,108,000)
Weighted average common and common equivalent
shares outstanding                                           7,662,307                  6,254,063
Diluted EPS                                                      $0.01                   $ (0.98)
</TABLE>

(5) ACQUISITIONS

     MAINSTREAM ACQUISITION

     In January 1997,  Bitstream  purchased  substantially  all of the assets of
Mainstream Software Solutions, a corporation organized under the laws of England
primarily  engaged in the  business  of  marketing,  selling,  distributing  and
supporting  Bitstream  type products in the United  Kingdom,  for  approximately
$505,000.  As a result,  Bitstream directly  distributes its own products in the
United Kingdom.  The acquisition was accounted for as a purchase and resulted in
approximately $500,000 of goodwill.

     ARCHETYPE ACQUISITION

     In April 1997,  the  Company  acquired  Archetype,  Inc.  ("Archetype"),  a
Delaware  corporation  primarily  engaged  in the  business  of  developing  and
marketing server-based  information management computer software for the graphic
arts industry, pursuant to an Agreement and Plan of Merger, dated March 27, 1997
among the Company,  Archetype,  and Archetype Acquisition  Corporation,  a newly
organized wholly owned subsidiary of the Company.  Archetype's products include:
MediaBank,  a digital asset  management  product that allows for the cataloging,
archiving, and management of electronic images, text and documents; InterSep OPI
and  InterSep  Output  Manager,  advanced  open  prepress  interface  and  print
management  products for raster image  processors  and  servers;  and NuDoc,  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  $1.6 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.

 
                                        7





     The aggregate purchase price of $7,454,000 consisted of the following:

DESCRIPTION                                       AMOUNT
-----------                                       ------

Common stock                                   $ 2,904,000
Cash paid                                        2,544,000
Assumed liabilities                              1,606,000
Acquisition costs                                  400,000
                                           ---------------
Total purchase price                           $ 7,454,000


       The purchase price allocations represent the fair values 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:

DESCRIPTION                                         AMOUNT
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



     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.

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

                                                                   NINE MONTHS
                                                YEAR ENDED            ENDED
                                               DECEMBER 31,        SEPTEMBER 30,
                                                   1996                1997
                                              ---------------   ----------------

REVENUES                                       $     13,552     $       10,406
  Net Income (loss)                                     915            (6,751)
  Net Income (loss) per share                  $       0.16     $       (1.00)

     The pro forma results are not necessarily  indicative of future  operations
or the actual  results that would have  occurred had the  acquisition  been made
during 1996.

(6)  SEVERANCE AND OTHER NON-RECURRING EXPENSES

     Operating  expenses  for the nine months ended  September  30, 1997 reflect
$1.4  million  for  severance  and  other  non-recurring  compensation  expenses
incurred in connection with the  acquisition of Archetype and certain  severance
arrangements between the Company and certain former high-level executives.


                                       8








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

OVERVIEW

    The  Company   develops,   markets  and  supports   software   products  and
technologies  to enhance the  creation,  management  and transport of electronic
information. The Company 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 and develops  publishing  applications that are sold
to publishers, advertising agencies, and other major corporations.

    The Company derives  revenues  principally from the following  sources:  (i)
licensing fees and royalty  payments paid by OEM and ISV customers;  (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. 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.

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

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

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

     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,
including  its  TrueDoc   enabling   technology,   


                                       9








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  (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.


RESULTS OF OPERATIONS

     REVENUES.  Revenues for the three months ended September 30, 1997 increased
by  $1,031,000,   or  39%,  to  approximately  $3.7  million,   as  compared  to
approximately  $2.6  million for the three  months  ended  September  30,  1996.
Revenues  from OEM and ISV  customers  for the three months ended  September 30,
1997  increased  by  $213,000,   or  9%,  to   approximately   $2,492,000   from
approximately $2,279,000 for the three months ended September 30, 1996. Revenues
from end users and  distributors  for the three months ended  September 30, 1997
increased by $805,000,  or 230%, to approximately  $1,154,000 from approximately
$349,000 for the three months ended  September 30, 1996 reflecting the inclusion
of Archetype revenues for the period.

     Revenues  for the  nine  months  ended  September  30,  1997  increased  by
$1,305,000, or 16.2% to approximately $9.3 million, as compared to approximately
$8.0 million for the nine months ended September 30, 1996. Revenues from OEM and
ISV  customers  for the nine months  ended  September  30, 1997 were  relatively
unchanged  at  approximately  $6.6  million as  compared to  approximately  $6.7
million for the nine months ended  September  30, 1996.  Revenues from end users
and  distributors  for the  nine  months  ended  September  30,  1997  increased
$1,359,000,  or 99%, to approximately  $2,731,000 from approximately  $1,372,000
for the nine months ended September 30, 1996  reflecting  inclusion of Archetype
revenues since April 28, 1997.

     GROSS  PROFIT.  Gross profit for the three months ended  September 30, 1997
increased by $1.4 million,  or 70.6%, to approximately  $3.4 million compared to
approximately  $2.0 million for the three months ended September 30, 1996. Gross
profit as a percentage of revenues for the three months ended September 30, 1997
increased to 92.5%  compared to 75.5% for the three months ended  September  30,
1996.  The  increase in gross profit as a  percentage  of revenues  reflects the
decrease  in the  cost of  third  party  royalties  to  Bitstream's  asian  font
partners.

     Gross  profit for the nine months  ended  September  30, 1997  increased by
$1,708,000,  or 25.9%, to  approximately  $8.3 million compared to approximately
$6.6 million for the nine months  ended  September  30, 1996.  Gross profit as a
percentage of revenues for the nine months ended September 30, 1997 increased to
88.8%  compared to 81.9% for the nine  months  ended  September  30,  1996.  The
increase in gross  profit as a  percentage  of  revenues  reflects a decrease in
costs of custom products,  licensing fees and royalties.  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.

      MARKETING AND SELLING. Marketing and selling expenses for the three months
ended September 30, 1997 increased by $944,000,  or 84.5%, to approximately $2.1
million  compared  to  approximately  $1.1  million for the three  months  ended
September 30, 1996. This increase  primarily reflects the inclusion of Archetype
operations since April 28, 1997.

      Marketing  and selling  expenses for the nine months ended  September  30,
1997 increased by $1,618,000,  or 49.6%, to approximately  $4.9 million compared
to approximately $3.3 million for the nine months ended September 30, 1996. This
increase  primarily  reflects  the  inclusion of  Archetype  operations  for the
period.

                                       10







       RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended  September 30, 1997 increased by $507,000,  or 151.8%,  to $841,000
compared to $334,000 for the three months ended  September 30, 1996,  reflecting
the addition of  personnel  to support  expanded  development  of the  Company's
enabling  technologies,  as  well  as the  addition  of  Archetype  development.
Research and development  expenses consist primarily of personnel costs and fees
paid for outside software development and consulting fees.

       Research and development expenses for the nine months ended September 30,
1997 increased by $984,000,  or 97.0%, to approximately $2.0 million compared to
approximately  $1.0  million  for the nine  months  ended  September  30,  1996,
reflecting  the  addition of personnel to support  expanded  development  of the
Company's enabling  technologies,  as well as Archetype expenses since April 28,
1997. 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  September  30, 1997  increased by $107,000,  or 27.5%,  to $
495,000 compared to $388,000 for the three months ended September 30, 1996. As a
percentage of revenues,  general and administrative  expenses  represented 13.5%
for the three months ended  September  30, 1997  compared to 14.8% for the three
months ended September 30, 1996.

       General and  administrative  expenses for the nine months ended September
30, 1997 increased by $320,000, or 27.5%, to approximately $1.5 million compared
to approximately $1.2 million for the nine months ended September 30, 1996. As a
percentage of revenues,  general and administrative  expenses  represented 16.0%
for the nine months  ended  September  30,  1997  compared to 14.5% for the nine
months ended September 30, 1996.

       Operating  expenses for the nine months ended  September 30, 1997 reflect
non-recurring  expenses of $6.3 million,  including  $4.9 million for in process
research and development expenses incurred in conjunction with the merger of the
Company and Archetype  and $1.4 million for  severance  and other  non-recurring
compensation expenses.

       The Company recorded a tax provision for the three months and nine months
ended September 30, 1997 of $57,000 and $198,000, respectively. These provisions
consisted of foreign  withholding  taxes of $47,000 and $136,000,  respectively,
and an income tax provision of $10,000 and $62,000,  respectively,  in the three
months and nine months ended September 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

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

    At September  30, 1997,  the Company had cash and cash  equivalents  of $6.4
million, a decrease of $5.3 million from approximately $11.7 million at December
31, 1996.  Working capital was approximately  $8.9 million at September 30, 1997
as compared to $14.2  million at December  31,  1996.  The  Company's  operating
activities  used cash of $705,000 for the nine months ended  September  30, 1997
and provided cash of $219,000 for the nine months ended  September 30, 1996. The
Company's  investing  activities used cash of approximately $4.6 million for the
nine months ended September 30, 1997 as compared to $592,000 for the nine months
ended  September  30,  1996.  Investing  activities  consisted  primarily of the
purchase of  Archetype as well as the  purchase of  substantially  all assets of
Mainstream Software Solutions.  The Company's financing  activities used cash of
$38,000 for the nine  months  ended  September  30,  1997 and  provided  cash of
$760,000 for the nine months ended September 30, 1996.


                                       11







    The Company has  received 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.

    The  Company  believes  that the cash  generated  from the  proceeds  of its
initial  public  offering  of its Class A Common  Stock,  cash from  operations,
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.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    Not applicable.

ITEM 2. CHANGES IN SECURITIES

     During  the  quarter  ended  September  30,  1997,  the  Company  issued an
aggregate of 143,869 shares of Class A Common Stock  including (i) 13,000 shares
of Class A Common Stock issued in connection  with the exercise of 13,000 vested
options  issued under the Company's  1994 Stock Plan, and (ii) 130,869 shares of
Class A Common Stock issued in connection  with the conversion of 130,869 shares
of the  Company's  Class B Common  Stock at the  request of the  holder  thereof
pursuant to the terms of the Company's Certificate of Incorporation.

     The sales and issuances of securities  under the 1994 Stock Plan are deemed
to be exempt from registration under the Securities Act of 1933, as amended (the
"Securities  Act"),  under Rule 701  promulgated  thereunder,  in that they were
issued pursuant to a written  compensatory benefit plan or pursuant to a written
contract  relating to  compensation  as provided by Rule 701.  The  issuances of
securities  upon  conversion  of the Class B Common Stock is deemed to be exempt
from registration under the Securities Act under Section 4(2) thereof.

     On September 30, 1997, the Company filed a  Registration  Statement on Form
S-8 under the Securities Act of 1933, as amended, relating to the issuance of up
to an aggregate of 3,500,000  shares of the Company's Class A Common Stock,  par
value $.01 per share,  pursuant to stock  options and warrants  granted or which
may be granted  under the  Company's  1997 Stock Plan,  1996 Stock Plan and 1994
Stock Plan.

                                       12








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

        10.4.7    First  Amendment  to Credit  Agreement  dated  August 29, 1997
                  between BankBoston, N.A. and Company.

        10.4.8    Amended and  Restated  Revolving  Credit Note dated August 29,
                  1997 between BankBoston, N.A. and the Company.

        27.1      Financial Data Schedule

    (b) Reports on Form 8-K

        Not applicable.



                                       13







                                   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)

<TABLE>
<CAPTION>
       SIGNATURE                                 TITLE                               DATE
       ---------                                 -----                               ----


<S>                                   <C>                                     <C> 
/s/ Wendy Darland                     Vice President, Finance and              November 13, 1997
--------------------------            Administration, Chief Financial
Wendy Darland                         Officer, Treasurer and Assistant
                                      Secretary (Principal Financial
                                      Officer and Principal Accounting
                                      Officer)
</TABLE>



                                       14