<PAGE>

                                  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, 1999

                                       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
   of incorporation or organization)                Identification No.)

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


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

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

    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, 1999 there were 7,250,500 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>

                                 BITSTREAM INC.

                                      INDEX


<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                          NUMBERS
                                                                                          -------
<S>                                                                                       <C>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

     CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND DECEMBER 31, 1998......           3

     CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
            ENDED MARCH 31, 1999 AND 1998........................................           4

     CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
            MARCH 31, 1999 AND 1998..............................................           5

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..............          15

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS........................................................          15

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................          15

ITEM 3. DEFAULTS UPON SENIOR SECURITIES..........................................          16

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................          16

ITEM 5. OTHER INFORMATION........................................................          16

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................          16

               SIGNATURES........................................................          18
</TABLE>

                                       2

<PAGE>


                         PART I -- FINANCIAL STATEMENTS

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                         BITSTREAM INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     MARCH 31,      DECEMBER 31,
                                                                                       1999             1998
                                                                                     --------         --------
<S>                                                                                  <C>            <C>     
                                     ASSETS
Current assets:
    Cash and cash equivalents                                                        $ 12,622         $ 14,252
    Accounts receivable, net of allowance of $994                                       1,808            1,206
    Current portion of long-term accounts receivable, net of allowance of $59             176              304
    Deferred tax assets                                                                   868              868
    Prepaid expenses and other current assets                                             382              390
                                                                                     --------         --------
           Total current assets                                                        15,856           17,020
                                                                                     --------         --------
Property and equipment, net                                                               844              853
                                                                                     --------         --------
Other assets:
    Long-term accounts receivable, net of allowance of $14                           $     13         $     93
    Goodwill, net                                                                       2,016            2,133
    Investment in DiamondSoft, Inc.                                                       434              444
    Other                                                                                 160              168
                                                                                     --------         --------
            Total other assets                                                          2,623            2,838
                                                                                     --------         --------
                Total assets                                                         $ 19,323         $ 20,711
                                                                                     --------         --------
                                                                                     --------         --------

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current maturities of capital lease obligations                                  $     29         $     27
    Accounts payable                                                                      637              171
    Accrued income taxes                                                                   14              692
    Accrued expenses                                                                    1,927            2,344
    Deferred revenue                                                                      787            1,148
                                                                                     --------         --------
           Total current liabilities                                                    3,394            4,382
                                                                                     --------         --------
Long-term liabilities:
    Capital lease obligations, less current maturities                                     20               27
    Other long-term liabilities                                                            23               27
                                                                                     --------         --------
           Total long-term liabilities                                                     43               54
                                                                                     --------         --------
Stockholders' equity:
    Common Stock, $.01 par value, 30,500,000 shares authorized,
      7,250,000 and 7,055,000 issued as of March 31, 1999 and
      December 31, 1998, respectively                                                      73               70
    Additional paid-in capital                                                         30,894           30,714
    Accumulated deficit                                                               (15,021)         (14,449)
    Treasury stock, at cost; 38,549 shares                                                (60)             (60)
                                                                                     --------         --------
           Total stockholders' equity                                                  15,886           16,275
                                                                                     --------         --------
                Total liabilities and stockholders' equity                           $ 19,323         $ 20,711
                                                                                     --------         --------
                                                                                     --------         --------
</TABLE>




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

                                       3
<PAGE>


                         BITSTREAM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                                                                            MARCH 31,
                                                                      1999               1998

<S>                                                               <C>                 <C>        
     Revenues                                                     $     2,371         $     2,841
     Cost of revenues                                                     481                 175
                                                                  -----------         -----------
         Gross Profit                                                   1,890               2,666
                                                                  -----------         -----------
OPERATING EXPENSES:
     Selling and marketing                                                846               1,777
     Research and development                                           1,283               1,050
     General and administrative                                           447                 577
     Severance and other non-recurring compensation                      --                   440
                                                                  -----------         -----------
         Total operating expenses                                       2,576               3,844
                                                                  -----------         -----------
         Operating loss                                                  (686)             (1,178)
                                                                  -----------         -----------
     Gain on investment in DiamondSoft, Inc.                               30                --
     Other income, net                                                    123                 106
                                                                  -----------         -----------
         Provision for income taxes                                      --                    24
                                                                  -----------         -----------
         Net loss                                                 $      (533)        $    (1,096)
                                                                  -----------         -----------
                                                                  -----------         -----------
     Basic and diluted net loss per share                         $     (0.07)        $     (0.17)
                                                                  -----------         -----------
                                                                  -----------         -----------
     Basic and diluted weighted average shares outstanding          7,717,208           6,346,909
                                                                  -----------         -----------
                                                                  -----------         -----------
</TABLE>



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

                                       4

<PAGE>


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


<TABLE>
<CAPTION>
                                                                                           THREE MONTHS ENDED
                                                                                                MARCH 31,
                                                                                           1999             1998
                                                                                         --------         --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                      <C>              <C>      
     Net income (loss)                                                                   $   (573)        $ (1,096)
     Adjustments to reconcile net income (loss) to net cash provided by (used in)
     operating activities:
          Depreciation and amortization                                                       258              282
          Compensation on grant of stock options                                             --                152
          Loss on investment in DiamondSoft, Inc.                                              10             --
          Changes in assets and liabilities:
            Accounts receivable                                                              (602)             132
            Long-term and extended plan accounts receivable                                   208              547
            Prepaid expenses and other current assets                                           8              (41)
            Accounts payable                                                                  466              (86)
            Accrued expenses                                                               (1,095)            (316)
            Deferred Revenue                                                                 (361)            --
                                                                                         --------         --------
            Net cash used in operating activities                                          (1,681)            (426)
                                                                                         --------         --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property and equipment                                                     (124)            (162)
     Investment in DiamondSoft, Inc                                                          --               (500)
     Change in other assets                                                                     8              (38)
                                                                                         --------         --------
            Net cash used in investing activities                                            (116)            (700)
                                                                                         --------         --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments of capital lease obligations                                                     (5)              (9)
     Change in other long-term liabilities                                                     (4)             (12)
     Proceeds from the exercise of stock options and warrants                                 176              117
                                                                                         --------         --------
             Net cash used in financing activities                                            167               96
                                                                                         --------         --------

     Net increase (decrease) in cash and cash equivalents                                  (1,630)          (1,030)
     Cash and cash equivalents, beginning of period                                        14,252            6,364
                                                                                         --------         --------
     Cash and cash equivalents, end of period                                            $ 12,622         $  5,334
                                                                                         --------         --------
                                                                                         --------         --------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for interest                                                              $      1         $      1
                                                                                         --------         --------
                                                                                         --------         --------
     Cash paid for income taxes                                                          $      5         $      1
                                                                                         --------         --------
                                                                                         --------         --------
</TABLE>


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

                                       5
<PAGE>




                         BITSTREAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1999

(1) BASIS OF PRESENTATION

     The consolidated financial statements of Bitstream Inc. (the "Company" or
"Bitstream") 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, 1998 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, 1998 included in the Company's Annual Report on Form 10-K which was
filed by the Company with the SEC on March 31, 1999.

     The balance sheet as of March 31, 1999, the statements of operations for
the three months ended March 31, 1999 and 1998, the statements of cash flows for
the three months ended March 31, 1999 and 1998, 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, 1999 may not
necessarily be indicative of the results to be expected for any future interim
period or for the year ending December 31, 1999.

     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, B.V. (a Dutch
corporation); Bitstream B.V. France (a French corporation), which was closed in
1998; Bitstream S.A.R.L. (a French corporation); Mainstream Software Solutions
(an English corporation); Archetype, Inc. (a Delaware corporation); Pageflex
Inc. (a Delaware corporation) and Type Solutions, Inc. (a New Hampshire
corporation). All material intercompany transactions and balances have been
eliminated in consolidation.

(2) EARNINGS PER SHARE

     In accordance with Statement of Financial Accounting Standards No. 128,
basic earnings per share was determined by dividing net income by weighted
average shares of common stock outstanding during the year. Diluted earnings per
share reflects dilution of potentially derivative securities, primarily stock
options based on the treasury stock method. Diluted net loss per share for the
three months ended March 31, 1999 and March 31, 1998 is the same as basic net
loss per share for each period as the inclusion of the potential common stock
equivalents would be antidilutive.

     A reconciliation of basic and diluted weighted average shares outstanding
for basic and diluted earnings per share is as follows (in thousands):

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                  MARCH 31,
                                                             1999          1998
                                                             -----         -----
<S>                                                          <C>           <C>  
Weighted average shares outstanding                          7,717         6,347
    Dilutive effect of options                                --            --
    Dilutive effect of warrants                               --            --
                                                             -----         -----
Shares outstanding for diluted loss per share:               7,717         6,347
                                                             -----         -----
                                                             -----         -----
Antidilutive options and warrants excluded                   3,212         2,822
                                                             -----         -----
                                                             -----         -----
</TABLE>


                                       6

(3) CONCENTRATION OF CREDIT RISK

     SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT
RISK, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company places its temporary cash investments in
several financial institutions. The Company has not experienced significant
losses related to receivables from any individual customers or groups of
customers in any specific industry or by geographic area. Due to these factors,
no additional credit risk beyond amounts provided for collection losses is
believed by management to be inherent in the Company's accounts receivable.

     For the three months ended March 31, 1999, one customer represented 13% of
revenues. For the three months ended March 31, 1998, one customer represented
15% of revenues.

(4) COMPREHENSIVE LOSS

     The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income (loss) and its components in a full set of
general purpose financial statements. The components of the Company's
comprehensive income (loss) are as follows (in thousands):


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                 MARCH 31,
                                                         1999                1998
                                                         ----                ----
<S>                                                  <C>                 <C>         
Net loss                                             $    (573)            $(1,096)
Cumulative translation adjustment, net of tax             --                   (39)
                                                     -----------         -----------
Total comprehensive loss                             $    (573)            $(1,135)
                                                     -----------         -----------
                                                     -----------         -----------
</TABLE>


(5) RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company believes that the adoption of SFAS No. 133 will not have a material
impact on its financial results or financial position.

(6) ACQUISITIONS

     ALARAS ACQUISITION

     In November 1998, the Company purchased certain assets of Alaras
Corporation ("Alaras"), a North Carolina corporation primarily engaged in the
business of developing, marketing and distributing its software products to a
variety of markets, for $1,300,000 in cash. Alaras' products included: Tropix, a
workflow application to automate repetitive steps in electronic publishing
production; Mixxer, a color correction filter for Adobe Photoshop; and Apertura,
an application which enables Adobe Photoshop to open one or more smaller
portions of most popular image formats including native Scitex CT and LWs. The
acquisition was accounted for as a purchase and resulted in $1,300,000 of
goodwill.

     Selected financial information for the Company and Alaras on a pro forma
basis has not been provided as it is immaterial to the consolidated financial
statements taken as a whole.

     TYPE SOLUTIONS ACQUISITION

                                       7

<PAGE>

     In December 1998, the Company acquired all of the outstanding stock of Type
Solutions, Inc. ("Type Solutions"), a New Hampshire corporation primarily
engaged in the business of developing and licensing font rendering technologies,
for $600,000 in cash. The acquisition was accounted for as a purchase and
resulted in $595,000 of goodwill.

     Selected financial information for Bitstream and Type Solutions on a pro
forma basis has not been provided as it is immaterial to the consolidated
financial statements taken as a whole.

(7)  INVESTMENTS

     In March 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 represents a 25%
ownership interest in DiamondSoft. Losses for the three-month period ended March
31, 1999 related to the Company's investment in DiamondSoft totaled
approximately $10,000 and are included in the accompanying statement of
operations.

(8)  SEVERANCE AND OTHER NON-RECURRING CHARGES

     Operating expenses for the three months ended March 31, 1998 include
$440,000 for severance and other non-recurring compensation expenses incurred in
connection with certain arrangements between the Company and certain former
employees and executives. No such costs were incurred for the three months ended
March 31, 1999.

(9)  SEGMENT REPORTING

      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. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company has determined it has two
reportable segments as of January 1, 1999: (i) a type and technology segment;
and (ii) an on-demand publishing segment. Prior to January 1, 1999, the Company
did not have distinctive reportable segments for its business and, as result,
the Company has not previously reported segment information.

      The Company's reportable segments are strategic business units that sell
the Company's products through distinct distribution channels. They are managed
separately because each business requires different marketing strategies. The
Company's approach is based on the way that management organizes the segments
within the enterprise for making operating decisions and assessing performance.

      The Company evaluates performance based on profit or loss from operations
before income taxes not including non-recurring gains and losses.

                                       8

<PAGE>


    The following table sets forth the Company's income statement information by
segment:


<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED MARCH 31, 1999
                                           ---------------------------------------------
                                           TYPE AND TECHNOLOGY      ON-DEMAND PUBLISHING
                                           -------------------      --------------------
<S>                                        <C>                      <C>    
Revenues                                         $ 1,667                  $   704
Cost of revenues                                     459                       22
                                                 -------                  -------
      Gross profit                                 1,208                      682
                                                 -------                  -------
Operating Expenses:
  Selling and marketing                              361                      485
  Research and development                           506                      777
  General and administrative                         187                      260
                                                 -------                  -------

     Total operating expenses                      1,054                    1,522
                                                 -------                  -------
     Operating income (loss)                         154                     (840)
                                                 -------                  -------
     Net income (loss)                               307                     (840)
                                                 -------                  -------
                                                 -------                  -------
</TABLE>

                                       9

<PAGE>


      The following table sets forth the Company's balance sheet information by
segment:


<TABLE>
<CAPTION>
                                                                                      THREE MONTHS ENDED
                                                                                        MARCH 31, 1999
                                                                                 -------------------------------
                                  ASSETS                                          TYPE AND            ON-DEMAND
Current assets:                                                                  TECHNOLOGY           PUBLISHING
                                                                                 ----------           ----------
<S>                                                                              <C>                  <C>   
    Cash and cash equivalents                                                     $ 12,622             $   --
    Accounts receivable, net of allowance                                            1,808                 --
    Current portion of long-term accounts receivable, net of allowance                 176                 --
    Deferred tax assets                                                                868                 --
    Prepaid expenses and other current assets                                          380                    2
                                                                                  --------             --------
           Total current assets                                                     15,854                    2
                                                                                  --------             --------
Property and equipment, net                                                            785                   59
                                                                                  --------             --------
Other assets:
    Long-term accounts receivable, net of allowance                               $     13             $   --
    Goodwill, net                                                                      781                1,235
    Investment in DiamondSoft, Inc.                                                    434                 --
    Other                                                                              160                 --
                                                                                  --------             --------
            Total other assets                                                       1,388                1,235
                                                                                  --------             --------
                Total assets                                                      $ 18,027             $  1,296
                                                                                  --------             --------
                                                                                  --------             --------
                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current maturities of capital lease obligations                               $     29             $   --
    Accounts payable                                                                   479                  158
    Accrued income taxes                                                                14                 --
    Accrued expenses                                                                   649                1,278
    Deferred revenue                                                                    86                  701
                                                                                  --------             --------
           Total current liabilities                                                 1,257                2,137
                                                                                  --------             --------
Long-term liabilities:
    Capital lease obligations, less current maturities                                  20                 --
    Other long-term liabilities                                                         23                 --
                                                                                  --------             --------
           Total long-term liabilities                                                  43                 --
                                                                                  --------             --------
Stockholders' equity:
    Common Stock                                                                        73                 --
    Additional paid-in capital                                                      30,894                 --
    Accumulated deficit                                                            (14,180)                (841)
    Treasury stock, at cost; 38,549 shares                                             (60)                --
                                                                                  --------             --------
           Total stockholders' equity                                               16,727                 (841)
                                                                                  --------             --------
               Total liabilities and stockholders' equity                         $ 18,027             $  1,296
                                                                                  --------             --------
                                                                                  --------             --------
</TABLE>


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

OVERVIEW

                                       10

<PAGE>

     Bitstream Inc. develops, markets and supports software products and
technologies to enhance the creation, management and transport of electronic
documents. The Company's type and technology products and technologies consist
of: (i) type products, such as libraries of type designs (fonts) and custom type
products; (ii) enabling technologies, which deliver typographic capabilities to
hardware output devices and software applications; (iii) TrueDoc(R), a portable
type technology providing for the efficient distribution of text, with fidelity,
in a highly compact format; (iv) T2K(TM), a font engine software component
providing high-quality text rendering; (v) WebFonT Maker(TM), a web publishing
tool that allows web page designers to embed their selected typefaces in web
pagE designs. The Company's on-demand publishing products consist of: (i)
Pageflex(TM), an on-demand publishing serveR enabling the design and automatic
production of customized print documents that are targeted at a narrow segment
or an individual reader; (ii) NuDoc(TM), an advanced document composition
engine; (iii) Tropix(TM), a workFLOw application to automate repetitive steps in
electronic publishing production; (iv) Mixxer(TM), a color correctioN filter for
Adobe Photoshop; and (v) Apertura(TM), an application which enables Adobe
Photoshop to open one or morE smaller portions of most popular image formats.

     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 original equipment manufacturers ("OEMs"), independent software vendors
("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. The Company's 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. Recently, 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. 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 recognizes
revenue under software development contracts as services are provided for per
diem contracts or by using the percentage-of-completion method of accounting for
long-term fixed price contracts.

     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.

IMPACT OF YEAR 2000 ISSUE

YEAR 2000 READINESS DISCLOSURE - MADE PURSUANT TO THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT, PUB. L. NO. 105-271 (1998)

    The Year 2000 presents potential concerns and issues for the Company as well
as other companies in the software industry. In general, Year 2000 readiness
issues typically arise in computer software and hardware systems that use two
digit date formats, instead of four digit dates, to represent a particular year.
Users must test their unique combination of hardware, system software (including
databases, transaction processors, and operating systems) and application
software in order to achieve Year 2000 readiness. This


                                       11
<PAGE>

issue creates risk for the Company from unforeseen problems in its own computer
and embedded systems and from third parties with whom the Company deals on
financial and other transactions worldwide. Failure of the Company's and/or
third parties' computer systems could have a material impact on the Company's
ability to conduct its business.

YEAR 2000 COMMITTEE

     The Company has established a Year 2000 steering committee to evaluate,
plan and implement policies and practices, including contingency planning, and
to address the impact of the Year 2000 on the Company and its products. The
Company's Year 2000 readiness preparations fall into three categories: (1)
product readiness, addressing product functionality; (2) internal readiness,
addressing the Year 2000 operability of internal information technology ("IT")
systems and mission critical non-IT systems; and (3) third party readiness,
addressing the preparedness of relevant third parties and the Year 2000
operability of products furnished for internal use and resale. After reviewing
these areas, the committee will report to the Board of Directors specific areas
of concern and a plan for resolving and further testing of any remaining Year
2000 issues. The committee will also formulate a contingency plan in the event
that the committee reasonably determines that certain Year 2000 issues may not
be resolved by the end of 1999 or if unforeseen problems arise.

STATUS OF INVESTIGATION - PRODUCT READINESS

     The Company has established Year 2000 date operability standards against
which it is testing the most current versions of its software products. During
1997, the Company initiated a program to update its accounting and information
systems, where applicable, to ensure that its computer systems are Year 2000
compliant. Bitstream currently expects to substantially complete analyzing its
current internal systems and to develop contingency plans for certain internal
systems, by mid-1999. In addition, the Company maintains a Year 2000 expert on
its staff to continue to assess, plan and implement solutions that will prepare
its internal systems for January 1, 2000. Bitstream believes that these
solutions will not pose significant operational problems for the Company, and
that the costs of such preparations will not be material. However, if
contingency plans were to fail or new non-compliance issues are identified, the
Company's results of operations or financial condition could be materially
adversely affected.

     The Company has completed testing of its current software products and
believes the most current versions conform to these standards and are Year 2000
ready. Despite the Company's testing, there can be no assurance that the
Company's products do not contain undetected errors or defects related to Year
2000 operability that may result in material costs to the Company or that the
Company's products contain all features and functionality considered necessary
by customers, end users and distributors to be Year 2000 ready.

     While the Company believes that most of its current releases of products
are Year 2000 ready, other factors may result in an application created using
the Company's products not being Year 2000 ready. Some of these factors include
improper programming techniques used by third parties in creating the
application, customization, or non-compliance of hardware, software or firmware
not provided by the Company with which the products operate. The Company does
not believe that it would be liable in such an event. However, due to the
unprecedented nature of the potential litigation related to Year 2000 readiness
as discussed in the industry and popular press, the most likely worst case
scenario is that the Company would be subject to litigation. It is uncertain
whether or to what extent the Company may be affected by such litigation.

     The Company has tested only the current versions of its products, and does
not plan to test earlier versions of products. The Company believes a
substantial number of the Company's customers are running product versions which
have not been tested and may experience Year 2000 date related operability
issues. The Company is in the process of identifying these customers and
encouraging them to upgrade to current versions of the products. Further, the
Company cautions users of such products to conduct their own Year 2000
operability testing to determine if continued use of the products allows them to
meet their own Year 2000 readiness objectives. While many customers will be
upgraded to Year 2000 ready versions of products under maintenance coverage, if
eligible, in the normal course the Company expects to incur some increased
expenses associated with the furnishing of upgrades and modifications. In
addition, the ability of

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<PAGE>

the Company to implement upgrades in time to meet customers' Year 2000 readiness
requirements requires the continued availability of qualified technical
personnel and the Company may incur additional costs to attract and retain such
personnel as the Year 2000 draws closer. At this time the Company does not
believe that the cost of potential upgrades or modifications will have a
material effect on the Company's business, financial condition and operating
results.

STATUS OF INVESTIGATION - INTERNAL READINESS

     The Company is engaged in conducting a Year 2000 readiness audit of its
internal IT and non-IT systems (including telecommunication, facilities
management, safety and security systems). Although the Company is not presently
aware of any material operational issues or costs associated with preparing its
internal IT and non-IT systems for the Year 2000, the Company is continuing its
investigation and there can be no assurance that the Company will not experience
unanticipated negative consequences or material costs caused by undetected
errors or defects in the technology used in its internal systems, which include
third party hardware, firmware, and software. The Company anticipates finalizing
its testing of internal IT and non-IT systems on or about September 30, 1999.

STATUS OF INVESTIGATION - THIRD PARTY READINESS

     The Company is continuing to assess the Year 2000 readiness of material
third parties, such as public utilities and key clients or suppliers, who
provide external services to the Company. The Company expects to substantially
complete these assessments and testing by the middle of 1999. The Company has
certain key relationships with suppliers which furnish components and software
used by the Company in its products. If these suppliers fail to adequately
address the Year 2000 issue for the products they supply to the Company, such
failure could have a material adverse effect on the Company's operations,
reputation, and financial results. Certain of the Company's products contain
third party components and software that are integral to their operation for
which the cost and time to integrate alternative components or software into
these products would be material.

CONTINGENCY PLANS AND WORST CASE SCENARIO

     At the present time, the Company is in the process of outlining contingency
plans to operate in the event that its products, systems, or business partners
are not Year 2000 ready. If the Company's investigations suggest that there is a
significant risk that certain products, systems, or business partners might not
be Year 2000 ready, the Company will modify its contingency plans accordingly.

COSTS, SOURCE OF FUNDS AND ACCOUNTING TREATMENT

     The Company's policy is to expense all costs related to its Year 2000
compliance program unless the useful life of the technological asset is extended
or increased. The expenses incurred to date have not had a material impact on
the Company's results of operations or financial condition. At this time, the
Company intends to fund Year 2000 expenses through cash flows from operations.

RESULTS OF OPERATIONS

     REVENUES. Total revenues for the three months ended March 31, 1999
decreased by approximately $470,000 or 16.5%, to approximately $2,371,000, as
compared to approximately $2,841,000 for the three months ended March 31, 1998.
The decrease in revenues for the three months ended March 31, 1999 as compared
to the three months ended March 31, 1998, is primarily attributable to the loss
of revenues associated with the Company's MediaBank and InterSep OPI product
lines, which were sold to Inso Providence Corporation in August of 1998. For the
three months ended March 31, 1999, revenues from the sale of the Company's type
and technology and on-demand publishing business were $1,667,000 and $704,000,
respectively.

     GROSS PROFIT. Gross profit for the three months ended March 31, 1999
decreased by approximately $776,000, or 29.1%, to $1,890,000 compared to
approximately $2,666,000 for the three months ended March 31, 1998. Gross profit
as a percentage of revenues for the three months ended March 31, 1999 decreased
to 79.7% compared to 93.8% for the three months ended March 31, 1998. The
decreases in gross profit and gross profit as a percentage of revenues are a
result of the sale of substantially all of the

                                       13

<PAGE>

assets relating to the Company's MediaBank and InterSep OPI product lines to
Inso Providence Corporation in August of 1998.

     SELLING AND MARKETING. Selling and marketing expenses for the three months
ended March 31, 1999 decreased by $931,000, or 52.4%, to approximately $846,000
compared to approximately $1,777,000 for the three months ended March 31, 1998.
Selling and marketing expenses as a percentage of revenues for the three months
ended March 31, 1999 decreased to 35.7% from 62.5% for the three months ended
March 31, 1998. The decrease in selling and marketing expenses reflects a
reduction in salary expense of sales and marketing personnel from the headcount
reductions that took place in March and June of 1998.

     RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended March 31, 1999 increased by $233,000, or 22.2%, to $1,283,000
compared to $1,050,000 for the three months ended March 31, 1998. Research and
development expenses as a percentage of revenues for the three months ended
March 31, 1999 increased to 54.1% from 37.0% for the three months ended March
31, 1998. The increase in research and development expenses in dollars, and as a
percentage of revenues, for the three months ended March 31, 1999 as compared to
the three months ended March 31, 1998 reflects the ongoing investment in
additional personnel to support expanded development of the Company's on-demand
publishing technologies, NuDoc and Pageflex.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended March 31, 1999 decreased by $130,000, or 22.5%, to $447,000,
compared to $577,000 for the three months ended March 31, 1998. As a percentage
of revenues, general and administrative expenses represented 18.9% for the three
months ended March 31, 1999 as compared to 20.3% for the three months ended
March 31, 1998. The decreases in general and administrative expenses in dollars,
and as a percentage of revenues, for the three months ended March 31, 1999 as
compared to the three months ended March 31, 1998, are primarily due to the
elimination of duplicative general and administrative functions and
administrative costs, including rent, utilities and other costs associated with
Archetype's Burlington, Massachusetts office and a reduction in salary expense
of general and administrative personnel resulting from the headcount reductions
that took place in March and June of 1998.

     Operating expenses for the three months ended March 31, 1998 reflect
$440,000 for severance and other non-recurring compensation expenses related to
certain arrangements between the Company and certain former employees and
executives.

     The Company recorded no tax benefit for the three months ended March 31,
1999. The Company recorded a tax provision consisting of foreign tax liabilities
of $24,000 for the three months ended March 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

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

    The Company used approximately $1,681,000 of cash for the three months ended
March 31, 1999 and approximately $426,000 of cash for the three months ended
March 31, 1998 primarily to fund operating losses.

    The Company used approximately $116,000 of cash for the three months ended
March 31, 1999 as compared to $700,000 of cash for the three months ended March
31, 1998. During the three months ended March 31, 1999, cash was used primarily
to purchase equipment. For the three months ended March 31, 1998, the primary
uses of cash were for the purchase of equipment and a $500,000 equity investment
in DiamondSoft, Inc.

    The Company's financing activities provided cash of $167,000 for the three
months ended March 31, 1999 as compared to $96,000 for the three months ended
March 31, 1998. The cash provided in the three months ended March 31, 1999 and
March 31, 1998 primarily resulted from the exercise of stock options.

    The Company believes its current cash and cash equivalent balances will be
sufficient to meet the Company's operating and capital requirements for at least
the next 12 months. There can be no assurance,

                                       14

<PAGE>

however, that the Company will not require additional financing in the future.
If the Company was 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.

    FORWARD-LOOKING STATEMENTS

     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, 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 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.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE
COMMODITY INSTRUMENTS.

     As of March 31, 1999, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments are short-term, investment-grade commercial paper, and money market
accounts that are carried on the Company's books at amortized cost, which
approximates fair market value. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.

PRIMARY MARKET RISK EXPOSURES.

     The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.

     The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies. International subsidiary operating results are translated into
U.S. dollars and consolidated for reporting purposes. The impact of currency
exchange rate movements on intercompany transactions was immaterial for the
three-month period ended March 31, 1999. Currently, the Company does not engage
in foreign currency hedging activities.

                                       15

<PAGE>

PART II -- OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

    Not applicable.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)  Instruments defining the rights of the holders of any class of registered
     securities of the Company have not been materially modified during the
     three months ended March 31, 1999.

(b)  Rights evidenced by any class of registered securities of the Company have
     not been materially limited or qualified by the issuance or modification of
     any other class of securities during the three months ended March 31, 1999.

(c)  There were no unregistered securities sold by the Company during the three
     months ended March 31, 1999.

(d)  Use of Proceeds

         As of March 31, 1999, the approximately $12,200,000 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, Inc.; (ii) approximately $6,041,000
for the acquisition of Mainstream Software Solutions, Ltd., Archetype, Inc.,
Type Solutions, Inc. and certain assets of Alaras Corporation; (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 $850,000 for royalty payments to others; (v) $500,000 for the
investment in DiamondSoft, Inc.; and (vi) approximately $880,000 for the
purchase and installation of equipment. The remaining net proceeds from the IPO
are invested in short-term, interest-bearing, investment-grade securities.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    Not applicable.


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

    No matters were submitted to a vote of security holders during the three
months ended March 31, 1999.


ITEM 5. OTHER INFORMATION

    Not applicable.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

        27.1 Financial Data Schedule for the three months ended 
March 31, 1999.

                                       16
<PAGE>

    (b) Reports on Form 8-K

        No reports on Form 8-K were filed during the three months ended March
31, 1999.

                                       17

<PAGE>


                                   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/ Anna M. Chagnon      Executive Vice President, Chief Financial Officer    May 14, 1999
Anna M. Chagnon          and General Counsel (Principal Financial Officer
                         and Principal Accounting Officer)
</TABLE>


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